Notes
to
Unaudited Condensed Consolidated Financial Statements (Unaudited)
September
30, 2007
NOTE
A
BASIS OF
PRESENTATION
The
accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10
of
Regulation S-X. Accordingly, they do not include all the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management of Iconix Brand Group, Inc.
("Company", "we", "us", or "our"), all adjustments (consisting primarily of
normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three months (“Current Quarter”) and
nine months (“Current Nine Months”) ended September 30, 2007 are not necessarily
indicative of the results that may be expected for a full fiscal
year.
Impairment
losses are recognized for long-lived assets, including certain intangibles,
used
in operations when indicators of impairment are present and the undiscounted
cash flows estimated to be generated by those assets are not sufficient to
recover the assets' carrying amount. Impairment losses are measured by comparing
the fair value of the assets to their carrying amount.
Certain
prior year amounts have been reclassified to conform to the current year's
presentation.
For
further information, refer to the consolidated financial statements and
footnotes thereto included in the Company's Annual Report on Form 10-K for
the
year ended December 31, 2006.
NOTE
B -
MARKETABLE SECURITIES
Marketable
securities, which are accounted for as available-for-sale, are stated at fair
value in accordance with Statement of Financial Accounting Standards No. 115,
“Accounting for Certain Investments in Debt and Equity Securities,” and consist
of short-term debt securities. As of September 30, 2007, the Company had $13.0
million in marketable securities. There were no such investments as of December
31, 2006.
NOTE
C
ACQUISITION OF DANSKIN
On
March
9, 2007, the Company completed its acquisition of the Danskin trademarks from
Danskin, Inc. and Danskin Now, Inc. Danskin is a 125 year-old iconic brand
of
women's activewear, legwear, dancewear, yoga apparel and fitness equipment.
The
brand is sold through better department, specialty and sporting goods stores,
and directly by Triumph Apparel Corporation (formerly known as Danskin, Inc.)
(“Triumph”) through freestanding Danskin boutiques and Danskin.com. In
connection with the acquisition, we acquired Danskin Now, Inc.'s license of
the
Danskin Now® brand of apparel and fitness equipment to Wal-Mart
Stores.
The
purchase price for the acquisition was $70 million in cash and contingent
additional consideration of up to $15 million based on certain criteria relating
to the achievement of revenue and performance targets involving the licensing
of
the Danskin brand, all or a portion of which contingent consideration, if
earned, may be paid in shares of the Company's common stock. The cash
portion of the purchase price was self-funded from the Company's cash reserves.
Upon the closing, a subsidiary of the Company entered into a license agreement
with Triumph granting Triumph the right to continue to operate its wholesale
business and freestanding retail stores under the Danskin marks acquired by
the
Company in the acquisition.
(000's
omitted except share information)
|
|
|
|
|
|
Cash
paid at closing to sellers
|
|
|
|
|
$
|
70,000
|
|
Fair
value of 12,500 shares of $.001 par value common stock, at $19.33
fair
market value per share issued as a cost of the
acquisition
|
|
$
|
241
|
|
|
|
|
Fair
value of 30,000 warrants ($20.18 exercise price) issued as a cost
of the
acquisition
|
|
|
284
|
|
|
|
|
Fair
value of 133,334 warrants ($8.81 exercise price) issued as a cost
of the
acquisition
|
|
|
1,976
|
|
|
|
|
Total
equity consideration
|
|
|
|
|
|
2,501
|
|
Other
estimated costs of the acquisition
|
|
|
|
|
|
1,782
|
|
Total
|
|
|
|
|
$
|
74,283
|
|
The
preliminary purchase price was allocated to the estimated fair value of the
assets acquired as follows:
Trademarks
|
|
$
|
71,700
|
|
License
agreements
|
|
|
1,700
|
|
Goodwill
|
|
|
883
|
|
Total
allocated preliminary purchase price
|
|
$
|
74,283
|
|
The
Danskin trademark has been determined by management to have an indefinite useful
life and accordingly, consistent with Statement of Financial Accounting
Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”),
no amortization will be recorded in the Company's consolidated income
statements. The licensing contracts are being amortized on a straight-line
basis
over the remaining contractual period of approximately 3 to 5 years. The
goodwill is subject to a test for impairment on an annual basis. Any adjustments
resulting from the finalization of the purchase price allocations will affect
the amount assigned to goodwill.
NOTE
D
ACQUISITION OF ROCAWEAR AND UNAUDITED PROFORMA INFORMATION
On
March
30, 2007, the Company completed its acquisition of the Rocawear brand and
certain of the assets and rights related to the business of designing,
marketing, licensing and/or managing the Rocawear brand from Rocawear Licensing
LLC (“RLC”).
The
purchase price for the acquisition was $204 million in cash and contingent
additional consideration of up to $35 million based on certain criteria relating
to the achievement of revenue and performance targets involving the licensing
of
the Rocawear assets, all of which contingent consideration, if earned, is to
be
paid in shares of the Company's common stock. The cash portion of the purchase
price was funded pursuant to the Company's credit agreement with Lehman Brothers
Inc. and Lehman Commercial Paper Inc., which consists of a term loan facility
in
an aggregate principal amount of $212.5 million. For further details on this
credit agreement, see Note E. Upon the closing, a subsidiary of the Company
entered into a license agreement, expiring in March 2012, with Roc Apparel
Group, LLC (“Roc Apparel”), an affiliate of RLC, in which it granted Roc Apparel
the exclusive right to use the Rocawear assets in connection with the design,
manufacture, market and sale of menswear apparel products in the United States,
its territories and possessions and military installations throughout the world.
Further, upon closing, the Company committed an amount of $5.0 million to fund
its investment in Scion LLC, a joint venture formed by the Company with Shawn
Carter, a principal of RLC, which will operate as a brand management and
licensing company to identify brands to be acquired across a broad spectrum
of
consumer product categories. This investment has been funded subsequent to
September 30, 2007.
