Annual report pursuant to Section 13 and 15(d)

Commitments and Contingencies

v2.4.0.6
Commitments and Contingencies
 12 Months Ended
Jun. 30, 2012
Commitments and Contingencies Disclosure [Abstract]  
Commitments and Contingencies
COMMITMENTS AND CONTINGENCIES
(a) Litigation

We 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 we complied with the reporting requirements of 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.

On August 27, 2012, Junkfood 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. 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 thousand. 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. As of June 30, 2012 we have recorded a liability for the most likely outcome within this range.

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 for use in our operations. At June 30, 2012, minimum payments under these contracts were as follows (in thousands):
Yarn
$
21,871

Natural Gas
1,346

Finished fabric
1,611

Finished products
21,823

 
$
46,651


(c) Letters of Credit
As of June 30, 2012, we had outstanding standby letters of credit totaling $0.4 million and outstanding commercial letters of credit totaling $2.0 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. We do not use these financial instruments for trading or speculative purposes. On September 1, 2011, our $15 million interest rate swap agreement at 1.1% matured. The outstanding financial instruments as of June 30, 2012 are as follows:
 
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 30, 2012
$
209

 
—

 
$
209

 
—

July 2, 2011
$
22

 
—

 
$
22

 
—

 
 
 
 
 
 
 
 
Contingent Consideration
 
 
 
 
 
 
 
June 30, 2012
—

 
—

 
—

 
—

July 2, 2011
—

 
—

 
—

 
—


The fair value of the interest rate swap agreement was 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 30, 2012 and July 2, 2011.
 
June 30,
2012
 
7/2/2011
Accrued expenses
$
—

 
$
22

Deferred tax liabilities
(80
)
 
(8
)
Other liabilities
209

 
—

Accumulated other comprehensive loss
$
129

 
$
14


 
(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 $15.2 million, $12.4 million and $11.6 million during fiscal years 2012, 2011, and 2010, respectively.
Based on minimum sales requirements, future minimum royalty payments required under these license agreements are (in thousands):
Fiscal Year
Amount
2013
$
2,496

2014
2,787

2015
2,335

2016
770

2017
—

 
$
8,388