Item
1.
Business
General
The
Company is a brand management company engaged in licensing, marketing and
providing trend direction for a portfolio of owned consumer brands. The Company
currently owns 16 brands, Candie's®, Bongo®, Badgley Mischka®, Joe Boxer®,
Rampage®, Mudd®, London Fog®, Mossimo®, Ocean Pacific®/OP®, Danskin®, Rocawear®,
Cannon®, Royal Velvet®, Fieldcrest®, Charisma® and Starter®, which it licenses
directly to leading retailers, wholesalers and suppliers for use across a wide
range of product categories, including apparel, fashion accessories, footwear,
beauty and fragrance, and home products and decor. The Company’s brands are sold
across a variety of distribution channels, from the mass tier to the luxury
market. The Company supports its brands with innovative advertising and
promotional campaigns designed to increase brand awareness, and provides its
licensees with coordinated trend direction to enhance product appeal and help
maintain and build brand integrity.
The
Company has a business strategy designed to maximize the value of its existing
brands by entering into strategic licenses with partners that have the
responsibility for manufacturing and selling the licensed products. These
licensees have been selected based upon the Company's belief that they will
be
able to produce and sell top quality products in the categories of their
specific expertise and that they are capable of exceeding the minimum sales
targets and guaranteed royalties that the Company generally requires from its
licensees. In addition, the Company plans to continue to build its portfolio
by
acquiring additional brands. In assessing potential acquisitions, the Company
primarily evaluates the strength of the target brand and the viability of future
royalty streams. This focused approach allows the Company to screen a wide
pool
of consumer brand candidates, quickly evaluate acquisition targets and
efficiently complete due diligence for potential acquisitions.
The
Company also continues to arrange, as agent, through its wholly-owned
subsidiary, Bright Star, for the manufacture of footwear products for mass
market and discount retailers under their private label brands. Bright Star
has
no inventory and earns commissions on sales.
Since
October 2004, the Company has acquired the following 14 brands:
|
Date
acquired
|
|
Brand
|
|
October
2004
|
|
Badgley
Mischka
|
|
July
2005
|
|
Joe
Boxer
|
|
September
2005
|
|
Rampage
|
|
April
2006
|
|
Mudd
|
|
August
2006
|
|
London
Fog
|
|
October
2006
|
|
Mossimo
|
|
November
2006
|
|
Ocean
Pacific/OP
|
|
March
2007
|
|
Danskin
and Rocawear
|
|
October
2007
|
|
Official-Pillowtex
brands (including Cannon, Royal Velvet, Fieldcrest and
Charisma)
|
|
December
2007
|
|
Starter
|
In
connection with its licensing model, the Company has eliminated its inventory
risk, substantially reduced its operating exposure, improved its cash flows
and net income margins and benefited from the model's scalability, which
enables the Company to leverage new licenses with its existing infrastructure.
The Company's objective is to capitalize on its brand management expertise
and
relationships and continue to build a diversified portfolio of consumer brands
that generate increasing revenues. To achieve this, the Company intends to
continue pursuing organic growth through its existing brands, pursue additional
international licensing arrangements and purchase new brands to build its
trademark portfolio.
Additional
information
The
Company was incorporated under the laws of the state of Delaware in 1978. Its
principal executive offices are located at 1450 Broadway, New York, New York
10018 and its telephone number is (212) 730-0300. The Company’s website
address is www.iconixbrand.com. The information on the Company’s website does
not constitute part of this Form 10-K. The Company has included its website
address in this document as an inactive textual reference only. Candie’s®,
Bongo®, Joe Boxer®, Rampage®, Mudd® and London Fog® are the registered
trademarks of the Company’s wholly-owned subsidiary, IP Holdings; Badgley
Mischka®
is
the
registered trademark of the Company’s wholly-owned subsidiary, Badgley Mischka
Licensing; Mossimo® is the registered trademark of the Company’s wholly-owned
subsidiary, Mossimo Holdings; Ocean Pacific®
and
OP®
are the
registered trademarks of the Company’s wholly-owned subsidiary, OP Holdings;
Danskin®, Danskin Now®, Rocawear® and Starter® are the registered trademarks of
the Company’s wholly-owned subsidiary, Studio IP Holdings; and Fieldcrest®,
Royal Velvet®, Cannon® and Charisma® are the registered trademarks of the
Company’s wholly-owned subsidiary, Official-Pillowtex. Each of the other
trademarks, trade names or service marks of other companies appearing in this
Form 10-K is the property of its respective owner.
The
Company's brands
The
Company’s objective is to
continue
to develop and build a diversified portfolio of iconic consumer brands by
organically growing its existing portfolio and by acquiring new brands that
leverage the Company’s brand management expertise and existing infrastructure.
To achieve this objective, the Company intends to:
|
·
|
extend
its existing brands
by
adding additional product categories, expanding the brands’ retail
presence and optimizing its licensees’ sales through innovative marketing
that increases consumer awareness and loyalty;
|
|
·
|
continue
its international expansion
through
additional partnerships with leading retailers and wholesalers worldwide;
and
|
|
·
|
continue
acquiring consumer brands
with high consumer awareness, broad appeal, applicability to a range
of
product categories and an ability to diversify the Company’s
portfolio.
|
In
managing its brands, the Company seeks to capitalize on the brands’ histories,
while simultaneously working to keep them relevant to today’s consumer.
As
of
December 31, 2007, the Company’s brand portfolio consisted of the following 16
iconic consumer brands:
Candie’s.
Candie’s
is known primarily as a junior lifestyle brand, with products in the footwear,
apparel and accessories categories, and has achieved brand recognition for
its
flirty and fun image, value prices and affiliations with celebrity spokespeople.
The Company purchased the brand from a predecessor company in 1993, making
it
the Company’s longest held trademark. The primary licensee of Candie’s is Kohl’s
Department Stores, Inc.
(“Kohl’s”)
,
which
commenced the roll out of the brand in July 2005 in all of its stores with
a
multi-category line of Candie’s lifestyle products, including sportswear, denim,
footwear, handbags, intimate apparel, children’s apparel, fragrance and home
accessories. Celebrity spokespeople for the Candie’s brand over the past two
decades have included Jenny McCarthy, Destiny’s Child, Alyssa Milano, Kelly
Clarkson, Ashlee Simpson, Hilary Duff, Pat Benatar, Fergie and, currently,
Hayden Panettiere.
Bongo.
The
Bongo
brand is positioned as a California lifestyle brand, with a broad range of
women’s and children’s casual apparel and accessories, including denim,
sportswear, eyewear, fragrance and watches. The brand was established in 1982
and was purchased by the Company in 1998. Bongo products are sold primarily
through mid-tier department stores, such as JC Penney, Kohl’s, Sears, Goody’s
and Mervyn’s. The Company has 16 Bongo licenses, including those licensed
internationally to wholesalers in South America and Central America. Celebrity
spokespeople for the Bongo brand have included Liv Tyler, Rachel Bilson, Nicole
Richie, the stars of the top rated MTV television reality show
Laguna Beach
,
and
Vanessa Minnillo. Currently, Kim Kardashian is the spokesperson for the Bongo
brand.
Badgley
Mischka.
The
Badgley Mischka brand is known as one of the premiere couture eveningwear
brands. The brand was established in 1988 and was acquired by the Company in
October 2004. Badgley Mischka products are sold in luxury department and
specialty stores, including Bergdorf Goodman, Neiman Marcus and Saks Fifth
Avenue, with its largest retail categories being women’s apparel and
accessories. The Company has 18 Badgley Mischka licenses. Badgley Mischka
designs have been worn by
such
celebrities as Angelina Jolie, Catherine Zeta Jones, Halle Berry, Kate Winslet,
and Ashley and Mary Kate Olsen. Currently, the spokesperson for the brand is
actress Teri Hatcher.
Joe
Boxer.
Joe
Boxer
is a highly recognized underwear, sleepwear and loungewear brand known for
its
irreverent and humorous image and provocative promotional events. The brand
was
established in 1985 and was acquired by the Company in July 2005. Kmart
Corporation (“Kmart”), a wholly-owned subsidiary of Sears Holding Corporation,
has held the exclusive license in the United States covering Joe Boxer apparel,
fashion accessories and home products for men, women, teens and children since
2001. In September 2006, the Company expanded the license with Kmart to extend
the brand into Sears’ stores. The brand is also being developed internationally,
with 14 international licenses, including licenses in Canada, Mexico, the United
Kingdom, and Scandinavia.
Rampage.
Rampage
was established in 1982 and is known as a contemporary/junior women’s sportswear
brand. The brand was acquired by the Company in September 2005. Rampage products
are sold through better department stores such as Macy’s, with the largest
retail categories being sportswear, footwear, intimate apparel and swimwear.
The
Company licenses the brand to 17 wholesalers in the United States and to
partners in parts of South and Central America and the Middle East. Supermodel
Petra Nemcova is the spokesperson for the Rampage brand and has modeled for
its
campaigns for the past few seasons.
Mudd.
Mudd
is a
highly recognizable junior apparel brand, particularly in the denim and footwear
categories. It was established in 1995 and acquired by the Company in April
2006. There are 15 licenses for Mudd products, including jeanswear, footwear,
eyewear and a variety of other accessories, which are distributed through
mid-level department stores such as JC Penney.
London
Fog.
London
Fog is a classic brand known worldwide for its outerwear, cold weather
accessories, umbrellas, luggage and travel products. The brand was established
over 80 years ago and was acquired by the Company in August 2006. The brand
is
sold through the better department store channel. The Company has 13 London
Fog licenses, including a direct-to-retail license agreement with Hudson’s Bay
Corporation in Canada, covering apparel, accessories and lifestyle products.
Spokespeople for the London Fog brand have included Kevin Bacon and Nicolette
Sheridan.
Mossimo.
Mossimo
is known as a contemporary, active and youthful lifestyle brand and is one
of
the largest apparel brands in the United States. The brand was established in
1986 and acquired by the Company in October 2006. In the United States, Target
Corporation (“Target”) holds the exclusive Mossimo brand license covering
apparel products for men, women and children, including casual sportswear,
denim, swimwear, body wear, watches, handbags and other fashion accessories.
The
brand is also licensed to eight wholesale partners in Australia, New Zealand,
South America, Mexico, the Philippines, and Japan.
Ocean
Pacific/OP.
Ocean
Pacific and OP are global action-sports lifestyle apparel brands which trace
their heritage to Ocean Pacific’s roots as a 1960’s surfboard label. The Company
acquired the Ocean Pacific brands in November 2006 at which time it assumed
15
domestic licenses covering such product categories as footwear, sunglasses,
kids’ apparel and fragrance. For the Ocean Pacific brands, the Company has 21
wholesale licenses and two direct-to-retail licenses, including one with
Wal-Mart Stores, Inc. (“Wal-Mart”) for the United States, Brazil, India and
China, and one with The Style Company for the Middle East.
Danskin
.
Danskin, our oldest brand, is a 125 year-old iconic brand of women's activewear,
legwear, dancewear, yoga apparel and fitness equipment, which the Company
acquired in March 2007. The Danskin brand is sold through better department,
specialty and sporting goods stores and through freestanding Danskin boutiques
and Danskin.com. In addition, the Company has a direct-to-retail license with
Wal-Mart for its Danskin Now® brand for apparel and fitness
equipment.
Rocawear.
Rocawear
is a leading international, urban lifestyle apparel brand established by Shawn
“Jay-Z” Carter, Damon Dash and Kareem Burke in 1999. The Company acquired the
Rocawear brand in March 2007. There are 23 licenses for Rocawear products,
including men’s, women’s and kids’ apparel, outerwear, footwear, jewelry,
handbags and fragrance. Rocawear products are sold through better department
and
specialty stores. The founder, Jay-Z, remains actively involved in the brand
as
the core licensee, and has been contracted to aid with the creative direction
of
the brand.
In
October 2007, the Company expanded its portfolio by acquiring the following
four
brands through its acquisition of Official-Pillowtex
:
Cannon.
Cannon
is one of the most recognizable brands in home textiles with a strong heritage
and history and is known as the first textile brand to sew logos onto products.
Cannon is distributed in over 1,000 doors in regional department stores,
including Meijer, ShopKo, Mervyn’s and Steinmart, as well as in Wal-Mart and
Costco. Cannon was established in 1887, making it the Company’s third oldest
brand. In February 2008, the Company signed a direct-to-retail license with
Kmart for Cannon.
Royal
Velvet.
Royal
Velvet is a distinctive luxury home textile brand that strives to deliver the
highest quality to consumers. The Royal Velvet towel has been an industry
standard since 1954 and is known as the authority for color and quality. Royal
Velvet products, including towels, sheets, rugs and shams, are sold pursuant
to
seven licenses in over 3,000 locations through the high-end and better
department store channels. The core licensee for Royal Velvet is Li & Fung
Limited, which in February 2008 established an exclusive distribution
arrangement with Bed Bath & Beyond Inc.
Fieldcrest.
Fieldcrest is a brand of contemporary relevance to the mass channel consumer.
The brand is known for quality bed and bath textiles that are easy care, soft,
easy to coordinate and classic in style. Fieldcrest home products are sold
through the mass channel, with Target having the exclusive license in the United
States since Spring 2005. The Fieldcrest brand was created in 1883, making
it
the Company’s second oldest brand.
Charisma.
Charisma
home textiles were introduced in the 1970s and are known for their quality
materials and classic designs. Charisma products are currently distributed
through better department stores such as Bloomingdales. The Company has two
licenses for the brand, including Westpoint Stevens, Inc..
In
December 2007, the Company acquired the Starter brand
.
Starter.
Starter,
founded in 1971 and one of the original brands in licensed team merchandise,
is
a highly recognized and authentic brand of athletic apparel and footwear. Today,
products bearing the Starter brand are distributed in the United States,
primarily at Wal-Mart, through a number of different wholesale licensees.
Starter is also licensed internationally and sold through retailers including
Carrefour and Metro. Starter was acquired by the Company in December 2007.
The
Company currently has 27 Starter licenses.
Scion
LLC
Scion
LLC
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 completed its first
brand acquisition when its wholly-owned subsidiary purchased Artful Dodger™, an
exclusive, high end urban apparel brand for a purchase price of $15.0 million.
Concurrent with the acquisition of Artful Dodger, Scion entered into a
license agreement covering all major apparel categories for the United
States.
Bright
Star
Concurrent
with the acquisition of Artful Dodger, Scion entered into a license
agreement covering all major apparel categories for the United
States.
Bright
Star provides design direction and arranges for the manufacturing and
distribution of men’s private label footwear products primarily for Wal-Mart
under its private labels. Bright Star acts solely as an agent and never assumes
ownership of the goods. For the years ended December 31, 2007, and December
31,
2006, Bright Star’s agency commissions represented 1.5% and 3.0%, respectively,
of the Company’s revenues.
Transition
to a brand management company
Prior
to
2004, the Company designed, procured the manufacture of, and sold footwear
and
jeanswear under the two trademarks it owned at the time: Candie’s and Bongo.
Commencing in May 2003, however, it began to implement a shift in its business
model designed to transform it from a wholesaler and retailer of jeanswear
and
footwear products to a brand management company focused on licensing and
marketing its portfolio of consumer brands. In May 2003, the Company licensed
out both its Bongo footwear business and its Candie’s footwear business to third
party licensees, and, by the end of 2003, it had eliminated all of its Candie’s
retail concept stores. Effective in August 2004, the Company also licensed
out
its Bongo jeans wear operations, which were previously conducted through its
wholly-owned subsidiary, Unzipped Apparel, LLC (“Unzipped”). Beginning January
2005, the Company also changed its business practices with respect to its Bright
Star subsidiary, as a result of which Bright Star began acting solely as an
agent for, as opposed to an indirect wholesaler to, its private label footwear
clients. As a result of these changes to its operations, since the end of 2004,
the Company has had no wholesale or retail operations or product inventory
and
has operated solely as a brand management company.
Since
October 2004, the Company has acquired 14 new brands, bringing its total number
of iconic brands to 16 as of December 31, 2007, and, since July 2005, when
the
Company entered into its first multi-category retail license with Kohl’s, the
Company has entered into multi-category retail licenses with a number of other
retailers, such as Target, Sears Holding Corporation and Wal-Mart. As of
December 31, 2007, the Company had 220 wholesale and retail
licenses.
Licensing
relationships
The
Company's business strategy is to maximize the value of its brands by entering
into strategic licenses with partners who have the responsibility for
manufacturing and selling the licensed products. The Company licenses its brands
with respect to a broad range of products, including apparel, footwear, fashion
accessories, sportswear, home products and décor, and beauty and fragrance. The
Company seeks licensees with the ability to produce and sell quality products
in
their licensed categories and the demonstrated ability to meet and exceed
minimum sales thresholds and royalty payments to the Company.