(000's
omitted except share information)
|
|
|
|
|
|
Cash
paid at closing to sellers
|
|
|
|
|
$
|
204,000
|
|
Fair
value of 12,500 shares of $.001 par value common stock, at $20.40
fair
market value per share issued as a cost of acquisition
|
|
|
255
|
|
|
|
|
Fair
value of 55,000 warrants ($20.40 exercise price) issued as a cost
of the
acquisition
|
|
|
562
|
|
|
|
|
Fair
value of 133,334 warrants ($8.81 exercise price) issued as a cost
of the
acquisition
|
|
|
2,109
|
|
|
|
|
Total
equity consideration
|
|
|
|
|
|
2,926
|
|
Other
estimated costs of the acquisition
|
|
|
|
|
|
3,208
|
|
Total
|
|
|
|
|
$
|
210,134
|
|
The
preliminary purchase price was allocated to the estimated fair value of the
assets acquired as follows:
(000's
omitted)
|
|
|
|
|
|
|
|
Trademarks
|
|
$
|
200,000
|
|
License
agreements
|
|
|
5,100
|
|
Non-compete
agreement
|
|
|
3,000
|
|
Goodwill
|
|
|
2,034
|
|
Total
allocated preliminary purchase price
|
|
$
|
210,134
|
|
The
Rocawear trademark has been determined by management to have an indefinite
useful life and accordingly, consistent with FAS 142, no amortization will
be
recorded in the Company's consolidated income statements. The licensing
contracts are being amortized on a straight-line basis over the remaining
contractual period of approximately 4 years. The goodwill is subject to a test
for impairment on an annual basis. Any adjustments resulting from the
finalization of the purchase price allocations will affect the amount assigned
to goodwill.
The
following unaudited pro-forma information presents a summary of the Company's
consolidated results of operations as if the 2006 acquisitions of Mossimo,
Inc.
("Mossimo") and the Mudd and Ocean Pacific® brands and certain related
assets, and the 2007 acquisitions of the Danskin (see Note C) and
Rocawear brands and certain related assets, and financings related to such
acquisitions had occurred on January 1, 2006. These pro forma results have
been
prepared for comparative purposes only and do not purport to be indicative
of
the results of operations which actually would have resulted had the
acquisitions occurred on January 1, 2006, or which may result in the
future.
(000's
omitted except share information)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended
September
30,
|
|
Nine
Months Ended
September
30,
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
Licensing
revenues
|
|
$
|
42,681
|
|
$
|
45,960
|
|
$
|
125,379
|
|
$
|
119,768
|
|
Operating
income
|
|
$
|
29,320
|
|
$
|
26,755
|
|
$
|
90,497
|
|
$
|
61,572
|
|
Net
income
|
|
$
|
16,993
|
|
$
|
9,026
|
|
$
|
47,843
|
|
$
|
22,750
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per common share
|
|
$
|
0.30
|
|
$
|
0.21
|
|
$
|
0.85
|
|
$
|
0.54
|
|
Diluted
earnings per common share
|
|
$
|
0.28
|
|
$
|
0.19
|
|
$
|
0.78
|
|
$
|
0.47
|
|
NOTE
E
DEBT
ARRANGEMENTS
Asset-Backed
Notes
The
financing for certain of the Company's acquisitions has been accomplished
through private placements by its subsidiary, IP Holdings LLC ("IP
Holdings") of Asset-Backed Notes secured by intellectual property assets
(trade names, trademarks, license agreements and payments and proceeds with
respect thereto relating to the Candies®, Bongo®, Joe Boxer®, Rampage®, Mudd and
London Fog brands) of IP Holdings. At September 30, 2007, the balance of the
Asset-Backed Notes was $142.3 million.
Cash
on
hand in the bank account of IP Holdings is restricted at any point in time
up to
the amount of the next debt principal and interest payment required under the
Asset-Backed Notes. Accordingly, $3.6 million and $4.3 million as of September
30 , 2007 and December 31, 2006, respectively, have been disclosed as restricted
cash within the Company's current assets. Further, in connection with IP
Holdings' issuance of Asset-Backed Notes, a reserve account has been established
and the funds on deposit in such account will be applied to the last principal
payment with respect to the Asset-Backed Notes. Accordingly, $14.5 million
and
$11.7 million as of September 30, 2007 and December 31, 2006, respectively,
have
been disclosed as restricted cash within other assets on the Company's balance
sheets.
Interest
rates and terms on the outstanding principal amount of the Asset-Backed Notes
as
of September 30, 2007 are as follows: $50.0 million principal amount bears
interest at a fixed interest rate of 8.45% with a six year term, $22.1 million
principal amount bears interest at a fixed rate of 8.12% with a six year term,
and $70.2 million principal amount bears interest at a fixed rate of 8.99%
with
a six and a half year term.
Neither
the Company nor any of its subsidiaries (other than IP Holdings) is obligated
to
make any payment with respect to the Asset-Backed Notes, and the assets of
the
Company and its subsidiaries (other than IP Holdings) are not available to
IP
Holdings' creditors. The assets of IP Holdings are not available to the
creditors of the Company or its subsidiaries (other than IP
Holdings).
The
Kmart Note
In
connection with the acquisition of the Joe Boxer brand in July 2005, the Company
assumed a promissory note, dated August 13, 2001 in the amount of $10.8 million,
which originated with the execution of the Kmart License by the former owners
of
the Joe Boxer brand. The note provides for interest at 5.12% and is
payable in three (3) equal annual installments, on a self-liquidating basis,
on
the last day of each year commencing on December 31, 2005 and continuing through
December 31, 2007. Payments due under the note may be off-set against any
royalties owed under the Kmart License. As of September 30, 2007, the
outstanding balance of the note was $3.8 million. The note may be pre-paid
without penalty.
Term
Loan Facility
In
connection with the acquisition of the Rocawear brand, in March 2007, the
Company entered into a $212.5 million credit agreement (the “Credit Agreement”
or “Term Loan Facility”) with Lehman Brothers Inc. and Lehman Commercial
Paper Inc. (“LCPI”). The Company pledged to LCPI 100% of the capital stock owned
by the Company in OP Holdings and Management Corporation, a Delaware corporation
(“OPHM”), and Studio Holdings and Management Corporation, a Delaware corporation
(“SHM”). The Company's obligations under the Credit Agreement are guaranteed by
each of OPHM and SHM, as well as by two of its other subsidiaries, OP Holdings
LLC, a Delaware limited liability company (“OP Holdings”), and Studio IP
Holdings LLC, a Delaware limited liability company ("Studio IP Holdings").
