United
States
Securities
and Exchange Commission
Washington,
D.C. 20549
FORM
10-Q
x
Quarterly Report
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
For the
Quarterly Period Ended
March
31, 2010
OR
o
Transition
Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
For the
Transition Period From
________
to
________
.
Commission
file number 0-10593
ICONIX
BRAND GROUP, INC.
(Exact
name of registrant as specified in its charter)
Delaware
|
|
11-2481903
|
(State
or other jurisdiction of incorporation or
organization)
|
|
(I.R.S.
Employer Identification No.)
|
|
|
|
1450 Broadway, New York, NY
|
|
10018
|
(Address
of principal executive offices)
|
|
(Zip
Code)
|
(212)
730-0030
(Registrant's
telephone number, including area code)
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes
x
No
o
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files). Yes
o
No
o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
|
Large accelerated filer
x
|
Accelerated filer
o
|
|
|
|
|
Non
- accelerated filer
o
(Do not check if a smaller reporting company)
|
Smaller reporting company
o
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act)
Yes
o
No
x
Indicate
the number of shares outstanding of each of the issuer's classes of Common
Stock, as of the latest practicable date.
Common
Stock, $.001 Par Value – 72,184,712 shares as of May 3, 2010.
INDEX
FORM
10-Q
Iconix
Brand Group, Inc. and Subsidiaries
|
|
|
Page No.
|
Part I.
|
Financial
Information
|
|
|
|
|
|
|
Item 1.
|
Financial
Statements
|
|
3
|
|
|
|
|
|
Condensed
Consolidated Balance Sheets – March 31, 2010 (unaudited) and December
31, 2009
|
|
3
|
|
Unaudited
Condensed Consolidated Income Statements – Three Months Ended March 31,
2010 and 2009
|
|
4
|
|
Unaudited
Condensed Consolidated Statement of Stockholders' Equity – Three Months
Ended March 31, 2010
|
|
5
|
|
Unaudited
Condensed Consolidated Statements of Cash Flows - Three Months Ended March
31, 2010 and 2009
|
|
6
|
|
Notes
to Unaudited Condensed Consolidated Financial Statements
|
|
8
|
|
|
|
|
Item 2.
|
Management's
Discussion and Analysis of Financial Condition and Results of
Operations
|
|
24
|
|
|
|
|
Item 3.
|
Quantitative
and Qualitative Disclosures about Market Risk
|
|
29
|
|
|
|
|
Item 4.
|
Controls
and Procedures
|
|
29
|
|
|
|
|
Part II.
|
Other
Information
|
|
|
|
|
|
|
Item 1.
|
Legal
Proceedings
|
|
30
|
Item 1A.
|
Risk
Factors
|
|
30
|
Item 2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
|
33
|
Item 6.
|
Exhibits
|
|
34
|
|
|
|
|
Signatures
|
|
|
35
|
Part I.
Financial Information
Item 1.
Financial Statements
Iconix
Brand Group, Inc. and Subsidiaries
Condensed
Consolidated Balance Sheets
(in
thousands, except par value)
|
|
March
31,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(Unaudited)
|
|
|
|
|
Assets
|
|
|
|
|
|
|
Current
Assets:
|
|
|
|
|
|
|
Cash
(including restricted cash of $8,536 in 2010 and $6,163 in
2009)
|
|
$
|
194,495
|
|
|
$
|
201,544
|
|
Accounts
receivable
|
|
|
61,029
|
|
|
|
62,667
|
|
Deferred
income tax assets
|
|
|
1,985
|
|
|
|
1,886
|
|
Prepaid
advertising and other
|
|
|
16,523
|
|
|
|
14,549
|
|
Total
Current Assets
|
|
|
274,032
|
|
|
|
280,646
|
|
Property
and equipment:
|
|
|
|
|
|
|
|
|
Furniture,
fixtures and equipment
|
|
|
9,084
|
|
|
|
9,060
|
|
Less:
Accumulated depreciation
|
|
|
(2,931
|
)
|
|
|
(2,611
|
)
|
|
|
|
6,153
|
|
|
|
6,449
|
|
Other
Assets:
|
|
|
|
|
|
|
|
|
Restricted
cash
|
|
|
15,866
|
|
|
|
15,866
|
|
Marketable
securities
|
|
|
7,284
|
|
|
|
6,988
|
|
Goodwill
|
|
|
170,737
|
|
|
|
170,737
|
|
Trademarks
and other intangibles, net
|
|
|
1,252,592
|
|
|
|
1,254,689
|
|
Deferred
financing costs, net
|
|
|
4,378
|
|
|
|
4,803
|
|
Investments
and joint ventures
|
|
|
56,855
|
|
|
|
36,568
|
|
Other
assets – non-current
|
|
|
25,018
|
|
|
|
25,867
|
|
|
|
|
1,532,730
|
|
|
|
1,515,518
|
|
Total
Assets
|
|
$
|
1,812,915
|
|
|
$
|
1,802,613
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and Stockholders' Equity
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable and accrued expenses
|
|
$
|
30,092
|
|
|
$
|
24,446
|
|
Deferred
revenue
|
|
|
16,471
|
|
|
|
14,802
|
|
Current
portion of long-term debt
|
|
|
62,526
|
|
|
|
93,251
|
|
Other
current liabilities
|
|
|
4,000
|
|
|
|
-
|
|
Total
current liabilities
|
|
|
113,089
|
|
|
|
132,499
|
|
|
|
|
|
|
|
|
|
|
Non-current
deferred income taxes
|
|
|
121,899
|
|
|
|
117,090
|
|
Long-term
debt, less current maturities
|
|
|
548,107
|
|
|
|
569,128
|
|
Long-term
deferred revenue
|
|
|
11,431
|
|
|
|
11,831
|
|
Other
liabilities
|
|
|
14,316
|
|
|
|
2,293
|
|
Total
Liabilities
|
|
|
808,842
|
|
|
|
832,841
|
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders'
Equity
|
|
|
|
|
|
|
|
|
Common
stock, $.001 par value shares authorized 150,000; shares
issued 73,152 and 72,759 respectively
|
|
|
73
|
|
|
|
73
|
|
Additional
paid-in capital
|
|
|
732,994
|
|
|
|
725,504
|
|
Retained
earnings
|
|
|
220,243
|
|
|
|
195,469
|
|
Accumulated
other comprehensive loss
|
|
|
(3,675
|
)
|
|
|
(4,032
|
)
|
Less:
Treasury stock – 1,219 and 1,219 shares at cost,
respectively
|
|
|
(7,861
|
)
|
|
|
(7,861
|
)
|
Total
Iconix Stockholders’ Equity
|
|
|
941,774
|
|
|
|
909,153
|
|
Non-controlling
interest
|
|
|
62,299
|
|
|
|
60,619
|
|
Total
Stockholders’ Equity
|
|
|
1,004,073
|
|
|
|
969,772
|
|
Total
Liabilities and Stockholders' Equity
|
|
$
|
1,812,915
|
|
|
$
|
1,802,613
|
|
See Notes
to Unaudited Condensed Consolidated Financial Statements.
Iconix
Brand Group, Inc. and Subsidiaries
Unaudited
Condensed Consolidated Income Statements
(in
thousands, except earnings per share data)
|
|
Three Months Ended March
31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
Licensing
and other revenue
|
|
$
|
71,704
|
|
|
$
|
50,501
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative expenses
|
|
|
22,318
|
|
|
|
16,270
|
|
Expenses
related to specific litigation
|
|
|
6
|
|
|
|
54
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
|
49,380
|
|
|
|
34,177
|
|
|
|
|
|
|
|
|
|
|
Other
expenses
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
11,029
|
|
|
|
10,438
|
|
Interest
and other income
|
|
|
(1,054
|
)
|
|
|
(603
|
)
|
Equity
earnings on joint ventures
|
|
|
(1,113
|
)
|
|
|
(37
|
)
|
Other
expenses - net
|
|
|
8,862
|
|
|
|
9,798
|
|
|
|
|
|
|
|
|
|
|
Income
before income taxes
|
|
|
40,518
|
|
|
|
24,379
|
|
|
|
|
|
|
|
|
|
|
Provision
for income taxes
|
|
|
14,064
|
|
|
|
8,730
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
26,454
|
|
|
$
|
15,649
|
|
|
|
|
|
|
|
|
|
|
Less:
Net income attributable to non-controlling interest
|
|
$
|
1,680
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Net
income attributable to Iconix Brand Group, Inc.
|
|
$
|
24,774
|
|
|
$
|
15,649
|
|
|
|
|
|
|
|
|
|
|
Earnings
per share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.35
|
|
|
$
|
0.27
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.33
|
|
|
$
|
0.26
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of common shares outstanding:
|
|
|
|
|
|
|
|
|
Basic
|
|
|
71,537
|
|
|
|
58,044
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
74,426
|
|
|
|
60,892
|
|
See Notes
to Unaudited Condensed Consolidated Financial Statements.
Iconix
Brand Group, Inc. and Subsidiaries
Unaudited
Condensed Consolidated Statement of Stockholders' Equity
Three
Months Ended March 31, 2010
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Other
|
|
|
|
|
|
Non-
|
|
|
|
|
|
|
Common Stock
|
|
|
Paid-in
|
|
|
Retained
|
|
|
Comprehensive
|
|
|
Treasury
|
|
|
Controlling
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Earnings
|
|
|
Loss
|
|
|
Stock
|
|
|
Interest
|
|
|
Total
|
|
Balance
at January 1, 2010
|
|
|
72,759
|
|
|
$
|
73
|
|
|
$
|
725,504
|
|
|
$
|
195,469
|
|
|
$
|
(4,032
|
)
|
|
$
|
(7,861
|
)
|
|
$
|
60,619
|
|
|
$
|
969,772
|
|
Shares
issued on exercise of stock options
|
|
|
53
|
|
|
|
-
|
|
|
|
515
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
515
|
|
Shares
issued on vesting of restricted stock
|
|
|
39
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Shares
issued for earn-out on acquisition
|
|
|
301
|
|
|
|
-
|
|
|
|
4,719
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,719
|
|
Tax
benefit of stock option exercises
|
|
|
-
|
|
|
|
-
|
|
|
|
28
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
28
|
|
Amortization
expense in connection with restricted stock
|
|
|
-
|
|
|
|
-
|
|
|
|
2,228
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,228
|
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
24,774
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,680
|
|
|
|
26,454
|
|
Realization
of cash flow hedge, net of tax
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
61
|
|
|
|
-
|
|
|
|
-
|
|
|
|
61
|
|
Change
in fair value of securities, net of tax
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
296
|
|
|
|
-
|
|
|
|
-
|
|
|
|
296
|
|
Total
comprehensive income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
26,811
|
|
Balance
at March 31, 2010
|
|
|
73,152
|
|
|
$
|
73
|
|
|
$
|
732,994
|
|
|
$
|
220,243
|
|
|
$
|
(3,675
|
)
|
|
$
|
(7,861
|
)
|
|
$
|
62,299
|
|
|
$
|
1,004,073
|
|
See Notes
to Unaudited Condensed Consolidated Financial Statements.
Iconix
Brand Group, Inc. and Subsidiaries
Unaudited
Condensed Consolidated Statements of Cash Flows
(in
thousands)
|
|
Three Months Ended March
31,
|
|
|
|
2010
|
|
|
2009
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
Net
income
|
|
$
|
26,454
|
|
|
$
|
15,649
|
|
Depreciation
of property and equipment
|
|
|
320
|
|
|
|
336
|
|
Amortization
of trademarks and other intangibles
|
|
|
2,106
|
|
|
|
1,787
|
|
Amortization
of deferred financing costs
|
|
|
573
|
|
|
|
605
|
|
Amortization
of convertible note discount
|
|
|
3,670
|
|
|
|
3,340
|
|
Stock-based
compensation expense
|
|
|
2,228
|
|
|
|
1,612
|
|
Change
in non-controlling interest
|
|
|
-
|
|
|
|
(146
|
)
|
Allowance
for doubtful accounts
|
|
|
1,750
|
|
|
|
416
|
|
Accrued
interest on long-term debt
|
|
|
2,013
|
|
|
|
1,644
|
|
(Earnings)
loss on equity investment in joint venture
|
|
|
(1,113
|
)
|
|
|
108
|
|
Deferred
income taxes
|
|
|
4,568
|
|
|
|
5,623
|
|
Changes
in operating assets and liabilities, net of business
acquisitions:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(112
|
)
|
|
|
(551
|
)
|
Prepaid
advertising and other
|
|
|
(1,974
|
)
|
|
|
1,655
|
|
Other
assets
|
|
|
849
|
|
|
|
(468
|
)
|
Deferred
revenue
|
|
|
1,269
|
|
|
|
(4,826
|
)
|
Accounts
payable and accrued expenses
|
|
|
9,275
|
|
|
|
(1,067
|
)
|
Other
liabilities
|
|
|
23
|
|
|
|
-
|
|
Net
cash provided by operating activities
|
|
|
51,899
|
|
|
|
25,717
|
|
Cash
flows used in investing activities:
|
|
|
|
|
|
|
|
|
Purchases
of property and equipment
|
|
|
(24
|
)
|
|
|
(11
|
)
|
Additions
to trademarks
|
|
|
(9
|
)
|
|
|
(58
|
)
|
Acquisition
of 50% interest in joint venture
|
|
|
(4,000
|
)
|
|
|
-
|
|
Payment
of expenses related to acquisitions
|
|
|
(173
|
)
|
|
|
-
|
|
Distributions
to equity partners
|
|
|
999
|
|
|
|
-
|
|
Earn-out
payment on acquisition
|
|
|
(719
|
)
|
|
|
(6,667
|
)
|
Net
cash used in investing activities
|
|
|
(3,926
|
)
|
|
|
(6,736
|
)
|
Cash
flows used in financing activities:
|
|
|
|
|
|
|
|
|
Proceeds
from exercise of stock options and warrants
|
|
|
515
|
|
|
|
136
|
|
Shares
repurchased on vesting of restricted stock and exercise of stock
options
|
|
|
-
|
|
|
|
(30
|
)
|
Expiration
of cash flow hedge
|
|
|
-
|
|
|
|
34
|
|
Shares
repurchased on the open market
|
|
|
-
|
|
|
|
(1,455
|
)
|
Payment
of long-term debt
|
|
|
(55,564
|
)
|
|
|
(44,077
|
)
|
Non-controlling
interest contribution
|
|
|
-
|
|
|
|
2,066
|
|
Excess
tax benefit from share-based payment arrangements
|
|
|
27
|
|
|
|
261
|
|
Restricted
cash - current
|
|
|
(2,373
|
)
|
|
|
(4,228
|
)
|
Net
cash used in financing activities
|
|
|
(57,395
|
)
|
|
|
(47,293
|
)
|
Net
decrease in cash and cash equivalents
|
|
|
(9,422
|
)
|
|
|
(28,312
|
)
|
Cash,
beginning of period
|
|
|
195,381
|
|
|
|
66,404
|
|
Cash,
end of period
|
|
$
|
185,959
|
|
|
|
38,092
|
|
Balance
of restricted cash - current
|
|
|
8,536
|
|
|
|
5,103
|
|
Total
cash including current restricted cash, end of period
|
|
$
|
194,495
|
|
|
|
43,195
|
|
Supplemental
disclosure of cash flow information:
|
|
Three Months Ended March
31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
Cash
paid during the period:
|
|
|
|
|
|
|
Income
taxes
|
|
$
|
-
|
|
|
$
|
302
|
|
Interest
|
|
$
|
4,131
|
|
|
$
|
4,874
|
|
Supplemental
disclosures of non-cash investing and financing activities:
|
|
Three Months Ended March
31,
|
|
|
|
2010
|
|
|
2009
|
|
Acquisitions:
|
|
|
|
|
|
|
Common
stock issued
|
|
$
|
4,719
|
|
|
$
|
-
|
|
See Notes
to Unaudited Condensed Consolidated Financial Statements.