The
Company maintains retail and wholesale licenses. The retail licenses typically
restrict the sale of products under the brand to a single retailer but cover
a
broad range of product categories. For example, the Candie’s brand is licensed
to Kohl’s in the United States across approximately 25 product categories. The
wholesale licenses typically are limited to a single or small group of related
product categories, but permit broader distribution in the designated territory
to stores within an approved channel. For example, the Company licenses Rampage
to 17 partners across product categories ranging from footwear and apparel
to
handbags and fragrances. Each of the Company’s licenses also has a stipulated
territory or territories, as well as distribution channels, in which the
licensed products may be sold. Currently, most of the licenses are U.S. based
licenses, but the Company anticipates the number of foreign based licenses
to
grow and revenue generated by international businesses to increase as the
Company’s brands grow internationally.
Typically,
the Company's licenses require the licensee to pay the Company royalties based
upon net sales and guaranteed minimum royalties in the event that net sales
do
not reach certain specified targets. The Company's licenses also typically
require the licensees to pay to the Company certain minimum amounts for the
advertising and marketing of the respective licensed brands. As of December
31,
2007, the Company had 220 royalty-producing licenses with respect to its 16
brands.
The
Company believes that coordination of brand presentation across product
categories is critical to maintaining the strength and integrity of its brands.
Accordingly, the Company maintains the right in its licenses to preview and
approve all product, packaging and presentation of the licensed brand. Moreover,
in most licenses, prior to each season, representatives of the Company supply
licensees with trend guidance as to the “look and feel” of the current trends
for the season, including colors, fabrics, silhouettes and an overall style
sensibility, and then work with licensees to coordinate the licensed products
across the categories to maintain the cohesiveness of the brand's overall
presentation in the market place. Thereafter, the Company obtains and approves
(or objects and requires modification to) product and packaging provided by
each
licensee on an on-going basis. In addition, the Company communicates with its
licensees throughout the year to obtain and review reporting of sales and the
calculation and payment of royalties.
In
the
fiscal year ended December 31, 2007, the Company’s largest direct-to-retail
licenses were with Target, Kohl’s, and Kmart, which collectively represented 27%
of total revenue for the period.
Key
licenses in fiscal 2007
Target
license
As
part
of the Company's acquisition of Mossimo, Inc. in October 2006, the
Company acquired the license with Target, which originally commenced in 2000
and
was subsequently amended in March 2006. Pursuant to this license, Target
has the exclusive right to produce and distribute substantially all
Mossimo-branded products sold in the United States, its territories and
possessions through Target retail stores, until January 31, 2010. If Target
is current with payments of its obligations under the license, Target has the
right to renew the Target license on the same terms and conditions for
successive additional terms of two years each.
Under
the
Target license, Target pays royalty fees based on certain percentages of its
net
sales of Mossimo-branded products, subject to its obligation to pay certain
guaranteed minimum fees per each contract year. Under the Target license, the
Company provides the creative director services of Mr. Mossimo Giannulli with
respect to Mossimo-branded products sold through Target stores. The revenues
generated from this contract for the years ended December 31, 2007 and 2006
represented 13% and 5%, respectively, of the Company’s overall revenue for such
periods.
Kohl’s
license
In
December 2004, the Company entered into a license agreement with Kohl’s, which
was subsequently amended in February 2005. Pursuant to this license, the Company
granted Kohl’s the exclusive right to design, manufacture, sell and distribute a
broad range of products under the Candie’s trademark, including women’s,
juniors’ and children’s apparel, accessories (except prescription eyewear),
beauty and personal care products, home accessories and electronics. Kohl’s was
also granted the non-exclusive right to sell footwear and handbags bearing
the
Candie’s brand through December 31, 2006, which rights became exclusive to
Kohl’s on January 1, 2007. The initial term of the Kohl’s license expires on
January 29, 2011, subject to Kohl’s option to renew it for up to three
additional terms of five years, each contingent on Kohl's meeting specified
performance and minimum sale standards. The agreement also provides for minimum
royalties that Kohl’s is obligated to pay the Company for each contract year
(the first contract year ended December 31, 2006).
The
revenue generated from this contract totaled 8%, 14%, and 15% of the Company’s
overall revenue for the years ended December 31, 2007, 2006 and 2005
respectively. Kohl’s is also obligated to pay an advertising royalty equal to 1%
of net sales each contract year. Kohl’s does not have the right to sell Candie’s
ophthalmic eyewear (currently sold predominantly in doctors’ offices), which has
been licensed to Viva International Group, Inc. since 1998.
Kmart
license
As
part
of the Joe Boxer brand acquisition in July 2005, the Company assumed a license
with Kmart, which commenced in August 2001, pursuant to which Kmart (now a
wholly-owned subsidiary of Sears Holdings Corporation) was granted the exclusive
right to manufacture, market and sell through Kmart stores located in the United
States and its territories a broad range of products under the Joe Boxer
trademark, including men’s, women’s and children’s underwear, apparel,
apparel-related accessories, footwear and home products, for an initial term
expiring in December 2007. The license provided for guaranteed minimum royalty
payments to the Company for each of the years ending December 31, 2006 and
2007.
In
September 2006, the Company entered into a new license with Kmart that extended
the initial term through December 31, 2010, subject to Kmart’s option to renew
the license for up to four additional terms of five years, each contingent
on
its meeting specified performance and minimum sale standards. The new license
also provides for guaranteed annual minimums and provides for Kmart’s expansion
of Joe Boxer’s distribution into Sears stores. The revenue generated from Kmart
totaled 6%, 24%, and 28% of the Company’s overall revenue in the years ended
December 31, 2007, 2006 and 2005, respectively.
Marketing
Marketing
is a critical element of maximizing brand value to the licensees and to the
Company. The Company’s in-house marketing team tailors advertising for each of
the Company’s brands and each spring and fall the Company develops new
advertising campaigns that incorporate the design aesthetic of each
brand.
The
Company believes that its innovative national advertising campaigns, including
those featuring celebrities and performers, result in increased sales and
consumer awareness of its brands. Because of the Company’s established
relationships with celebrities, performers, agents, magazine publishers and
the
media in general, the Company has been able to leverage advertising dollars
into
successful public relations campaigns that reach tens of millions of
consumers.
The
Company’s advertising expenditures for each of its brands are dedicated largely
to creating and developing creative advertising concepts, reaching appropriate
arrangements with key celebrities, or other models and participants,
advertisements in magazines and trade publications, securing product placements,
developing sweepstakes and media contests, running Internet advertisements
and
promoting public relations events, often featuring personal appearances and
concerts. The advertisements for the Company’s various brands have appeared in
fashion magazines such as
InStyle
,
Seventeen
and
Vogue
in
popular lifestyle and entertainment magazines such as
Us
,
and
In
Touch
,
in
newspapers and on outdoor billboards. The Company also uses television
commercials to promote certain of its brands, partnering with licensees to
create and air commercials that will generate excitement for its brands with
consumers. The Company maintains a website (
www.iconixbrand.com
) to
further market its brands by providing brand materials and examples of current
advertising campaigns. In addition, the Company has established an intranet
with
approved vendors and service providers who can access additional materials
and
download them through a secure network. The Company also maintains, in some
cases through its licensees, separate, dedicated sites for its
brands.
A
majority of the Company’s license agreements require the payment of an
advertising royalty by the licensee. In certain cases, the Company’s licensees
supplement the marketing of the Company’s brands by performing additional
advertising through trade, cooperative or other sources.
The
Company has organized the brand management and marketing functions to best
foster the ability to develop innovative and creative marketing and brand
support for each existing brand. This structure can be leveraged to support
future acquisitions with minimal growth in expense. Typically, each brand is
staffed with a brand manager who is supported by a fashion and product
development team and who works closely with the creative and graphic groups
in
the advertising department. Although each brand’s creative direction and image
is developed independently, the creative team meets together on a regular basis
to share ideas that might work across multiple or all brands. Licensees are
provided information both through group meetings and individual sessions, as
well as through intranet sites, where creative ideas, brand marketing campaigns
and graphics are accessible and easy to download and use in an authorized
manner.
Trend
direction
The
Company’s in-house trend direction teams support the brands by providing
licensees with unified trend direction and guidance and by coordinating the
brand image across licensees and product categories. The Company’s trend
direction personnel are focused on identifying and interpreting the most current
trends, both domestically and internationally, and helping forecast the future
design and product demands of the respective brands’ customers. Typically, the
Company develops a trend guide, including colors, fabrics, silhouettes and
an
overall style sensibility for each brand and for each product season, and then
works with licensees to maintain consistency with the overall brand presentation
across product categories. In addition, the Company has product approval rights
in most licenses and further controls the look and mix of products its licensees
produce through that process. With respect to Badgley Mischka, Mossimo and
Rocawear, the Company has contracted the exclusive services of the designers
who
founded the respective brands to control creative direction.
The
Company Website
The
Company maintains a website at
www.iconixbrand.com
,
which
provides a wide variety of information on each of its brands, including brand
books and examples of current advertising campaigns. The Company also makes
available free of charge on its website its annual reports on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments
to those reports filed with or furnished to the Securities and Exchange
Commission (the
“SEC
”
) under
applicable law as soon as reasonably practicable after it files such material.
In addition, the Company has established an intranet with approved vendors
and
service providers who can access additional materials and download them through
a secure network. In addition, there are websites for most of the Company’s
brands, for example, at
www.candies.com
,
www.badgleymischka.com
,
www.joeboxer.com
and
www.rocawear.com
.
The
information regarding the Company’s website address and/or those established for
its brands is provided for convenience, and the Company is not including the
information contained on the Company’s and brands’ websites as part of, or
incorporating it by reference into, this Annual Report on Form
10-K.
The
Company’s website also contains information about its history, investor
relations, governance and links to access copies of its publicly filed
documents.
Competition
The
Company’s brands are all subject to extensive competition by numerous domestic
and foreign brands. Each of its brands has numerous competitors within each
of
its specific distribution channels that span numerous products categories
including such categories as the apparel and home products and
decor industries. For example, while Rampage may compete with XOXO in the
mid-tier jeanswear business, Joe Boxer competes with Hanes, Calvin Klein and
Jockey with respect to underwear in the mass tier, and Badgley Mischka competes
with other couture apparel and bridal brands. Other of our brands (such as
Danskin), which are distributed both at the mass level (for instance with
Danskin through the diffusion brand Danskin Now) and at the department and
specialty store level under the core Danskin label (for instance with Danskin),
may have many competitors in different or numerous distribution channels. These
competitors have the ability to compete with the Company’s licensees in terms of
fashion, quality, price and/or advertising. The Company also faces competition
from other brand owners in similar categories for the best
licensees.
In
addition, the Company faces competition for retail licenses and brand
acquisitions. Companies owning established brands may decide to enter into
licensing arrangements with retailers similar to the ones the Company currently
has in place, thus creating direct competition. Similarly, the retailers to
which the Company currently, or may otherwise, license its brands, may decide
to
develop or purchase brands rather than enter into license agreements with the
Company. The Company also competes with traditional apparel and consumer brand
companies and with other brand management companies for
acquisitions.
Trademarks
The
Company’s trademarks are owned by six subsidiaries. IP Holdings owns the
Candie’s, Bongo, Joe Boxer, Rampage, Mudd and London Fog related trademarks.
Badgley Mischka Licensing owns the Badgley Mischka related trademarks; Mossimo
Holdings owns the Mossimo related trademarks; OP Holdings owns the Ocean
Pacific/OP related trademarks; Studio IP Holdings owns the Danskin, Rocawear
and
Starter related trademarks; and Official-Pillowtex owns the Fieldcrest, Royal
Velvet, Cannon and Charisma trademarks, each for numerous categories of goods.
These trademarks and associated marks are registered or pending registration
with the U.S. Patent and Trademark Office in block letter and/or logo formats,
as well as in combination with a variety of ancillary marks for use with respect
to, depending on the brand, a variety of product categories, including footwear,
apparel, fragrance, handbags, watches and various other goods and services,
including in some cases, home accessories and electronics. The Company intends
to renew these registrations as appropriate prior to expiration. In addition,
the Company’s subsidiaries register their trademarks in other countries and
regions around the world, including Canada, Europe, South and Central America
and Asia.
The
Company monitors on an ongoing basis unauthorized use and filings of the
Company’s trademarks, and the Company relies primarily upon a combination of
federal, state, and local laws, as well as contractual restrictions to protect
its intellectual property rights both domestically and
internationally.
Seasonality
The
majority of the products manufactured and sold under the Company's 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 the Company’s revenue from its licensees,
particularly from those mature licensees that are performing and 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.
Employees
As
of
December 31, 2007, the Company had a total of 94 full-time employees. Of these
94 employees, five are executive officers of the Company, seven others are
senior managers, and five are designers. The remaining employees are middle
management, marketing, and administrative personnel. None of the Company’s
employees is represented by a labor union. The Company considers its
relationship with its employees to be satisfactory.
Financial
information about geographical areas
Revenues
from external customers related to operations in the United States and foreign
countries are as follows:
|
|
|
Year
Ended
|
|
Year
Ended
|
|
Year
Ended
|
|
|
|
|
December
31,
|
|
December
31,
|
|
December
31,
|
|
|
(000's
omitted)
|
|
2007
|
|
2006
|
|
2005
|
|
|
Revenues
from external customers:
|
|
|
|
|
|
|
|
|
United
States
|
|
$
|
150,376
|
|
$
|
77,564
|
|
$
|
29,510
|
|
|
Foreign
countries
|
|
|
9,628
|
|
|
3,130
|
|
|
646
|
|
|
|
|
$
|
160,004
|
|
$
|
80,694
|
|
$
|
30,156
|
|
Item
1.A. Risk Factors
We
operate in a changing environment that involves numerous known and unknown
risks
and uncertainties that could impact our operations. The following highlights
some of the factors that have affected, and in the future, could affect our
operations:
The
failure of our licensees to adequately produce, market and sell products bearing
our brand names in their license categories or to pay their obligations under
their license agreements could result in a decline in our results of operations.
We
are no
longer directly engaged in the sale of branded products and, consequently,
our
revenues are now almost entirely dependent on royalty payments made to us under
our licensing agreements. Although the licensing agreements for our brands
usually require the advance payment to us of a portion of the licensing fees
and
in most cases provide for guaranteed minimum royalty payments to us, the failure
of our licensees to satisfy their obligations under these agreements or their
inability to operate successfully or at all, could result in their breach and/or
the early termination of such agreements, their non-renewal of such agreements
or our decision to amend such agreements to reduce the guaranteed minimums
due
thereunder, thereby eliminating some or all of that stream of revenue. Moreover,
during the terms of the license agreements, we are substantially dependent
upon
the abilities of our licensees to maintain the quality and marketability of
the
products bearing our trademarks, as their failure to do so could materially
tarnish our brands, thereby harming our future growth and prospects. In
addition, the failure of our licensees to meet their production, manufacturing
and distribution requirements could cause a decline in their sales and
potentially decrease the amount of royalty payments (over and above the
guaranteed minimums) due to us. A weak economy or softness in the apparel and
retail sectors could exacerbate this risk. This, in turn, could decrease our
potential revenues. Moreover, the concurrent failure by several of our material
licensees to meet their financial obligations to us could jeopardize our ability
to meet the debt service coverage ratios required in connection with our senior
secured term loan facility and the asset-backed notes issued by our subsidiary,
IP Holdings, and/or our ability or IP Holdings’ ability to make required
payments with respect to such indebtedness. The failure to meet such debt
service coverage ratios or to make such required payments would, with respect
to
our term loan facility, give the lenders thereunder the right to foreclose
on
the Ocean Pacific/OP, Danskin, Rocawear, Mossimo and Starter trademarks, the
trademarks acquired by us in the Official-Pillowtex acquisition and other
related intellectual property assets securing the debt outstanding under such
facility and, with respect to the IP Holdings’ notes, give the holders of such
notes the right to foreclose on the Candie’s, Bongo, Joe Boxer, Rampage, Mudd
and London Fog trademarks and other related intellectual property assets
securing such notes.
Our
business is dependent on continued market acceptance of our brands and the
products of our licensees bearing these brands.