The
guarantees are secured by a pledge to LCPI of, among other things, the Ocean
Pacific, Danskin and Rocawear trademarks and related intellectual property
assets, license agreements and proceeds therefrom. The loan under the Credit
Agreement currently bears interest at a variable rate equal to the three-month
LIBOR plus 2.25% per annum, with minimum principal payable in equal quarterly
installments in annual aggregate amounts equal to 1.00% of the initial aggregate
principal amount of the loan, in addition to an annual payment equal to 50%
of
the excess cash flow from the Term Loan Facility group, with any remaining
unpaid principal balance to be due on March 30, 2013. The interest rate as
of
September 30, 2007 was 7.45%. At September 30, 2007, the balance of the Term
Loan Facility was $211.4 million. The $212.5 million in proceeds from the
Credit Agreement was used by the Company as follows: $204.0 million was used
to
pay the cash portion of the initial consideration for the acquisition of the
Rocawear brand; approximately $0.2 million was used to pay the costs associated
with the acquisition; $2.7 million will be used to pay additional costs
associated with the acquisition; and $3.9 million was used to pay costs
associated with the Term Loan Facility. The costs of $3.9 million relating
to
the Term Loan Facility have been deferred and are being amortized over the
life
of the loan, using the effective interest method. The remaining cash has
been invested by the Company to fund its investment in Scion LLC. See
Note D.
On
July
26, 2007, the Company purchased a hedge instrument to mitigate the risk of
rising interest rates. This hedge instrument caps the Company’s exposure to
rising interest rates at 6.00% for LIBOR for 50% of the forecasted outstanding
balance of the Term Loan Facility (“interest rate cap”). Based on management’s
assessment, the interest rate cap qualifies for hedge accounting under Statement
of Financial Accounting Standards 133 “Accounting for Derivative Instruments and
Hedging Transactions”. On a quarterly basis, the value of the hedge is adjusted
to reflect its current fair value, with any adjustment flowing through other
comprehensive income. At September 30, 2007, the fair value of the interest
rate
cap was $135,000, resulting in an other comprehensive loss of $193,000, which
is
reflected in the Unaudited Condensed Consolidated Balance Sheet and Statement
of
Stockholders’ Equity.
Convertible
Senior Subordinated Notes
On
June
20, 2007, the Company completed the sale of $287.5 million principal amount
of
the Company's 1.875% convertible senior subordinated notes due 2012 (the
“Convertible Notes”) in a private offering to certain institutional investors.
The net proceeds received by the Company from the offering were approximately
$281.1 million.
The
Convertible Notes bear interest at an annual rate of 1.875%, payable
semi-annually in arrears on June 30 and December 31 of each year, beginning
December 31, 2007. The Convertible Notes will be convertible into cash and,
if
applicable, shares of the Company's common stock based on a conversion rate
of
36.2845 shares of the Company's common stock, subject to customary adjustments,
per $1,000 principal amount of the Convertible Notes (which is equal to an
initial conversion price of approximately $27.56 per share) only under the
following circumstances: (1) during any fiscal quarter beginning after September
30, 2007 (and only during such fiscal quarter), if the closing price of the
Company's common stock for at least 20 trading days in the 30 consecutive
trading days ending on the last trading day of the immediately preceding fiscal
quarter is more than 130% of the conversion price per share, which is $1,000
divided by the then applicable conversion rate; (2) during the five business
day
period immediately following any five consecutive trading day period in which
the trading price per $1,000 principal amount of the Convertible Notes for
each
day of that period was less than 98% of the product of (a) the closing price
of
the Company's common stock for each day in that period and (b) the conversion
rate per $1,000 principal amount of the Convertible Notes; (3) if specified
distributions to holders of the Company's common stock are made, as set forth
in
the indenture governing the Convertible Notes (“Indenture”); (4) if a “change of
control” or other “fundamental change,” each as defined in the Indenture,
occurs; (5) if the Company chooses to redeem the Convertible Notes upon the
occurrence of a “specified accounting change,” as defined in the Indenture; and
(6) during the last month prior to maturity of the Convertible Notes. If the
holders of the Convertible Notes exercise the conversion provisions under the
circumstances set forth, the Company will need to remit the lower of the
principal balance of the Convertible Notes or their conversion value to the
holders in cash. As such, the Company would be required to classify the entire
amount outstanding of the Convertible Notes as a current liability in the
following quarter. The evaluation of the classification of amounts outstanding
associated with the Convertible Notes will occur every quarter.
Upon
conversion, a holder will receive an amount in cash equal to the lesser of
(a)
the principal amount of the Convertible Note or (b) the conversion value,
determined in the manner set forth in the Indenture. If the conversion value
exceeds the principal amount of the Convertible Note on the conversion date,
the
Company will also deliver, at its election, cash or the Company's common stock
or a combination of cash and the Company's common stock for the conversion
value
in excess of the principal amount. In the event of a change of control or other
fundamental change, the holders of the Convertible Notes may require the Company
to purchase all or a portion of their Convertible Notes at a purchase price
equal to 100% of the principal amount of the Convertible Notes, plus accrued
and
unpaid interest, if any. If a specified accounting change occurs, the Company
may, at its option, redeem the Convertible Notes in whole for cash, at a price
equal to 102% of the principal amount of the Convertible Notes, plus accrued
and
unpaid interest, if any. Holders of the Convertible Notes who convert their
Convertible Notes in connection with a fundamental change or in connection
with
a redemption upon the occurrence of a specified accounting change may be
entitled to a make-whole premium in the form of an increase in the conversion
rate.
Pursuant
to Emerging Issues Task Force (“EITF”) 90-19, “Convertible Bonds with Issuer
Option to Settle for Cash upon Conversion” (“EITF 90-19”), EITF 00-19,
“Accounting for Derivative Financial Instruments Indexed to, and Potentially
Settled in, a Company's Own Stock” (“EITF 00-19”), and EITF 01-6, “The Meaning
of Indexed to a Company's Own Stock” (“EITF 01-6”), the Convertible Notes are
accounted for as convertible debt in the accompanying Condensed Consolidated
Balance Sheet and the embedded conversion option in the Notes has not been
accounted for as a separate derivative. For a discussion of the effects of
the
Convertible Notes and the convertible note hedge and warrants discussed below
on
earnings per share, see Note I.