Iconix
Brand Group, Inc. and Subsidiaries
Notes to
Unaudited Condensed Consolidated Financial Statements
March 31,
2010
1.
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.
(the "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 ended March 31, 2010
(“Current Quarter”) are not necessarily indicative of the results that may be
expected for a full fiscal year.
Certain
prior period amounts have been reclassified to conform to the current period’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, 2009 (“2009”).
2. Investments
and Joint Ventures
Scion LLC
(“Scion”) is a brand management and licensing company formed by the Company with
Shawn “Jay-Z” Carter in March 2007 to buy, create and develop brands across a
spectrum of consumer product categories. On November 7, 2007,
Scion, through its wholly-owned subsidiary Artful Holdings LLC (“Artful
Holdings”), purchased Artful Dodger, an exclusive, high end urban apparel brand
for a purchase price of $15.0 million. The Artful Dodger brand is currently
licensed to Roc Apparel Group LLC ("Roc Apparel") in the United States and its
territories.
The
Artful Dodger brand has been licensed to wholesale partners and distributors in
Canada and Europe.
At
inception, the Company determined that it would consolidate Scion since,
under Accounting Standards Codification (“ASC”) Topic 810 “Consolidation”,
the Company is the primary beneficiary of the variable interest
entity.
In March
2009, the Company, through its investment in Scion, effectively acquired a
16.6% interest in Roc Apparel, its licensee for the Roc Apparel and
Artful Dodger brands, for $1. The Company has determined that Roc
Apparel is a variable interest entity as defined by ASC Topic
810. However, the Company is not the primary
beneficiary. The investment in Roc Apparel is accounted for
under the cost method of accounting. As part of the transaction, the
Company and its Scion partner each contributed approximately $2.1 million to
Scion, totaling approximately $4.1 million, which was deposited as cash
collateral under the terms of Roc Apparel's financing
agreements. The total contributed cash of approximately $4.1 million,
which is owned by Scion, is included as short-term restricted cash in the
Company’s balance sheet. The Company’s maximum exposure for this
investment is $2.1 million, the amount of the original
guarantee. During the Current Quarter, the Company recognized $0.5
million in dividends from its investment in Roc Apparel, which is included
in interest and other income in the unaudited condensed consolidated income
statement.
In
December 2007, the Financial Accounting Standards Board (“FASB”) issued guidance
under ASC Topic 810 regarding non-controlling interests in consolidated
financial statements. This guidance requires the recognition of a
non-controlling interest (formerly known as a “minority interest”) as equity in
the consolidated financial statements and separate from the parent’s
equity. For the Current Quarter, the amount of net loss attributable
to the non-controlling interest is approximately $0.3 million and has been
included in net income attributable to non-controlling interest in the unaudited
condensed consolidated income statement. The impact of consolidating
the joint venture in the three months ended March 31, 2009 (“Prior Year
Quarter”) decreased net income by $0.2 million.
At March
31, 2010, the impact of consolidating the joint venture on the Company’s
unaudited condensed consolidated balance sheet has increased current assets
by $4.6 million, non-current assets by $13.9 million and current liabilities by
$0.9 million. At December 31, 2009, the impact of consolidating the
joint venture on the Company’s consolidated balance sheet had increased current
assets by $4.6 million, non-current assets by $14.2 million and current
liabilities by $1.3 million.
At March
31, 2010 and December 31, 2009, the carrying value of the consolidated assets
that are collateral for the variable interest entity’s obligations total $13.4
million and $13.7 million, respectively, which is comprised of the Artful Dodger
trademark.
Iconix
China
In
September 2008, the Company and Novel Fashions Holdings Limited (“Novel”) formed
a joint venture (“Iconix China”) to develop and market the Company's brands in
the People’s Republic of China, Hong Kong, Macau and Taiwan (the “China
Territory”). Pursuant to the terms of this transaction, the Company contributed
to Iconix China substantially all rights to its brands in the China Territory
and committed to contribute an additional $5.0 million, and Novel committed to
contribute $20 million. Upon closing of the transaction, the Company
contributed $2.0 million and Novel contributed $8.0 million. In
September 2009, the parties amended the terms of the transaction documents to
eliminate the obligation of the Company to make any additional contributions and
to reduce Novel’s remaining contribution commitment to $9.0 million, payable as
follows: $4.0 million payable on or prior to August 1, 2010, $3.0 million
payable on or prior to June 1, 2011, and $2.0 million payable on or prior to
June 1, 2012. Each of these payments is subject to reduction
by mutual agreement of the parties.
At
inception, the Company determined, in accordance with ASC Topic 810, based
on the corporate structure, voting rights and contributions of the Company and
Novel, Iconix China is a variable interest entity and not subject to
consolidation, as, under ASC Topic 810, the Company is not the primary
beneficiary of Iconix China. The Company has recorded its investment
under the equity method of accounting.
At March
31, 2010, Iconix China’s balance sheet included approximately $5.0 million in
current assets, $21.9 million in total assets, $0.6 million in current
liabilities, and $0.6 million in total liabilities. At December 31,
2009, Iconix China’s balance sheet included approximately $5.7 million in
current assets, $22.6 million in total assets, $0.4 million in current
liabilities, and $0.4 million in total liabilities.
For the
Current Quarter, Iconix China’s statement of operations reflects less than $0.1
million in revenue and approximately $0.6 million in operating
expenses. As a result, for the Current Quarter, the Company recorded
an equity loss of approximately $0.3 million on its equity investment in the
Iconix China joint venture, representing the Company's 50% equity interest in
Iconix China. For the Prior Year Quarter, the Company recorded an
equity loss of approximately $0.3 million on its equity investment in the Iconix
China joint venture.
Iconix
Latin America
In
December 2008, the Company contributed substantially all rights to its
brands in Mexico, Central America, South America, and the Caribbean (the “Latin
America Territory”) to Iconix Latin America LLC (“Iconix Latin America”), a then
newly formed subsidiary of the Company. On December 29, 2008, New
Brands America LLC (“New Brands”), an affiliate of the Falic Group, purchased a
50% interest in Iconix Latin America. In consideration for its 50%
interest in Iconix Latin America, New Brands agreed to pay $6.0 million to the
Company. New Brands paid $1.0 million upon closing of this
transaction and has committed to pay an additional $5.0 million over the
30-month period following closing. As of March 31, 2010, the balance
owed to the Company under this obligation is $3.0 million. The current
portion of $2.5 million is included in the unaudited condensed consolidated
balance sheet in prepaid advertising and other and the long term portion of $0.5
million is included in other assets – non-current.
Based on
the corporate structure, voting rights and contributions of the Company and New
Brands, Iconix Latin America is not subject to consolidation. This
conclusion was based on the Company’s determination that the entity met the
criteria to be considered a “business,” and therefore was not subject to
consolidation due to the “business scope exception” of ASC Topic 810. As
such, the Company has recorded its investment under the equity method of
accounting.
At March
31, 2010, Iconix Latin America’s balance sheet included approximately $1.3
million in current assets, $1.5 million in total assets, $0.3 million in current
liabilities, and $0.3 million in total liabilities. At December 31,
2009, Iconix Latin America’s balance sheet included approximately $1.0 million
in current assets, $1.2 million in total assets, $0.2 million in current
liabilities, and $0.2 million in total liabilities. For the Current
Quarter, Iconix Latin America’s statement of operations reflects that it had
approximately $0.6 million in revenue and approximately $0.1 million in
operating expenses. As a result, during the Current Quarter, the
Company recorded equity earnings of approximately $0.2 million on its equity
investment in the Iconix Latin America joint venture, representing the Company’s
50% equity interest in Iconix Latin America. For the Prior Year Quarter,
the Company recorded equity earnings of approximately $0.2 million on its equity
investment in the Iconix Latin America joint venture.
Ed
Hardy
In May
2009, the Company acquired a 50% interest in Hardy Way LLC (“Hardy Way”), the
owner of the Ed Hardy brands and trademarks, for $17.0 million, comprised of
$9.0 million in cash and 588,688 shares of the Company’s common stock valued at
$8.0 million. In addition, the sellers of the 50% interest received
an additional $1.0 million in shares of the Company’s common stock pursuant to
an earn-out based on royalties received by Hardy Way for the year ending
December 31, 2009. As of December 31, 2009, the Company had
determined that the sellers had met the threshold of royalties received by Ed
Hardy to trigger this earn-out.
Based on
the corporate structure, voting rights and contributions of the Company and
Hardy Way, Hardy Way is not subject to consolidation. This
conclusion was based on the Company’s determination that the entity met the
criteria to be considered a “business,” and therefore was not subject to
consolidation due to the “business scope exception” of ASC Topic 810. As
such, the Company has recorded its investment under the equity method of
accounting.
At March
31, 2010, Hardy Way’s balance sheet included approximately $1.8 million in
current assets, $1.8 million in total assets, $0.2 million in current
liabilities, and $0.2 million in total liabilities. At December 31,
2009, Hardy Way’s balance sheet included approximately $1.9 million in current
assets, $1.9 million in total assets, $0.2 million in current liabilities, and
$0.2 million in total liabilities. For the Current Quarter, Hardy
Way’s statement of operations reflects that it had approximately $2.1 million in
revenue and approximately $0.2 million in operating
expenses. As a result, during the Current Quarter, the Company
recorded equity earnings of approximately $1.0 million on its equity investment
in the Hardy Way joint venture, representing the Company’s 50% equity interest
in Hardy Way. As of March 31, 2010 and December 31, 2009, the Company’s
equity at risk in Hardy Way was approximately $19.6 million and $19.7 million,
respectively.
IPH
Unltd
In
October 2009, the Company consummated, through a newly formed subsidiary, IP
Holdings Unltd LLC (“IPH Unltd”), a transaction with the sellers of the Ecko
portfolio of brands, including Ecko and Zoo York (the “Ecko Assets”), pursuant
to which the sellers sold and/or contributed the Ecko Assets to IPH Unltd joint
venture in exchange for a 49% membership interest in IPH Unltd and $63.5 million
in cash which had been contributed to IPH Unltd by the Company. As a
result of this transaction, the Company owns a 51% controlling membership
interest in IPH Unltd. In addition, IPH Unltd borrowed $90.0 million
from a third party to repay certain indebtedness of the
sellers. Approximately $0.7 million in costs associated with this
transaction were expensed in 2009.
The
following table is a reconciliation of cash paid to sellers and the fair value
of the sellers non-controlling interest:
(000’s
omitted)
Cash
paid to sellers
|
|
$
|
63,500
|
|
Fair
value of 49% non-controlling interest to sellers
|
|
|
57,959
|
|
|
|
$
|
121,459
|
|
The
estimated fair value of the assets acquired, less long-term debt issued, is
allocated as follows:
(000’s
omitted)
Trademarks
|
|
$
|
203,515
|
|
License
agreements
|
|
|
6,830
|
|
Non-compete
agreement
|
|
|
400
|
|
Goodwill
|
|
|
714
|
|
Long-term
debt issued
|
|
|
(90,000
|
)
|
|
|
$
|
121,459
|
|
ASC Topic
810 affirms that consolidation is appropriate when one entity has a controlling
financial interest in another entity. The Company owns a 51% membership interest
in IPH Unltd compared to the minority owner’s 49% membership interest. Further,
the Company believes that the voting and veto rights of the minority shareholder
are merely protective in nature and does not provide them with substantive
participating rights in IPH Unltd. As such, IPH Unltd is subject to
consolidation with the Company, which is reflected in the Company’s financial
statements as of March 31, 2010 and December 31, 2009.
In
accordance with ASC Topic 810, the Company recognizes the non-controlling
interest of IPH Unltd as equity in the consolidated financial statements and
separate from the parent’s equity. As such, for the Current Quarter,
the amount of net income attributable to the non-controlling interest is
approximately $1.9 million and has been included in net income attributable to
non-controlling interest in the unaudited condensed consolidated income
statement.
The Ecko
and Zoo York trademarks have been determined by management to have an indefinite
useful life and accordingly, consistent with ASC Topic 350, no amortization is
being recorded in the Company’s consolidated income statements. The goodwill and
trademarks are 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 the Company’s Consolidated Income Statement.
The $0.7 million of goodwill is deductible for income tax
purposes. The licensing contracts are being amortized on a
straight-line basis over the remaining contractual periods of approximately 1 to
9 years.
At March
31, 2010, the impact of consolidating the joint venture on the Company’s
unaudited condensed consolidated balance sheet has increased current assets
by $21.2 million, non-current assets by $210.9 million, current liabilities by
$22.4 million and total liabilities by $99.9 million. At December 31,
2009, the impact of consolidating the joint venture on the Company’s
Consolidated Balance Sheet has increased current assets by $15.4 million,
non-current assets by $211.2 million, current liabilities by $21.2 million and
total liabilities by $101.2 million.
At March
31, 2010 and December 31, 2009, the carrying value of the consolidated assets
that are collateral for the variable interest entity’s obligations total $210.1
million and $210.3 million, respectively, which is comprised of trademarks and
license agreements. The assets of the Company are not available to the
variable interest entity's creditors.
Iconix
Europe
In
December 2009, the Company contributed substantially all rights to its brands in
all member states and candidate states of the European Union and certain other
European countries (“European Territory”) to Iconix Europe LLC, a newly formed
wholly-owned subsidiary of the Company (“Iconix Europe”). Also in
December 2009 and shortly after the formation of Iconix Europe, an investment
group led by The Licensing Company and Albion Equity Partners LLC purchased a
50% interest in Iconix Europe through Brand Investments Vehicles Group 3 Limited
(“BIV”), to assist the Company in developing, exploiting, marketing
and licensing the Company's brands in the European Territory. In
consideration for its 50% interest in Iconix Europe, BIV agreed to pay $4.0
million, of which $3.0 million was paid upon closing of this transaction in
December 2009, the remaining $1.0 million to be paid in December 2010, and is
included in prepaid advertising and other on the Company’s unaudited condensed
consolidated balance sheet at March 31, 2010 and December 31,
2009.
At
inception, the Company determined, in accordance with ASC 810, based on the
corporate structure, voting rights and contributions of the Company and BIV,
that Iconix Europe is not a variable interest entity and not subject to
consolidation. The Company has recorded its investment under the
equity method of accounting.
At March
31, 2010, Iconix Europe’s balance sheet included approximately $0.4 million in
current assets, $26.9 million in total assets, $0.1 million in current
liabilities, and $0.1 million in total liabilities. At December 31,
2009, Iconix Europe’s balance sheet included approximately $26.5 million in
total assets.
For the
Current Quarter, Iconix Europe’s statement of operations reflects $0.4 million
in revenue and approximately $0.1 million in operating expenses. As a
result, for the Current Quarter, the Company recorded equity earnings of
approximately $0.2 million, representing the Company's 50% equity investment in
the Iconix Europe joint venture.
MG
Icon
In March
2010, the Company acquired a 50% interest in MG Icon LLC (“MG Icon”), the owner
of the Material Girl brands and trademarks and other rights associated with the
artist, performer and celebrity known as "Madonna", from Purim LLC (“Purim”) for
$20.0 million, $4.0 million of which was paid at closing. Of the
remaining $16.0 million owed to Purim, $4.0 million is included in other current
liabilities and $12.0 million is included in other liabilities. In
addition, Purim may be entitled to receive an additional consideration pursuant
to an earn-out based on certain qualitative criteria.
At
inception, the Company determined, in accordance with ASC 810, based on the
corporate structure, voting rights and contributions of the Company and Purim,
that MG Icon is not a variable interest entity and not subject to
consolidation. The Company has recorded its investment under the
equity method of accounting.