Although
most of our licensees guarantee minimum net sales and minimum royalties to
us, a
failure of our brands or of products bearing our brands to achieve or maintain
market acceptance could cause a reduction of our licensing revenues, and could
further cause existing licensees not to renew their agreements. Such failure
could also cause the devaluation of our trademarks, which are our primary
assets, making it more difficult for us to renew our current licenses upon
their
expiration or enter into new or additional licenses for our trademarks. In
addition, if such devaluation of our trademarks were to occur, a material
impairment in the carrying value of one or more of our trademarks could also
occur and be charged as an expense to our operating results. Continued market
acceptance of our brands and our licensees’ products, as well as market
acceptance of any future products bearing our brands, is subject to a high
degree of uncertainty, made more so by constantly changing consumer tastes
and
preferences. Maintaining market acceptance of our licensees’ products and
creating market acceptance of new products and categories of products bearing
our marks will require our continuing and substantial marketing efforts, which
may, from time to time, also include our expenditure of significant additional
funds to keep pace with changing consumer demands. Additional marketing efforts
and expenditures may not, however, result in either increased market acceptance
of, or additional licenses for, our trademarks or increased market acceptance,
or sales, of our licensees’ products. Furthermore, while we believe that we
currently maintain sufficient control over the products our licensees’ produce
under our brand names through the provision of trend direction and our right
to
preview and approve a majority of such products, including their presentation
and packaging, we do not actually design or manufacture products bearing our
marks and therefore have more limited control over such products’ quality and
design than a traditional product manufacturer might have.
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
December 31, 2007, we had consolidated debt of approximately $702.2 million,
including secured debt of $408.3 million ($270.8 million under our senior
secured term loan facility and $137.5 million under asset-backed notes issued
by
our subsidiary, IP Holdings), primarily all of which was incurred in connection
with our acquisition activities. 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 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
|
|
·
|
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 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 and Mossimo trademarks, as well as the trademarks acquired
by
us in connection with the Official-Pillowtex acquisition, and, in the case
of IP
Holdings’ asset-backed notes, it would enable the holders of such notes to
foreclose on the assets securing such notes, including the Candie’s, Bongo, Joe
Boxer, Rampage, Mudd and London Fog trademarks.
We
are experiencing rapid growth. If we fail to manage our growth, our business
and
operating results could be harmed.
Our
business has grown dramatically over the past several years. For example, after
the completion of our transition to a brand management company in 2004, our
revenue increased from $30.2 million for the year ended December 31, 2005 to
$160.0 million for the year ended December 31, 2007. Our growth has largely
resulted from our acquisition of new brands of various sizes. Since October
2004, we acquired 14 of the 16 iconic brands we currently own and increased
our
total number of licenses from approximately 18 to approximately 220.
Furthermore, we continue to evaluate and pursue appropriate acquisition
opportunities. Therefore, while we have no outstanding agreements or commitments
with respect thereto, we believe that it is likely we will make additional
acquisitions.
This
significant growth has placed considerable demands on our management and other
resources and continued growth could place additional demands on such resources.
Our ability to compete effectively and to manage future growth, if any, will
depend on the sufficiency and adequacy of our current resources and
infrastructure and our ability to continue to identify, attract and retain
personnel to manage our brands. There can be no assurance that our personnel,
systems, procedures and controls will be adequate to support our operations
and
properly oversee our brands. The failure to support our operations effectively
and properly oversee our brands could cause harm to our brands and have a
material adverse effect on our business, financial condition and results of
operations. In addition, we may be unable to leverage our core competencies
in
managing apparel brands to managing brands in new product
categories.
Also,
there can be no assurance that we will be able to sustain our recent growth.
Our
growth may be limited by a number of factors including increased competition
for
retail license and brand acquisitions, insufficient capitalization for future
acquisitions and the lack of attractive acquisition targets, each as described
further below. As we continue to grow larger, we will be required to make
additional and larger acquisitions to continue to grow at our current pace.
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. As our competitors pursue our brand
management model, acquisitions have become more expensive and suitable
acquisition candidates are becoming more difficult to find. In addition, even
if
we successfully acquire 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 the projected rate of return on our investment,
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:
|
·
|
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, that may be retained by us in
connection with or as a result of our acquisitions;
and
|
|
·
|
risks
of entering new domestic and international licensing 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.
|
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. Any issuance by us of shares of our common stock (and in certain
cases, convertible securities) as equity consideration in future acquisitions
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.
We
may require additional capital to finance the acquisition of additional brands
and our inability to raise such capital on beneficial terms or at all could
restrict our growth.
We
may,
in the future, require additional capital to help fund all or part of potential
trademark acquisitions. If, at the time required, we do not have sufficient
cash
to finance those additional capital needs, we will need to raise additional
funds through equity and/or debt financing. We cannot assure you that, if and
when needed, additional financing will be available to us on acceptable terms
or
at all. If additional capital is needed and is either unavailable or cost
prohibitive, our growth may be limited as we may need to change our business
strategy to slow the rate of, or eliminate, our expansion plans. In addition,
any additional financing we undertake could impose additional covenants upon
us
that restrict our operating flexibility, and, if we issue equity securities
to
raise capital, our existing stockholders may experience dilution or the new
securities may have rights senior to those of our common stock.
Because
of the intense competition within our licensees’ markets and the strength of
some of their competitors, we and our licensees may not be able to continue
to
compete successfully.
Currently,
most of our trademark licenses are for products in the
apparel,
fashion accessories, footwear, beauty and fragrance, and home products and
decor
industries,
in which our licensees face intense and substantial competition, including
from
our other brands and licensees. In general, competitive factors include quality,
price, style, name recognition and service. In addition, various fads and the
limited availability of shelf space could affect competition for our licensees’
products. Many of our licensees’ competitors have greater financial,
distribution, marketing and other resources than our licensees and have achieved
significant name recognition for their brand names. Our licensees may be unable
to successfully compete in the markets for their products, and we may not be
able to continue to compete successfully with respect to our licensing
arrangements.
If
our competition for retail licenses and brand acquisitions increases, our growth
plans could be slowed.
We
may
face increasing competition in the future for retail licenses as other companies
owning established brands may decide to enter into licensing arrangements with
retailers similar to the ones we currently have in place. Furthermore, our
current or potential retailer licensees may decide to develop or purchase brands
rather than maintain or enter into license agreements with us. We also compete
with traditional apparel and consumer brand companies, other brand management
companies and private equity groups for brand acquisitions. If our competition
for retail licenses and brand acquisitions increases, it may take us longer
to
procure additional retail licenses and/or acquire additional brands, which
could
slow down our growth rate.
Our
licensees are subject to risks and uncertainties of foreign manufacturing that
could interrupt their operations or increase their operating costs, thereby
affecting their ability to deliver goods to the market, reduce or delay their
sales and decrease our potential royalty revenues.
Substantially
all of the products sold by our licensees are manufactured overseas. There
are
substantial risks associated with foreign manufacturing, including changes
in
laws relating to quotas, and the payment of tariffs and duties, fluctuations
in
foreign currency exchange rates, shipping delays and international political,
regulatory and economic developments. Any of these risks could increase our
licensees’ operating costs. Our licensees also import finished products and
assume all risk of loss and damage with respect to these goods once they are
shipped by their suppliers. If these goods are destroyed or damaged during
shipment, the revenues of our licensees, and thus our royalty revenues over
and
above the guaranteed minimums, could be reduced as a result of our licensees’
inability to deliver or their delay in delivering their products.
Our
failure to protect our proprietary rights could compromise our competitive
position and decrease the value of our brands.
We
own,
through our wholly-owned subsidiaries, U.S. federal trademark registrations
and
foreign trademark registrations for our brands that are vital to the success
and
further growth of our business and which we believe have significant value.
We
monitor on an ongoing basis unauthorized filings of our trademarks and
imitations thereof, and rely primarily upon a combination of trademarks,
copyrights and contractual restrictions to protect and enforce our intellectual
property rights domestically and internationally. We believe that such measures
afford only limited protection and, accordingly, there can be no assurance
that
the actions taken by us to establish, protect and enforce our trademarks and
other proprietary rights will prevent infringement of our intellectual property
rights by others, or prevent the loss of licensing revenue or other damages
caused therefrom.
For
instance, despite our efforts to protect and enforce our intellectual property
rights, unauthorized parties may attempt to copy aspects of our intellectual
property, which could harm the reputation of our brands, decrease their value
and/or cause a decline in our licensees’ sales and thus our revenues. Further,
we and our licensees may not be able to detect infringement of our intellectual
property rights quickly or at all, and at times we or our licensees may not
be
successful combating counterfeit, infringing or knockoff products, thereby
damaging our competitive position. In addition, we depend upon the laws of
the
countries where our licensees’ products are sold to protect our intellectual
property. Intellectual property rights may be unavailable or limited in some
countries because standards of registerability vary internationally.
Consequently, in certain foreign jurisdictions, we have elected or may elect
not
to apply for trademark registrations. While we generally apply for trademarks
in
most countries where we license or intend to license our trademarks, we may
not
accurately predict all of the countries where trademark protection will
ultimately be desirable. If we fail to timely file a trademark application
in
any such country, we may be precluded from obtaining a trademark registration
in
such country at a later date. Failure to adequately pursue and enforce our
trademark rights could damage our brands, enable others to compete with our
brands and impair our ability to compete effectively.
In
addition, in the future, we may be required to assert infringement claims
against third parties, and there can be no assurance that one or more parties
will not assert infringement claims against us. Any resulting litigation or
proceeding could result in significant expense to us and divert the efforts
of
our management personnel, whether or not such litigation or proceeding is
determined in our favor. In addition, to the extent that any of our trademarks
were ever deemed to violate the proprietary rights of others in any litigation
or proceeding or as a result of any claim, we may be prevented from using them,
which could cause a termination of our licensing arrangements, and thus our
revenue stream, with respect to those trademarks. Litigation could also result
in a judgment or monetary damages being levied against us.
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 Target, Kohl's and Kmart were our three largest direct-to-retail
licensees during the year ended December 31, 2007, representing approximately
14%, 8% and 6%, respectively, of our total revenue for such period. Our license
agreement with Kohl's grants it the exclusive U.S. license with respect to
the
Candie's trademark for a wide variety of product categories for a term expiring
in January 2011; 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
Target grants it the exclusive U.S. license with respect to the Mossimo
trademark for substantially all Mossimo-branded products for an initial term
expiring in January 2010; and, our other license agreement with Target grants
it
the exclusive U.S. license with respect to our Fieldcrest trademark for
substantially all Fieldcrest-branded products for an initial term expiring
in
July 2010. 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. For example, as of September 2006,
Kmart had not approached the sales levels of Joe Boxer products needed to
trigger royalty payments in excess of its guaranteed minimums since 2004, and,
as a result, when we entered into the current license agreement with Kmart
in
September 2006 expanding its scope to include Sears stores and extending its
term from December 2007 to December 2010, we agreed to reduce the guaranteed
annual royalty minimums by approximately half, as a result of which our revenues
from this license were substantially reduced.
We
are dependent upon our president 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
successful transition from a manufacturer and marketer of footwear and jeanswear
to a 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.
Our
license agreement with Target could be terminated by Target in the event we
were
to lose the services of Mossimo Giannulli as our creative director with respect
to Mossimo-branded products, thereby significantly devaluing the assets acquired
by us in the Mossimo merger and decreasing our expected revenues and cash flows.
Target,
the primary licensee of our Mossimo brand, has the right at its option to
terminate its license agreement with us if the services of Mossimo Giannulli
as
creative director for Mossimo-branded products are no longer available to
Target, upon his death or permanent disability or in the event a morals clause
in the agreement relating to his future actions and behavior is breached.
Although we have entered into an agreement with Mr. Giannulli in which he
has agreed to continue to provide us with his creative director services,
including those which could be required by Target under the Target license,
for
an initial term expiring on January 31, 2010, there can be no assurance
that if his services are required by Target he will provide such services or
that in the event we, and thus Target, were to lose the ability to draw on
such
services, Target would continue its license agreement with us. The loss of
the
Target license would significantly devalue the assets acquired by us in the
Mossimo merger and decrease our expected revenues and cash flows until we were
able to enter into one or more replacement licenses.
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
profitability or increase our net loss.
As
of
December 31, 2007, goodwill represented approximately $128.9 million, or
approximately 10% of our total assets, and trademarks and other intangible
assets represented approximately $1,038.2 million, or approximately 78% of
our total assets. Under Statement of Financial Accounting Standard No. 142,
or SFAS No. 142, “Goodwill and Other Intangible Assets,” 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.
We
may not be able to pay the cash portion of the conversion price upon any
conversion of the $287.5 million principal amount of our outstanding convertible
senior subordinated notes, which would constitute an event of default with
respect to such notes and could also constitute a default under the terms of
our
other debt.
We
may
not have sufficient cash to pay, or may not be permitted to pay, the cash
portion of the consideration that we may need to pay if our convertible senior
subordinated notes are converted. Upon conversion of a note, we will be required
to pay to the holder of such note a cash payment equal to the lesser of the
principal amount of such note and its conversion value. This part of the payment
must be made in cash, not in shares of our common stock. As a result, we may
be
required to pay significant amounts in cash to holders of the convertible notes
upon their conversion.
If
we do
not have sufficient cash on hand at the time of conversion, we may have to
raise
funds through debt or equity financing. Our ability to raise such financing
will
depend on prevailing market conditions. Further, we may not be able to raise
such financing within the period required to satisfy our obligation to make
timely payment upon any conversion. In addition, the terms of any current or
future debt, including our outstanding term loan facility, may prohibit us
from
making these cash payments or otherwise restrict our ability to make such
payments and/or may restrict our ability to raise any such financing. In
particular, the terms of our outstanding term loan facility restrict the amount
of proceeds from collateral pledged to secure our obligations thereunder that
may be used by us to make payments in cash under certain circumstances,
including payments to the convertible notes holders upon conversion. Although
the terms of our outstanding term loan facility do not restrict our ability
to
make payments in cash with assets not pledged as collateral to secure our
obligations thereunder, such assets may not generate sufficient cash to enable
us to satisfy our obligations to make timely payment of the notes upon
conversion. A failure to pay the required cash consideration upon conversion
would constitute an event of default under the indenture governing the
convertible notes, which might constitute a default under the terms of our
other
debt.
Proposed
changes in the accounting method for convertible debt securities could, if
implemented, have an adverse impact on our reported or future financial
results.
For
the
purpose of calculating diluted earnings per share, a convertible debt security
providing for net share settlement of the excess of the conversion value over
the principal amount, if any, and meeting specified requirements under Emerging
Issues Task Force, or EITF, Issue No. 90-19, “Convertible Bonds with Issuer
Option to Settle for Cash upon Conversion,” such as our convertible notes, is
accounted for similar to non-convertible debt, with the stated coupon
constituting interest expense and any shares issuable upon conversion of the
security being accounted for under the treasury stock method. The effect of
the
treasury stock method in relation to our convertible notes is that the shares
potentially issuable upon conversion of the notes are not included in the
calculation of our diluted earnings per share until the conversion price is
“in
the money,” at which time we are assumed to have issued the number of shares of
common stock necessary to settle.
In
July
2007, the Financial Accounting Standards Board, or FASB, voted unanimously
to
reconsider the current accounting treatment for convertible debt securities
that
require or permit settlement in cash, either in whole or in part, upon
conversion, or cash settled debt securities (which would include our outstanding
convertible notes). Under a proposed staff position issued by the FASB in August
2007 for a method of accounting that would be applied retroactively, the debt
and equity components of such cash settled debt securities would be bifurcated
and accounted for separately in a manner that reflects the issuer’s economic
interest cost.
While
the
effect on us of this proposal cannot be quantified unless and until the FASB
finalizes its guidance, under this proposal, we could recognize higher interest
on our convertible notes at effective rates more comparable to what we would
have incurred had we issued nonconvertible debt with otherwise similar terms.
Therefore, if the proposed method of accounting for cash settled debt securities
is adopted by the FASB as described above, it would have an adverse impact
on
our past and future reported financial results. In addition, any other change
that could affect the accounting for convertible securities, including any
changes in generally accepted accounting principles in the United States, could
have a material impact on our reported or future financial results.
The
comment period for the proposed FASB staff position described above expired
on
October 15, 2007. We cannot determine at this time whether this staff position
will ultimately be adopted in its present form or at all. In the event the
proposed method of accounting described above is adopted, we will, pursuant
to
the terms of the indenture governing our outstanding convertible notes, have
the
right for a period of 90 days thereafter, at our option, to call the convertible
notes for redemption. However, although we will have such redemption right,
we
may not have sufficient cash to pay, or may not be permitted to pay, the
required cash portion of the consideration that would be due to holders of
the
convertible notes in the event we elected to exercise such right or the ability
to raise funds through debt or equity financing within the time period required
for us to make such an election.
Changes
in the accounting method for business combinations will have an adverse impact
on our reported or future financial results.
Currently
and for the years ended December 31, 2007 and prior, in accordance with
Statement of Financial Accounting Standard (“SFAS”) 141 “Business Combinations”
(“SFAS 141”) all acquisition-related costs such as attorney’s fees and
accountant’s fees, as well as contingent consideration to the seller, are
capitalized as part of the purchase price.