In
connection with the sale of the Convertible Notes, the Company entered into
hedges for the Convertible Notes (“Convertible Note Hedges”) with respect to its
common stock with two entities (the “Counterparties”). Pursuant to the
agreements governing these Convertible Note Hedges, the Company has purchased
call options (the “Purchased Call Options”) from the Counterparties covering up
to approximately 10.4 million shares of the Company's common stock. These
Convertible Note Hedges are designed to offset the Company's exposure to
potential dilution upon conversion of the Convertible Notes in the event that
the market value per share of the Company's common stock at the time of exercise
is greater than the strike price of the Purchased Call Options (which strike
price corresponds to the initial conversion price of the Convertible Notes
and
is simultaneously subject to certain customary adjustments). On June 20, 2007,
the Company paid an aggregate amount of approximately $76.3 million of the
proceeds from the sale of the Convertible Notes for the Purchased Call Options,
of which $26.7 million is included in the balance of deferred tax
assets.
The
Company also entered into separate warrant transactions with the Counterparties
whereby the Company, pursuant to the agreements governing these warrant
transactions, sold to the Counterparties warrants (the “Sold Warrants”) to
acquire up to 3.6 million shares of the Company's common stock, at a strike
price of $42.40 per share of the Company's common stock. The Sold Warrants
will
become exercisable on September 28, 2012 and will expire by the end of 2012.
The
Company received aggregate proceeds of approximately $37.5 million from the
sale
of the Sold Warrants on June 20, 2007.
The
Convertible Note Hedge transactions and the warrant transactions were separate
transactions, entered into by the Company with the Counterparties, and as such
are not part of the terms of the Convertible Notes and will not affect the
holders' rights under the Convertible Notes. In addition, holders of the
Convertible Notes will not have any rights with respect to the Purchased Call
Options or the Sold Warrants. As a result of these transactions, the Company
recorded a reduction to additional paid-in-capital of $12.1
million.
If
the
market value per share of the Company's common stock at the time of conversion
of the Convertible Notes is above the strike price of the Purchased Call
Options, the Purchased Call Options entitle the Company to receive from the
Counterparties net shares of the Company's common stock, cash or a combination
of shares of the Company's common stock and cash, depending on the consideration
paid on the underlying Convertible Notes, based on the excess of the then
current market price of the Company's common stock over the strike price of
the
Purchased Call Options. Additionally, if the market price of the Company's
common stock at the time of exercise of the Sold Warrants exceeds the strike
price of the Sold Warrants, the Company will owe the Counterparties net shares
of the Company's common stock or cash, not offset by the Purchased Call Options,
in an amount based on the excess of the then current market price of the
Company's common stock over the strike price of the Sold Warrants.
These
transactions will generally have the effect of increasing the conversion price
of the Convertible Notes to $42.40 per share of the Company's common stock,
representing a 100% percent premium based on the last reported sale price of
the
Company’s common stock of $21.20 per share on June 14, 2007.
Debt
Maturities
(In
000's)
The
Company's debt maturities are the following:
|
|
Total
|
|
2007
|
|
2008
|
|
2009
|
|
2010
|
|
2011
|
|
thereafter
|
|
Due
to Sweet (Note J)
|
|
$
|
3,230
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
3,230
|
|
$
|
-
|
|
Kmart
Note
|
|
|
3,781
|
|
|
3,781
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Asset
backed notes
|
|
|
142,339
|
|
|
19,976
|
|
|
21,760
|
|
|
23,704
|
|
|
25,822
|
|
|
36,773
|
|
|
14,304
|
|
Term
Loan Facility
|
|
|
211,438
|
|
|
2,125
|
|
|
2,125
|
|
|
2,125
|
|
|
2,125
|
|
|
2,125
|
|
|
200,813
|
|
Convertible
Notes
|
|
|
281,391
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
281,391
|
|
Total
Debt
|
|
$
|
642,179
|
|
$
|
25,882
|
|
$
|
23,885
|
|
$
|
25,829
|
|
$
|
27,947
|
|
$
|
42,128
|
|
$
|
496,508
|
|
NOTE
F -
UNZIPPED APPAREL, LLC (“UNZIPPED”)
Equity
Investment
On
October 7, 1998, the Company formed Unzipped with its then joint venture partner
Sweet Sportswear, LLC (“Sweet”), the purpose of which was to market and
distribute apparel under the Bongo label. The Company and Sweet each had a
50%
interest in Unzipped. Pursuant to the terms of the joint venture, the Company
licensed the Bongo trademark to Unzipped for use in the design, manufacture
and
sale of certain designated apparel products.
Acquisition
On
April
23, 2002, the Company acquired the remaining 50% interest in Unzipped from
Sweet
for a purchase price of three million shares of the Company's common stock
and
$11 million in debt evidenced by the 8% Senior Subordinated Note due in 2012
(“Sweet Note”). See Note J. In connection with the acquisition of Unzipped, the
Company filed a registration statement with the Securities and Exchange
Commission ("SEC") for the three million shares of the Company's common stock
issued to Sweet, which was declared effective by the SEC on July 29,
2003.
Related
Party Transactions
Prior
to
August 5, 2004, Unzipped was managed by Sweet pursuant to a management agreement
(the “Management Agreement”). Unzipped also had a supply agreement with Azteca
Productions International, Inc. ("Azteca") and a distribution agreement with
Apparel Distribution Services, LLC ("ADS"). All of these entities are owned
or
controlled by Hubert Guez.
On
August
5, 2004, Unzipped terminated the Management Agreement with Sweet, the supply
agreement with Azteca and the distribution agreement with ADS and commenced
a
lawsuit against Sweet, Azteca, ADS and Hubert Guez. See Note K.
There
were no transactions with these related parties during the nine months ended
September 30, 2007.