3. Fair
Value Measurements
ASC Topic
820 “Fair Value Measurements”, which the Company adopted on January 1, 2008,
establishes a framework for measuring fair value and requires expanded
disclosures about fair value measurement. While ASC 820 does not require any new
fair value measurements in its application to other accounting pronouncements,
it does emphasize that a fair value measurement should be determined based on
the assumptions that market participants would use in pricing the asset or
liability. As a basis for considering market participant assumptions in fair
value measurements, ASC 820 established the following fair value hierarchy that
distinguishes between (1) market participant assumptions developed based on
market data obtained from sources independent of the reporting entity
(observable inputs) and (2) the reporting entity's own assumptions about market
participant assumptions developed based on the best information available in the
circumstances (unobservable inputs):
Level 1:
Observable inputs such as quoted prices for identical assets or liabilities in
active markets
Level 2:
Other inputs that are observable directly or indirectly, such as quoted prices
for similar assets or liabilities or market-corroborated inputs
Level 3:
Unobservable inputs for which there is little or no market data and which
requires the owner of the assets or liabilities to develop its own assumptions
about how market participants would price these assets or
liabilities
The
valuation techniques that may be used to measure fair value are as
follows:
(A)
Market approach - Uses prices and other relevant information generated by market
transactions involving identical or comparable assets or
liabilities
(B)
Income approach - Uses valuation techniques to convert future amounts to a
single present amount based on current market expectations about those future
amounts, including present value techniques, option-pricing models and excess
earnings method
(C) Cost
approach - Based on the amount that would currently be required to replace the
service capacity of an asset (replacement cost)
To
determine the fair value of certain financial instruments, the Company relies on
Level 2 inputs generated by market transactions of similar instruments where
available, and Level 3 inputs using an income approach when Level 1 and Level 2
inputs are not available. The Company’s assessment of the significance of a
particular input to the fair value measurement requires judgment and may affect
the valuation of financial assets and financial liabilities and their placement
within the fair value hierarchy. The following table summarizes the instruments
measured at fair value at March 31, 2010 and December 31, 2009:
Carrying Amount as of
|
|
|
|
|
|
|
|
|
|
|
|
March
31, 2010
|
|
|
|
|
|
|
|
|
|
Valuation
|
|
(
000's omitted
)
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Technique
|
|
Marketable
Securities
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
7,284
|
|
(B)
|
|
Cash
Flow Hedge
|
|
$
|
-
|
|
|
$
|
1
|
|
|
$
|
-
|
|
(A)
|
|
December
31, 2009
|
|
|
|
|
|
|
|
|
|
Valuation
|
|
(
000's omitted
)
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Technique
|
|
Marketable
Securities
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
6,988
|
|
(B)
|
|
Cash
Flow Hedge
|
|
$
|
-
|
|
|
$
|
1
|
|
|
$
|
-
|
|
(A)
|
|
Marketable
Securities
Marketable
securities, which are accounted for as available-for-sale, are stated at fair
value in accordance with ASC Topic 320 “Investments – Debt and Equity” and
consist of auction rate securities (“ARS”). Temporary changes in fair market
value are recorded as other comprehensive income or loss, whereas other than
temporary markdowns will be realized through the Company’s income
statement.
As of
March 31, 2010, the Company held ARS with a face value of $13.0 million and a
fair value of approximately $7.3 million. In December 2008, the
insurer of the ARS exercised its put option to replace the underlying securities
of the ARS with its preferred securities. Prior to the second quarter of 2009
the ARS had paid cash dividends according to their stated
terms. During the second quarter of 2009, the Company received notice
from the insurer that payment of cash dividends ceased as of July 31, 2009 and
would be resumed only if the board of directors of the insurer declared such
cash dividends to be payable at a later date. The insurer’s board of
directors temporarily reinstated dividend payments for the 4-week period from
December 23, 2009 to January 15, 2010. In January 2010, the Company
commenced a lawsuit against the broker-dealer of these ARS alleging, among
other things, fraud, and seeking full recovery of the $13.0 million face value
of the ARS, as well as legal costs and punitive damages. Prior to
June 30, 2009, the Company estimated the fair value of its ARS with a discounted
cash flow model where the Company used the expected rate of cash dividends to be
received. As the cash dividend payments have ceased, the Company has
changed its methodology for estimating the fair value of the
ARS. Beginning June 30, 2009, the Company has estimated the fair
value of its ARS using the present value of the weighted average of several
scenarios of recovery based on management’s assessment of the probability of
each scenario. The Company considered a variety of factors in its model
including: credit rating of the issuer and insurer, comparable market data (if
available), current macroeconomic market conditions, quality of the underlying
securities, and the probabilities of several levels of recovery and
reinstatement of the cash dividend payments. As a result of its
evaluation, during the Current Quarter the Company has recorded an unrealized
pre-tax gain of approximately $0.3 million in accumulated other comprehensive
loss as an increase to stockholders’ equity to reflect a temporary increase in
the fair value of the ARS. The Company believes the cumulative
decrease in fair value since inception is temporary due to general macroeconomic
market conditions. Further, the Company has the ability and intent to
hold the ARS until an anticipated full redemption. These funds will not be
available to the Company unless a successful auction occurs, a buyer is found
outside the auction process, or if recovery is realized through settlement
or legal judgment of the action brought against the broker-dealer. As the ARS
have failed to auction and may not auction successfully in the near future, the
Company has classified its ARS as non-current. The Company continues to monitor
the auction rate securities market as well as the financial condition of the
insurer of the ARS and considers its impact, if any, on the fair value of its
ARS. The following table summarizes the activity for the
period:
Auction Rate Securities
(000's omitted)
|
|
|
|
|
|
2010
|
|
|
2009
|
|
Balance
at January 1
|
|
$
|
6,988
|
|
|
$
|
7,522
|
|
Additions
|
|
|
-
|
|
|
|
-
|
|
Gains
(losses) reported in earnings
|
|
|
-
|
|
|
|
-
|
|
Gains
(losses) reported in accumulated other comprehensive loss
|
|
|
296
|
|
|
|
(66
|
)
|
Balance
at March 31
|
|
$
|
7,284
|
|
|
$
|
7,456
|
|
Cash
Flow Hedge
On July
26, 2007, the Company purchased a hedge instrument from Lehman Brothers Special
Financing Inc. (“LBSF”) to mitigate the cash flow risk of rising interest rates
on the Term Loan Facility (see Note 5 for a description of this credit
agreement). 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 ASC Topic 815
“Derivatives and Hedging”. 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. The fair value of this instrument is
obtained by comparing the characteristics of this cash flow hedge with similarly
traded instruments, and is therefore classified as Level 2 in the fair value
hierarchy. At March 31, 2010 and December 31, 2009, the fair value of the
Interest Rate Cap was approximately $1. On October 3, 2008, LBSF filed a
petition for bankruptcy protection under Chapter 11 of the United States
Bankruptcy Code. The Company does not believe that the LBSF bankruptcy
filing and its potential impact on LBSF will have a material adverse effect on
the Company’s financial position, results of operations or cash
flows.
Financial
Instruments
At March
31, 2010 and December 31, 2009, the fair values of cash and cash equivalents,
receivables and accounts payable and accrued expenses approximated their
carrying values due to the short-term nature of these instruments. The fair
value of the note receivable from New Brands (see Note 2) approximates its $3.0
million carrying value; the fair value of the note receivable due from the
purchasers of the Canadian trademark for Joe Boxer approximates its $4.0 million
carrying value; and, the fair value of the note payable to Purim LLC
approximates its $16.0 million carrying value. The fair value of the
estimated fair values of other financial instruments subject to fair value
disclosures, determined based on broker quotes or quoted market prices or rates
for the same or similar instruments, and their related carrying amounts are as
follows:
(000's omitted)
|
|
March 31, 2010
|
|
|
December 31, 2009
|
|
|
|
Carrying Amount
|
|
|
Fair Value
|
|
|
Carrying Amount
|
|
|
Fair Value
|
|
Long-term
debt, including current portion
|
|
$
|
610,633
|
|
|
$
|
626,228
|
|
|
$
|
662,379
|
|
|
$
|
650,732
|
|
Financial
instruments expose the Company to counterparty credit risk for nonperformance
and to market risk for changes in interest. The Company manages exposure
to counterparty credit risk through specific minimum credit standards,
diversification of counterparties and procedures to monitor the amount of credit
exposure. The Company’s financial instrument counterparties are substantial
investment or commercial banks with significant experience with such
instruments.
Non-Financial
Assets and Liabilities
On
January 1, 2009, the Company adopted the provisions of ASC Topic 820 with
respect to its non-financial assets and liabilities requiring non-recurring
adjustments to fair value using a market participant approach. The Company uses
a discounted cash flow model with level 3 inputs to measure the fair value of
its non-financial assets and liabilities. The Company had no
impairment adjustments for the Current Quarter or Prior Year Quarter. The
Company also adopted the provisions of ASC 820 as it relates to purchase
accounting for its acquisitions. The Company has goodwill, which is
tested for impairment at least annually, as required by ASC Topic 350
“Intangibles – Goodwill and Other”. Further, in accordance with ASC
Topic 350, the Company’s indefinite-lived trademarks are tested for impairment
at least annually, on an individual basis as separate single units of
accounting. Similarly, consistent with ASC Topic 360 as it relates to
accounting for the impairment or disposal of long-lived assets, the Company
assesses whether or not there is impairment of the Company’s definite-lived
trademarks. There was no impairment, and therefore no write-down, of
any of the Company’s long-lived assets during the Current Quarter or the Prior
Year Quarter.
4. Trademarks
and Other Intangibles, net
Trademarks
and other intangibles, net consist of the following:
|
|
|
|
March 31, 2010
|
|
|
December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
|
|
Gross
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
Lives in
|
|
Carrying
|
|
|
Accumulated
|
|
|
Carrying
|
|
|
Accumulated
|
|
(000's omitted)
|
|
Years
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indefinite
life trademarks
|
|
Indefinite
(1)
|
|
$
|
1,229,705
|
|
|
$
|
9,498
|
|
|
$
|
1,229,695
|
|
|
$
|
9,498
|
|
Definite
life trademarks
|
|
10-15
|
|
|
19,571
|
|
|
|
4,079
|
|
|
|
19,571
|
|
|
|
3,715
|
|
Non-compete
agreements
|
|
2-15
|
|
|
10,475
|
|
|
|
8,072
|
|
|
|
10,475
|
|
|
|
7,644
|
|
Licensing
agreements
|
|
1-9
|
|
|
29,023
|
|
|
|
14,624
|
|
|
|
29,023
|
|
|
|
13,338
|
|
Domain
names
|
|
5
|
|
|
570
|
|
|
|
479
|
|
|
|
570
|
|
|
|
450
|
|
|
|
|
|
$
|
1,289,344
|
|
|
$
|
36,752
|
|
|
$
|
1,289,334
|
|
|
$
|
34,645
|
|
(1)
The amortization for the
Candie’s and Bongo trademarks is as of June 30, 2005. Effective July,
1 2005, the Company changed their useful lives to indefinite.
Amortization
expense for intangible assets for the Current Quarter and the Prior Year Quarter
was $2.1 million and $1.8 million, respectively. The trademarks of Candie’s,
Bongo, Joe Boxer, Rampage, Mudd, London Fog, Mossimo, Ocean Pacific, Danskin,
Rocawear, Cannon, Royal Velvet, Fieldcrest, Charisma, Starter, Waverly, Ecko and
Zoo York have been determined to have an indefinite useful life and accordingly,
consistent with SFAS 142, no amortization will be recorded in the Company's
consolidated income statements. Instead, each of these intangible assets are
tested for impairment at least annually on an individual basis as separate
single units of accounting, with any related impairment charge recorded to the
statement of operations at the time of determining such
impairment. Similarly, consistent with SFAS 144 “Accounting for the
Impairment or Disposal of Long-Lived Assets”, there was no impairment of the
definite-lived trademarks.
5. Debt
Arrangements
The
Company's debt is comprised of the following:
|
|
March
31,
|
|
|
December
31,
|
|
(000’s
omitted)
|
|
2010
|
|
|
2009
|
|
Convertible
Notes
|
|
$
|
251,365
|
|
|
$
|
247,696
|
|
Term
Loan Facility
|
|
|
170,577
|
|
|
|
217,632
|
|
Asset-Backed
Notes
|
|
|
89,005
|
|
|
|
94,865
|
|
Promissory
Note
|
|
|
87,500
|
|
|
|
90,000
|
|
Sweet
Note
|
|
|
12,186
|
|
|
|
12,186
|
|
Total
|
|
$
|
610,633
|
|
|
$
|
662,379
|
|
Convertible
Notes
On June
20, 2007, the Company completed the issuance of $287.5 million principal amount
of the Company's 1.875% convertible senior subordinated notes due June 2012
(“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. However, the Company recognizes an effective interest rate of
7.85% on the carrying amount of the Convertible Notes. The effective
rate is based on the rate for a similar instrument that does not have a
conversion feature. 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 guidance issued under ASC Topic 815, the Convertible Notes are accounted for
as convertible debt in the accompanying unaudited condensed consolidated balance
sheet and the embedded conversion option in the Convertible 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 Sold Warrants discussed
below on earnings per share, see Note 7.
In June
2008, the FASB issued guidance under ASC Topic 815 regarding the determination
of whether an instrument (or an embedded feature) is indexed to an entity’s own
stock. This guidance provides that an entity should use a two step approach to
evaluate whether an equity-linked financial instrument (or embedded feature) is
indexed to its own stock, including evaluating the instrument’s contingent
exercise and settlement provisions. It also clarifies on the impact of foreign
currency denominated strike prices and market-based employee stock option
valuation instruments on the evaluation. This guidance is effective for fiscal
years beginning after December 15, 2008. The Company has
evaluated the impact of this guidance, and has determined it will have no
impact on the Company’s results of operations and financial position in 2010,
and will have no impact on the Company’s results of operations and financial
position in future fiscal periods.
At March
31, 2010 and December 31, 2009, the amount of the Convertible Notes accounted
for as a liability was approximately $251.4 million and $247.7 million, and is
reflected on the unaudited condensed consolidated balance sheet as
follows:
|
|
March
31,
|
|
|
December
31,
|
|
(000’s omitted)
|
|
2010
|
|
|
2009
|
|
Equity
component carrying amount
|
|
$
|
41,309
|
|
|
$
|
41,309
|
|
Unamortized
discount
|
|
|
36,135
|
|
|
|
39,804
|
|
Net
debt carrying amount
|
|
|
251,365
|
|
|
|
247,696
|
|
For the
Current Quarter and the Prior Year Quarter, the Company recorded additional
non-cash interest expense of $3.4 million and $3.1 million, respectively,
representing the difference between the stated interest rate on the Convertible
Notes and the rate for a similar instrument that does not have a conversion
feature.
For both
the Current Quarter and the Prior Year Quarter, cash interest expense relating
to the Convertible Notes was approximately $1.3
million.
The
Convertible Notes do not provide for any financial
covenants.
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, one of which was Lehman Brothers OTC Derivatives
Inc. (“Lehman OTC” and together with the other counterparty, the
“Counterparties”). Pursuant to the agreements governing these Convertible Note
Hedges, the Company purchased call options (the “Purchased Call Options”) from
the Counterparties covering up to approximately 10.4 million shares of the
Company's common stock of which 40% were purchased from Lehman OTC. 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 was included in the balance of deferred income tax assets
at June 30, 2007 and is being recognized over the term of the Convertible Notes.
As of March 31, 2010, the balance of deferred income tax assets related to this
transaction was approximately $12.1 million.