In
December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business
Combinations” (“SFAS 141R”), which requires an acquirer to do the following:
expense acquisition related costs as incurred; record contingent consideration
at fair value at the acquisition date with subsequent changes in fair value
to
be recognized in the income statement; and recognize any adjustments to the
purchase price allocation as a period cost in the income statement. SFAS
141R applies prospectively to business combinations for which the acquisition
date is on or after beginning of the first annual reporting period beginning
on
or after December 15, 2008. Earlier application is prohibited. At the date
of
adoption, SFAS 141R is expected to have a material impact on our results of
operations and our financial position due to our acquisition
strategy.
Changes
in effective tax rates or adverse outcomes resulting from examination of our
income or other tax returns could adversely affect our results.
Our
future effective tax rates could be adversely affected by changes in the
valuation of our deferred tax assets and liabilities, or by changes in tax
laws
or interpretations thereof. In addition, we are subject to the continuous
examination of our income tax returns by the Internal Revenue Service and other
tax authorities. We regularly assess the likelihood of recovering the amount
of
deferred tax assets recorded on the balance sheet and the likelihood of adverse
outcomes resulting from examinations by various taxing authorities in order
to
determine the adequacy of our provision for income taxes. We cannot guarantee
that the outcomes of these evaluations and continuous examinations will not
harm
our reported operating results and financial conditions.
The
market price of our common stock has been, and may continue to be, volatile,
which could reduce the market price of our common stock.
The
publicly traded shares of our common stock have experienced, and may continue
to
experience, significant price and volume fluctuations. This market volatility
could reduce the market price of our common stock, regardless of our operating
performance. In addition, the trading price of our common stock could change
significantly over short periods of time in response to actual or anticipated
variations in our quarterly operating results, announcements by us, our
licensees or our respective competitors, factors affecting our licensees’
markets generally and/or changes in national or regional economic conditions,
making it more difficult for shares of our common stock to be sold at a
favorable price or at all. The market price of our common stock could also
be
reduced by general market price declines or market volatility in the future
or
future declines or volatility in the prices of stocks for companies in the
trademark licensing business or companies in the industries in which our
licensees compete.
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 entered into
convertible note hedge transactions with affiliates of Merrill Lynch and Lehman
Brothers, which hedging transactions are expected, but are not guaranteed,
to
eliminate the potential dilution upon conversion of the convertible notes.
At
the same time, we entered into sold warrant transactions with the hedge
counterparties. In connection with such transactions, the hedge counterparties
entered into various over-the-counter derivative transactions with respect
to
our common stock and purchased our common stock; and they may enter into or
unwind various over-the-counter derivatives and/or purchase or sell our common
stock in secondary market transactions in the future.
Such
activities could have the effect of increasing, or preventing a decline in,
the
price of our common stock. Such effect is expected to be greater in the event
we
elect to settle converted notes entirely in cash. The hedge counterparties
are
likely to modify their hedge positions from time to time prior to conversion
or
maturity of the convertible notes or termination of the transactions by
purchasing and selling shares of our common stock, other of our securities,
or
other instruments they may wish to use in connection with such hedging. In
particular, such hedging modification may occur during any conversion reference
period for a conversion of notes. In addition, we intend to exercise options
we
hold under the convertible note hedge transactions whenever notes are converted
and we have elected, with respect to such conversion, to pay a portion of the
consideration then due by us to the noteholder in shares of our common stock.
In
order to unwind their hedge positions with respect to those exercised options,
the hedge counterparties will likely sell shares of our common stock in
secondary market transactions or unwind various over-the-counter derivative
transactions with respect to our common stock during the conversion reference
period for the converted notes.
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. Also, the sold warrant transaction could have a
dilutive effect on our earnings per share to the extent that the price of our
common stock exceeds the strike price of the warrants.
Future
sales of our common stock may cause the prevailing market price of our shares
to
decrease.
We
have
issued a substantial number of shares of common stock that are eligible for
resale under Rule 144 of the Securities Act of 1933, as amended, or Securities
Act, and that may become freely tradable. We have also already registered a
substantial number of shares of common stock that are issuable upon the exercise
of options and warrants and have registered for resale a substantial number
of
restricted shares of common stock issued in connection with our acquisitions.
If
the holders of our options and warrants choose to exercise their purchase rights
and sell the underlying shares of common stock in the public market, or if
holders of currently restricted shares of our common stock choose to sell such
shares in the public market under Rule 144 or otherwise, the prevailing market
price for our common stock may decline. The sale of shares issued upon the
exercise of our derivative securities could also further dilute the holdings
of
our then existing stockholders, including holders of the notes that receive
shares of our common stock upon conversion of their notes. In addition, future
public sales of shares of our common stock could impair our ability to raise
capital by offering equity securities.
Provisions
in our charter and in our share purchase rights plan and Delaware law could
make
it more difficult for a third party to acquire us, discourage a takeover and
adversely affect our stockholders.
Certain
provisions of our certificate of incorporation and our share purchase rights
plan, either alone or in combination with each other, could have the effect
of
making more difficult, delaying or deterring unsolicited attempts by others
to
obtain control of our company, even when these attempts may be in the best
interests of our stockholders. Our certificate of incorporation currently
authorizes 150,000,000 shares of common stock to be issued. Based on our
outstanding capitalization at December 31, 2007, and assuming the exercise
of
all outstanding options and warrants and the issuance of the maximum number
of
shares of common stock issuable upon conversion of all of our outstanding
convertible notes, there are still a substantial number of shares of common
stock available for issuance by our board of directors without stockholder
approval. Our certificate of incorporation also authorizes our board of
directors, without stockholder approval, to issue up to 5,000,000 shares of
preferred stock, in one or more series, which could have voting and conversion
rights that adversely affect or dilute the voting power of the holders of our
common stock, none of which has been issued to date. Furthermore, under our
share purchase rights plan, often referred to as a “poison pill,” if anyone
acquires 15% or more of our outstanding shares, all of our stockholders (other
than the acquirer) have the right to purchase additional shares of our common
stock for a fixed price. We are also subject to the provisions of
Section 203 of the Delaware General Corporation Law, which could prevent us
from engaging in a business combination with a 15% or greater stockholder for
a
period of three years from the date it acquired that status unless appropriate
board or stockholder approvals are obtained.
These
provisions could deter unsolicited takeovers or delay or prevent changes in
our
control or management, including transactions in which stockholders might
otherwise receive a premium for their shares over the then current market price.
These provisions may also limit the ability of stockholders to approve
transactions that they may deem to be in their best interests.
Due
to the recent downturn in the market, certain of the marketable securities
we
own may take longer to auction than initially anticipated.
Marketable
securities consist of investment grade auction rate securities. During the
third
and fourth quarter of fiscal 2007, our balance of auction rate securities failed
to auction due to sell orders exceeding buy orders. These funds will not be
available to us until a successful auction occurs or a buyer is found outside
the auction process. As a result, $13.0 million of auction rate securities
were
written down to $10.9 million, based on third party estimates, as an unrealized
pre-tax loss of $2.1 million to reflect a temporary decrease in fair value.
We
believe this decrease in fair value is temporary due to general macroeconomic
market conditions, as the underlying securities have maintained their investment
grade rating. There are no assurances that a successful auction will occur,
or
that we can find a buyer outside the auction process.
Item
1B. Unresolved Staff Comments
None.
Item
2. Properties
On
November 9, 2007, the Company entered into a new lease with respect to the
Company’s current and future offices at 1450 Broadway in New York, New York. The
lease, among other things, covers approximately 30,550 square feet of office
and
showroom space (the “New Headquarters”) that the Company intends to occupy
following the date that the landlord completes certain work in the space and
delivers it to the Company (the “Delivery Date”), which is expected to occur on
or prior to November 15, 2008. With respect to the New Headquarters, the lease
will expire 15 years after the Delivery Date, providing for rental payments
to
commence on the 181
st
day
following the Delivery Date (the “Rent Commencement Date”) and provides for
total annual base rental payments for such space of approximately $27.4 million
(ranging from approximately $1.528 million for the first year following the
Rent
Commencement Date to approximately $2.157 million in the last year of the
lease). The lease also provides for the temporary rental by the Company of
(i)
the approximately 15,000 square feet of office space currently occupied by
the
Company in the building for a term expiring on the 91
st
day
after the Rent Commencement Date at an annual rent of approximately $0.452
million and gives the Company the right to extend the term of the lease
with respect to such space such that it ends co-terminus with that of the New
Headquarters for an annual rent of approximately $0.764 million and (ii)
approximately 7,000 square feet of temporary office space on another floor
of
the building for a term expiring on the Rent Commencement Date at an annual
rent
of $0.315 million. The Company will also be required to pay its proportionate
share of any increased taxes attributed to the premises.
In
addition, in connection with the Starter acquisition, the Company assumed a
lease for office space at 1350 Broadway, which covers approximately 13,090
square feet of office and showroom space with an annual rent of $476,000, which
expires on October 31, 2011, as well as a lease for approximately 7,900 square
feet of office space in Bentonville, AR with an annual rent of $149,000.
The
Company also acquired 5,994 square feet of office space in Santa Monica,
California in connection with the Mossimo merger, pursuant to a lease that
expires July 31, 2009. The Company sublets half of this space pursuant to a
sublease that will expire concurrent with the lease.
Bright
Star currently occupies approximately 2,269 square feet of office space in
Mt.
Arlington, New Jersey, pursuant to a lease that expires on March 14,
2009.
Item
3. Legal Proceedings
Sweet
Sportswear/Unzipped litigation
On
August
5, 2004, the Company, along with its subsidiaries, Unzipped, Michael Caruso
& Co., referred to as Caruso, and IP Holdings, collectively referred to as
the plaintiffs, commenced a lawsuit in the Superior Court of California, Los
Angeles County, against Unzipped's former manager, former supplier and former
distributor, Sweet Sportswear, LLC (“Sweet”), Azteca Productions
International, Inc. (“Azteca”) and Apparel Distribution Services, LLC (“ADS”),
respectively, and a principal of these entities and former member of the
Company's Board of Directors, Hubert Guez, collectively referred to as the
Guez
defendants. The Company pursued numerous causes of action against the Guez
defendants, including breach of contract, breach of fiduciary duty, trademark
infringement and others and sought damages in excess of $20 million. On March
10, 2005, Sweet, Azteca and ADS, collectively referred to as cross-complainants,
filed a cross-complaint against the Company claiming damages resulting from
a
variety of alleged contractual breaches, among other things.
In
January 2007, a jury trial was commenced, and on April 10, 2007, the jury
returned a verdict of approximately $45 million in favor of the Company and
its
subsidiaries, finding in favor of the Company and its subsidiaries on every
claim that they pursued, and against the Guez defendants on every counterclaim
asserted. Additionally, the jury found that all of the Guez defendants acted
with malice, fraud or oppression with regard to each of the tort claims asserted
by the Company and its subsidiaries, and on April 16, 2007, awarded plaintiffs
$5 million in punitive damages against Mr. Guez personally. The Guez defendants
filed post-trial motions seeking, among other things, a new trial. Through
a set
of preliminary rulings dated September 27, 2007, the Court granted in part,
and
denied in part, the Guez defendants’ post trial motions, and denied plaintiffs’
request that the Court enhance the damages awarded against the Guez defendants
arising from their infringement of plaintiffs’ trademarks. Through these
rulings, the Court, among other things, reduced the amount of punitive damages
assessed against Mr. Guez to $4 million, and reduced the total damages awarded
against the Guez defendants by more than 50%.
The
Court
adopted these preliminary rulings as final on November 16, 2007. On the same
day, the Court entered judgment against Mr. Guez in the amount of $10,964,730
and ADS in the amount of $1,272,420, and against each of the Guez defendants
with regard to each and every claim that they pursued in the litigation
including, without limitation, ADS’s and Azteca’s unsuccessful efforts to
recover against Unzipped any account balances claimed to be owed, totaling
approximately $3.5 million including interest (collectively, the “Judgments”).
In entering the Judgments, the Court upheld the jury’s verdict in favor of the
Company relating to its writedown of the senior subordinated note due 2012,
issued by the Company to Sweet in connection with the Company’s acquisition of
Unzipped, for Unzipped’s 2004 fiscal year and disallowed the Company’s writedown
of the note for Unzipped’s 2005 fiscal year. The current balance of the note is
estimated to be approximately $12 million (including unpaid interest), without
regard to offsets or the outcome of appeals. The Company believes that the
balance of the note will be offset in its entirety by amounts recoverable
against Guez and the Guez defendants. The monetary portion of the Judgments
accrues interest at a rate of 10% per annum from the date of the Judgments’
entry. Also on November 16, 2007, the Court issued a Memorandum Order wherein
it
upheld an aggregate of approximately $6.8 million of the jury’s verdicts against
Sweet and Azteca, but declined to enter judgment against these entities since
it
had ordered a new trial with regard to certain other damage awards entered
against these entities by the jury. On March 7, 2008, the Court is scheduled
to
hear the attorneys’ fees and costs petitions filed by the Company and its
subsidiaries.
On
November 21, 2007, the Guez defendants filed a notice of appeal. They also
filed
a $49,090,491 undertaking with the Court, consisting primarily of a $43,380,491
personal surety given jointly by Gerard Guez and Jacqueline Rose Guez, bonding
the monetary portions of the Judgments. By Order dated December 17, 2007, the
Court determined that the undertaking was adequate absent changed circumstances.
This determination serves to prevent the Company and its subsidiaries from
pursuing collection of the monetary portions of the Judgments during the
pendency of the appeal. The Company and its subsidiaries filed a notice of
appeal on November 26, 2007, appealing, among other things, those parts of
the
jury’s verdicts vacated by the Court in connection with the Guez defendants’
post-trial motions. The Company and its subsidiaries intend to vigorously pursue
their appeal, and vigorously defend against the Guez parties’
appeal.
Bader/Unzipped
litigation
On
November 5, 2004, Unzipped commenced a lawsuit in the Supreme Court of New
York,
New York County, against Unzipped's former president of sales, Gary Bader,
alleging that Mr. Bader breached certain fiduciary duties owed to Unzipped
as
its president of sales, unfairly competed with Unzipped and tortiously
interfered with Unzipped's contractual relationships with its employees. On
October 5, 2005, Unzipped amended its complaint to assert identical claims
against Bader's company, Sportswear Mercenaries, Ltd. On October 14, 2005,
Bader
and Sportswear Mercenaries filed an answer containing counterclaims to
Unzipped's amended complaint, and a third-party complaint, which was dismissed
in its entirety on June 9, 2006, except with respect to a single claim that
it
owes Bader and Sportswear Mercenaries $72,000. Trial in this action is set
to
commence on April 28, 2008. The parties to this lawsuit have recently reached
a
settlement for which counsel is preparing a settlement agreement.
Redwood
Shoe litigation
This
litigation, which was commenced in January 2002, by Redwood Shoe Corporation
(“Redwood”), one of the Company's former buying agents of footwear, was
dismissed with prejudice by the court on February 15, 2007, pursuant to an
agreement in principle by the Company, Redwood, its affiliate, Mark Tucker,
Inc.
(“MTI”) and MTI's principal, Mark Tucker, to settle the matter. The proposed
settlement agreement provides for the Company to pay a total of $1.9 million
to
Redwood. The stipulation and order dismissing the action may be reopened should
the settlement agreement not be finalized and consummated by all of the parties.
The Company is awaiting receipt of the signed Settlement Agreement from the
other parties, and has recorded this liability as accounts payable subject
to
litigation.
Bongo
Apparel, Inc. litigation
On
or
about June 12, 2006, Bongo Apparel, Inc. (“BAI”), filed suit in the Supreme
Court of the State of New York, County of New York, against the Company and
IP
Holdings alleging certain breaches of contract and other claims and seeks,
among
other things, damages of at least $25 million. The Company and IP Holdings
believe that, in addition to other defenses and counterclaims that they intend
to assert, the claims in the lawsuit are the subject of a release and settlement
agreement that was entered into by the parties in August 2005, and based upon
this belief, moved to dismiss most of BAI’s claims. In response to the motion to
dismiss, BAI made a cross-motion for partial summary judgment on some of its
claims. On April 25, 2007, the Court entered an order refusing to consider,
and
declining to accept BAI's summary judgment motion. On January 2, 2008, the
Court
granted the Company’s and IP Holdings’ motion to dismiss BAI’s lawsuit virtually
in its entirety, holding that all but one claim against the Company and five
claims against IP Holdings were barred by the parties’ August 2005 release and
settlement agreement or otherwise failed to state a claim. As to the sole
remaining claim against the Company, BAI has indicated that it will be withdrawn
against both the Company and IP Holdings. If the claim is not withdrawn
promptly, the Company and IP Holdings intend to move for its dismissal. BAI
has
appealed the Court’s January 2, 2008 rulings, and the Company and IP Holdings
intend to vigorously defend against this appeal.
Additionally,
on or about October 6, 2006, the Company and IP Holdings filed suit in the
U.S.