At
September 30, 2007, the Company included in accounts payable subject to
litigation amounts due to Azteca and ADS of $847,000 and $2,261,000
respectively. These amounts, however, were in dispute in the litigation at
September 30, 2007. See Note J.
NOTE
G -
SPECIAL CHARGES
Special
charges consist of professional fees and reimbursement of certain fees related
to the Unzipped litigation (See Note J)
NOTE
H -
STOCKHOLDERS' EQUITY
Public
Offering
On
December 13, 2006, the Company completed a public offering of its common stock.
All 10,784,750 shares of common stock sold by the Company in the offering were
sold at $18.75 per share. Net proceeds to the Company from the offering amounted
to approximately $189.5 million.
Stock
Options
The
Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
The
fair
value for these options was estimated at the date of grant using a Black-Scholes
option-pricing model with the following weighted-average
assumptions:
|
|
Nine
months ended
|
|
|
|
September
30,
|
|
|
|
2007
|
|
Expected
Volatility
|
|
|
.30-.50
|
|
Expected
Dividend Yield
|
|
|
0
|
%
|
Expected
Life (Term)
|
|
|
3-5
|
years
|
Risk-Free
Interest Rate
|
|
|
3.00-4.75
|
%
|
The
options that were granted under the Company's existing stock option and equity
incentive plans expire between five and ten years from the date of
grant.
Summaries
of the Company's stock option and warrant activity and related information
for
the Current Nine Months follow:
|
|
Weighted-Average
|
|
|
|
Options
|
|
Exercise
Price
|
|
Outstanding
January 1, 2007
|
|
|
5,769,632
|
|
$
|
4.35
|
|
Granted
|
|
|
-
|
|
|
-
|
|
Canceled
|
|
|
-
|
|
|
-
|
|
Exercised
|
|
|
(290,339
|
)
|
|
5.56
|
|
Expired
|
|
|
-
|
|
|
-
|
|
Outstanding
September 30, 2007
|
|
|
5,479,293
|
|
$
|
4.28
|
|
Exercisable
at September 30, 2007
|
|
|
5,382,625
|
|
$
|
4.21
|
|
|
|
Weighted-Average
|
|
|
|
Warrants
|
|
Exercise
Price
|
|
Outstanding
January 1, 2007
|
|
|
799,175
|
|
$
|
11.02
|
|
Granted
in connection with Sold Warrants (see Note E)
|
|
|
3,628,450
|
|
|
42.40
|
|
Granted
|
|
|
80,000
|
|
|
20.32
|
|
Canceled
|
|
|
-
|
|
|
-
|
|
Exercised
|
|
|
(702,275
|
)
|
|
11.34
|
|
Expired
|
|
|
-
|
|
|
-
|
|
Outstanding
September 30, 2007
|
|
|
3,805,350
|
|
$
|
41.08
|
|
Exercisable
at September 30, 2007
|
|
|
176,900
|
|
$
|
13.96
|
|
All
warrants issued in connection with acquisitions are recorded at fair market
value using the Black Scholes model and are recorded as part of purchase
accounting. See Notes C and D.
Other
warrants issued to non-employees are valued at fair market value using the
Black
Scholes model and are expensed over the vesting period.
At
September 30, 2007, 1,904,345, 1,597,334, 922,250, and 564,721 shares of common
stock were reserved for issuance upon exercise of stock options under the
Company's 2006 Equity Incentive Plan and its 2002, 2001, and 2000 Stock Option
Plans, respectively.
Restricted
stock
Compensation
cost for restricted stock is measured as the excess, if any, of the quoted
market price of our stock at the date the common stock is issued over the amount
the employee must pay to acquire the stock (which is generally zero). The
compensation cost, net of projected forfeitures, is recognized over the period
between the issue date and the date any restrictions lapse, with compensation
cost for grants with a graded vesting schedule recognized on a straight-line
basis over the requisite service period for each separately vesting portion
of
the award as if the award was, in substance, multiple awards. The restrictions
do not affect voting and dividend rights.
The
Company has from time to time awarded restricted shares of common stock to
certain employees. The awards have restriction periods tied to employment and
vest over a period of six months to five years. The cost of the restricted
stock
awards, which is the fair market value on the date of grant net of estimated
forfeitures, is expensed ratably over the vesting period. During the Current
Nine Months, the Company awarded 93,804 restricted shares with a vesting period
of six months to five years and a fair market value of $1.9 million. As of
September 30, 2007, 19,838 shares related to restricted stock grants had
vested.
Unearned
compensation expense related to restricted stock grants for the Current Quarter
and Current Nine Months was approximately $523,000 and $1,207,000, respectively.
An additional amount of $2.1 million is expected to be expensed evenly over
a
period of approximately 2-3 years.
NOTE
I
- EARNINGS PER SHARE
Basic
earnings per share includes no dilution and is computed by dividing net income
available to common shareholders by the weighted average number of common shares
outstanding for the period. Diluted earnings per share reflect, in periods
in
which they have a dilutive effect, the effect of common shares issuable upon
exercise of stock options and warrants. The difference between reported basic
and diluted weighted-average common shares results from the assumption that
all
dilutive stock options and warrants outstanding were exercised. Diluted loss
per
share reflects, in periods in which they have a dilutive effect, the effect
of
common shares issuable upon exercise of stock options.
As
of
September 30, 2007, of the total potentially dilutive shares related to stock
options and warrants, approximately 3.6 million warrants to purchase common
stock shares were anti-dilutive, and no stock options were
anti-dilutive.