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 of which 40% were
sold to Lehman OTC, 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.
Pursuant
to guidance issued under ASC Topic 815 Derivatives and Hedging as it relates to
accounting for derivative financial instruments indexed to, and potentially
settled in, a company’s own stock, the Convertible Note Hedge and the proceeds
received from the issuance of the Sold Warrants were recorded as a charge and an
increase, respectively, in additional paid-in capital in stockholders’ equity as
separate equity transactions. As a result of these transactions, the Company
recorded a net reduction to additional paid-in-capital of $12.1 million in June
2007.
The
Company has evaluated the impact of adopting guidance issued under ASC
Topic 815 regarding embedded features as it relates to the Sold
Warrants, and has determined it will have no impact on the Company’s
results of operations and financial position in 2010, and will have no impact on
the Company’s results of operations and financial position in future fiscal
periods.
As the
Convertible Note Hedge transactions and the warrant transactions were separate
transactions entered into by the Company with the Counterparties, they 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.
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.
On
September 15, 2008 and October 3, 2008, respectively, Lehman Brothers Holdings
Inc. (“Lehman Holdings”) and its subsidiary, Lehman OTC, filed for protection
under Chapter 11 of the United States Bankruptcy Code in the United States
Bankruptcy Court in the Southern District of New York (“Bankruptcy Court”). On
September 17, 2009, the Company filed proofs of claim with the Bankruptcy Court
relating to the Lehman OTC Convertible Note Hedges. The Company will
continue to monitor the bankruptcy filings of Lehman Holdings and Lehman OTC
with respect to such claims. The Company currently believes that the
bankruptcy filings and their potential impact on these entities will not have a
material adverse effect on the Company’s financial position, results of
operations or cash flows. The terms of the Convertible Notes and the rights of
the holders of the Convertible Notes are not affected in any way by the
bankruptcy filings of Lehman Holdings or Lehman OTC.
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 with Lehman Brothers
Inc., as lead arranger and bookrunner, and Lehman Commercial Paper Inc.
(“LCPI”), as syndication agent and administrative agent (the “Credit Agreement”
or “Term Loan Facility”). At the time, the Company pledged to LCPI, for the
benefit of the lenders under the Term Loan Facility (the “Lenders”), 100% of the
capital stock owned by the Company in its subsidiaries, 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").
On
October 3, 2007, in connection with the acquisition of Official-Pillowtex, a
Delaware limited liability company (“Official-Pillowtex”), with the proceeds of
the Convertible Notes, the Company pledged to LCPI, for the benefit of the
Lenders, 100% of the capital stock owned by the Company in Mossimo, Inc., a
Delaware corporation (“MI”), and Pillowtex Holdings and Management Corporation,
a Delaware corporation (“PHM”), each of which guaranteed the Company’s
obligations under the Credit Agreement. Simultaneously with the acquisition of
Official-Pillowtex, each of Mossimo Holdings LLC, a Delaware limited
liability company (“Mossimo Holdings”), and Official-Pillowtex guaranteed the
Company’s obligations under the Credit Agreement. On September 10,
2008, PHM was converted into a Delaware limited liability company, Pillowtex
Holdings and Management LLC (“PHMLLC”), and the Company’s membership interest in
PHMLLC was pledged to LCPI in place of the capital stock of PHM.
On
December 17, 2007, in connection with the acquisition of the Starter brand, the
Company borrowed an additional $63.2 million pursuant to the Term Loan Facility
(the “Additional Borrowing”). The net proceeds received by the Company from the
Additional Borrowing were $60 million.
As of
March 31, 2010, the Company may borrow an additional $36.8 million under the
terms of the Term Loan Facility.
The
guarantees under the Term Loan Facility are secured by a pledge to LCPI, for the
benefit of the Lenders, of, among other things, the Ocean Pacific/OP, Danskin,
Rocawear, Mossimo, Cannon, Royal Velvet, Fieldcrest, Charisma, Starter and
Waverly trademarks and related intellectual property assets, license agreements
and proceeds therefrom. Amounts outstanding under the Term Loan Facility bear
interest, at the Company’s option, at the Eurodollar rate or the prime rate,
plus an applicable margin of 2.25% or 1.25%, as the case may be, per annum. The
Credit Agreement provides that the Company is required to repay the outstanding
term loan in equal quarterly installments in annual aggregate amounts equal to
1.00% of the aggregate principal amount of the loans outstanding, subject to
adjustment for prepayments, in addition to an annual payment equal to 50% of the
excess cash flow from the subsidiaries subject to the Term Loan Facility, as
described in the Credit Agreement, with any remaining unpaid principal balance
to be due on April 30, 2013 (the “Loan Maturity Date”). Upon completion of the
Convertible Notes offering, the Loan Maturity Date was accelerated to January 2,
2012. The Term Loan Facility can be prepaid, without penalty, at any time. On
March 11, 2008, the Company paid to LCPI, for the benefit of the Lenders, $15.6
million, representing 50% of the excess cash flow from the subsidiaries subject
to the Term Loan Facility for 2007. As a result of such payment, the Company is
no longer required to pay the quarterly installments described above. The Term
Loan Facility requires the Company to repay the principal amount of the term
loan outstanding in an amount equal to 50% of the excess cash flow of the
subsidiaries subject to the Term Loan Facility for the most recently completed
fiscal year. On March 17, 2010, the Company paid to LCPI, for the benefit of the
Lenders, $47.2 million, representing 50% of the excess cash flow from the
subsidiaries subject to the Term Loan Facility for the year ended December 31,
2009. As of March 31, 2010, $15.6 million has been classified as
current portion of long-term debt, which represents 50% of the estimated excess
cash flow for the Current Quarter of the subsidiaries subject to the Term Loan
Facility. The aggregate amount of 50% of the excess cash flow for all
four quarters in 2010 is payable during the first quarter of
2011. For the Current Quarter and the Prior Year Quarter, the
effective interest rate of the Term Loan Facility was 2.49% and 3.71%,
respectively. At March 31, 2010, the balance of the Term Loan
Facility was $170.6 million. As of March 31, 2010, the Company was in
compliance with all material covenants set forth in the Credit Agreement. The
$272.5 million in proceeds from the Term Loan Facility were 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; $2.1 million was used
to pay the costs associated with the Rocawear acquisition; $60 million was used
to pay the consideration for the acquisition of the Starter brand; 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.
As of March 31, 2010, the subsidiaries subject to the Term Loan Facility were
Studio IP Holdings, SHM, OP Holdings, OPHM, Mossimo Holdings,
MI, Official-Pillowtex and PHMLLC (collectively, the “Term Loan
Facility Subsidiaries”). As of March 31, 2010, the Term Loan Facility
Subsidiaries, directly or indirectly, owned the following trademarks, excluding
certain territories covered by the Iconix China, Iconix Latin America, and
Iconix Europe joint ventures (see Note 2): Danskin, Rocawear, Starter, Ocean
Pacific/OP, Mossimo, Cannon, Royal Velvet, Fieldcrest, Charisma and
Waverly.
On July
26, 2007, the Company purchased a hedge instrument to mitigate the cash flow
risk of rising interest rates on the Term Loan Facility. See Note 3 for
further information.
On February 24, 2010, Barclays Bank PLC was appointed as successor
Administrative Agent under the Credit Agreement.
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 ("Asset-Backed Notes") secured
by intellectual property assets (trade names, trademarks, license agreements and
payments and proceeds with respect thereto relating to the Candie’s, Bongo, Joe
Boxer, Rampage, Mudd and London Fog brands) of IP Holdings. At March 31, 2010,
the balance of the Asset-Backed Notes was $89.0 million, $24.7 million of which
is included in the current portion of long-term debt on the unaudited condensed
consolidated balance sheet.
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, $4.4 million and $2.0 million as of March 31,
2010 and December 31, 2009, respectively, are included 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 final principal payment with
respect to the Asset-Backed Notes. Accordingly, as of March 31, 2010 and
December 31, 2009, $15.9 million has been classified as non-current and
disclosed as restricted cash within other assets on the Company's unaudited
condensed consolidated balance sheets.
Interest
rates and terms on the outstanding principal amount of the Asset-Backed Notes as
of March 31, 2010 are as follows: $30.2 million principal amount bears interest
at a fixed interest rate of 8.45% with a six year term, $13.4 million principal
amount bears interest at a fixed rate of 8.12% with a six year term, and $45.4
million principal amount bears interest at a fixed rate of 8.99% with a six and
a half year term. The Asset-Backed Notes have no financial covenants by which
the Company or its subsidiaries need comply. The aggregate principal amount of
the Asset-Backed Notes is required to be fully paid by February 22,
2013.
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).
Promissory
Note
In
connection with the Ecko transaction, IPH Unltd issued a promissory note
(“Promissory Note”) to a third party creditor for $90.0 million. IPH
Unltd’s obligations under the Promissory Note are secured by the Ecko portfolio
of trademarks and related intellectual property assets (including Ecko and Zoo
York), further guaranteed personally by the minority owner of IPH
Unltd. Amounts outstanding under the Promissory Note bear interest at
7.50% per annum, with minimum principal payable in equal quarterly installments
of $2.5 million, with any remaining unpaid principal balance and accrued
interest to be due on June 30, 2014, the Promissory Note maturity
date. The Promissory Note may be prepaid without penalty, and would
be applied to the scheduled quarterly principal payments in the order of their
maturity. As of March 31, 2010, the total principal balance of the
Promissory Note is $87.5 million, of which $10.0 million is included in the
current portion of long-term debt on the unaudited condensed consolidated
balance sheet.
Sweet
Note
On April
23, 2002, the Company acquired the remaining 50% interest in Unzipped (see Note
8) from Sweet Sportswear, LLC (“Sweet”) for a purchase price comprised of
3,000,000 shares of its common stock and $11.0 million in debt, which was
evidenced by the Company’s issuance of the 8% Senior Subordinated Note due in
2012 (“Sweet Note”). Prior to August 5, 2004, Unzipped was managed by Sweet
pursuant to the Management Agreement (as defined in Note 8), which obligated
Sweet to manage the operations of Unzipped in return for, commencing in the
fiscal year ended January 31, 2003 (“Fiscal 2003”), an annual management fee
based upon certain specified percentages of net income achieved by Unzipped
during the three- year term of the agreement. In addition, Sweet guaranteed that
the net income, as defined in the agreement, of Unzipped would be no less than
$1.7 million for each year during the term, commencing with Fiscal 2003. In the
event that the guarantee was not met for a particular year, Sweet was obligated
under the Management Agreement to pay the Company the difference between the
actual net income of Unzipped, as defined, for such year and the guaranteed $1.7
million. That payment, referred to as the shortfall payment, could be offset
against the amounts due under the Sweet Note at the option of either the Company
or Sweet. As a result of such offsets, the balance of the Sweet Note was reduced
by the Company to $3.1 million as of December 31, 2006 and $3.0 million as of
December 31, 2005 and was reflected in Long- term debt. This note bears
interest at the rate of 8% per year and matures in April 2012.
In
November 2007, the Company received a signed judgment related to the Sweet
Sportswear/Unzipped litigation. See Note 10.
The
judgment stated that the Sweet Note (originally $11.0 million when issued by the
Company upon the acquisition of Unzipped from Sweet in 2002) should total
approximately $12.2 million as of December 31, 2007. The recorded balance of the
Sweet Note, prior to any adjustments related to the judgment was approximately
$3.2 million. The Company increased the Sweet Note by approximately $6.2 million
and recorded the expense as an expense related to specific litigation. The
Company further increased the Sweet Note by approximately $2.8 million to record
the related interest and included the charge in interest expense. As of March
31, 2010, the Sweet Note is approximately $12.2 million and included in the
current portion of long-term debt. The Sweet Note bears interest, which was
accrued for during the Current Quarter and the Prior Year Quarter and included
in accounts payable and accrued expenses, at the rate of 8% per
year.
In
addition, in November 2007 the Company was awarded a judgment of approximately
$12.2 million for claims made by it against Hubert Guez and Apparel Distribution
Services, Inc. (“ADS”). As a result, the Company recorded a receivable of
approximately $12.2 million and recorded the benefit in special charges during
the year ended December 31, 2007. This receivable is included in other assets -
non-current and bears interest, which was accrued for during Current Quarter and
the Prior Year Quarter, at the rate of 8% per year.
Debt
Maturities
As of
March 31, 2010, the Company’s debt maturities on a calendar year basis are as
follows:
(000’s omitted)
|
|
Total
|
|
|
April 1
through
December 31,
2010
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
2014
|
|
Convertible
Notes
1
|
|
$
|
251,365
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
251,365
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Term
Loan Facility
|
|
|
170,577
|
|
|
|
-
|
|
|
|
15,600
|
|
|
|
154,977
|
|
|
|
-
|
|
|
|
-
|
|
Asset-Backed
Notes
|
|
|
89,005
|
|
|
|
18,356
|
|
|
|
26,380
|
|
|
|
33,468
|
|
|
|
10,801
|
|
|
|
-
|
|
Promissory
Note
|
|
|
87,500
|
|
|
|
7,500
|
|
|
|
10,000
|
|
|
|
10,000
|
|
|
|
10,000
|
|
|
|
50,000
|
|
Sweet
Note
|
|
|
12,186
|
|
|
|
12,186
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
$
|
610,633
|
|
|
$
|
38,042
|
|
|
$
|
51,980
|
|
|
$
|
449,810
|
|
|
$
|
20,801
|
|
|
$
|
50,000
|
|
1
Reflects
the net debt carrying amount of the Convertible Notes on the unaudited condensed
consolidated balance sheet as of March 31, 2010, in accordance with accounting
for convertible notes. The principal amount owed to the holders of
the Convertible Notes is $287.5 million.
6.
Stockholders’ Equity
Public
Offering
On June
9, 2009, the Company completed a public offering of common stock pursuant to a
registration statement that had been declared effective by the Securities and
Exchange Commission. All 10,700,000 shares of common stock offered by
the Company in the final prospectus were sold at $15.00 per
share. Net proceeds to the Company from the offering amounted to
approximately $152.8 million.
2009
Equity Incentive Plan
On August
13, 2009, the Company's stockholders approved the Company's 2009 Equity
Incentive Plan ("2009 Plan”). The 2009 Plan authorizes the granting of common
stock options or other stock-based awards covering up to 3,000,000 shares of the
Company’s common stock. All employees, directors, consultants and
advisors of the Company, including those of the Company's subsidiaries, are
eligible to be granted non-qualified stock options and other stock-based awards
(as defined) under the 2009 Plan, and employees are also eligible to be granted
incentive stock options (as defined) under the 2009 Plan. No new awards may be
granted under the Plan after August 13, 2019.
Stockholder
Rights Plan
In
January 2000, the Company's Board of Directors adopted a stockholder rights
plan. Under the plan, each stockholder of common stock received a dividend
of one right for each share of the Company's outstanding common stock, entitling
the holder to purchase one thousandth of a share of Series A Junior
Participating Preferred Stock, par value, $0.01 per share of the Company, at an
initial exercise price of $6.00. The rights become exercisable and will trade
separately from the common stock ten business days after any person or group
acquires 15% or more of the common stock, or ten business days after any person
or group announces a tender offer for 15% or more of the outstanding common
stock. This plan expired by its terms on January 26,
2010.
Stock
Repurchase Program
On
November 3, 2008, the Company announced that its Board of Directors had
authorized the repurchase of up to $75 million of the Company's common stock
over a period of approximately three years (the “Program”). The Program replaces
any prior plan or authorization. The Program does not obligate the Company to
repurchase any specific number of shares and may be suspended at any time at
management's discretion. During 2009, the Company repurchased 200,000
shares under the Program for approximately $1.5 million. No shares
were repurchased under the Program by the Company during the Current
Quarter.