District Court for the Southern District of New York against BAI and its
guarantor, TKO Apparel, Inc. (“TKO”). In that complaint, the Company and IP
Holdings assert various contract, tort and trademark claims that arose as a
result of the failures of BAI with regard to the Bongo men's jeanswear business
and its wrongful conduct with regard to the Bongo women's jeanswear business.
The Company and IP Holdings are seeking monetary damages in an amount in excess
of $10 million and a permanent injunction with respect to the use of the Bongo
trademark. On January 4, 2007, the District Court denied the motion of BAI
and
TKO to dismiss the federal court action, and instead stayed the proceeding.
On
January 14, 2008, the Company and IP Holdings requested that the District Court
lift the stay. The Court scheduled a hearing on the matter on February 29,
2008,
which the Company plans to attend and will await a ruling from the Court
thereafter.
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.
Item
4.
Submission of Matters to a Vote of Security Holders.
None.
Item
10. Directors, Executive Officers and Corporate Governance
Our
executive officers and directors and their respective ages and positions are
as
follows:
|
Name
|
|
Age
|
|
Position(s)
|
|
Neil
Cole
|
|
50
|
|
Chairman
of the Board, President and Chief Executive Officer
|
|
David
Conn
|
|
40
|
|
Executive
Vice President
|
|
Warren
Clamen
|
|
43
|
|
Chief
Financial Officer
|
|
Andrew
Tarshis
|
|
41
|
|
Senior
Vice President and General Counsel
|
|
Deborah
Sorell Stehr
|
|
45
|
|
Senior
Vice President - Business Affairs and Licensing
|
|
Barry
Emanuel
1,3
|
|
66
|
|
Director
|
|
Steven
Mendelow
2,
3
|
|
65
|
|
Director
|
|
Drew
Cohen
1,
2, 3
|
|
39
|
|
Director
|
|
F.
Peter Cuneo
2,
3
|
|
63
|
|
Director
|
|
Mark
Friedman
1,
3
|
|
44
|
|
Director
|
|
James
A. Marcum
1, 2
|
|
48
|
|
Director
|
|
(1)
Member
of nominating/governance committee.
(2)
Member
of audit committee.
(3)
Member
of compensation committee.
|
Neil
Cole
has
served as Chairman of the Company's Board of Directors and as its Chief
Executive Officer and President since the Company's public offering in February
1993. In addition, from February through April 1992, Mr. Cole served as its
Acting President and as a member of its Board of Directors. Mr. Cole also served
as Chairman of the Board, President, Treasurer and a Director of New Retail
Concepts, Inc., the company from which we acquired the Candie's trademark in
1993, from its inception in April 1986 until it was merged with and into our
Company in August 1998. In 2001, Mr. Cole founded The Candie's Foundation,
for
the purpose of educating teenagers as to the risks and consequences of teen
pregnancy. In April 2003, Mr. Cole, without admitting or denying the SEC's
allegations, consented to the entry by the SEC of an administrative order in
which Mr. Cole agreed to cease and desist from violating or causing any
violations or future violation of certain books and records and periodic
reporting provisions and the anti-fraud provisions of the Securities Exchange
Act of 1934. Mr. Cole also paid a $75,000 civil monetary fine. Mr. Cole received
a Bachelor of Science degree in political science from the University of Florida
in 1978 and his Juris Doctor from Hofstra law school in 1982.
David
Conn
has
served as the Company's Executive Vice President since rejoining the Company
in
May 2004. Prior thereto, from June 2000 until May 2004, Mr. Conn was employed
at
Columbia House, one of the world's largest licensees of content for music and
film, where he oversaw its internet business and was responsible for online
advertising, sales promotion and customer retention on the internet. During
his
tenure at Columbia House, it grew to become one of the ten largest e-commerce
sites on the internet. Prior to that, Mr. Conn served as Vice President of
Marketing for the Company from 1995 to 2000. Mr. Conn has also been active
in
the Direct Marketing Association, serving on its ethics policy committee and,
prior to joining the Company in 1995, he held marketing positions with The
Discovery Channel and CCM, a New York based marketing and promotion agency.
Mr.
Conn received his Bachelor of Arts degree from Boston University in
1990.
Warren
Clamen
has
served as the Company's Chief Financial Officer since joining the Company in
March 2005. From June 2000 until March 2005, Mr. Clamen served as Vice President
of Finance for Columbia House, one of the world's largest licensees of content
for music and film ,and from December 1998 to June 2000, he was Vice President
of Finance of Marvel Entertainment, Inc. a publicly traded entertainment company
active in motion pictures, television, publishing, licensing and toys. Prior
to
that time, Mr. Clamen served as the Director, International Management for
Biochem Pharma Inc., a public company located in Montreal, Canada that has
its
shares traded on NASDAQ, and as a Senior Manager at Richter, Usher and Vineberg,
an accounting firm also located in Montreal, Canada. Mr. Clamen is a certified
public accountant and a chartered accountant. He received a Bachelor of Commerce
degree in 1986 and a Graduate Diploma in public accounting in 1988, each from
McGill University in Montreal.
Andrew
Tarshis
has
served as the Company’s Senior Vice President and General Counsel since
September 2006. From July 2005, when he joined the Company in connection with
its acquisition of the Joe Boxer brand, until September 2006, he served as
the
Company’s Senior Vice President, business affairs and associate counsel. Prior
to joining the Company, from May 2001 to July 2005, Mr. Tarshis served as
Senior Vice President and General Counsel to Windsong Allegiance Group, LLC
and,
from December 1998 to May 2001, he served as a general attorney for Toys R
Us,
Inc. Mr. Tarshis received his Bachelor of Arts degree from the University
of Michigan, Ann Arbor in 1988 and his Juris Doctor degree from the University
of Connecticut School of Law in 1992.
Deborah
Sorell Stehr
has
served as the Company’s Senior Vice President—Business Affairs and Licensing
since September 2006. Since joining the Company in December 1998, she served
as
Vice President and General Counsel from December 1998 until November 1999,
and
then served as Senior Vice President and General Counsel until September 2006.
Ms. Sorell Stehr has also been the Secretary since 1999 and on the Board of
Directors of numerous of the Company’s subsidiaries. From September 1996 to
December 1998, Ms. Sorell Stehr was Associate General Counsel with Nine
West Group Inc., a women’s footwear corporation, where Ms. Sorell Stehr was
primarily responsible for overseeing legal affairs relating to domestic and
international contracts, intellectual property, licensing, general corporate
matters, litigation and claims. Prior to joining Nine West Group,
Ms. Sorell Stehr practiced law for nine years at private law firms in New
York City and Chicago in the areas of corporate law and commercial litigation.
Ms. Sorell Stehr received her A.B. in politics from Princeton University in
1984 and her Juris Doctor degree from the Northwestern University School of
Law
in 1987.
Barry
Emanuel
has
served on the Company's Board of Directors since May 1993. For more than the
past five years, Mr. Emanuel has served as President of Copen Associates, Inc.,
a textile manufacturer located in New York, New York. Mr. Emanuel was a director
of New Retail Concepts, Inc. from 1992 until its merger with the Company in
1998. He received his Bachelor of Science degree from the University of Rhode
Island in 1962.
Steven
Mendelow
has
served on the Company's Board of Directors since December 1999. He has been
a
principal with the accounting firm of Konigsberg Wolf & Co. and its
predecessor, which is located in New York, New York, since 1972. Mr. Mendelow
was a director of New Retail Concepts, Inc. from 1992 until its merger with
the
Company in 1998. He also serves as a director of several privately held
companies. He is a trustee of The Washington Institute for Near East Studies
and
actively involved with the Starlight Starbright Children's Foundation and the
Foundation for Fighting Blindness. He received a Bachelor of Science degree
in
business administration from Bucknell University in 1964 where he was elected
to
Delta Mu Delta, the national Economics Honor Society.
Drew
Cohen
has
served on the Company's Board of Directors since April 2004. He is the President
of Music Theatre International, which represents the dramatic performing rights
of classic properties such as “West Side Story,” and “Fiddler on the Roof,” and
licenses over 50,000 performances a year around the world. Before joining Music
Theatre International in September 2002, Mr. Cohen was from July 2001 the
Director of Investments for Big Wave NV, an investment management company,
and
prior to that, General Manager for GlassNote Records, an independent record
company. Mr. Cohen received a Bachelor of Science degree from Tufts University
in 1990, his Juris Doctor from Fordham Law School in 1993, and a Masters Degree
in business administration from Harvard Business School in 2001.
F.
Peter Cuneo
has
served on the Company’s Board of Directors since October 2006. He has served as
the Vice Chairman of the Board of Directors of Marvel Entertainment, Inc.,
a
publicly traded entertainment company active in motion pictures, television,
publishing, licensing and toys, since June 2003, and prior thereto, he served
as
the President and Chief Executive Officer of Marvel Entertainment from July
1999
to December 2002. Mr. Cuneo has also served as the Chairman of
Cuneo & Co., L.L.C., a private investment firm, since July 1997 and
previously served on the Board of Directors of WaterPik Technologies, Inc.,
a
New York Stock Exchange company engaged in designing, manufacturing and
marketing health care products, swimming pool products and water-heating
systems, prior to its sale earlier in 2006. Mr. Cuneo currently serves as
the Vice Chairman of the Alfred University Board of Trustees, and he received
a
Bachelor of Science degree from Alfred University in 1967 and a Masters degree
in business administration from Harvard Business School in
1973.
Mark
Friedman
has
served on the Company’s Board of Directors since October 2006. He has been the
Managing Partner of Trilea Partners LLC, an investment and consulting firm,
since May 2006. Previously, he was with Merrill Lynch since 1996, serving in
various capacities including, most recently, as group head of its U.S. equity
research retail team where he specialized in analyzing and evaluating specialty
retailers in the apparel, accessory and home goods segments. Prior thereto,
he
specialized in similar services for Lehman Brothers Inc. and Goldman,
Sachs & Co. Mr. Friedman has been ranked on the Institutional
Investor All-American Research Team as one of the top-rated sector analysts
and
received a Bachelor of Business Administration degree from the University of
Michigan in 1986 and a Masters degree in business administration from The
Wharton School, University of Pennsylvania in 1990.
James
A. Marcum
has
served on the Company’s Board of Directors since October 2007. He is an
Operating Partner and has served as an Operating Executive of Tri-Artisan
Capital Partners, LLC, a merchant banking firm, since January 2004. In addition,
since April 2007, Mr. Marcum has been a principal shareholder and has served
as
the Chairman and Chief Strategic Officer of Enabl-u Technologies Corp., an
early
stage interactive training and data management solutions provider. From January
2005 to January 2006, he served in various capacities, including Chief Executive
Officer and Director of Ultimate Electronics, Inc., a consumer electronics
retailer specializing in home and car entertainment. From May 2001 to July
2003,
he served as an Executive Vice President, Chief Financial Officer and Executive
Vice President of Operations of Hollywood Entertainment Corporation, a video
home entertainment specialty retailer. Prior thereto, Mr. Marcum was recruited
by private equity investors to serve in such roles as Executive Vice President
and Chief Operating Officer of Lids, Inc., a specialty retailer of hats, and
Vice Chairman and Chief Financial Officer of State Stores, Inc., a specialty
retailer bringing branded apparel to small town America. Mr. Marcum has also
served in senior executive capacities at Melville Corporation, a conglomerate
of
specialty retail chains in the apparel, footwear, drug, health and beauty aids
and furniture and accessories sectors. He received a Bachelors degree from
Southern Connecticut State University in accounting and economics in 1980.
Election
of officers
Our Board
of Directors elects the officers of the Company on an annual basis and its
officers serve until their successors are duly elected and qualified. No family
relationships exist among any of our officers or directors.
Election
of directors
Our Board
of Directors is currently comprised of seven directors. At each annual meeting
of stockholders, the successors to the directors then serving are elected to
serve from the time of their election and qualification until the next annual
meeting following their election or until their successors have been duly
elected and qualified, or until their earlier death, resignation or removal.
All
of our current directors have been elected to serve until the annual
meeting of stockholders to be held in 2008.
Committees
of the Board of Directors
Our bylaws
authorize the Board of Directors to appoint one or more committees, each
consisting of one or more directors. Our Board of Directors currently has
three standing committees: an audit committee, nominating/governance committee
and a compensation committee, each of which has adopted written charters and
which are currently available on our website.
Audit
committee
Our audit
committee’s responsibilities include:
|
|
●
|
appointing,
replacing, overseeing and compensating the work of a firm to
serve as the
independent registered public accounting firm to audit our financial
statements;
|
|
|
●
|
discussing
the scope and results of the audit with the independent registered
public
accounting firm and reviewing with management and the independent
registered public accounting firm our interim and year-end operating
results;
|
|
|
●
|
considering
the adequacy of our internal accounting controls and audit
procedures; and
|
|
|
●
|
approving
(or, as permitted, pre-approving) all audit and non-audit services
to be
performed by the independent registered public accounting
firm.
|
The
members of our audit committee are Messrs. Mendelow, Cuneo, Cohen and
Marcum, and Mr. Mendelow currently serves as its chairperson. Each member of
the
audit committee is an “independent director” under the marketplace rules of
NASDAQ applicable to companies whose securities are listed on the NASDAQ Global
Market. Our Board of Directors has also determined that Mr. Mendelow is the
“audit committee financial expert,” as that term is defined under applicable SEC
rules and NASDAQ Marketplace Rules, serving on its audit committee.
Nominating/governance
committee
Our nominating/governance
committee's responsibilities include:
|
|
●
|
identifying,
evaluating and recommending nominees to serve on the Board and
committees
of the Board;
|
|
|
●
|
conducting
searches for appropriate directors and evaluating the performance
of the
Board and of individual directors;
and
|
|
|
●
|
reviewing
developments in corporate governance practices, evaluating the adequacy
of
our corporate governance practices and reporting and making
recommendations to the Board concerning corporate governance
matters.
|
The
members of our nominating/governance committee are Messrs. Cohen, Emanuel,
Friedman and Marcum, and Mr. Cohen currently serves as its
chairperson.
Compensation
committee
Our compensation
committee's responsibilities include:
|
|
●
|
setting
the compensation and negotiating the employment arrangements
for the chief
executive officer;
|
|
|
●
|
reviewing
and recommending approval of the compensation of our other executive
officers;
|
|
|
●
|
administering
our stock option and stock incentive
plans;
|
|
|
●
|
reviewing
and making recommendations to the Board with
respect to our overall
compensation objectives, policies and practices, including
with
respect to incentive compensation and equity plans;
and
|
|
|
●
|
evaluating
the chief executive officer's performance
in light of corporate
objectives.
|
The
members of our compensation committee are Messrs. Mendelow, Cohen, Cuneo,
Emanuel and Friedman, and Mr. Friedman currently serves as its
chairperson.
Section
16(a) Beneficial Ownership Reporting Compliance
Section
16(a) of the Exchange Act requires our officers and directors, and persons
who beneficially own more than 10% of a registered class of our equity
securities, to file reports of ownership and changes in ownership with the
SEC.
Officers, directors and greater than 10% owners are required by certain SEC
regulations to furnish us with copies of all Section 16(a) forms they
file.
Based
solely on our review of the copies of such forms received by it, we believe
that during fiscal 2007, there was compliance with the filing requirements
applicable to its officers, directors and 10% common stockholders.
Corporate
governance policies
We
have adopted a written code of business conduct that applies to its
officers, directors and employees, responsive to Section 406 of the
Sarbanes-Oxley Act of 2002 and the rules of the SEC. In addition, we
have established an ethics website at
www.ethicspoint.com
.
To
assist individuals in upholding the code of conduct and to facilitate reporting,
we have also established an on-line anonymous and confidential reporting
mechanism that is hosted at
www.ethicspoint.com
and an
anonymous and confidential telephone hotline at 800-963-5864. Copies of
our code of business conduct are available, without charge, upon written
request directed to our corporate secretary at Iconix Brand Group, Inc.,
1450 Broadway, New York, NY 10018.
Item
11. Executive Compensation
Compensation
Discussion and Analysis
Philosophy
and Objectives
Our
compensation philosophy is to offer our executive officers, including our named
executive officers, compensation that is fair, reasonable and competitive,
and
that meets our goals of attracting, retaining and motivating highly skilled
management personnel so that we can be in a position to achieve our financial,
operational and strategic objectives to create long-term value for our
stockholders.
We
seek
to deliver fair, reasonable and competitive compensation for our employees
and
executives, including our named executive officers, by structuring
compensation around one fundamental goal: incentivizing our executives to build
stockholder value over the long term. Our ability to attract, motivate and
retain employees and executives with the requisite skills and experience to
develop, expand and execute business opportunities for us is essential to our
growth and success. We believe that we offer attractive career opportunities
and
challenges for our employees, but remain mindful that the best talent will
always have a choice as to where they wish to pursue their careers, and fair
and
competitive compensation is an important element of job
satisfaction.