Certain
effects on diluted net income per common share may result in future periods
as a
result of the Company's issuance of $281.1 million in Convertible Notes and
the Company's entry into note hedge and warrant agreements during the Current
Quarter. See Note E for a description of the key terms of these
transactions. Under EITF 04-8, “The Effect of Contingently Convertible
Instruments on Diluted Earnings Per Share”, and EITF 90-19, and because of the
Company's obligation to settle the par value of the Convertible Notes in cash,
the Company is not required to include any shares underlying the Convertible
Notes in its weighted average shares outstanding - assuming dilution until
the
average stock price per share for the quarter exceeds the $27.56 conversion
price of the Convertible Notes and only to the extent of the additional shares
that the Company may be required to issue in the event that the Company's
conversion obligation exceeds the principal amount of the Convertible Notes
converted. These conditions had not been met as of September 30, 2007. At any
such time in the future that these conditions are met, only the number of shares
that would be issuable (under the “treasury” method of accounting for the share
dilution) will be included, which is based upon the amount by which the average
stock price exceeds the conversion price. Therefore, no additional shares are
included in the Company's calculations of earnings per share and diluted
earnings per share for the Current Quarter and the Current Nine Months. The
condition to include underlying shares related to the warrants had not been
met
as of September 30, 2007 and was not met as of October 31, 2007.
|
|
For
the Quarter Ended
|
|
For
the Nine Months Ended
|
|
|
|
September
30,
|
|
September
30,
|
|
September
30,
|
|
September
30,
|
|
(in
millions)
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
16,993
|
|
$
|
7,946
|
|
$
|
44,529
|
|
$
|
23,648
|
|
Weighted
average common shares outstanding
|
|
|
56,801
|
|
|
39,782
|
|
|
56,569
|
|
|
38,075
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share
|
|
$
|
0.30
|
|
$
|
0.20
|
|
$
|
0.79
|
|
$
|
0.62
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
16,993
|
|
$
|
7,946
|
|
$
|
44,529
|
|
$
|
23,648
|
|
Weighted
average common shares outstanding
|
|
|
56,801
|
|
|
39,782
|
|
|
56,569
|
|
|
38,075
|
|
Effect
of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee
stock options and restricted stock
|
|
|
4,579
|
|
|
5,036
|
|
|
4,720
|
|
|
5,394
|
|
Weighted
average common shares and share
equivalents
outstanding
|
|
|
61,380
|
|
|
44,818
|
|
|
61,289
|
|
|
43,469
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per share
|
|
$
|
0.28
|
|
$
|
0.18
|
|
$
|
0.73
|
|
$
|
0.54
|
|
NOTE
J
- COMMITMENTS AND CONTINGENCIES
Sweet
Sportswear/Unzipped litigation
On
August
5, 2004, the Company, along with its subsidiaries, Unzipped, Michael Caruso
& Co., referred to as Caruso, and IP Holdings, collectively referred to as
the plaintiffs, commenced a lawsuit in the Superior Court of California, Los
Angeles County, against Unzipped's former manager, former supplier and former
distributor, Sweet, Azteca and ADS, respectively, and a principal of these
entities and former member of the Company's board of directors, Hubert Guez,
collectively referred to as the Guez defendants. The Company pursued numerous
causes of action against the Guez defendants, including breach of contact,
breach of fiduciary duty, trademark infringement and others and sought damages
in excess of $20 million. On March 10, 2005, Sweet, Azteca and ADS, collectively
referred to as cross-complainants, filed a cross-complaint against the Company
claiming damages resulting from a variety of alleged contractual breaches,
among
other things.
In
January 2007, a jury trial was commenced, and on April 10, 2007, the jury
returned a verdict of approximately $45 million in favor of the Company and
its
subsidiaries, finding in favor of the Company and its subsidiaries on every
claim that they pursued, and against the Guez defendants on every counterclaim
asserted. Additionally, the jury found that all of the Guez defendants acted
with malice, fraud or oppression with regard to each of the tort claims asserted
by the Company and its subsidiaries, and on April 16, 2007, awarded plaintiffs
$5 million in punitive damages against Mr. Guez personally. The Guez defendants
filed post-trial motions seeking, among other things, a new trial. Though a
set
of preliminary rulings dated September 27, 2007, the Court granted in part,
and
denied in part, the Guez defendants’ post trial motions, and denied plaintiffs’
request that the Court enhance the damages awarded against the Guez defendants
arising from their infringement of plaintiffs’ trademarks. Through these
rulings, the Court, among other things, reduced the amount of punitive damages
assessed against Mr. Guez to $4 million, and reduced the total damages awarded
against the Guez defendants by approximately 50%. Plaintiffs anticipate that
a
judgment taking into account these rulings will be entered in their favor within
the next couple of weeks. In the upcoming months the Company and its
subsidiaries will request that the Court award them, pursuant to various
contractual and statutory fee-shifting provisions, certain fees, expenses and
costs incurred in connection with this litigation.
The
Company and its subsidiaries intend to vigorously pursue collection of the
judgments against the Guez defendants. Upon the entry of such judgments by
the
Court, the Guez defendants have the right to appeal the judgments, but should
be
required to post an appropriate bond to secure the judgments and to stay
execution proceedings. Plaintiffs also intend to appeal, among other things,
those parts of the jury’s verdicts vacated by the Court in connection with the
Guez defendants’ post-trial motions, and intend to vigorously pursue such
appeal.
Bader/Unzipped
litigation
On
November 5, 2004, Unzipped commenced a lawsuit in the Supreme Court of New
York,
New York County, against Unzipped's former president of sales, Gary Bader,
alleging that Mr. Bader breached certain fiduciary duties owed to Unzipped
as
its president of sales, unfairly competed with Unzipped and tortiously
interfered with Unzipped's contractual relationships with its employees. On
October 5, 2005, Unzipped amended its complaint to assert identical claims
against Bader's company, Sportswear Mercenaries, Ltd. On October 14, 2005,
Bader
and Sportswear Mercenaries filed an answer containing counterclaims to
Unzipped's amended complaint, and a third-party complaint, which was dismissed
in its entirety on June 9, 2006, except with respect to a single claim that
it
owes Bader and Sportswear Mercenaries $72,000. The Company intends to vigorously
pursue its claims against Bader and Sportswear Mercenaries and to vigorously
defend against the remaining claim asserted against it.
Redwood
Shoe litigation
This
litigation, which was commenced in January 2002, by Redwood Shoe Corporation
(“Redwood”), one of the Company's former buying agents of footwear, was
dismissed with prejudice by the court on February 15, 2007, pursuant to an
agreement in principle by the Company, Redwood, its affiliate, Mark Tucker,
Inc.
(“MTI”) and MTI's principal, Mark Tucker, to settle the matter. The proposed
settlement agreement provides for the Company to pay a total of $1.9 million
to
Redwood. The stipulation and order dismissing the action may be reopened should
the settlement agreement not be finalized and consummated by all of the parties.