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 and warrants for all years was estimated at the date of
grant using a Black-Scholes option-pricing model with the following
weighted-average assumptions:
Expected
Volatility
|
|
|
30
- 45
|
%
|
Expected
Dividend Yield
|
|
|
0
|
%
|
Expected
Life (Term)
|
|
3 -
7 years
|
|
Risk-Free
Interest Rate
|
|
|
3.00 - 4.75
|
%
|
The
options that the Company granted under its plans expire at
various times, either five, seven or ten years from the date of grant, depending
on the particular grant.
Summaries
of the Company's stock options, warrants and performance related options
activity, and related information for the year Current Quarter are as
follows:
Options
|
|
|
|
|
Weighted-Average
|
|
|
|
Options
|
|
|
Exercise Price
|
|
|
|
|
|
|
|
|
Outstanding
January 1, 2010
|
|
|
3,094,079
|
|
|
$
|
4.48
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
Canceled
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
(53,334
|
)
|
|
|
9.65
|
|
Expired/Forfeited
|
|
|
(16,844
|
)
|
|
|
1.31
|
|
Outstanding
March 31, 2010
|
|
|
3,023,901
|
|
|
$
|
4.41
|
|
Exercisable
at March 31, 2010
|
|
|
3,020,567
|
|
|
$
|
4.40
|
|
Warrants
|
|
|
|
|
Weighted-Average
|
|
|
|
Warrants
|
|
|
Exercise Price
|
|
|
|
|
|
|
|
|
Outstanding
January 1, 2010
|
|
|
286,900
|
|
|
$
|
16.99
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
Canceled
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Expired/Forfeited
|
|
|
-
|
|
|
|
-
|
|
Outstanding
March 31, 2010
|
|
|
286,900
|
|
|
$
|
16.99
|
|
Exercisable
at March 31, 2010
|
|
|
286,900
|
|
|
$
|
16.99
|
|
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. Certain warrants are exercised using the cashless
method.
The
Company values other warrants issued to non-employees at the commitment date at
the fair market value of the instruments issued, a measure which is more readily
available than the fair market value of services rendered, using the Black
Scholes model. The fair market value of the instruments issued is expensed over
the vesting period.
Restricted
stock
Compensation
cost for restricted stock is measured as the excess, if any, of the quoted
market price of the Company’s 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
following tables summarize information about unvested restricted stock
transactions (shares in thousands):
|
|
|
|
|
Weighted-Average
|
|
|
|
Shares
|
|
|
Grant
Date Fair Value
|
|
|
|
|
|
|
|
|
Non-vested,
January 1, 2010
|
|
|
2,041,126
|
|
|
$
|
17.28
|
|
Granted
|
|
|
255,412
|
|
|
|
13.95
|
|
Vested
|
|
|
(800
|
)
|
|
|
20.89
|
|
Forfeited/Canceled
|
|
|
-
|
|
|
|
-
|
|
Non-vested,
March 31, 2010
|
|
|
2,295,738
|
|
|
$
|
16.91
|
|
Compensation
expense related to restricted stock grants for the Current Quarter and the Prior
Year Quarter was approximately $2.2 million and $1.6 million, respectively. An
additional amount of $19.1 million is expected to be expensed over a period of
approximately three years. During both the Current Quarter and the Prior Year
Quarter the Company withheld shares valued at less than $0.1 million of its
restricted common stock in connection with net share settlement of restricted
stock grants and option exercises.
Shares
Reserved for Issuance
At March
31, 2010, 1,918,566 common shares were reserved for issuance under the 2009
Plan, and 76,653 common shares were reserved for issuance of stock options under
the 2006 Stock Option Plan. There were no common shares
available for issuance under the 2002, 2001, and 2000 Stock Option
Plans.
7. Earnings
Per Share
Basic
earnings per share includes no dilution and is computed by dividing net income
available to common stockholders 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 restricted stock-based awards
and common shares issuable upon exercise of stock options and warrants. The
difference between basic and diluted weighted-average common shares results from
the assumption that all dilutive stock options outstanding were exercised and
all convertible notes have been converted into common stock.
As of
March 31, 2010, of the total potentially dilutive shares related to restricted
stock-based awards, stock options and warrants, 1.8 million were anti-dilutive,
compared to 1.8 million as of December 31, 2009.
As of
March 31, 2010, of the performance related restricted stock-based awards issued
in connection with the Company’s employment agreement with its chairman, chief
executive officer and president, 1.3 million of such awards (which is included
in the total 1.8 million anti-dilutive stock-based awards described above) were
anti-dilutive and therefore not included in this calculation.
Warrants
issued in connection with the Company’s Convertible Notes financing were
anti-dilutive and therefore not included in this calculation. Portions of the
Convertible Notes that would be subject to conversion to common stock were
anti-dilutive as of March 31, 2010 and therefore not included in this
calculation.
A
reconciliation of shares used in calculating basic and diluted earnings per
share follows:
(000's
omitted)
|
|
For
the Three Months ended
March
31,
|
|
|
|
2010
|
|
|
2009
|
|
Basic
|
|
|
71,537
|
|
|
|
58,044
|
|
Effect
of exercise of stock options
|
|
|
1,940
|
|
|
|
2,023
|
|
Effect
of contingent common stock issuance
|
|
|
353
|
|
|
|
589
|
|
Effect
of assumed vesting of restricted stock
|
|
|
596
|
|
|
|
236
|
|
|
|
|
74,426
|
|
|
|
60,892
|
|
8.
Unzipped Apparel, LLC (
“Unzipped”
)
On
October 7, 1998, the Company formed Unzipped with its then joint venture partner
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.
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 Sweet Note. See Note 5. 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.
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
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 10.
There
were no transactions with these related parties during the Current Quarter or
Prior Year Quarter.
In
November 2007, a judgment was entered in the Unzipped litigation, pursuant to
which the $3.1 million in accounts payable to ADS/Azteca (previously shown as
“accounts payable - subject to litigation”) was eliminated and recorded in the
income statement as a benefit to the “expenses related to specific
litigation”.
As a
result of the judgment, in 2007 the balance of the $11.0 million principal
amount Sweet Note, originally issued by the Company upon the acquisition of
Unzipped from Sweet in 2002, including interest, was increased from
approximately $3.2 million to approximately $12.2 million as of December 31,
2007. Of this increase, approximately $6.2 million was attributed to the
principal of the Sweet Note and the expense was recorded as an expense related
to specific litigation. The remaining $2.8 million of the increase was
attributed to related interest on the Sweet Note and recorded as interest
expense. As of March 31, 2010, the full $12.2 million current balance of the
Sweet Note and $2.2 million of accrued interest are included in the current
portion of long term debt and accounts payable and accrued expenses,
respectively.
In
addition, in November 2007 the Company was awarded a judgment of approximately
$12.2 million for claims made by it against Hubert Guez and ADS. As a result,
the Company recorded a receivable of approximately $12.2 million and recorded
the benefit in special charges for 2007. As of March 31, 2010, this receivable
and the associated accrued interest of $2.2 million are included in other assets
- non-current.
9. Expenses
Related to Specific Litigation
Expenses
related to specific litigation consist of legal expenses and costs related to
the Unzipped litigation. For the Current Quarter and the Prior Year Quarter, the
Company recorded expenses related to specific litigation of less than $0.1
million and $0.1 million, respectively.
10. Commitments
and Contingencies
Sweet
Sportswear/Unzipped litigation
In August
2004, the Company commenced a lawsuit in the Superior Court of California, Los
Angeles County, against Unzipped’s former manager, supplier and distributor
Sweet, Azteca and ADS and Hubert Guez, a principal of these entities and former
member of the Company’s board of directors (collectively referred to as the Guez
defendants) alleging numerous causes of action, including fraud, breach of
contract, breach of fiduciary duty and trademark infringement. Sweet, Azteca and
ADS filed counterclaims against the Company claiming damages resulting from,
among other things, a variety of alleged contractual breaches.
In April
2007, a jury returned a verdict of approximately $45 million in the Company’s
favor on every claim that the Company pursued, and against the Guez defendants
on every counterclaim they 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, in addition, awarded the Company
$5 million in punitive damages against Guez personally.
In
November 2007, the Court, among other things, reduced the total damages awarded
against the Guez defendants by approximately 50% and reduced the amount of
punitive damages assessed against Guez to $4 million. The Court also entered
judgments against Guez in the amount of approximately $11 million and ADS in the
amount of approximately $1.3 million. It also entered judgment against all of
the Guez defendants on every counterclaim that they pursued in the litigation,
including ADS’s and Azteca’s unsuccessful efforts to recover against Unzipped
any account balances claimed to be owed, totaling approximately $3.5 million and
Sweet’s efforts to accelerate the principal balance of a note and other fees
totaling approximately $15 million (these orders are collectively referred to as
the “judgments”). The Court also issued an order confirming an additional
aggregate of approximately $6.8 million of the jury’s verdicts against Sweet and
Azteca (referred to as the “confirmed verdicts”) but declined to enter judgment
against these entities since it had ordered a new trial with regard to certain
of the jury’s other damage awards against these entities.
In May
2008, the Court awarded the Company statutory litigation costs (jointly and
severally against the Guez defendants) of approximately $650,000. In October
2008, the Court granted the Company’s petition for attorneys’ fees with respect
to approximately $7.7 million of fees (mostly against Sweet and Azteca), but did
not award any non-statutory (contractual) costs. In December 2008, the earlier
judgments were amended to add the cost award against all the Guez defendants, as
well as $100,000 of attorneys’ fees awarded against ADS.
In sum,
the trial court entered judgment in the Company’s favor of over $12 million and
has confirmed, but not reduced to judgment, additional amounts owed of
approximately $15 million, which consists of the confirmed verdicts plus the fee
and cost awards against Sweet and Azteca. All of these amounts accrue interest
at an annual rate of 10%. All parties have filed notices of appeal. The
Company’s notice of appeal relates to, among other things, those parts of the
jury’s verdicts vacated by the Court. In December 2008, the Company also filed a
notice of appeal from the Court’s orders relating to attorneys’ fees awarded
against ADS, statutory costs and non-statutory costs. The Guez defendants have
posted an aggregate of approximately $51.7 million in undertakings with the
Court to secure the judgments. The Company is unable to pursue collection
of the monetary portions of the judgments during the pendency of the
appeals.
The
Company intends to vigorously pursue its appeals, and vigorously defend against
the Guez defendants’ appeal.
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.
11. Related
Party Transactions
The
Candie’s Foundation
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 $0.8 million and $0.8 million at March 31, 2010 and
December 31, 2009, respectively. In February 2010, the Candie’s
Foundation received a contribution of approximately $0.7 million from a licensee
of the Company. The Candie's Foundation intends to pay-off the entire
borrowing from the Company during 2010, although additional advances will be
made as and when necessary.
Travel
The
Company recorded expenses of approximately $20,000 and $178,000 for the
Current Quarter and Prior Year Quarter, respectively, for the hire and use of
aircraft solely for business purposes owned by a company in which the
Company’s chairman, chief executive officer and president is the sole owner.
Management believes that all transactions were made on terms and conditions no
less favorable than those available in the marketplace from unrelated
parties.
12. Segment
and Geographic Data
The
Company has one reportable segment, licensing and commission revenue generated
from its brands. The geographic regions consist of the United States and Other
(which principally represents Canada, Japan and Europe). Long lived assets are
substantially all located in the United States. Revenues attributed to each
region are based on the location in which licensees are located.
The net
revenues by type of license and information by geographic region are as
follows:
|
|
For
the Three Months Ended
|
(000's
omitted)
|
|
March
31,
|
|
|
2010
|
|
|
2009
|
|
Net
sales by category:
|
|
|
|
|
|
|
Direct-to-retail
license
|
|
$
|
38,564
|
|
|
$
|
23,036
|
|
Wholesale
license
|
|
|
32,602
|
|
|
|
27,005
|
|
Other
|
|
|
538
|
|
|
|
460
|
|
|
|
$
|
71,704
|
|
|
$
|
50,501
|
|
|
|
|
|
|
|
|
|
|
Net
sales by geographic region:
|
|
|
|
|
|
|
|
|
United
States
|
|
$
|
68,173
|
|
|
$
|
48,233
|
|
Other
|
|
|
3,531
|
|
|
|
2,268
|
|
|
|
$
|
71,704
|
|
|
$
|
50,501
|
|
13. Subsequent
Events
Entry
into a Definitive Agreement to Purchase the Peanuts Brand and Related
Assets
On April
26, 2010, the Company entered into an interest purchase agreement (the “Purchase
Agreement”) with United Feature Syndicate, Inc (“UFS”) and The E.W. Scripps
Company (the “Parent”) (Parent and UFS, collectively, the
“Sellers”).
Pursuant
to the Purchase Agreement, the Company has agreed to buy all of the issued and
outstanding Interests (“Interests”) of Character Licensing, LLC, a newly formed
Delaware limited liability company (“CL”), which will own the Peanuts brand and
related assets. On or prior to the closing date, Iconix will assign its right to
buy all of the interests to a joint venture (the “JV”) owned 80% by Iconix’
wholly-owned subsidiary, Icon Entertainment LLC, a Delaware limited liability
company (“IE”), and 20% by Beagle Scout LLC, a Delaware limited liability
company (“Beagle”) owned by certain Schulz family trusts. The interests will be
purchased by the Company through the JV.
On or
prior to the Closing Date, UFS shall contribute and transfer to CL all of its
right, title and interest in, to and under (i) any and all of the assets used
exclusively in UFS’ licensing business, which includes the Peanuts brand and
related assets; (ii) the licensing and character representation business of
United Media Licensing, a division of UFS, which includes Dilbert and Fancy
Nancy; (iii) certain assets of UFS’ syndication and web businesses; and (iv) all
of the issued and outstanding shares of each of United Media Kabushiki Kaisha
and UMNet Y.K., each a corporation formed under the laws of Japan (collectively,
the “Peanuts Assets”). In addition, Iconix has agreed to hire certain employees
of Seller as of the closing date.
IE and
Beagle will enter into an operating agreement with respect to the JV. Iconix
will contribute $141.0 million in cash to the JV in exchange for its 80%
ownership interest. Beagle will contribute $34.0 million to the JV in cash and
promissory notes.
The
purchase price for the Interests will be $175.0 million in cash, subject to a
working capital adjustment on the closing date.
Item 2.
Management’s Discussion and Analysis
of Financial Condition and Results of Operations
Safe Harbor Statement under the
Private Securities Litigation Reform Act of 1995
. The statements that are
not historical facts contained in this report are forward looking statements
that involve a number of known and unknown risks, uncertainties and other
factors, all of which are difficult or impossible to predict and many of which
are beyond our control, which may cause our actual results, performance or
achievements to be materially different from any future results, performance or
achievements expressed or implied by such forward looking statements. These
risks are detailed our Form 10-K for the fiscal year ended December 31, 2009 and
other SEC filings. The words “believe”, “anticipate,” “expect”, “confident”,
“project”, provide “guidance” and similar expressions identify forward-looking
statements. Readers are cautioned not to place undue reliance on these forward
looking statements, which speak only as of the date the statement was
made.
Executive Summary.