Our
compensation program includes short-term elements, such as annual base salary,
and in some cases, an annual incentive cash bonus, and long term elements such
as equity-based awards through grants of restricted stock, restricted stock
units and stock options. We believe that our compensation program contributes
to
our employees’ and named executive officers’ incentive to execute on our goals
and perform their job functions with excellence and integrity.
We also
take into account the roles played by each of our named executive officers
and
endeavor to individually customize their compensation packages to align the
amount and mix of their compensation to their contributions to, and roles
within, our organization. The compensation package for our chief executive
officer, Mr. Neil Cole, differs from those of our other named executive officers
in light of his distinct role and responsibilities within Iconix. As Mr.
Cole makes executive decisions that influence our direction and growth
initiatives, his total compensation is intended to be strongly aligned with
objective financial measures, including a bonus driven by a formula set forth
in
his employment agreement based upon our performance.
We enter
into employment agreements with senior officers, including our named executive
officers, when the compensation committee determines that an employment
agreement is in order for us to obtain a degree of certainty as to an
executive’s continued employment in light of prevailing market conditions and
competition for the particular position held by the officer, or where the
compensation committee determines that an employment agreement is appropriate
to
attract an executive in light of market conditions, the prior experience of
the
executive or practices at our Company with respect to other similarly situated
executives. Based on these and any other factors then deemed relevant, we have
entered into written employment agreements with Messrs. Neil Cole, David Conn,
Warren Clamen and Andrew Tarshis and Ms. Deborah Sorell Stehr.
See
“-
Narrative to Summary Compensation Table and Plan-Based Awards Table - Employment
Agreements” for a description of these employment agreements and related
information.
See
also
“2008 Compensation Changes—New Employment Agreement with our Chief Executive
Officer” for a description of a new employment agreement we entered into in
January 2008.
Forms
of Compensation Paid to Named Executive Officers During
2007
During
the last fiscal year, we provided our named executive officers with the
following forms of compensation:
Base
salary.
Base
salary represents amounts paid during the fiscal year to named executive
officers as direct guaranteed compensation under their employment agreements
for
their services to us.
Equity-based
awards.
Awards
of restricted stock units, shares of restricted stock and stock options are
made
under our 2006 Equity Incentive Plan, which was approved by our stockholders
in
August 2006, or under other our other option plans depending upon the
amount of equity to be granted under the respective plans. Shares of restricted
stock were issued subject to a vesting schedule and cannot be sold until and
to
the extent the shares have vested. In 2007, we awarded shares of restricted
stock to four of the named executive officers in connection with performance
based incentive awards.
While
we
have not formally adopted any policies with respect to cash versus equity
components in the mix of executive compensation, we feel that it is important
to
provide for a compensation mix that allows for acquisition of a meaningful
level
of equity ownership by our named executive officers in order to help align
their
interests with those of our stockholders.
Cash
bonuses.
Two of
our named executive officers in 2007 have a contractual right to receive a
cash
bonus, one based upon our performance, and the other a guaranteed
amount.
Perquisites
and other personal benefits.
During
2007, our named executive officers received, to varying degrees, a limited
amount of perquisites and other personal benefits that we paid on their behalf.
These included, among other things:
|
·
|
payments
of life insurance premiums; and
|
Objectives
of Our Compensation Program
The
co
mpensation
paid to our named executive officers is primarily structured into two broad
categories:
|
·
|
incentive
compensation, primarily in the form of equity-based awards under
our
various equity incentive and stock option plans; to a lesser degree,
certain of our named executive officers also have received cash
bonuses.
|
Our
overall compensation program with respect to our named executive officers is
designed to achieve the following objectives:
|
·
|
to
attract, retain and motivate highly qualified executives through
both
short-term and long-term incentives that reward company and individual
performance;
|
|
·
|
to
emphasize equity-based compensation to more closely align the interests
of
executives with those of our
stockholders;
|
|
·
|
to
support and encourage our financial growth and
development;
|
|
·
|
to
motivate our named executive officers to continually provide
excellent
performance throughout the
year;
|
|
·
|
to
ensure continuity of services of named executive officers so that
they
will contribute to, and be a part of, our long-term success;
and
|
|
·
|
to
manage fixed compensation costs through the use of performance
and
equity-based compensation.
|
Determination
of Compensation for Named Executive Officers
Compensation
of chief executive officer.
During
2007, the compensation of Mr. Cole, our chairman, president and chief executive
officer was based on Mr. Cole’s employment agreement which expired on December
31, 2007 (the “prior employment agreement”) and the general principles of our
executive compensation program. In determining the salary and other forms of
compensation for Mr. Cole, the compensation committee took into consideration
Mr. Cole’s contribution to our growth over the past several years under his
leadership, and his substantial experience and performance in the industry
in general and with us in particular. The compensation committee also considered
the increased responsibilities of Mr. Cole as a result of our diversification
and substantial growth experienced by our company during his tenure. The
compensation committee believes that Mr. Cole’s compensation for 2007 as our
principal executive officer reflects our performance during 2007 and his
significant contributions to that performance. Mr. Cole’s prior employment
agreement, pursuant to which he was compensated in 2007, expired on December
31,
2007.
On
January 28, 2008, we entered into a new employment agreement with Mr. Cole,
effective as of January 1, 2008. See “2008 Compensation Changes - New Employment
Agreement with our Chief Executive Officer”.
Overall
compensation program.
Compensation of our executive officers, including the named executive officers,
has been determined by the Board of Directors pursuant to recommendations made
by the chief executive officer and the compensation committee, and in accordance
with the terms of the respective employment agreements of certain executive
officers in effect prior to the re-formation of the nominating/governance
committee on December 13, 2006. The compensation committee is responsible for,
among other things, reviewing and recommending approval of the compensation
of
our executive officers; administering our equity incentive and stock option
plans; reviewing and making recommendations to the Board of Directors with
respect to incentive compensation and equity incentive and stock option plans,
evaluating our chief executive officer’s performance in light of corporate
objectives, and setting our chief executive officer’s compensation based on the
achievement of corporate objectives.
With
respect to the named executive officers, their compensation is based upon what
we believe is a competitive base salary in view of our recent change of business
strategy and accelerated growth goals. In conjunction with our compensation
committee, we have assessed our total compensation program, and its components,
and believe that it operates well to serve both our goals and the current,
short-term and long-term compensation needs of the executive officers. It is
our
intention to implement, subject to stockholder approval, a more structured
bonus
program for all our employees in conformance with Section 162(m), including
our named executive officers based, in part, upon the achievement of
performance goals.
Compensation
amounts for named executive officers are determined according to the level
of
seniority and position of the named executive officer. Relatively greater
emphasis is typically placed on the equity-based components of compensation
so
as to put a greater portion of total pay based on company and individual
performance. We believe the combination of a competitive base compensation,
coupled with an opportunity to significantly enhance overall individual
compensation if individual and company performance warrant such enhancement,
yields an attractive compensation program that facilitates our recruitment
and
retention of talented executive personnel.
The
total
compensation amount for our named executive officers is also established
relative to officers at levels above and below them, which we believe rewards
them for increased levels of knowledge, experience and responsibility.
Base
salary.
The base
salary of each of our named executive officers is fixed pursuant to the terms
of
their respective employment agreements with us and, when a contract is up for,
or otherwise considered for, renewal, upon a review of the executive’s
abilities, experience and performance, as well as a review of salaries for
executives in the marketplace for comparable positions at corporations which
either compete with us in its business or of comparable size and scope of
operations. The recommendations to the Board of Directors by the compensation
committee (or, prior to its re-formation, the nominating/governance committee)
with respect to base salary are based primarily on informal judgments reasonably
believed to be in our best interests. In determining the base salaries of
certain of our executives whose employment agreements were up for, or otherwise
considered for, renewal, the nominating/governance considered our performance
and growth plans. Base salaries are used to reward superior individual
performance of each named executive officer on a day-to-day basis during the
year, and to encourage them to perform at their highest levels. We also use
our
base salary as an incentive to attract top quality executives and other
management employees from other companies. Moreover, base salary (and increases
to base salary) are intended to recognize the overall experience, position
within our company, and expected contributions of each named executive officer
to us.
The
following were contractual increases in the base salaries of our named executive
officers from 2006 to 2007 as set forth on the table below:
|
Named
Executive Officer
|
|
2006
Base Salary
|
|
2007
Base Salary
|
|
Change
in Base Salary
|
|
Percentage
of 2006 Base Salary
|
|
|
Neil
Cole
|
|
$
|
550,000
|
|
$
|
600,000
|
|
$
|
50,000
|
|
|
9
|
%
|
|
David
Conn
|
|
|
275,000
|
|
|
300,000
|
|
|
25,000
|
|
|
9
|
%
|
|
Warren
Clamen
|
|
|
275,000
|
|
|
300,000
|
|
|
25,000
|
|
|
9
|
%
|
|
Andrew
Tarshis
|
|
|
275,000
|
|
|
300,000
|
|
|
25,000
|
|
|
9
|
%
|
|
Deborah
Sorell Stehr
|
|
|
220,000
|
|
|
230,000
|
|
|
10,000
|
|
|
5
|
%
|
Equity-based
awards.
We
currently make equity awards to our named executive officers pursuant to our
2006 Equity Incentive Plan, which provides for awards in the form of stock
options, stock appreciation rights, restricted stock, unrestricted stock, stock
units including restricted stock units, and performance awards to eligible
persons. The mix of cash and equity-based awards, as well as the types of
equity-based awards, granted to our named executive officers varies from year
to
year. Consideration has been given to various factors, such as the relative
merits of cash and equity as a device for retaining and motivating the named
executive officers, the practices of other companies, individual performance,
an
individual’s pay relative to others, contractual commitments pursuant to
employment or other agreements, and the value of already-outstanding grants
of
equity in determining the size and type of equity-based awards to each named
executive officer.
All
equity-based compensation we issued to our named executive officers in 2006
took
the form of restricted stock and stock option grants. In prior years, we
typically placed particular emphasis on the grant of stock options. In 2007,
we
continued to utilize restricted stock as a form of equity
compensation primarily because of the increased stock-based compensation
expense associated with stock options and similar instruments under SFAS No.
123(R), “
Accounting
for share-based payment
.” This
accounting standard, which we adopted as of January 1, 2006, requires us to
record as compensation expense the grant date fair value of a stock option
over
the life of the option.
As
described above, we provide a substantial portion of named executive officer
compensation in the form of equity awards because the compensation committee
(and its predecessor, the nominating/governance committee) has determined that
such awards serve to encourage our executives to create value for our company
over the long-term, which aligns the interests of named executive officers
with
those of our stockholders.
Generally,
we make three types of equity-based grants to our named executive
officers:
|
·
|
initial
grants when a named executive officer is
hired;
|
|
·
|
annual
performance based grants; and
|
|
·
|
retention
grants, which are typically made in connection with employment agreement
renewals.
|
An
initial grant when an executive officer is hired or otherwise becomes a named
executive officer serves to help us to recruit new executives and to reward
existing officers upon promotion to higher levels of management. Because these
initial grants are structured as an incentive for employment, the amount of
these grants may vary from executive to executive depending on the particular
circumstances of the named executive officer and are usually recommended by
the
chief executive officer and approved by the appropriate committee. While initial
grants of equity awards have been made in prior years, no initial grants were
awarded to any of our named executive officers in 2006. Annual, time-vested
grants of equity awards, as well as retention grants made in connection with
renewals of employment agreements are designed so as to compensate our named
executive officers for their contributions to our long-term
performance.
Generally,
restricted stock and stock option awards granted to named executive officers
as
either initial or annual performance grants or in connection with employment
agreement renewals vest in equal installments over the term of the agreement,
or a period determined by the nominating/governance committee or
compensation committee, typically beginning on the first anniversary of the
date
of grant. Restricted stock grants for 2007 were as follows: David Conn 4,967,
Warren Clamen - 4,967, Andrew Tarshis 4,967, and Deborah Sorell Stehr 3,725
shares vesting over an 18-month period. The vesting date of a portion for each
of Mr. Conn’s, Mr. Clamen’s, Mr. Tarshis’s, and Ms. Sorell Stehr’s
shares was changed to vest simultaneously on January 1,
2008.
Cash
bonuses.
To the
extent not covered by employment agreements with our executive officers,
the compensation committee determines bonuses for our executive officers
based on our overall performance, profitability, and other qualitative and
quantitative measurements, including individual performance goals relating
to
our budget and financial objectives. In determining the amount of bonuses
awarded, the compensation committee considers our revenues and profitability
for
the applicable period and each executive’s contribution to our success. Our
chairman, president and chief executive officer will receive a bonus for 2007
of
$649,000, and one named executive officer received a $25,000 bonus,
pursuant to the terms of his employment agreement with
us.
Post-termination
compensation.
We have
entered into employment agreements with each of the named executive officers.
Each of these agreements provides for certain payments and other benefits if
the
executive’s employment terminates under certain circumstances, including, in the
event of a “change in control”. See “Executive Compensation - Narrative to
Summary Compensation Table and Plan-Based Awards Table - Employment Agreements"
and “Executive Compensation - Potential Payments Upon Termination or Change
in Control” for a description of the severance and change in control
benefits.
Perquisites.
The
perquisites provided to some or all of our executive officers are described
below. Perquisites are generally provided, as applicable, in accordance with
the
executives’ employment agreements. Below is a list of material perquisites,
personal benefits and other items of compensation we provided to our named
executive officers in 2007, the total amount of each such item paid to all
named
executive officers and an explanation as to why we chose to pay the
item.
|
Perquisite,
Other Benefit or Other Item of Compensation (1)
|
|
|
Aggregate
Amount of This Perquisite Paid to All Named Executive Officers in
2007
|
|
|
Additional
Explanation for Offering Certain Perquisites
|
|
|
Car
allowances
|
|
$
|
98,279
|
|
|
Serves
to defray the cost of owning and operating an automobile often used
for
business purposes; prevents us from having to own and maintain a
fleet of
automobiles and is a taxable benefit for the named executive
officer.
|
|
|
Life
Insurance Premiums
|
|
$
|
21,420
|
|
|
Reduces
risk to the beneficiaries of executives in
the event of the death of the executive.
|
|
|
(1)
|
Perquisites
are generally granted as part of our executive recruitment and retention
efforts.
|
Other
matters
.
The
compensation
committee has not historically engaged consultants with respect to executive
compensation matters. However, in 2007, the
compensation committee engaged an outside consulting firm, James F. Reda &
Associates, LLC (“Reda & Associates”) for advice in 2007 in connection with
the negotiation of the new employment agreement for our chief executive officer,
which agreement was entered into in January 2008. See “2008 Compensation Changes
- New Employment Agreement with our Chief Executive Officer”. Reda &
Associates has provided no other services to Iconix and has no other
relationship or engagement with Iconix. The Board of Directors has not
established a policy for the adjustment of any compensation award or payment
if
the relevant performance measures on which they are based are restated or
adjusted. The Board has not established any security ownership guidelines for
executive officers.
Tax
Deductibility and Accounting Ramifications
T
he
compensation committee generally takes into account the various tax and
accounting ramifications of compensation paid to our executives. When
determining amounts of equity-based grants to executives the compensation
committee also considers the accounting expense associated with the
grants.
Our
2006
Equity Incentive Plan and our other plans are intended to allow us to make
awards to executive officers that are deductible under Internal Revenue Code
Section 162(m), which otherwise sets limits on the tax deductibility of
compensation paid to a company’s most highly compensated executive officers. The
compensation committee will continue to seek ways to limit the impact of Section
162(m). However, the compensation committee also believes that the tax deduction
limitation should not compromise our ability to maintain incentive programs
that
support the compensation objectives discussed above. Achieving these objectives
and maintaining flexibility in this regard may therefore result in compensation
that is not deductible by Iconix for federal income tax purposes.
Summary
In
summary, we believe that our mix of salary, cash incentives for short-term
and long-term performance and the potential for additional equity ownership
in
Iconix motivates our management to produce significant returns for our
stockholders. Moreover, we also believe that our compensation program strikes
an
appropriate balance between the interests and needs of Iconix in operating
and
further developing our business and suitable compensation levels that can lead
to the enhancement of stockholder value.
Compensation
Committee Interlocks and Insider Participation
During
the year ended December 31, 2007, none of our named executive officers served
on
the Board of Directors or the compensation committee of any other entity that
has officers that serve on our Board of Directors or on its compensation
committee. In addition, none of the members of our compensation committee were
formerly, or during the year ended December 31, 2007, employed by us in the
capacity as an officer.