The Company is awaiting receipt of the signed Settlement Agreement from the
other parties.
Bongo
Apparel, Inc. litigation
On
or
about June 12, 2006, Bongo Apparel, Inc. (“BAI”), filed suit in the Supreme
Court of the State of New York, County of New York, against the Company alleging
certain breaches of contract and other claims and seeks, among other things,
damages of at least $25 million. The Company believes that, in addition to
other
defenses and counterclaims that it intends to assert, the claims in the lawsuit
are the subject of a release and settlement agreement that was entered into
by
the parties in August 2005, and has moved to dismiss most of the claims. In
response to the motion to dismiss, BAI made a cross-motion for partial summary
judgment on some of its claims. On April 25, 2007, the Court entered an order
refusing to consider, and declining to accept, BAI's summary judgment motion.
The Company's motion to dismiss remains pending before the Court.
Additionally,
on or about October 6, 2006, the Company and IP Holdings filed suit in the
U.S.
District Court for the Southern District of New York against BAI and its
guarantor, TKO Apparel, Inc. (“TKO”) In that complaint, the Company asserts
various contract, tort and trademark claims that arose as a result of the
failures of BAI with regard to the Bongo men's jeans wear business and its
wrongful conduct with regard to the Bongo women's jeans wear business. The
Company and IP Holdings are seeking monetary damages in an amount in excess
of
$10 million and a permanent injunction with respect to the use of the Bongo
trademark. On January 4, 2007, the District Court denied the motion of BAI
and
TKO to dismiss the federal court action. Currently, a stay of the District
Court
proceedings is in place.
Mossimo
litigation
In
April 2005, Mr. Mossimo Giannulli offered to acquire all of the outstanding
publicly held common stock of Mossimo, Inc. at a price of $4.00 per share.
Following the announcement of such offer, six purported class action lawsuits
were filed in the Court of Chancery of the State of Delaware seeking an
injunction preventing the proposed acquisition of Mossimo by the Company and
asserting that the Mossimo directors breached their fiduciary duties to the
Mossimo stockholders. These six cases were consolidated. Although Mr. Giannulli
subsequently withdrew his acquisition proposal, plaintiffs filed a first
consolidated amended complaint in March 2006, in which they allege, among other
things, that Mossimo and its board of directors breached their fiduciary duties
and engaged in self-dealing in approving the merger agreement with the
Company.
In
addition, on April 12, 2006, a purported shareholder class action lawsuit was
filed in the Superior Court of the State of California for the County of Los
Angeles asserting similar claims against Mossimo and its directors with respect
to the merger and seeking, among other relief, to enjoin the merger and rescind
any agreements entered into in connection with the merger, and to recover costs,
including attorney's fees.
On
September 27, 2006, Mr. Giannulli and other defendants entered into a memorandum
of understanding with the Delaware plaintiffs to settle the Delaware action
which was approved by the Delaware Chancery Court on February 26, 2007. The
settlement agreement provides that if the Company sells Mossimo or the Mossimo
business prior to October 31, 2007 to an unaffiliated third party and if the
consideration for such sale is greater than 120% of the amount paid to the
Mossimo stockholders in the merger, 30% of that excess amount will be paid
into
a settlement fund to be administered and distributed by the plaintiffs' lawyers
under the supervision of the Delaware court. This additional amount, if it
becomes due and distributable, will be paid to all persons who owned Mossimo
stock, directly or indirectly, between April 12, 2005 and October 31, 2006,
and
will not constitute additional merger consideration. Mossimo also negotiated
in
good faith with the plaintiffs' lead counsel concerning the amount of attorney
fees and expenses to be paid by Mossimo or the Company, as its successor, and
not to oppose such counsel's application to the court of up to $800,000 in
payment of such fees and expenses. In consideration of these terms, the parties
agreed that they would fully and finally release and discharge all claims
against each other. On February 26, 2007, the Court of Chancery of the State
of
Delaware entered an order approving the settlement and the action was dismissed
with prejudice. In connection with the settlement, plaintiffs counsel was
awarded fees and expenses in the amount of $800,000.
On
October 27, 2006, Mr. Giannulli and other defendants also entered into a
settlement letter with the California plaintiffs in the California action.
Under
the terms of this settlement, Mr. Giannulli and the other defendants agreed
to
pay plaintiffs' counsel between $620,000 and $650,000. On March 1, 2007,
following the Delaware Chancery Court's approval of the Delaware settlement,
the
parties filed a stipulation with the California court requesting the dismissal
of the action with prejudice and requesting an order awarding Plaintiffs'
counsel between $620,000 and $650,000. On March 13, 2007, the California court
entered an order approving the settlement, and the action was dismissed with
prejudice, and Plaintiff's counsel was awarded $650,000 for fees and
expenses.
The
Company received an insurance payment of $700,000 in connection with the above
mentioned litigations.
Normal
course litigation
From
time
to time, the Company is also made a party to litigation incurred in the normal
course of business. While any litigation has an element of uncertainty, the
Company believes that the final outcome of any of these routine matters will
not
have a material effect on the Company's financial position or future
liquidity.
Joint
Venture with Shawn Carter
The
Company has committed an amount of $5.0 million to fund its investment in Scion
LLC, a joint venture formed by the Company with Shawn Carter, which will operate
as a brand management and licensing company to identify brands to be acquired
across a broad spectrum of consumer product categories. This investment has
been
funded subsequent to September 30, 2007 (see Note D).
NOTE
K -
RELATED PARTY TRANSACTIONS
On
May 1,
2003, the Company granted Kenneth Cole Productions, Inc. the exclusive worldwide
license to design, manufacture, sell, distribute and market footwear under
its
Bongo brand. The chief executive officer and chairman of Kenneth Cole
Productions is Kenneth Cole, who is the brother of Neil Cole, the Company's
Chief Executive Officer and President. During the Current Quarter and the three
months ended September 30, 2006 (“Prior Year Quarter”), the Company received
$283,000 and $350,000, respectively, in royalties from Kenneth Cole
Productions.