We are a
brand management company engaged in licensing, marketing and providing trend
direction for a diversified and growing consumer brand portfolio. Our brands are
sold across every major segment of retail distribution, from luxury to mass. As
of March 31, 2010 we and our joint ventures owned 22 iconic consumer brands. As
of March 31, 2010, we owned the following brands: Candie’s, Bongo, Badgley
Mischka, Joe Boxer, Rampage, Mudd, London Fog, Mossimo, Ocean Pacific/OP,
Danskin/Danskin Now, Rocawear, Cannon, Royal Velvet, Fieldcrest, Charisma,
Starter, and Waverly. In addition, Scion LLC, a joint venture in which
hawse have a 50% investment, owns the Artful Dodger brand; Hardy Way, a
joint venture in which we have a 50% investment, owns the Ed Hardy brands; and
IPH Unltd, a joint venture in which we have a 51% controlling investment,
owns the Ecko and Zoo York brands. Further, on March 9, 2010, we
purchased 50% of MG Icon, the owner of the Material Girl brand and trademarks
and simultaneously entered into a multi-year license agreement for the Material
Girl brand with Macy’s Retail Holdings, Inc. We license our brands
worldwide through approximately 250 direct-to-retail and wholesale licenses for
use across a wide range of product categories, including footwear, fashion
accessories, sportswear, home products and décor, and beauty and fragrance. Our
business model allows us to focus on our core competencies of marketing and
managing brands without many of the risks and investment requirements associated
with a more traditional operating company. Our licensing agreements with
leading retail and wholesale partners throughout the world provide us with a
predictable stream of guaranteed minimum royalties.
Our
growth strategy is focused on increasing licensing revenue from our
existing portfolio of brands through adding new product categories, expanding
the retail penetration of our existing brands and optimizing the sales
of our licensees. We will also seek to continue the international expansion
of our brands by partnering with leading licensees and/or joint venture
partners throughout the world. Finally, we believe we will continue to acquire
iconic consumer and character-based brands with applicability to a wide range of
merchandise categories and an ability to further diversify our brand
portfolio.
Results
of Operations
The
three months ended March 31, 2010 compared to the three months ended March 31,
2009
Licensing and Other
Revenue.
Licensing and other revenue for the Current Quarter
increased to $71.7 million from $50.5 million for the Prior Year
Quarter. In the Current Quarter, we recorded approximately $9.6
million in aggregate revenue related to our acquisition of the Ecko assets, for
which there was no comparable revenue in the Prior Year Quarter. The
primary drivers of the remaining increase in revenue from the Prior Year Quarter
to the Current Quarter are as follows: an aggregate increase of approximately
$9.9 million from our three direct-to-retail brands with Wal-Mart Stores, Inc.
(“Wal-Mart”), an aggregate increase of approximately $1.3 million from our three
direct-to-retail brands with Target Corporation (“Target”), an aggregate
increase of approximately $0.5 million from our two direct-to-retail brands at
Kohl’s Corporation (“Kohl’s”), and an increase of approximately $1.6 million
from our Charisma brand primarily due to its direct-to-retail with
Costco. These increases were partially offset by an aggregate
decrease of approximately $1.5 million primarily related to the transition of
our women’s category for our Rocawear brand to a new licensee, and the
transition of our Bongo brand to a direct-to-retail license with Kmart
Corporation (“Kmart”), which is expecting a full launch in both Kmart and Sears
stores in Fall 2010.
Operating Expenses.
Consolidated selling, general and administrative (“SG&A”), expenses totaled
$22.3 million in the Current Quarter compared to $16.3 million in the Prior Year
Quarter. The increase of $6.0 million was primarily driven by the following
factors: (i) an increase of approximately $3.1 million in advertising and
marketing related expenses and (ii) an increase of approximately $0.8 million in
payroll costs due to bonuses paid to employees in the Current
Quarter.
For the
Current Quarter and the Prior Year Quarter, our expenses related to specific
litigation included an expense for professional fees of less than $0.1 million
and $0.1 million, respectively, relating to litigation involving
Unzipped. See Notes 8, 9 and 10 of Notes to Unaudited Condensed
Consolidated Financial Statements for further information on our litigation
involving Unzipped.
Operating Income.
Operating
income for the Current Quarter increased to $49.4 million, or approximately 69%
of total revenue, compared to $34.2 million or approximately 68% of total
revenue in the Prior Year Quarter. The slight increase in our operating margin
percentage is primarily the result of the increase in revenue, offset by the
increase in SG&A, for the reasons detailed above.
Other Expenses - Net
– Other
expenses - net decreased by approximately $0.9 million in the Current Quarter to
$8.9 million, compared to other expenses - net of $9.8 million for the Prior
Year Quarter. This decrease was primarily due to an aggregate
increase of approximately $1.1 million in our equity earnings on joint ventures
due to earnings from our Hardy Way joint venture (created in May 2009) for which
there was no comparable revenue in the Prior Year Quarter, and our Iconix Europe
joint venture created in December 2009. Further, interest expense
related to our variable rate debt decreased from approximately $2.3 million in
the Prior Year Quarter to $1.3 million in the Current Quarter as a result of
both a lower debt balance and a decrease in our effective interest rate to 2.49%
in the Current Quarter from 3.71% in the Prior Year Quarter. Further,
this decrease can be partially attributed to an increase from the Prior Year
Quarter to the Current Quarter of approximately $0.5 million in interest and
other income related to a higher cash balance in the quarter, which was
partially offset by lower interest rates. This aggregate decrease in
other expenses – net was partially offset by an increase in interest expense of
approximately $1.7 million related to our Promissory Note, which was entered
into as part of our acquisition of the Ecko assets, for which there was no
comparable interest expense in the Prior Year Quarter.
Provision for Income Taxes.
The effective income tax rate for the Current Quarter is approximately 34.7%
resulting in the $14.1 million income tax expense, as compared to an effective
income tax rate of 35.8% in the Prior Year Quarter which resulted in the $8.7
million income tax expense.
Net Income
. Our net income
was $26.5 million in the Current Quarter, compared to net income of $15.6
million in the Prior Year Quarter, as a result of the factors discussed
above.
Liquidity
and Capital Resources
Liquidity
Our
principal capital requirements have been to fund acquisitions, working capital
needs, and to a lesser extent, capital expenditures. We have historically relied
on internally generated funds to finance our operations and our primary source
of capital needs for acquisitions has been the issuance of debt and equity
securities. At March 31, 2010 and December 31, 2009, our cash totaled $194.5
million and $201.5 million, respectively, including short-term restricted cash
of $8.5 million and $6.2 million, respectively.
In
February 2010, we completed our acquisition of 50% of MG Icon, a
limited liability company and owner of the Material Girl brands, for $20.0
million, $4.0 million of which was cash paid to the sellers at
closing.
Our term
loan facility requires us to repay the principal amount of the term loan
outstanding in an amount equal to 50% of the excess cash flow of the
subsidiaries subject to the term loan facility for the most recently completed
fiscal year. For the Current Quarter, we paid approximately
$47.2 million of the principal balance, which represents 50% of the estimated
excess cash flow of the subsidiaries subject to the term loan facility for the
year ended December 31, 2009.
We
believe that cash from future operations as well as currently available cash
will be sufficient to satisfy our anticipated working capital requirements for
the foreseeable future. We intend to continue financing future brand
acquisitions through a combination of cash from operations, bank financing and
the issuance of additional equity and/or debt securities. See Note 5 of Notes to
Unaudited Condensed Consolidated Financial Statements for a description of
certain prior financings consummated by us.
As of
December 31, 2009, our marketable securities consist of auction rate securities,
herein referred to as ARS. Beginning in the third quarter of 2007, $13.0 million
of our ARS had failed auctions due to sell orders exceeding buy orders. In
December 2008, the insurer of the ARS exercised its put option to replace the
underlying securities of the auction rate securities with its preferred
securities. Further, although these ARS had paid dividends according to their
stated terms, we had received notice from the insurer that the payment of cash
dividends will cease after July 31, 2009 and only temporarily reinstated for the
4-week period from December 23, 2009 through January 15, 2010, to be resumed if
the board of directors of the insurer declares such cash dividends to be payable
at a later date. In January 2010, we commenced a lawsuit against the
broker-dealer of these ARS alleging, among other things, fraud, and seeking full
recovery of the $13.0 million face value of the ARS, as well as legal costs and
punitive damages. These funds will not be available to us until a
successful auction occurs, a buyer is found outside the auction process or we
realize recovery through settlement or legal judgment. Prior to June 30, 2009,
we estimated the fair value of our ARS with a discounted cash flow model where
we used the expected rate of cash dividends to be received. As
regular cash dividend payments have ceased, we changed our methodology for
estimating the fair value of the ARS. Beginning June 30, 2009, we
estimated the fair value of our ARS using the present value of the weighted
average of several scenarios of recovery based on our assessment of the
probability of each scenario. We considered a variety of factors in our analysis
including: credit rating of the issuer and insurer, comparable market data (if
available), current macroeconomic market conditions, quality of the underlying
securities, and the probabilities of several levels of recovery and
reinstatement of cash dividend payments. As the aggregate result of
our quarterly evaluations, $13.0 million of our ARS have been written down to
$7.3 million as a cumulative unrealized pre-tax loss of $5.7 million to reflect
a temporary decrease in fair value. As the write-down of $5.7 million has been
identified as a temporary decrease in fair value, the write-down has not
impacted our earnings and is reflected as an other comprehensive loss in the
stockholders’ equity section of our consolidated balance
sheet. We believe this decrease in fair value is temporary due
to general macroeconomic market conditions. Further, we have the
ability and intent to hold the ARS until an anticipated full redemption. We
believe our cash flow from future operations and our existing cash on hand will
be sufficient to satisfy our anticipated working capital requirements for the
foreseeable future, regardless of the timeliness of the auction process or other
recovery.
Changes
in Working Capital
At March
31, 2010 and December 31, 2009 the working capital ratio (current assets to
current liabilities) was 2.42 to 1 and 2.12 to 1, respectively. This increase
was driven primarily by a decrease in the current portion of our short term
debt, as well as the factors set forth below:
Operating
Activities
Net cash
provided by operating activities increased approximately $26.2 million, from
$25.7 million in the Prior Year Quarter to $51.9 million in the Current Quarter.
This increase in net cash provided by operating activities of $26.2 million is
primarily due to an increase in net income of $10.9 million from $15.6 million
in the Prior Year Quarter to $26.5 million in the Current Quarter for the
reasons discussed above, as well as an aggregate increase in net cash provided
by changes in operating assets and liabilities (net of acquisitions) of $14.6
million from approximately $5.3 million of net cash used in operating activities
in the Prior Year Quarter to approximately $9.3 million of net cash provided by
operating activities in the Current Quarter.
Investing
Activities
Net cash
used in investing activities in the Current Quarter decreased $2.8 million,
from $6.7 million in the Prior Year Quarter to $3.9 million in the Current
Quarter. During the Current Quarter, we paid $4.0 million in
connection with our acquisition of a 50% interest in MG Icon. In the Prior
Year Quarter we paid cash earn-outs totaling $6.7 million, as compared to $0.7
million in cash earn-outs in the Current Quarter, both of which were related to
acquisitions prior to 2009 and were recorded as increases to
goodwill.
Financing
Activities
Net cash
used in financing activities increased $10.1 million, from $47.3 million in the
Prior Year Quarter to $57.4 million in the Current Quarter. The main
driver of this increase of $10.1 million was an increase of $11.5 million in
principal payments on our long-term debt. Specifically, our payment
in March 2010 of 50% of the excess cash flow from the subsidiaries subject to
the term loan facility for 2009 was $47.2 million, as compared to our payment in
March 2009 of 50% of the excess cash flow from the subsidiaries subject to the
term loan facility for the year ended December 31, 2008 was $38.7
million. Further, in the Prior Year Quarter, we made a
non-controlling interest contribution of $2.1 million related to an investment
through our joint venture Scion. This was offset by a decrease in the
change in current restricted cash of approximately $1.9 million, related to a
$4.1 million investment through our joint venture Scion in the Prior Year
Quarter. See Note 2 of Notes to Unaudited Condensed
Consolidated Financial Statements for further information on this
investment.
Other
Matters
New
Accounting Standards
In June
2009, the FASB issued guidance under ASC Topic 810 “Consolidation”. This
guidance amends the consolidation guidance for variable interest entities,
herein referred to as a VIE, by requiring an on-going qualitative assessment of
which entity has the power to direct matters that most significantly impact the
activities of a VIE and has the obligation to absorb losses or benefits that
could be potentially significant to the VIE. This guidance is effective for us
beginning in January 1, 2010 and the results of its adoption are reflected
herein.
In
October 2009, the FASB issued guidance under ASC Topic 605 regarding revenue
recognition for multiple deliverable revenue arrangements. This
guidance eliminates the residual method of allocation and requires that
arrangement consideration be allocated at the inception of the arrangement to
all deliverables using the relative selling price method and expands the
disclosures related to multiple deliverable revenue arrangements. This guidance
is effective prospectively for revenue arrangements entered into or materially
modified in fiscal years beginning on or after June 15, 2010, with earlier
adoption permitted. The adoption of this guidance is not expected to have a
material impact our results of operations or financial position.
In
January 2010, the FASB issued guidance under ASC Topic 810 regarding scope
clarification on accounting and reporting for decreases in ownership of a
subsidiary. This guidance clarifies that the scope of the decrease in
ownership provisions of ASC Topic 810 applies to a subsidiary or group of assets
that is a business, a subsidiary that is a business that is transferred to an
equity method investee or a joint venture or an exchange of a group of assets
that constitutes a business for a noncontrolling interest in an
entity. This guidance is effective as of the beginning of the period
in which an entity adopts guidance under ASC Topic 810 regarding non-controlling
interests, and if it has been previously adopted, the first interim or annual
period ending on or after December 15, 2009, applied retrospectively to the
first period that the entity adopted this guidance, and its requirements are
reflected herein.
In
January 2010, the FASB issued guidance under ASC Topic 820 as it relates to
improving disclosures on fair value measurements. This guidance requires new
disclosures regarding transfers in and out of the Level 1 and 2 and activity
within Level 3 fair value measurements and clarifies existing disclosures of
inputs and valuation techniques for Level 2 and 3 fair value measurements. This
guidance also includes conforming amendments to employers’ disclosures about
postretirement benefit plan assets. The new disclosures and clarifications of
existing disclosures are effective for interim and annual reporting periods
beginning after December 15, 2009, except for the disclosure of activity within
Level 3 fair value measurements, which is effective for fiscal years beginning
after December 15, 2010, and for interim periods within those
years.
In
February 2010, the FASB issued ASC Topic 855 - Amendments to Certain Recognition
and Disclosure Requirements. ASC Topic 855 requires an entity that is an SEC
filer to evaluate subsequent events through the date that the financial
statements are issued and removes the requirement that an SEC filer disclose the
date through which subsequent events have been evaluated. ASC Topic
855 was effective upon issuance. The adoption of this standard had no
effect on our results of operation or financial position.
Summary
of Critical Accounting Policies.
Several
of our accounting policies involve management judgments and estimates that could
be significant. The policies with the greatest potential effect on our
consolidated results of operations and financial position include the estimate
of reserves to provide for collectability of accounts receivable. We estimate
the collectability considering historical, current and anticipated trends of our
licensees related to deductions taken by customers and markdowns provided to
retail customers to effectively flow goods through the retail channels, and the
possibility of non-collection due to the financial position of its licensees'
and their retail customers. Due to our licensing model, we do not have any
inventory risk and have reduced our operating risks, and can reasonably forecast
revenues and plan expenditures based upon guaranteed royalty minimums and sales
projections provided by our retail licensees.
The
preparation of the consolidated financial statements in conformity with
accounting principles generally accepted in the U.S. requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. We review all significant estimates affecting the
financial statements on a recurring basis and records the effect of any
adjustments when necessary.
In
connection with our licensing model, we have entered into various trademark
license agreements that provide revenues based on minimum royalties and
additional revenues based on a percentage of defined sales. Minimum royalty
revenue is recognized on a straight-line basis over each period, as defined, in
each license agreement. Royalties exceeding the defined minimum amounts are
recognized as income during the period corresponding to the licensee's
sales.
