Note 3 - Restructuring Plan Announced March 18, 2013

9 Months Ended

Mar. 31, 2013

Restructuring and Related Activities Disclosure [Text Block]

Note 3 – 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 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 a broad restructuring plan (the “Restructuring”) pursuant to which we will reduce the complexity of the 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 include:  (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 32%, 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 currently expect to incur pre-tax charges of approximately $12.5 million to $12.8 million in fiscal 2013, which include (a) a non-cash inventory impairment charge of $6.7 million, (b) employee severance costs of $0.6 million, (c) non-cash intangible impairment charges of $2.6 million and (d) other charges of approximately $2.6 million to $2.9 million.  

We recognized an inventory impairment charge of $6.7 million in the second quarter of fiscal 2013.  In the third quarter of fiscal 2013, we recognized an intangible impairment charge of $2.6 million, severance charges of $0.6 million, 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 other charges of $0.8 million.  We expect to recognize the remaining charges ($0.2 million to $0.5 million) in the fourth quarter of fiscal 2013.  Approximately $2.7 million to $2.9 million of the estimated charges are likely to result in future cash expenditures.  We expect the restructuring plan to be substantially complete by June 30, 2013 and expect to recognize the remaining cash expenditures over the next 12 months.

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

	Severance			Other			Total
Restructuring charges, January 1, 2013	$	-		$	-		$	-
Charges		649			1,926			2,575
Cash spent		(49	)		(289	)		(338	)
Restructuring charges, March 31, 2013	$	600		$	1,637		$	2,237