The
Candie's Foundation, a charitable foundation founded by Neil Cole for the
purpose of raising national awareness about the consequences of teenage
pregnancy, owed the Company $200,000 and $297,000 at September 30, 2007 and
December 31, 2006, respectively.
NOTE
L -
INCOME TAXES
The
Company accounts for income taxes in accordance with SFAS No. 109, “Accounting
for Income Taxes” (“SFAS 109”). Under SFAS 109, deferred tax assets and
liabilities are determined based on differences between the financial reporting
and tax basis of assets and liabilities and are measured using the enacted
tax
rates and laws that will be in effect when the differences are expected to
reverse. A valuation allowance is established when necessary to reduce deferred
tax assets to the amount expected to be realized. In determining the need for
a
valuation allowance, management reviews both positive and negative evidence
pursuant to the requirements of SFAS 109, including current and historical
results of operations, the annual limitation on utilization of net operating
loss carry forwards pursuant to Internal Revenue Code section 382, future income
projections and the overall prospects of the Company's business. Based upon
management's assessment of all available evidence, including the Company's
completed transition into a licensing business, estimates of future
profitability based on projected royalty revenues from its licensees, and the
overall prospects of the Company's business, management is of the opinion that
the Company will be able to utilize the deferred tax assets in the foreseeable
future, and as such do not anticipate requiring a further valuation allowance.
Based on current estimates of pre-tax income for the year ending December 31,
2007, the Company will have a net income tax expense for this year.
In
July 2006, the FASB issued FASB Interpretation No. 48 “Accounting for
Uncertainty in Income Taxes” (“FIN 48”). FIN 48 clarifies the accounting for
income taxes by prescribing the minimum recognition threshold a tax position
is
required to meet before being recognized in the financial statements. FIN 48
also provides guidance on derecognition, measurement, classification, interest
and penalties, and disclosure requirements. FIN 48 is effective for fiscal
years
beginning after December 15, 2006. Accordingly, we adopted FIN 48 beginning
January 1, 2007. The implementation of FIN 48 did not have a significant impact
on our financial position or results of operations. The total unrecognized
tax
benefit was $1,052,000 at the date of adoption. However, the liability is not
recognized for accounting purposes because the related deferred tax asset has
been fully reserved in prior years.
The
Company recognizes interest and penalties related to uncertain tax positions
in
income tax expense which were zero for the Current Quarter.
The
Company is subject to taxation in the US and various state and local
jurisdictions. The Company remains subject to examination by US Federal and
state tax authorities for tax years 2003 through 2006.
NOTE
M
RECENT
ACCOUNTING STANDARDS
In
September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements" (“SFAS
157”) which establishes a framework for measuring fair value in generally
accepted accounting principles and expands disclosures about fair value
measurements. SFAS 157 defines fair value as the price that would be received
to
sell an asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date. SFAS 157 is effective for financial
statements issued for fiscal years beginning after November 15, 2007, and
interim periods within those fiscal years. The adoption of SFAS 157 is not
expected to have a material impact on our results of operations or our financial
position.
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Asset and Financial Liability: Including an amendment to FASB
Statement No. 115” (“SFAS 159”). The standard permits all entities to elect to
measure certain financial instruments and other items at fair value with changes
in fair value reported in earnings. SFAS 159 is effective as of the beginning
of
the first fiscal year that begins after November 15, 2007. The adoption of
SFAS
No. 159 is not expected to have a material impact on our results of operations
or our financial position.
NOTE
N -
SUBSEQUENT EVENTS
On
October 3, 2007 (the “Closing Date”), the Company completed its acquisition of
all of the issued and outstanding limited liability company interests (the
“Company Interests”) of Official Pillowtex LLC (“Official Pillowtex”), from the
owners of such Company Interests (the “Sellers”) pursuant to a purchase and sale
agreement dated September 6, 2007 by and among the Company, Official Pillowtex
and the Sellers. Official Pillowtex is the owner of a portfolio of home brands
including four primary brands, Cannon®, Royal Velvet®, Fieldcrest® and Charisma®
and numerous others home brands including St. Mary's and Santa Cruz. The closing
of this transaction occurred following the early termination of the statutory
waiting period required under the Hart-Scott-Rodino Antitrust Improvements
Act
of 1976, as amended.
In
accordance with the terms of the Purchase Agreement, on the Closing Date, the
Company paid an aggregate of approximately $232.1 million in cash, which is
subject to adjustment to reflect certain prepaid royalties and royalties
receivable, as the purchase price for the Company Interests, of which (i)
approximately $208.1 million was paid to the Sellers by the Company,(ii) $15.0
million, together with any interest and any other income earned thereon, was
released to the Sellers by U.S. Bank National Association (the “Escrow Agent”)
in accordance with the escrow agreement dated September 6, 2007 (the “Escrow
Agreement”) by and among the Company, the Official Pillowtex and the Escrow
Agent, and (iii) $9.0 million, together with any interest and any other income
earned thereon, will be paid to the Sellers by the Escrow Agent on the twelve
(12) month anniversary of the Closing Date, less any amounts due to the Company
pursuant to the Sellers' indemnification obligations to the Company for breaches
of the Sellers' representations, warranties, covenants and obligations made
under the Purchase Agreement. The total of $24.0 million held in escrow prior
to
closing is reflected in the Unaudited Condensed Consolidated Balance Sheet
as of
September 30, 2007 under cash and cash equivalents in escrow for pending
acquisition.
In
addition, in accordance with the terms of the Purchase Agreement, the Sellers
were granted a contingent right to receive aggregate additional payments of
up
to $15.0 million in cash, based upon the Official Pillowtex brands surpassing
specific revenue targets.
In
connection with the Company’s purchase of Official Pillowtex, the Company
pledged its membership interests in Official Pillowtex, as well as its
membership interests in another of the Company’s wholly-owned subsidiaries,
Mossimo Holdings LLC, to the lenders under the Company’s Term Loan Facility (see
Note E). These two subsidiaries also became guarantors of the Company’s
obligations under the Term Loan Facility, and their guarantees are secured
by a
pledge of, among other things, the Official Pillowtex portfolio of brands and
the Mossimo brand, respectively.