In June
2001, the FASB issued guidance under ASC Topic 350 “Intangibles Goodwill and
Other”, which changed the accounting for goodwill from an amortization method to
an impairment-only approach. Upon our adoption of this guidance, on February 1,
2002, we ceased amortizing goodwill. As prescribed under this guidance, we had
goodwill tested for impairment during the years ended December 31, 2009, 2008
and 2007, and no write-downs from impairments were necessary. Our tests for
impairment utilize discounted cash flow models to estimate the fair values of
the individual assets. Assumptions critical to our fair value estimates are as
follow: (i) discount rates used to derive the present value factors used in
determining the fair value of the reporting units and trademarks; (ii) royalty
rates used in our trade mark valuations; (iii) projected average revenue growth
rates used in the reporting unit and trademark models; and (iv) projected
long-term growth rates used in the derivation of terminal year
values. These tests factor in economic conditions and expectations of
management and may change in the future based on period-specific facts and
circumstances.
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. For the
Current Quarter and Prior Year Quarter there was no impairment present for these
long-lived assets.
Effective
January 1, 2006, we adopted guidance under ASC Topic 718 “Compensation –
Stock Compensation”, which requires companies to measure and
recognize compensation expense for all stock-based payments at fair value. Under
this guidance, using the modified prospective method, compensation expense is
recognized for all share-based payments granted prior to, but not yet vested as
of, January 1, 2006. Prior to the adoption of this
guidance, we accounted for our stock-based compensation plans
under the recognition and measurement principles of accounting principles board,
or APB, Opinion No. 25, “Accounting for stock issued to employees,” and
related interpretations. Accordingly, the compensation cost for stock options
had been measured as the excess, if any, of the quoted market price of our
common stock at the date of the grant over the amount the employee must pay to
acquire the stock.
We
account for income taxes in accordance with guidance under ASC Topic 740 “Income
Taxes”. Under this guidance, 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 this
guidance, 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 our business. Based upon management's assessment of all available
evidence, including our completed transition into a licensing business,
estimates of future profitability based on projected royalty revenues from our
licensees, and the overall prospects of our business, management concluded that
it is more likely than not that the net deferred income tax asset will be
realized.
We
adopted guidance under ASC Topic 740, beginning January 1, 2007, as it relates
to uncertain tax positions. The implementation of this guidance did not have a
significant impact on our financial position or results of operations. The total
unrecognized tax benefit was $1.1 million at the date of adoption. At March 31,
2010, the total unrecognized tax benefit was $1.2 million. However, the
liability is not recognized for accounting purposes because the related deferred
tax asset has been fully reserved in prior years. We are continuing our practice
of recognizing interest and penalties related to income tax matters in income
tax expense. There was no accrual for interest and penalties related to
uncertain tax positions for the Current Quarter. We file federal and state tax
returns and we are generally no longer subject to tax examinations for fiscal
years prior to 2006.
Marketable
securities, which are accounted for as available-for-sale, are stated at fair
value in accordance with guidance under ASC Topic 320 “Debt and Equity
Securities”, and consist of auction rate securities. Temporary changes in fair
market value are recorded as other comprehensive income or loss, whereas other
than temporary markdowns will be realized through our statement of operations.
On January 1, 2008, we adopted guidance under ASC Topic 820, which establishes a
framework for measuring fair value and requires expanded disclosures about fair
value measurement. While this guidance does not require any new fair value
measurements in its application to other accounting pronouncements, it does
emphasize that a fair value measurement should be determined based on the
assumptions that market participants would use in pricing the asset or
liability. Our assessment of the significance of a particular input to the fair
value measurement requires judgment and may affect the
valuation. Although we believe our judgments, estimates and/or
assumptions used in determining fair value are reasonable, making material
changes to such judgments, estimates and/or assumptions could materially affect
such impairment analyses and our financial results.
Seasonal and Quarterly
Fluctuations
.
The
majority of the products manufactured and sold under our brands and licenses are
for apparel, accessories, footwear and home products and decor, which sales vary
as a result of holidays, weather, and the timing of product shipments.
Accordingly, a portion of our revenue from our licensees, particularly from
those licensees whose actual sales royalties exceed minimum royalties, is
subject to seasonal fluctuations. The results of operations in any quarter
therefore will not necessarily be indicative of the results that may be achieved
for a full fiscal year or any future quarter.
Other
Factors
We
continue to seek to expand and diversify the types of licensed products being
produced under our various brands, as well as diversify the distribution
channels within which licensed products are sold, in an effort to reduce
dependence on any particular retailer, consumer or market sector. The success of
our company, however, will still remain largely dependent on our ability to
build and maintain brand awareness and contract with and retain key licensees
and on our licensees’ ability to accurately predict upcoming fashion trends
within their respective customer bases and fulfill the product requirements of
their particular retail channels within the global marketplace. Unanticipated
changes in consumer fashion preferences, slowdowns in the U.S. economy, changes
in the prices of supplies, consolidation of retail establishments, and other
factors noted in “Part II - Item 1A-Risk Factors,” could adversely affect our
licensees’ ability to meet and/or exceed their contractual commitments to us and
thereby adversely affect our future operating results
Effects of Inflation.
We
do not believe that the relatively moderate rates of inflation experienced over
the past few years in the United States, where we primarily operate, have had a
significant effect on revenues or profitability.
Item 3.
Quantitative and Qualitative
Disclosures about Market Risk
We limit
exposure to foreign currency fluctuations by requiring substantially all of our
licenses to be denominated in U.S. dollars. Our note receivable due
from the purchasers of the Canadian trademark for Joe Boxer is denominated in
Canadian dollars. If there were an adverse change of 10% in the
exchange rate from Canadian dollars to U.S. dollars, the expected effect on net
income would be immaterial.
We are
exposed to potential loss due to changes in interest rates. Investments with
interest rate risk include marketable securities. Debt with interest rate risk
includes the fixed and variable rate debt. As of March 31, 2010, we had
approximately $170.6 million in variable interest debt under our Term Loan
Facility. To mitigate interest rate risks, we have purchased derivative
financial instruments such as interest rate hedges to convert certain portions
of our variable rate debt to fixed interest rates. If there were an adverse
change of 10% in interest rates, the expected effect on net income would be
immaterial.
We
invested in certain auction rate securities, herein referred to as ARS.
Beginning in the third quarter of 2007 and through the Current Quarter, our
balance of ARS failed to auction due to sell orders exceeding buy orders, and
the insurer of the ARS exercised its put option to replace the underlying
securities of the ARS with its preferred securities. Further,
although the ARS had paid cash dividends according to their stated
terms, the payment of cash dividends ceased after July 31, 2009 and were
only temporarily reinstated for the four week period from December 23, 2009 to
January 15, 2010. The dividends would be resumed only if the board of
directors of the insurer declared such cash dividends to be payable at a later
date. In January 2010, we commenced a lawsuit against the
broker-dealer of these ARS alleging, among other things, fraud, and seeking
full recovery of the $13.0 million face value of the ARS, as well as legal costs
and punitive damages. These funds will not be available to us unless
a successful auction occurs, a buyer is found outside the auction process, or if
we realize recovery through settlement or legal judgment of the action brought
against the broker-dealer. We estimated the fair value of our ARS to be $7.3
million, using the present value of the weighted average of several scenarios of
recovery based on our assessment of the probability of each scenario. We
believe this cumulative decrease in fair value is temporary due to general
macroeconomic market conditions. Further, we have the ability and intent to
hold the ARS until an anticipated full redemption. The cumulative effect of
the failure to auction since the third quarter of fiscal 2007 has resulted in an
accumulated other comprehensive loss of $5.7 million which is reflected in the
stockholders’ equity section of the consolidated balance sheet.
As
described elsewhere in Note 5 of the Notes to Unaudited Condensed Consolidated
Financial Statements, in connection with the initial sale of our convertible
notes, we entered into convertible note hedges with affiliates of Merrill Lynch,
Pierce, Fenner & Smith Incorporated and Lehman Brothers Inc. At such
time, the hedging transactions were expected, but were not guaranteed, to
eliminate the potential dilution upon conversion of the convertible notes.
Concurrently, we entered into warrant transactions with the hedge
counterparties.
On
September 15, 2008 and October 3, 2008, respectively, Lehman Holdings
and Lehman OTC filed for protection under Chapter 11 of the United States
Bankruptcy Code in bankruptcy court. We had purchased 40% of the convertible
note hedges from Lehman OTC and we had sold 40% of the warrants to Lehman OTC.
If Lehman OTC does not perform such obligations and the price of our common
stock exceeds the $27.56 conversion price (as adjusted) of the convertible
notes, the effective conversion price of the Convertible Notes (which is higher
than the actual $27.56 conversion price due to these hedges) would be reduced
and our existing stockholders may experience dilution at the time or times the
convertible notes are converted. On September 17, 2009, we filed proofs of claim
with the bankruptcy court relating to the Lehman OTC convertible note hedges. We
will continue to monitor the bankruptcy filings of Lehman Holdings and Lehman
OTC with respect to such claims. We currently believe, although there can be no
assurances, that the bankruptcy filings and their potential impact on
these entities will not have a material adverse effect on our financial
position, results of operations or cash flows.
The
effect, if any, of any of these transactions and activities on the trading price
of our common stock will depend in part on market conditions and cannot be
ascertained at this time, but any of these activities could adversely affect the
value of our common stock.
Item 4.
Controls and
Procedures
The
Company, under the supervision and with the participation of its management,
including its principal executive officer and principal financial officer,
evaluated the effectiveness of the design and operation of its disclosure
controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) of the
Securities Exchange Act of 1934, herein referred to as the Exchange Act), as of
the end of the period covered by this report. The purpose of disclosure controls
is to ensure that information required to be disclosed in our reports filed with
or submitted to the SEC under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the SEC’s rules and
forms. Disclosure controls are also designed to ensure that such information is
accumulated and communicated to our management, including our principal
executive officer and principal financial officer, to allow timely decisions
regarding required disclosure.
Based on
this evaluation, the principal executive officer and principal financial officer
concluded that the Company’s disclosure controls and procedures are effective in
timely alerting them to material information required to be included in our
periodic SEC filings and ensuring that information required to be disclosed by
the Company in the reports that it files or submits under the Exchange Act is
recorded, processed, summarized and reported within the time period specified in
the SEC’s rules and forms.
The
principal executive officer and principal financial officer also conducted an
evaluation of internal control over financial reporting, herein referred to as
internal control, to determine whether any changes in internal control occurred
during the quarter ended March 31, 2010 that may have materially affected or
which are reasonably likely to materially affect internal control. Based on that
evaluation, there has been no change in the Company’s internal control during
the quarter ended March 31, 2010 that has materially affected, or is reasonably
likely to affect, the Company’s internal control.
PART
II. Other Information
Item 1.
Legal
Proceedings.
See Note
10 of Notes to Unaudited Condensed Consolidated Financial
Statements.
Item 1A.
Risk Factors.
In
addition to the risk factors disclosed in Part 1, Item 1A, “Risk Factors” of our
Annual Report on Form 10-K for the year ended December 31, 2009, set forth below
are certain factors that have affected, and in the future could affect, our
operations or financial condition. We operate in a changing environment that
involves numerous known and unknown risks and uncertainties that could impact
our operations. The risks described below and in our Annual Report on Form 10-K
for the year ended December 31, 2009 are not the only risks we face. Additional
risks and uncertainties not currently known to us or that we currently deem to
be immaterial also may materially adversely affect our financial condition
and/or operating results.
Our
existing and future debt obligations could impair our liquidity and financial
condition, and in the event we are unable to meet our debt obligations we could
lose title to our trademarks.
As of
March 31, 2010, our unaudited condensed consolidated balance sheet reflects debt
of approximately $610.6 million, including secured debt of $347.1 million
($170.6 million under our Term Loan Facility, $89.0 million under Asset-Backed
Notes issued by our subsidiary, IP Holdings, and $87.5 million under the
Promissory Note issued by IPH Unltd), primarily all of which was incurred in
connection with our acquisition activities. In accordance with ASC 820, our
Convertible Notes are included in our $610.6 million of consolidated debt at a
net debt carrying value of $251.4 million; however, the principal amount owed to
the holders of our Convertible Notes is $287.5 million. We may also assume or
incur additional debt, including secured debt, in the future in connection with,
or to fund, future acquisitions. Our debt obligations:
|
•
|
could
impair our liquidity;
|
|
•
|
could
make it more difficult for us to satisfy our other
obligations;
|
|
•
|
require
us to dedicate a substantial portion of our cash flow to payments on our
debt obligations, which reduces the availability of our cash flow to fund
working capital, capital expenditures and other corporate
requirements;
|
|
•
|
could
impede us from obtaining additional financing in the future for working
capital, capital expenditures, acquisitions and general corporate
purposes;
|
|
•
|
impose
restrictions on us with respect to the use of our available cash,
including in connection with future
acquisitions;
|
|
•
|
make
us more vulnerable in the event of a downturn in our business prospects
and could limit our flexibility to plan for, or react to, changes in our
licensing markets; and
|
|
•
|
could
place us at a competitive disadvantage when compared to our competitors
who have less debt.
|
While we
believe that by virtue of the guaranteed minimum and percentage royalty payments
due to us under our licenses we will generate sufficient revenues from our
licensing operations to satisfy our obligations for the foreseeable future, in
the event that we were to fail in the future to make any required payment under
agreements governing our indebtedness or fail to comply with the financial and
operating covenants contained in those agreements, we would be in default
regarding that indebtedness. A debt default could significantly diminish the
market value and marketability of our common stock and could result in the
acceleration of the payment obligations under all or a portion of our
consolidated indebtedness. In the case of our term loan facility, it would
enable the lenders to foreclose on the assets securing such debt, including the
Ocean Pacific/OP, Danskin, Rocawear, Starter, Mossimo and Waverly trademarks, as
well as the trademarks acquired by us in connection with the
Official-Pillowtex
If
we are unable to identify and successfully acquire additional trademarks, our
growth may be limited, and, even if additional trademarks are acquired, we may
not realize anticipated benefits due to integration or licensing
difficulties.
A key
component of our growth strategy is the acquisition of additional trademarks.
Historically, we have been involved in numerous acquisitions of varying sizes.
We continue to explore new acquisitions. However, as our competitors continue to
pursue our brand management model, acquisitions may become more expensive and
suitable acquisition candidates could become more difficult to
find. In addition, even if we successfully acquire additional
trademarks or the rights to use additional trademarks, we may not be able to
achieve or maintain profitability levels that justify our investment in, or
realize planned benefits with respect to, those additional brands.
Although
we seek to temper our acquisition risks by following acquisition guidelines
relating to the existing strength of the brand, its diversification benefits to
us, its potential licensing scale and credit worthiness of licensee base,
acquisitions, whether they be of additional intellectual property assets or of
the companies that own them, entail numerous risks, any of which could
detrimentally affect our results of operations and/or the value of our equity.
