Note 3 - Significant Events

12 Months Ended

Jun. 30, 2013

Note 3 - Significant Events

Fiscal 2013 Restructuring Plan Announced March 18, 2013

Our second quarter fiscal 2013 financial results for our gifts segment were severely impacted by lower than expected consumer point-of-sale purchases and retailer promotional activity in December 2012, which was higher than both our expectations and historical levels. These events were primarily driven by lack of consumer acceptance of two new products, unfavorable placement of our products in certain retailers, and lower than expected consumer purchases in our categories. As a result, our gifts segment net sales and gross margins were significantly lower than expectations and historical results. This caused our December profits to fall, resulting in the previously-announced violation of our monthly minimum fixed charge coverage ratio within our prior credit agreement. Additionally, the performance of the gifts segment products resulted in higher than expected sales concessions, such as allowing certain retailers to return certain unsold products, which also reduced net sales, gross margins and accounts receivable, while increasing inventories. Each of these events unfavorably impacted our liquidity forecasts. As a result of the covenant violation and liquidity restraints, we decided to implement a restructuring plan.

On March 18, 2013, the Board of Directors (the “Board”) approved the Restructuring plan pursuant to which we reduced the complexity of our business through paring down the customer base we serve, focusing on the most profitable belts, small leather goods, and gifts products, streamlining our operations and further reducing operating expenses.

The primary components of the Restructuring included: (1) exiting under-performing product offerings which do not support our primary customer base and do not represent strategic components of our portfolio, (2) reducing corporate employee headcount by 33%, which occurred on March 18, 2013, (3) recognizing charges for certain intangible assets impaired as a result of our decision to immediately cease production and development of products under certain proprietary trade names and trade brands, and (4) accelerating the recognition of future expenses under certain contractual obligations. In connection with the foregoing, we incurred pre-tax charges of $13.7 million in fiscal 2013, which included (a) a non-cash inventory impairment charge of $7.2 million, (b) employee severance costs of $0.7 million, (c) non-cash intangible and held for sale impairment charges of $3.0 million, (d) charges related to the recognition of expenses under contractual liabilities of $1.6 million that we otherwise would have recorded over the life of the contract and related revenues attributable to those contracts, and (e) other charges of $1.2 million.

Approximately $3.1 million of the charges will result in future cash expenditures. The restructuring plan was substantially complete by June 30, 2013 and the remaining cash expenditures are expected to be recognized over the next 12 months.

The following table presents the movement in the severance liability and other restructuring costs (in thousands):

	Severance			Other			Total
Accrued restructuring charges, January 1, 2013	$	-		$	-		$	-
Charges		649			1,926			2,575
Cash spent		(49	)		(289	)		(338	)
Accrued restructuring charges, March 31, 2013	$	600		$	1,637		$	2,237
Charges		54			443			497
Cash spent		(355	)		(293	)		(648	)
Accrued restructuring charges, June 30, 2013	$	299		$	1,787		$	2,086

Fiscal 2013 - Inventory Write-down and Intangibles and Held for Sale Impairments

Due to (1) higher than expected holiday 2012 sales allowances and higher returns of unsold inventories in our gifts segment in December 2012; (2) the violation of the fixed charge covenant in our credit agreement with our senior lender; and (3) the Restructuring announced in March 2013 in which we made the decision to exit low-volume products and emphasize our focus on licensed products and high volume private label products, we concluded there was a need to generate immediate liquidity by selling returned, exited and slow moving inventories at prices discounted deeply below historical averages. As a result of our determination to accelerate the liquidation of this inventory at deeply discounted prices, we recorded a $7.2 million noncash inventory write-down ($5.4 million and $1.8 million related to the accessories and gifts segments, respectively), which is included as an inventory write-down in our consolidated statement of operations. The inventory was marked down to our best estimate of the market value we anticipated realizing based on actual close-out orders received for the inventory and our experiences selling through inventory liquidation channels in the past, including in certain cases, an incremental write-down compared to our historical experiences to reflect the need to immediately liquidate the effected inventory. At June 30, 2013, the carrying value of impacted inventories was $1.1 million. We expect to sell off all impacted inventory at approximately its current net book value by September 30, 2013. Sales and gross margins of underperforming products were $8.0 million and $2.4 million, respectively, in fiscal 2013. We do not expect any additional material write-offs related to the sell-off of this inventory.

Due to the Restructuring and our decision to cease production and development of products under certain proprietary trade names and trade brands, we tested our definite and indefinite-lived intangible assets for recoverability during the third quarter of fiscal 2013 using fair value methods, such as discounted cash flows (indefinite-lived intangible) and undiscounted cash flows (definite-lived intangibles). As a result of the impairment tests, in connection with our restructuring plan, we recorded a $2.3 million impairment charge (accessories segment), which was included in the intangibles and held for sale impairments line in our consolidated statement of operations.