Compensation
Committee Report
The
compensation committee of the Board of Directors has reviewed and discussed
with
management the Compensation Discussion and Analysis for the year ended December
31, 2007. Based on such reviews and discussions, the committee recommended
to
the Board that the Compensation Discussion and Analysis be included in this
Annual Report as Form 10-K for filing with the SEC.
|
By
the committee.
|
|
|
|
|
|
Mark
Friedman, Chairperson
|
|
|
|
Steven
Mendelow
|
|
|
|
Barry
Emanuel
|
|
|
|
F.
Peter Cuneo
|
SUMMARY
COMPENSATION TABLE
The
following table includes information for 2007 with respect to our named
executive officers.
Summary
Compensation Table
|
|
|
|
|
|
|
Salary
|
|
|
Bonus
|
|
|
Stock
Awards
|
|
|
Option
Awards
|
|
|
Non-Equity
Incentive Plan Compensation
|
|
|
Change
in Pension Value and Non-qualified Deferred Compensation
Earnings
|
|
|
All
Other Compensation
|
|
|
Total
|
|
|
Name
and
|
|
|
|
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|
Principal
Position
|
|
|
Year
|
|
|
(a)
|
|
|
(b)
|
|
|
(c)
|
|
|
(d)
|
|
|
(e)
|
|
|
(f)
|
|
|
(g)
|
|
|
(h)
|
|
|
Neil
Cole
|
|
|
FY
2007
|
|
$
|
600,000
|
|
$
|
649,000
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
118,574
|
(1)
|
$
|
1,367,574
|
|
|
President
and Chief Executive Officer
|
|
|
FY
2006
|
|
$
|
550,000
|
|
$
|
-
|
(2)
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
65,745
|
|
$
|
615,745
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
David
Conn
|
|
|
FY
2007
|
|
$
|
290,625
|
|
$
|
25,000
|
|
$
|
66,667
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
18,000
|
|
$
|
400,292
|
|
|
Executive
Vice President
|
|
|
FY
2006
|
|
$
|
265,486
|
|
$
|
50,000
|
|
$
|
-
|
|
|
-
|
|
$
|
|
|
$
|
-
|
|
$
|
18,000
|
|
$
|
333,486
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warren
Clamen
|
|
|
FY
2007
|
|
$
|
279,167
|
|
$
|
-
|
|
$
|
166,667
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
18,000
|
|
$
|
463,834
|
|
|
Chief
Financial Officer
|
|
|
FY
2006
|
|
$
|
243,250
|
|
$
|
25,000
|
|
$
|
16,667
|
|
|
-
|
|
$
|
|
|
|
-
|
|
$
|
18,000
|
|
$
|
302,917
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Andrew
Tarshis
|
|
|
FY
2007
|
|
$
|
281,250
|
|
$
|
-
|
|
$
|
166,664
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
18,000
|
|
$
|
465,914
|
|
|
Senior
Vice President and General Counsel
|
|
|
FY
2006
|
|
$
|
239,819
|
|
$
|
-
|
|
$
|
24,999
|
|
|
-
|
|
$
|
|
|
$
|
-
|
|
$
|
18,000
|
|
$
|
282,818
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deborah
Sorell Stehr
|
|
|
FY
2007
|
|
$
|
230,000
|
|
$
|
-
|
|
$
|
116,661
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
18,000
|
|
$
|
364,661
|
|
|
Senior
Vice President - Business Affairs and Licensing
|
|
|
FY
2006
|
|
$
|
220,000
|
|
$
|
-
|
|
$
|
16,665
|
|
$
|
-
|
|
$
|
|
|
$
|
-
|
|
$
|
12,612
|
|
$
|
249,277
|
|
|
(a)
|
Salary
includes, as applicable, base salary, pro-rated salaries for changes
made
to base salary during the year, as defined in the employment
agreements.
|
|
|
|
|
(b)
|
Bonuses
are discretionary, fixed incentive, and/or percentage incentive,
as
provided for in the applicable employment agreements. For the year
ended
December 31, 2007, Mr. Cole earned a bonus for reaching certain EBITDA
targets which were determined pursuant to the terms of his prior
employment agreement, and Mr. Conn received a bonus which was determined
by his employment agreement. For the year ended December 31, 2006,
Mr.
Conn and Mr. Clamen each received bonuses, which were determined
by their
employment agreements.
|
|
|
|
|
(c)
|
The
amounts shown in this column represent the dollar amounts recognized
as an
expense by us for financial statement reporting purposes in the years
ended December 31, 2007 and 2006 with respect to shares of restricted
stock as determined pursuant to SFAS No. 123 (revised
2004),
Share-Based Payment
(“SFAS 123(R)”). See Note 11 to Notes to the Consolidated
Financial Statements included in this Form 10-K for a discussion
of the
relevant assumptions used in calculating grant date fair value pursuant
to
SFAS 123(R).
|
|
(d)
|
Option
awards include, as applicable, Iconix options and equity-based
compensation instruments that have option-like features. There were
no
such awards for the years ended December 31, 2007 and
2006.
|
|
|
|
|
(e)
|
Non-equity
incentive plan compensation represents the dollar value of all amounts
earned during the fiscal year pursuant to non-equity incentive plans.
There was no such compensation for the years ended December 31, 2007
and
2006.
|
|
|
|
|
(f)
|
Change
in pension value and non-qualified deferred compensation earnings
represents the aggregate increase in actuarial value to the named
executive officer of all defined benefit and actuarial plans accrued
during the year and earnings on non-qualified deferred compensation.
There
are no defined benefit plans, actuarial plans, or non-qualified deferred
compensation for the years ended December 31, 2007 and
2006.
|
|
|
|
|
(g)
|
All
other compensation includes, as applicable, car allowances and life
insurance premiums (see the list of perquisites above).
|
|
|
|
|
(h)
|
Total
compensation represents all compensation from us earned by the named
executive officer for the year.
|
|
|
|
|
(1)
|
Represents
Company paid premiums on a life insurance policy for the benefit
of the
beneficiaries of Mr. Cole, as well as a car
allowance.
|
|
(2)
|
Mr.
Cole waived receipt of the bonus for 2006 he would have been entitled
to
under his prior employment
agreement.
|
GRANTS
OF PLAN-BASED AWARDS
The
following table sets forth information for 2007 with respect to grants of awards
to the named executive officers under our equity incentive and stock option
plans.
|
|
|
|
|
|
|
Estimated
Future Payouts Under Non-Equity Incentive Plan
Awards
|
|
|
Estimated
Future Payouts Under Equity Incentive Plan Awards
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Name
|
|
|
Grant
Date
|
|
|
Threshold
($)
|
|
|
Target
($)
|
|
|
Maximum
($)
|
|
|
Threshold
(#)
|
|
|
Target
(#)
|
|
|
Maximum
(#)
|
|
|
All
Other Stock Awards: Number of Shares of Stock or
Units
(#)
|
|
|
All
Other Option
Awards:
Number of Securities
Underlying
Options
(#)
|
|
|
Exercise
or Base Price of Option Awards ($/Sh)
($)
|
|
|
Closing
Price of Common Stock Units on Date of
Grant
($)
|
|
|
Grant
Date Fair Value of Stock and Option Awards
|
|
|
Neil
Cole
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
David
Conn
|
|
|
4/30/07
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
4,967
|
|
|
-
|
|
|
-
|
|
$
|
20.13
|
|
$
|
100,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warren
Clamen
|
|
|
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
4,967
|
|
|
-
|
|
|
-
|
|
$
|
20.13
|
|
$
|
100,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Andrew
Tarshis
|
|
|
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
4,967
|
|
|
-
|
|
|
-
|
|
$
|
20.13
|
|
$
|
100,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deborah
Sorell Stehr
|
|
|
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
3,725
|
|
|
-
|
|
|
-
|
|
$
|
20.13
|
|
$
|
75,000
|
|
NARRATIVE
TO SUMMARY COMPENSATION TABLE AND PLAN-BASED AWARDS TABLE
Employment
Agreements
The
compensation committee determines the compensation, including related terms
of
employment agreements with us for those who have them, for each of the named
executive officers.
Pursuant
to his prior employment agreement (which expired on December 31, 2007 and has
since been replaced by a new employment agreement - see “2008 Compensation
Changes- New Employment Agreement with our Chief Executive Officer” and Note 20
of Notes to Consolidated Financial Statements) with the Company, Neil Cole,
served as our President and Chief Executive Officer at an annualized base salary
of $500,000 in 2005, $550,000 in 2006 and $600,000 in 2007. In addition, Mr.
Cole's prior employment agreement provided for us to pay him additional salary
of $250,000 in four equal installments during 2005, all of which was paid.
Under
the prior employment agreement, for each year in which we met at least 100%
of
targeted earnings before interest, taxes, depreciation and amortization of
fixed
assets and intangible assets, or EBITDA, as determined by its Board of
Directors, Mr. Cole was also entitled to a bonus as follows: $100,000 for 2005,
$150,000 for 2006 and $200,000 for 2007. Mr. Cole received the bonus for 2005
and will receive the bonus for 2007. In addition, Mr. Cole was entitled to
receive a bonus equal to 5% of the amount, if any, by which our actual EBITDA
for a fiscal year exceeded the greater of (a) the targeted EBITDA for that
year,
and (b) the highest amount of actual EBITDA previously achieved for a fiscal
year during the term of his employment agreement, provided that prior negative
EBITDA amounts would have reduced the actual EBITDA in the year for which the
determination was made in determining whether and by how much the amounts set
forth in (a) and (b) were exceeded. Mr. Cole was also entitled to customary
benefits, including participation in management incentive and benefit plans,
reimbursement for automobile expenses, reasonable travel and entertainment
expenses and a life insurance policy benefiting his designated beneficiaries
in
the amount of $5,000,000. In addition, his employment agreement with us provided
that, if, within twelve months of a “change in control,” Mr. Cole’s employment
was terminated by us without “cause,” as such terms are defined in his
employment agreement, we were obligated to make a lump-sum severance payment
to
him equal to $100 less than “three times his annualized includable compensation
for the base period” (as defined in Section 280G of the Internal Revenue Code of
1986) reduced to the extent that this payment together with any other payment
or
benefit payable under the agreement constitutes an “excess parachute payment”
(as defined in Section 280G of the Internal Revenue Code of 1986). Pursuant
to
that agreement, Mr. Cole was also granted immediately exercisable ten-year
stock
options to purchase 800,000 shares of our common stock at $4.62 per share.
We had also agreed with Mr. Cole that, if we were sold and immediately
thereafter Mr. Cole was no longer employed by us or our successor in the
capacity in which he was employed prior to the sale, he would have been entitled
to a payment equal to 5% of the sale price in the event that sale price was
at
least $5.00 per share or the equivalent thereof with respect to an asset sale,
and Mr. Cole had agreed not to compete with us for a period of twelve months
after any sale that would have resulted in such payment to him.
On
April
17, 2004, we entered into an employment agreement, subsequently amended on
December 29, 2005, with David Conn, which, as amended, provides for him to
serve
as our Executive Vice President of until May 18, 2008, subject to earlier
termination as provided in the agreement. The amended agreement provides for
Mr.
Conn to receive an annualized base salary of: (i) $250,000 during the period
December 29, 2005 until May 17, 2006; (ii) $275,000 during the period May 18,
2006 through May 17, 2007 and (iii) $300,000 during the period May 18, 2007
through May 17, 2008, as well as a guaranteed bonus of $25,000 per year, and
a
car allowance. He was also granted immediately exercisable ten-year stock
options to purchase 100,000 shares of our common stock at $10.19 per share.
In
addition, his employment agreement with us provides that, if, within twelve
months of a “change in control,” Mr. Conn's employment is terminated by us
without “cause,” as such terms are defined in his employment agreement, we are
obligated to make a lump-sum severance payment to him equal to $100 less than
“three times his annualized includable compensation for the base period” (as
defined in Section 280G of the Internal Revenue Code of 1986), reduced to the
extent that this payment together with any other payment or benefit payable
under the agreement constitutes an “excess parachute payment” (as defined in
Section 280G of the Internal Revenue Code of 1986). One such benefit is
the change in vesting of certain of the 4,967 shares of restricted
stock awarded to him. His agreement with us also contains certain non-compete
and non solicitation provisions.
Effective
March 9, 2005, we entered into an employment agreement, subsequently amended
on
October 27, 2006, with Warren Clamen, which, as amended, provides for him to
serve as our Chief Financial Officer until October 27, 2008, subject to earlier
termination as specified in the agreement. The employment agreement provides
for
Mr. Clamen to receive a base salary of $275,000 per year for the year ending
October 27, 2007 and no less than $300,000 for the year ending October 27,
2008,
plus certain fringe benefits. In addition, he is eligible to participate in
any
executive bonus program that we have in effect during the term of his employment
agreement. Pursuant to his employment agreement, in March 2005, we granted
Mr.
Clamen ten-year stock options to purchase 200,000 shares of our common stock
at
$5.06 per share, subject to earlier termination under certain conditions if
Mr. Clamen ceases to be employed by us, half of which options vested
immediately and the other half vested as of June 1, 2005. Pursuant to the
amendment in October 2006, we also issued to Mr. Clamen 10,971 shares of our
restricted common stock, which vest in two equal annual installments commencing
on October 27, 2007. The amended agreement provides that if, within twelve
months of a “change in control,” Mr. Clamen’s employment is terminated by us
without “cause,” as such terms are defined in his employment agreement, we are
obligated to make a lump-sum severance payment to him equal to $100 less than
“three times his annualized includable compensation for the base period” (as
defined in Section 280G of the Internal Revenue Code of 1986) reduced to the
extent that this payment together with any other payment or benefit payable
under the agreement constitutes an “excess parachute payment” (as defined in
Section 280G of the Internal Revenue Code of 1986). One such benefit is
the change in vesting of certain of the 15,938 shares of
restricted stock awarded to him. His employment agreement also provides for
Mr.
Clamen to receive certain severance payments if we terminate the agreement
other
than for “cause” as defined in the agreement.
On
September 22, 2006, we entered into a new employment agreement with Andrew
Tarshis, which provides for him to serve as our Senior Vice President and
General Counsel until September 22, 2009 and provides for him to receive an
annual base salary of no less than $275,000 during the first year of the term
and $300,000 during the second and third years of the term. Pursuant to his
employment agreement, we also issued to Mr. Tarshis 18,461 shares of our
restricted common stock, which vest in three equal annual installments
commencing on the first year anniversary of the agreement. Under the agreement,
Mr. Tarshis is also eligible for a bonus consistent with other executive
officers, as well as customary benefits, including participation in management
incentive and benefit plans, a monthly car allowance of $1,500 and reasonable
business related travel and entertainment expenses. In addition, his employment
agreement with us provides that, if, within twelve months of a “change in
control,” Mr. Tarshis’s employment is terminated by us without “cause” or
Mr. Tarshis terminates his employment with us for “good reason,” as all
such terms are defined in his employment agreement, we are obligated to make
a
lump-sum severance payment to him equal to $100 less than three times his
“annualized includable compensation for the base period” (as defined in
Section 280G of the Internal Revenue Code of 1986), reduced to the extent
that this payment together with any other payment or benefit payable under
the
agreement constitutes an “excess parachute payment” (as defined in Section 280G
of the Internal Revenue Code of 1986). One such benefit is the change
in vesting of certain of the 17,274 shares of restricted stock awarded
to him. His agreement with us also contains certain non-compete and
non-solicitation provisions.
On
October 28, 2005, we entered into an employment agreement, subsequently
amended on September 22, 2006, with Deborah Sorell Stehr, which, as
amended, provides for her to serve as our Senior Vice President—Business Affairs
until December 31, 2008 and provides for her to receive a base salary for
performance based upon a four-day work week, as follows: (a) during the
period from January 1, 2006 through December 31, 2006, at the annual
rate of not less than $220,000, (b) during the period from January 1,
2007 through December 31, 2007, at an annual rate of not less than
$230,000, and (c) during the period from January 1, 2008 through
December 31, 2008 at the annual rate of not less than $250,000. Pursuant to
her employment agreement, in October 2005, we granted Ms. Stehr immediately
exercisable ten-year stock options to purchase 60,000 shares of our common
stock
at $8.03 per share, and, pursuant to its amendment, in September 2006 we also
issued to Ms. Stehr 9,230 shares of our restricted common stock, which vest
in two equal annual installments commencing on December 31, 2007. Under the
amended agreement, Ms. Stehr remains eligible for a bonus consistent with
other executive officers, as well as customary benefits, including participation
in management incentive and benefit plans, a monthly car allowance of $1,500
and
reasonable travel and entertainment expenses. Her employment agreement with
us
provides that, if, within twelve months of a “change in control,”
Ms. Stehr’s employment is terminated by us without “cause” or
Mr. Stehr terminates her employment with us for “good reason,” as all such
terms are defined in her employment agreement, we are obligated to make a
lump-sum severance payment to her equal to $100 less than three times her
“annualized includable compensation for the base period” (as defined in
Section 280G of the Internal Revenue Code of 1986) reduced to the extent
that this payment together with any other payment or benefit payable under
the
agreement constitutes an “excess parachute payment” (as defined in Section 280G
of the Internal Revenue Code of 1986). One such benefit is the change in vesting
of certain of the 12,955 shares of restricted stock awarded to
her.