These risks include, among others:
|
•
|
unanticipated
costs associated with the target
acquisition;
|
|
•
|
negative
effects on reported results of operations from acquisition related charges
and amortization of acquired
intangibles;
|
|
•
|
diversion
of management’s attention from other business
concerns;
|
|
•
|
the
challenges of maintaining focus on, and continuing to execute, core
strategies and business plans as our brand and license portfolio grows and
becomes more diversified;
|
|
•
|
adverse
effects on existing licensing
relationships;
|
|
•
|
potential
difficulties associated with the retention of key employees, and the
assimilation of any other employees, who may be retained by us in
connection with or as a result of our acquisitions;
and
|
|
•
|
risks
of entering new domestic and international markets (whether it be with
respect to new licensed product categories or new licensed product
distribution channels) or markets in which we have limited prior
experience.
|
When we
acquire intellectual property assets or the companies that own them, our due
diligence reviews are subject to inherent uncertainties and may not reveal all
potential risks. We may therefore fail to discover or inaccurately
assess undisclosed or contingent liabilities, including liabilities for which we
may have responsibility as a successor to the seller or the target
company. As a successor, we may be responsible for any past or
continuing violations of law by the seller or the target company, including
violations of decency laws. Although we generally attempt to seek
contractual protections through representations, warranties and indemnities, we
cannot be sure that we will obtain such provisions in our acquisitions or that
such provisions will fully protect us from all unknown, contingent or other
liabilities or costs. Finally, claims against us relating to any
acquisition may necessitate our seeking claims against the seller for which the
seller may not indemnify us or that may exceed the scope, duration or amount of
the sellers indemnification obligations.
Acquiring
additional trademarks could also have a significant effect on our financial
position and could cause substantial fluctuations in our quarterly and yearly
operating results. Acquisitions could result in the recording of significant
goodwill and intangible assets on our financial statements, the amortization or
impairment of which would reduce our reported earnings in subsequent years. No
assurance can be given with respect to the timing, likelihood or financial or
business effect of any possible transaction. Moreover, as discussed below, our
ability to grow through the acquisition of additional trademarks will also
depend on the availability of capital to complete the necessary acquisition
arrangements. In the event that we are unable to obtain debt financing on
acceptable terms for a particular acquisition, we may elect to pursue the
acquisition through the issuance by us of shares of our common stock (and, in
certain cases, convertible securities) as equity consideration, which could
dilute our common stock because it could reduce our earnings per share, and any
such dilution could reduce the market price of our common stock unless and until
we were able to achieve revenue growth or cost savings and other business
economies sufficient to offset the effect of such an issuance. As a result,
there is no guarantee that our stockholders will achieve greater returns as a
result of any future acquisitions we complete.
A
substantial portion of our licensing revenue is concentrated with a limited
number of licensees such that the loss of any of such licensees could decrease
our revenue and impair our cash flows.
Our
licensees Wal-Mart, Target, Kohl’s and Kmart, were our four largest
direct-to-retail licensees during the Current Quarter, representing
approximately 26%, 13%, 6% and 6%, respectively, of our total revenue for such
period, while Li & Fung USA was our largest wholesale licensee,
representing approximately 14.1% of our total revenue for such period. Our
license agreement with Target for the Mossimo trademark grants it the exclusive
U.S. license for substantially all Mossimo-branded products for a current term
expiring in January 2012; our second license agreement with Target for the
Fieldcrest mark grants it the exclusive U.S. license for substantially all
Fieldcrest-branded products for a term expiring in January 2015; and our third
license agreement with Target grants it the exclusive U.S. license for Waverly
Home for a broad range of Waverly Home-branded products for a term expiring in
January 2015. Our license agreement with Wal-Mart for the Ocean Pacific and OP
trademarks grants it the exclusive license in the U.S., Canada, Mexico, China,
India and Brazil for substantially all Ocean Pacific/OP-branded products for an
term expiring June 30, 2011; our second license agreement with Wal-Mart for
the Danskin Now trademark grants it the exclusive license in the U.S., Canada,
Argentina, and Central America for substantially all Danskin Now-branded
products for an initial term expiring December 2010; and our third license
agreement with Wal-Mart for the Starter trademark grants it the exclusive
license in the U.S., Canada and Mexico for substantially all Starter-branded
products for an initial term expiring December 2013. Our license agreement with
Kohl’s for the Candie’s trademark grants it the exclusive U.S. license for a
wide variety of Candie’s-branded product categories for a term expiring in
January 2016, and our license agreement with Kohl’s for the Mudd trademark
grants it the exclusive U.S. license for a wide variety of Mudd-branded product
categories for an initial term expiring in January 2015. Our license
agreement with Kmart grants it the exclusive U.S. license with respect to the
Joe Boxer trademark for a wide variety of product categories for a term expiring
in December 2010 and our license agreement with Kmart for the Cannon trademark
granted the exclusive license in the U.S. and Canada for a wide variety of
product categories for an initial term expiring February 1, 2014. Our
license agreements with Li & Fung USA grant it the exclusive worldwide
license with respect to our Royal Velvet trademarks for a variety of products
sold exclusively at Bed Bath & Beyond in the U.S., and the
exclusive license (in many countries outside of the U.S. and Canada) for the
Cannon trademark for a variety of products. The term for each of these licenses
with Li & Fung USA expires on December 31, 2013. Our license
agreements with Wear Me Apparel LLC (“Wear Me”), a subsidiary of Li & Fung
USA, for the Rocawear trademark grant it the exclusive licenses for the U.S. and
its territories for sleepwear, underwear, swimwear and outerwear expire on
December 31, 2010; our license agreements with Wear Me for certain Ecko
trademarks grant it the exclusive licenses for the U.S. and its territories for
sleepwear, underwear, swimwear and outerwear expire on December 31, 2013; and
our license agreements with Wear Me for the Zoo York trademark grant it the
exclusive licenses for the U.S. and its territories for sleepwear, underwear,
swimwear and outerwear trademark expires on December 31,
2014. Because we are dependent on these licensees for a significant
portion of our licensing revenue, if any of them were to have financial
difficulties affecting its ability to make guaranteed payments, or if any of
these licensees decides not to renew or extend its existing agreement with us,
our revenue and cash flows could be reduced substantially.
We
are dependent upon our chief executive officer and other key executives. If we
lose the services of these individuals we may not be able to fully implement our
business plan and future growth strategy, which would harm our business and
prospects.
Our
success as a marketer and licensor of intellectual property is largely due to
the efforts of Neil Cole, our president, chief executive officer and chairman.
Our continued success is largely dependent upon his continued efforts and those
of the other key executives he has assembled. Although we have entered into an
employment agreement with Mr. Cole, expiring on December 31, 2012, as
well as employment agreements with other of our key executives, there is no
guarantee that we will not lose their services. To the extent that any of their
services become unavailable to us, we will be required to hire other qualified
executives, and we may not be successful in finding or hiring adequate
replacements. This could impede our ability to fully implement our business plan
and future growth strategy, which would harm our business and
prospects.
We
have a material amount of goodwill and other intangible assets, including our
trademarks, recorded on our balance sheet. As a result of changes in market
conditions and declines in the estimated fair value of these assets, we may, in
the future, be required to write down a portion of this goodwill and other
intangible assets and such write-down would, as applicable, either decrease our
net income or increase our net loss.
As of
March 31, 2010, goodwill represented approximately $170.7 million, or
approximately 9% of our total consolidated assets, and trademarks and other
intangible assets represented approximately $1,252.6 million, or approximately
69% of our total consolidated assets. Under current U.S. GAAP accounting
standards, goodwill and indefinite life intangible assets, including some of our
trademarks, are no longer amortized, but instead are subject to impairment
evaluation based on related estimated fair values, with such testing to be done
at least annually. While, to date, no impairment write-downs have been
necessary, any write-down of goodwill or intangible assets resulting from future
periodic evaluations would, as applicable, either decrease our net income or
increase our net loss and those decreases or increases could be
material.
Convertible
note hedge and warrant transactions that we have entered into may affect the
value of our common stock.
In
connection with the initial sale of our convertible notes, we purchased hedge
instruments, herein referred to as convertible note hedges, from affiliates of
Merrill Lynch, Pierce, Fenner & Smith Incorporated and Lehman Brothers
Inc. At such time, the hedging transactions were expected, but were not
guaranteed, to eliminate the potential dilution upon conversion of the
convertible notes. Concurrently, we entered into warrant transactions with the
hedge counterparties.
On
September 15, 2008 and October 3, 2008, respectively, Lehman Brothers
Holdings Inc., or Lehman Holdings, and its subsidiary, Lehman Brothers OTC
Derivatives Inc., or Lehman OTC, filed for protection under Chapter 11 of
the United States Bankruptcy Code in the United States Bankruptcy Court in the
Southern District of New York, herein referred to as the bankruptcy court. On
September 17, 2009, we filed proofs of claim with the bankruptcy court relating
to the Lehman OTC convertible note hedges. We had purchased 40% of the
convertible note hedges from Lehman OTC, or the Lehman note hedges, and we had
sold 40% of the warrants to Lehman OTC. Lehman OTC’s obligations under the
Lehman note hedges are guaranteed by Lehman Holdings. If the Lehman note hedges
are rejected or terminated in connection with the Lehman OTC bankruptcy, we
would have a claim against Lehman OTC and Lehman Holdings, as guarantor, for the
damages and/or close-out values resulting from any such rejection or
termination. While we intend to pursue any claim for damages and/or close-out
values resulting from the rejection or termination of the Lehman note hedges, at
this point in the Lehman bankruptcy cases it is not possible to determine with
accuracy the ultimate recovery, if any, that we may realize on potential claims
against Lehman OTC or Lehman Holdings, as guarantor, resulting from any
rejection or termination of the Lehman note hedges. We also do not know whether
Lehman OTC will assume or reject the Lehman note hedges, and therefore cannot
predict whether Lehman OTC intends to perform its obligations under the Lehman
note hedges. As a result, if Lehman OTC does not perform such obligations and
the price of our common stock exceeds the $27.56 conversion price (as adjusted)
of the convertible notes, the effective conversion price of the convertible
notes (which is higher than the actual $27.56 conversion price due to these
hedges) would be reduced and our existing stockholders may experience dilution
at the time or times the convertible notes are converted. The extent of any such
dilution would depend, among other things, on the then prevailing market price
of our common stock and the number of shares of common stock then outstanding,
but we believe the impact will not be material and will not affect our income
statement presentation. We are not otherwise exposed to counterparty risk
related to the Lehman bankruptcies. We currently believe, although there can be
no assurance, that the bankruptcy filings and their potential impact on these
entities will not have a material adverse effect on our financial position,
results of operations or cash flows. We will continue to monitor the bankruptcy
filings of Lehman Holdings and Lehman OTC.
Moreover,
in connection with the warrant transactions with the counterparties, to the
extent that the price of our common stock exceeds the strike price of the
warrants, the warrant transactions could have a dilutive effect on our earnings
per share.
Due
to the recent downturn in the market, certain of the marketable securities we
own may take longer to auction than initially anticipated, if at
all.
Marketable
securities consist of auction rate securities, herein referred to as ARS. From
the third quarter of 2007 to the present, our balance of ARS failed to auction
due to sell orders exceeding buy orders, and the insurer of the ARS exercised
its put option to replace the underlying securities of the auction rate
securities with its preferred securities. Further, although the ARS had paid
cash dividends according to their stated terms, the payment of cash
dividends ceased after July 31, 2009, and would be resumed only if the board of
directors of the insurer declares such cash dividends to be payable at a later
date. The insurer’s board of directors temporarily reinstated
dividend payments for the 4-week period from December 23, 2009 to January 15,
2010. In January 2010, we commenced a lawsuit against the
broker-dealer of these ARS alleging, among other things, fraud, and seeking
full recovery of the $13.0 million face value of the ARS, as well as legal costs
and punitive damages. These funds will not be available to us unless
a successful auction occurs, a buyer is found outside the auction process, or if
we realize recovery through settlement or legal judgment of the action being
brought against the broker. As a result, $13.0 million of our ARS have been
written down to approximately $7.3 million, based on our evaluation, as an
unrealized pre-tax loss to reflect a temporary decrease in fair value, reflected
as an accumulated other comprehensive loss of $5.7 million in the stockholders’
equity section of our consolidated balance sheet. We estimated the fair value of
our ARS using the present value of the weighted average of several scenarios of
recovery based on our assessment of the probability of each scenario. We believe
this cumulative decrease in fair value is temporary due to general macroeconomic
market conditions. Further, we have the ability and intent to hold the
securities until an anticipated full redemption. However, there are no
assurances that a successful auction will occur, that we can find a buyer
outside the auction process, or that we will realize full recovery through
settlement or legal judgment.
A
decline in general economic conditions resulting in a decrease in
consumer-spending levels and an inability to access capital may adversely affect
our business.
Many
economic factors beyond our control may impact our forecasts and actual
performance. These factors include consumer confidence, consumer spending
levels, employment levels, availability of consumer credit, recession,
deflation, inflation, a general slowdown of the U.S. economy or an uncertain
economic outlook. Furthermore, changes in the credit and capital markets,
including market disruptions, limited liquidity and interest rate fluctuations,
may increase the cost of financing or restrict our access to potential sources
of capital for future acquisitions.
Item
2. Unregistered Sales of Equity Securities and Use of Proceeds
The
following table represents information with respect to purchases of common stock
made by the Company during the Current Quarter:
Month of purchase
|
|
Total number
of shares
purchased
(1)
|
|
|
Average
price
paid per share
|
|
|
Total number
of
shares
purchased as
part of
publicly
announced
plans or
programs
|
|
|
Maximum
number
(or
approximate
dollar
value) of
shares
that may yet
be
purchased
under the
plans or
programs
|
|
January
1 – January 31
|
|
|
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
71,722,003
|
|
February
1 – February 28
|
|
|
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
71,722,003
|
|
March
1 – March 31
|
|
|
337
|
|
|
$
|
15.69
|
|
|
$
|
-
|
|
|
$
|
71,722,003
|
|
Total
|
|
|
337
|
|
|
$
|
15.69
|
|
|
$
|
-
|
|
|
$
|
71,722,003
|
|
(1) On November
3, 2008, the Company announced that the Board of Directors authorized the
repurchase of up to $75 million of the Company's common stock over a period
ending October 30, 2011. This authorization replaced any prior plan or
authorization. The current plan does not obligate the Company to repurchase any
specific number of shares and may be suspended at any time at management's
discretion. Amounts not purchased under the stock repurchase program
represent shares surrendered to the Company to pay withholding taxes due upon
the vesting of restricted stock.
Item 6.
Exhibits
EXHIBIT
NO.
|
|
DESCRIPTION
OF EXHIBIT
|
|
|
|
Exhibit
10.1
|
|
Membership
Interest Purchase Agreement dated as of March 9, 2010 by and between the
Company and Purim LLC (1)
|
|
|
|
Exhibit
31.1
|
|
Certification
of Chief Executive Officer Pursuant To Rule 13a-14 or 15d-14 of The
Securities Exchange Act of 1934, As Adopted Pursuant To Section 302 Of The
Sarbanes-Oxley Act of 2002
|
|
|
|
Exhibit
31.2
|
|
Certification
of Chief Financial Officer Pursuant To Rule 13a-14 or 15d-14 of The
Securities Exchange Act of 1934, As Adopted Pursuant To Section 302 Of The
Sarbanes-Oxley Act of 2002
|
|
|
|
Exhibit
32.1
|
|
Certification
of Chief Executive Officer Pursuant To 18 U.S.C. Section 1350, As Adopted
Pursuant To Section 906 of The Sarbanes-Oxley Act of
2002
|
|
|
|
Exhibit
32.2
|
|
Certification
of Chief Financial Officer Pursuant To 18 U.S.C. Section 1350, As Adopted
Pursuant To Section 906 of The Sarbanes-Oxley Act of
2002
|
|
(1)
|
Filed
as an exhibit to the Company’s Current Report on Form 8-K
for
the event dated March 9, 2010 and incorporated by reference
herein
|
Signatures
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
|
Iconix
Brand Group, Inc.
(Registrant)
|
|
|
Date:
May 5, 2010
|
/s/
Neil Cole
|
|
Neil
Cole
Chairman
of the Board, President
and
Chief Executive Officer
(on
Behalf of the Registrant)
|
Date:
May 5, 2010
|
/s/
Warren Clamen
|
|
Warren
Clamen
Executive
Vice President
and
Chief Financial Officer
|
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