Due to our strategy to exit certain low-volume and unprofitable products and transition from proprietary to licensed brands, we determined that the life for our indefinite-lived trade brand intangible asset was no longer indefinite, and therefore the intangible asset will be amortized over the remaining period in which it is expected to contribute to cash flows, which is three years.

We recorded a $0.4 million impairment charge in the third quarter of fiscal 2013 on a held for sale property, which is included in the intangibles and held for sale impairments line in our consolidated statement of operations. Due to the length of time our last held for sale property has been on the market and our current liquidity forecasts, we decided to market the property below its carrying value.

Fiscal 2013 New License with Samsonite® and American Tourister®

During the second quarter of fiscal 2013, we announced the execution of a new licensing agreement with brands Samsonite® and American Tourister® (gifts segment). Under the terms of the agreement (which expires December 31, 2016), we will distribute gifts among a wide array of channels, including but not limited to, national retail and department stores, specialty stores and wholesale clubs. Revenues from this new license are expected to benefit results in the second half of fiscal 2014.

During fiscal year 2013, we made investments to procure and launch new licenses and incurred costs of $1.4 million without any significant associated sales or gross margins. These costs include charges for personnel, travel, and samples, which are included in selling, general and administrative expenses.

Fiscal 2012 New Licenses

During the first quarter of fiscal 2012, we entered into licensing agreements with brands Elie Tahari® (accessories segment), Miss Me® (accessories segment), and The Sharper Image® (gifts segment). The terms for each of the Elie Tahari®, Miss Me® and The Sharper Image® agreements are through December 31, 2014, December 31, 2014 and December 31, 2016, respectively. Under the terms of the agreements, we distribute belts or gifts among a wide array of channels, including but not limited to, national retail and department stores, clubs and specialty and boutique stores. In connection with our 2013 restructuring plan we ceased development and marketing of belts under the Elie Tahari® license and gifts under The Sharper Image license®.

During the third quarter of fiscal 2012, we entered into licensing agreements with brands Sperry Top-Sider® and Arnold Palmer®. The terms for each of the Sperry Top-Sider® and Arnold Palmer® agreements are through January 31, 2016 and December 31, 2016, respectively. Under the terms of the Sperry Top-Sider® agreement, we distribute belts and small leather goods for both men and women through department stores, specialty retail locations throughout the United States and Canada, Sperry Top-Sider’s own retail stores, and on sperrytopsider.com. Under the terms of the Arnold Palmer® agreement, we distribute belts through green grass shops, off-course golf specialty stores, department stores as well as in corporate and e-commerce shops.

During the third quarter of fiscal 2012, we expanded our previously executed Eddie Bauer® license to also include the rights to license and market belts and small leather goods.

During the fiscal year 2012, we made investments to procure and launch our new licenses and incurred costs of $597,000 without any associated sales or gross margins. These costs included charges for personnel, travel, and samples, which are included in selling, general and administrative expenses.

Fiscal 2012 Facilities Consolidation

During the third quarter of fiscal 2012, we consolidated certain facilities to simplify operations and reduce operating expenses. In connection with this consolidation, we incurred lease termination ($39,000), severance ($73,000) and other costs ($110,000) which were included in selling, general and administrative expenses.

Fiscal 2012 Bad Debt Provision

During the third quarter of fiscal 2012, we recognized a $900,000 provision for doubtful accounts for one close-out customer due to the customer’s financial difficulties raising doubts about the customer’s ability to make payment in the foreseeable future.

Fiscal 2012 Credit Facility

Effective August 25, 2011, we replaced our prior $27.5 million credit facility with a $35 million credit facility. The credit facility was guaranteed by substantially all of our and our subsidiaries assets, and required a specified profitability and fixed charge coverage and a minimum availability.

Related Party Transactions

During fiscal 2013 and 2012, we purchased $3.4 million and $4.3 million, respectively of accessories inventory from an entity affiliated with Chiang Chih-Chiang, a passive shareholder of the Company. At June 30, 2013 and 2012, the amount due to the passive shareholder for inventory purchases was $922,000 and $290,000, respectively. These amounts were included in the accounts payable line on the consolidated balance sheets. Although it is likely that we will continue our purchasing relationship with this existing shareholder, we believe there are numerous sources of products available at similar terms and conditions, and we do not believe the success of our operations is dependent on this or any one or more of our present suppliers.