Annual report pursuant to Section 13 and 15(d)

Commitments and Contingencies

v2.4.0.8
Commitments and Contingencies
 12 Months Ended
Jun. 29, 2013
Commitments and Contingencies Disclosure [Abstract]  
Commitments and Contingencies
COMMITMENTS AND CONTINGENCIES
(a) Litigation
We previously received an inquiry from the U.S. Consumer Product Safety Commission (“Commission”) regarding a children's drawstring hoodie product sourced, distributed and sold by our Junkfood division and its compliance with applicable product safety standards. The Commission subsequently investigated the matter, including whether Junkfood complied with the reporting requirements of the Consumer Product Safety Act (“CPSA”), and the garments in question were ultimately recalled. On or about July 25, 2012, Junkfood received notification from the Commission staff alleging that Junkfood knowingly violated CPSA Section 15(b) and that it will recommend to the Commission a $900,000 civil penalty. We contend that the Commission's allegations are without merit.
Junkfood has subsequently responded to the Commission staff regarding its recommended penalty, setting forth a number of defenses and mitigating factors that could result in a much lower penalty, if any, ultimately imposed by a court should the matter proceed to litigation. Since then the Commission has requested additional information from Junkfood regarding the matter. While we will continue to defend against these allegations, we believe it is probable that a liability has been incurred. Based upon the terms of previously published CPSC settlements and related product recall notices, we believe if we settle the matter the minimum settlement amount would be $25,000. Should the Commission seek enforcement of the recommended civil penalty and ultimately prevail on its claims at trial, we could be required to pay amounts exceeding $900,000, along with interest and the Commission's costs and fees. During the quarter ended June 30, 2012, we recorded a liability for the most likely outcome within this range and this liability remains recorded as of June 29, 2013.
In addition, at times we are party to various legal claims, actions and complaints. We believe that, as a result of legal defenses, insurance arrangements, and indemnification provisions with parties believed to be financially capable, such actions should not have a material effect on our operations, financial condition, or liquidity.
(b) Purchase Contracts
We have entered into agreements, and have fixed prices, to purchase yarn, natural gas, finished fabric, and finished apparel and headwear products. At June 29, 2013, minimum payments under these contracts were as follows (in thousands):
Yarn
$
14,408

Natural Gas
1,507

Finished fabric
1,445

Finished products
26,256

 
$
43,616


(c) Letters of Credit
As of June 29, 2013, we had outstanding standby letters of credit totaling $0.4 million and outstanding commercial letters of credit totaling $1.0 million.
(d) Derivatives
From time to time we may use interest rate swaps or other instruments to manage our interest rate exposure and reduce the impact of future interest rate changes. These financial instruments are not used for trading or speculative purposes. The following financial instruments were outstanding as of June 29, 2013:
 
Effective Date
 
Notational
Amount
 
LIBOR Rate
 
Maturity Date
Interest Rate Swap
9/1/2011
 
$10 million
 
0.7650
%
 
9/1/2013
Interest Rate Swap
9/1/2011
 
$10 million
 
0.9025
%
 
3/1/2014
Interest Rate Swap
9/1/2011
 
$10 million
 
1.0700
%
 
9/1/2014

FASB Codification No. 820, Fair Value Measurements and Disclosures (“ASC 820”), defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. Assets and liabilities measured at fair value are grouped in three levels. The levels prioritize the inputs used to measure the fair value of the assets or liabilities. These levels are:
◦
Level 1 – Quoted prices (unadjusted) in active markets for identical assets or liabilities.
◦
Level 2 – Inputs other than quoted prices that are observable for assets and liabilities, either directly or indirectly. These inputs include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in market that are less active.
◦
Level 3 – Unobservable inputs that are supported by little or no market activity for assets or liabilities and includes certain pricing models, discounted cash flow methodologies and similar techniques.
The following financial liabilities are measured at fair value on a recurring basis (in thousands):
 
Fair Value Measurements Using
Period Ended
Total
 
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
 
Significant Other
Observable Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Interest Rate Swap
 
 
 
 
 
 
 
June 29, 2013
$
133

 
—

 
$
133

 
—

June 30, 2012
$
209

 
—

 
$
209

 
—

July 2, 2011
$
22

 
—

 
$
22

 
—

 
 
 
 
 
 
 
 
Contingent Consideration
 
 
 
 
 
 
 
June 29, 2013
—

 
—

 
—

 
—

June 30, 2012
—

 
—

 
—

 
—

July 2, 2011
—

 
—

 
—

 
—


The fair value of the interest rate swap agreements were derived from discounted cash flow analysis based on the terms of the contract and the forward interest rate curve adjusted for our credit risk, which fall in level 2 of the fair value hierarchy. We used the historical results and projected cash flows based on the contractually defined terms, discounted as necessary, to estimate the fair value of the contingent consideration for Art Gun. Accordingly, the fair value measurement for contingent consideration falls in level 3 of the fair value hierarchy. The contingent consideration for Art Gun is remeasured at the end of each reporting period. Additionally, we remeasured the Art Gun goodwill to fair value in the period ended January 1, 2011. See Note 2(m) - Impairment of Goodwill for further discussion.
The following table summarizes the fair value and presentation in the Consolidated Balance Sheets for derivatives as of June 29, 2013 and June 30, 2012.
 
June 29,
2013
 
June 30,
2012
Accrued expenses
$
49

 
$
—

Deferred tax liabilities
(51
)
 
(80
)
Other liabilities
84

 
209

Accumulated other comprehensive loss
$
82

 
$
129


(e) License Agreements
We have entered into license agreements that provide for royalty payments of net sales of licensed products as set forth in the agreements. These license agreements are within our branded segment. We have incurred royalty expense (included in selling, general and administrative expenses) of approximately $15.7 million, $15.2 million and $12.4 million during fiscal years 2013, 2012, and 2011, respectively.
At June 29, 2013, based on minimum sales requirements, future minimum royalty payments required under these license agreements were as follows (in thousands):
Fiscal Year
Amount
2014
$
3,100

2015
2,204

2016
882

2017 and thereafter
—

 
$
6,186