OUTSTANDING
EQUITY AWARDS AT FISCAL YEAR-END
The
following table sets forth information with respect to outstanding equity-based
awards at December 31, 2007 for our nam
ed
executive officers.
|
|
|
|
Option
Awards
|
|
|
Stock
Awards
|
|
|
Name
|
|
|
Number
of Securities Underlying Unexercised Options
(#)
Exercisable
(a)
|
|
|
Number
of Securities Underlying Unexercised Options
(#)
Unexercisable
|
|
|
Equity
Incentive Plan Awards: Number of Securities Underlying Unexercised
Unearned Options
(#)
|
|
|
Option
Exercise Price
($)
|
|
|
Option
Expiration Date
|
|
|
Number
of Shares or Units of Stock That Have Not Vested
(#)
|
|
Vesting
Date of Shares or Units of Stock That Have Not
Vested
|
|
|
Market
Value of Shares or Units of Stock That Have Not
Vested
($)
|
|
|
Equity
Incentive Plan Awards: Number of Unearned Shares, Units or Other
Rights
That Have Not Vested
(#)
|
|
|
Equity
Incentive Plan Awards: Market or Payout Value of Unearned Shares,
Units or
Other Rights That Have Not Vested
(S)
|
|
|
Neil
Cole
|
|
|
10,000
650,000
84,583
84,583
84,583
25,000
321,625
260,500
76,500
273,500
600,000
15,000
800,000
200,000
|
|
|
-
-
-
-
-
-
-
-
-
-
-
-
-
-
|
|
|
-
-
-
-
-
-
-
-
-
-
-
-
-
-
|
|
$
$
$
$
$
$
$
$
$
$
$
$
$
$
|
3.50
3.50
3.50
3.50
3.50
0.97
1.13
1.25
2.30
2.30
2.75
4.41
4.62
10.00
|
|
|
12/11/08
10/14/08
03/09/08
03/09/08
03/09/08
02/01/10
07/18/10
08/18/10
10/26/11
10/26/11
04/23/12
05/22/12
03/29/15
12/28/15
|
|
|
-
-
-
-
-
-
-
-
-
-
-
-
-
-
|
|
|
|
|
-
-
-
-
-
-
-
-
-
-
-
-
-
-
|
|
|
-
-
-
-
-
-
-
-
-
-
-
-
-
-
|
|
|
-
-
-
-
-
-
-
-
-
-
-
-
-
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
David
Conn
|
|
|
50,000
50,000
25,000
100,000
|
|
|
-
-
-
-
|
|
|
-
-
-
-
|
|
$
$
$
$
|
4.82
6.40
10.00
10.19
|
|
|
05/24/15
06/14//15
12/28/15
12/28/15
|
|
|
4,967
-
-
-
|
|
|
|
$
|
97,651
-
-
-
|
|
|
-
-
-
-
|
|
|
-
-
-
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warren
Clamen
|
|
|
60,000
50,000
|
|
|
-
-
|
|
|
-
-
|
|
$
$
|
5.06
10.00
|
|
|
03/09/15
12/28/15
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Andrew
Tarshis
|
|
|
10,000
|
|
|
-
|
|
|
-
|
|
$
|
8.81
|
|
|
07/22/15
|
|
|
|
|
|
|
$
|
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deborah
Sorell Stehr
|
|
|
15,000
60,000
50,000
|
|
|
-
-
-
|
|
|
-
-
-
|
|
$
$
$
|
4.82
8.03
10.00
|
|
|
05/24/15
10/28/15
12/28/15
|
|
|
|
|
|
|
$
|
|
|
|
-
-
-
|
|
|
-
-
-
|
|
Grant
dates and vesting dates for all outstanding equity awards at December 31,
2007
are as follows:
|
Name
|
|
|
Number
of Securities Underlying Unexercised Options
(#)
Exercisable
|
|
|
Grant
Date
|
|
|
Vesting
Date
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Neil
Cole
|
|
|
10,000
650,000
84,583
84,583
84,583
25,000
321,625
260,500
76,500
273,500
600,000
15,000
800,000
200,000
|
|
|
12/11/98
12/11/98
12/11/98
12/11/98
12/11/98
02/01/00
07/18/00
08/18/00
10/26/01
10/26/01
04/23/02
05/22/02
03/29/05
12/28/05
|
|
|
12/11/98
12/11/98
12/11/98
12/11/98
12/11/98
02/01/00
07/18/00
08/18/00
10/26/01
10/26/01
04/23/02
05/22/02
03/29/05
12/28/05
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
David
Conn
|
|
|
50,000
50,000
25,000
100,000
|
|
|
05/24/05
06/14/05
12/28/05
12/29/05
|
|
|
05/24/05
12/19/05
12/28/05
12/29/05
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warren
Clamen
|
|
|
60,000
50,000
|
|
|
03/09/05
12/28/05
|
|
|
06/01/05
12/28/05
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Andrew
Tarshis
|
|
|
10,000
|
|
|
07/22/05
|
|
|
07/22/05
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deborah
Sorell Stehr
|
|
|
15,000
60,000
50,000
|
|
|
05/24/05
10/28/05
12/28/05
|
|
|
05/24/05
10/28/05
12/28/05
|
|
OPTION
EXERCISES AND STOCK VESTED
The
following table sets forth certain information regarding exercise of options
and
vesting of restricted stock held by the named executive officers during the
year
ended December 31, 2007.
|
|
|
Option
Awards
|
|
Stock
Awards
|
|
|
Name
|
|
Number
of Shares Acquired on Exercise
(#)
|
|
Value
Realized on Exercise
($)
(a)
|
|
Number
of
Shares
Acquired
on
Vesting
(#)
|
|
Value
Realized
on
Vesting
($)
|
|
|
Neil
Cole
|
|
|
-
|
|
$
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
David
Conn
|
|
|
50,000
50,000
|
|
$
$
|
1,020,280
1,014,895
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warren
Clamen
|
|
|
80,000
|
|
$
|
1,427,617
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Andrew
Tarshis
|
|
|
50,000
40,000
|
|
$
$
|
559,604
544,092
|
|
|
6,154
-
|
|
|
140,927
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deborah
Sorell Stehr
|
|
|
100,000
|
|
$
|
1,677,154
|
|
|
-
|
|
|
-
|
|
(a)
Included in this column is the aggregate dollar amount realized by the named
executive officer upon exercise of the options.
POTENTIAL
PAYMENTS UPON TERMINATION OR CHANGE IN CONTROL
As
noted
under “- Narrative to Summary Compensation Table-and Plan-Based Awards Table -
Employment Agreements”, we have entered into employment agreements with each of
our named executive officers. These agreements provide for certain payments
and
other benefits if a named executive officer’s employment with us is terminated
under circumstances specified in his or her respective agreement, including
a
“change in control” of the Company. A named executive officer’s rights upon the
termination of his or her employment will depend upon the circumstances of
the
termination.
The
receipt of the payments and benefits to the named executive officers under
their
employment agreements are generally conditioned upon their complying with
customary non-solicitation, non-competition, confidentiality, non-interference
and non-disparagement provisions. By the terms of such agreements, the
executives acknowledge that a breach of some or all of the covenants described
herein will entitle us to injunctive relief restraining the commission or
continuance of any such breach, in addition to any other available
remedies.
The
following table provides the term of such covenants following the termination
of
employment as it relates to each named executive officer:
|
Covenant
|
|
Neil
Cole
|
|
David
Conn
|
|
Warren
Clamen
|
|
Deborah
Sorell Stehr
|
|
Andrew
Tarshis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Confidentiality
|
|
Infinite
duration
|
|
Infinite
duration for trade secrets and two years otherwise
|
|
Infinite
duration
|
|
None
|
|
Infinite
duration
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-solicitation
|
|
Two
Years
|
|
Two
Years
|
|
None
|
|
None
|
|
One
Year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-competition
|
|
One
Year
|
|
Two
Years
|
|
None
|
|
None
|
|
One
Year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interference
|
|
Two
Years
|
|
Two
Years
|
|
None
|
|
None
|
|
One
Year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-disparagement
|
|
Five
years
|
|
None
|
|
None
|
|
None
|
|
None
|
Termination
Payments (without a change in control)
The
table
below includes a description and the amount of estimated payments and benefits
that would be provided by us (or our successor) to each of the named executive
officers under each employment agreement, assuming that a termination
circumstance occurred as of December 31, 2007 and a “change in control” had not
occurred:
|
|
|
|
|
Estimated
Amount of Termination Payment to:
|
|
Type
of Payment
|
|
Termination
Event
|
|
Neil
Cole
(1)
|
|
David
Conn
|
|
Warren
Clamen
|
|
Deborah
Sorell Stehr
|
|
Andrew
Tarshis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment
of accrued but unused vacation time
(2)
|
|
Termination
for Cause, death or disability
|
|
None
|
|
None
|
|
None
|
|
None
|
|
None
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lump
Sum Severance Payment
|
|
Termination
without Cause or by executive for Good Reason
|
|
$600,000
(3)
|
|
$114,167
|
|
$300,000
(4)
|
|
None
|
|
$517,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro
rata portion of Bonuses
|
|
Varies
|
|
None
|
|
None
|
|
None
|
|
None
|
|
None
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continued
coverage under medical, dental, hospitalization and life insurance
plans
|
|
Death,
termination without Cause, or termination by executive for Good
Reason
|
|
None
|
|
None
|
|
None
|
|
3
months
(5)
|
|
None
|
1
Upon Mr.
Cole's termination without cause by us or for good reason by Mr. Cole, we
are
obligated to pay Mr. Cole's indemnity payments and legal fees incurred by
him as
a result of his termination. Our possible range of payments is not determinable
at this time.
2
Vacation
time accrued but not taken for each executive was assumed to have been fully
used up at year-end 2007.
3
Payable
in monthly installments, not in a lump sum.
4
Only
payable upon termination by us without cause.
5
Three
months of continued health and medical benefits upon termination for Cause
or
upon death or disability.
Change
in Control Payments
The
prior
employment agreement with Mr. Cole provided that, if, within twelve months
of a “change in control,” his employment was terminated by us without “cause” or
he terminated his employment with us for “good reason,” as all such terms are
defined in his employment agreement, we were obligated to make a lump-sum
severance payment to Mr. Cole equal to $100 less than three times his
“annualized includable compensation for the base period” (as defined in
Section 280G of the Internal Revenue Code of 1986).
The
employment agreements with Ms. Sorell Stehr and Mr. Tarshis also provide
that, if, within twelve months of a “change in control,” their employment is
terminated by us without “cause” or they terminate their employment with us for
“good reason,” as all such terms are defined in each employment agreement, we
are obligated to make a lump-sum severance payment to each such named executive
officer equal to $100 less than three times the named executive officer’s
“annualized includable compensation for the base period” (as defined in
Section 280G of the Internal Revenue Code of 1986).
The
employment agreements (as amended) with Mr. Clamen and Mr. Conn also provide
that, if, within twelve months of a “change in control,” their employment is
terminated by us without “cause” as all such terms are defined in each
employment agreement, we are obligated to make a lump-sum severance payment
to
each such named executive officer equal to $100 less than three times the named
executive officer’s “annualized includable compensation for the base period” (as
defined in Section 280G of the Internal Revenue Code of 1986).
Under
the
circumstances described above, all of the named executive officers are entitled
to an accelerated vesting and payment of stock options and restricted stock
awards granted to that named executive officer. However, the sum of any lump
sum
payments, the value of any accelerated vesting of stock options and restricted
stock awards, and the value of any other benefits payable to the named executive
officer may not equal or exceed an amount that would constitute an “excess
parachute payment” (as defined in Section 280G of the Internal Revenue Code
of 1986).
The
following table quantifies the estimated maximum amount of payments and benefits
under our employment agreements and agreements relating to awards granted under
our equity incentive and stock option plans to which the named executive
officers would be entitled upon termination of employment if we terminated
their
employment without cause within twelve (12) months following a “change in
control” of our Company that (by assumption) occurred on December 31,
2007.
|
Name
|
|
|
Cash
Severance Payment
($)
(1)
|
|
|
Continuation
of Medical/Welfare Benefits
(Present
Value)
($)
|
|
|
Value
of Accelerated Vesting of Equity Awards
($)
(2)
|
|
|
Total
Termination Benefits
($)
|
|
|
Neil
Cole
|
|
|
5,134,829
|
|
|
-
|
|
|
-
|
|
|
5,134,829
|
|
|
David
Conn
|
|
|
2,258,626
|
|
|
-
|
|
|
12
|
|
|
2,258,638
|
|
|
Warren
Clamen
|
|
|
1,895,102
|
|
|
-
|
|
|
13,711
|
|
|
1,908,812
|
|
|
Andrew
Tarshis
|
|
|
1,711,749
|
|
|
-
|
|
|
14,951
|
|
|
1,726,700
|
|
|
Deborah
Sorell Stehr
|
|
|
1,170,877
|
|
|
-
|
|
|
46,993
|
|
|
1,217,869
|
|
|
(1)
|
Mr.
Clamen, Mr. Tarshis and Ms. Sorell Stehr may be entitled to additional
payments of $13,612, $14,852 and $46,894, respectively, to the extent
that
values of at least those amounts are ascribed to any post-termination
obligations set forth in their respective employment
agreements.
|
|
(2)
|
This
amount represents the unrealized value of the unvested portion of
the
respective
named
executive officer’s restricted stock based upon the closing price of
our
common stock on December 31, 2007.
|
|
(3)
|
Under
a prior non-competition and non-solicitation agreement, which terminated
in January 2008, Mr. Cole would have been entitled to a payment upon
the
sale of our Company equal to 5% of the sale price (in the event that
sale
price was at least $5.00 per share or the equivalent thereof with
respect
to an asset sale). Assuming that all of the common stock of our Company
had been purchased for the closing price as of December 31, 2007
($19.66
per share), Mr. Cole would have been entitled to a payment of $56,278,716
based upon our Company having approximately 57,252,000 shares outstanding
as of December 31, 2007.
|
2008
Compensation Changes- New Employment Agreement with our Chief Executive
Officer
On
January 28, 2008, we entered into a new, five-year (subject to a one-year
extension) employment agreement (the “new employment agreement”), effective as
of January 1, 2008, with Neil Cole, chairman of the board, president and chief
executive officer, which replaces his prior employment agreement that expired
on
December 31, 2007. The new employment agreement also supersedes and terminates
the prior non-competition and non-solicitation agreement between us and Mr.
Cole, which, among other things, provided for him to receive 5% of the sale
price upon a sale of our Company under certain circumstances.
Consistent
with our philosophy on executive compensation, Mr. Cole‘s new employment
agreement reflects a substantial portion of his compensation in the form of
long-term equity incentives, including performance stock incentives that vest
upon the achievement of specific metrics defined in the agreement, particularly,
growth in EBITDA, market capitalization and stock price as measured by targets
to be established and certified by the compensation committee.
As
described above, in connection with the negotiation of the new employment
agreement with Mr. Cole, the compensation committee retained Reda &
Associates, as its outside compensation consulting firm to provide advice.
In
assisting the compensation committee, Reda & Associates performed market
research as to compensation levels in similarly capitalized companies in the
industry, as well as companies that had achieved similar growth. Reda &
Associates also familiarized itself with the circumstances surrounding Mr.
Cole’s expiring contract and separate non-competition and non-solicitation
agreement, which provided Mr. Cole with 5% of the proceeds upon a sale
of the Company under certain circumstances. As various aspects of our
business, operations and management are unique, the compensation committee
utilized the Reda & Associates research as one resource, rather than a
stand-alone tool, in assessing the appropriate level of compensation and other
terms under Mr. Cole’s new employment agreement.
Under
his
new employment agreement, Mr. Cole is entitled to an annual base salary of
$1,000,000 and received a signing bonus of $500,000, which is repayable in
full
or on a pro rata basis under certain circumstances.
Pursuant
to the terms of the new employment agreement, on February 19, 2008, Mr. Cole
also was granted time-vested restricted common stock units with a fair market
value (as defined in the new employment agreement) of $24,000,000 (1,181,684
units) and 571,150 performance-based restricted common stock units with a fair
market value (as defined in the new employment agreement) on that date of
approximately $11,600,000. The restricted stock units will vest in five
substantially equal annual installments commencing on December 31, 2008, subject
to Mr. Cole’s continuous employment with us on the applicable vesting date, and
the performance stock units will be subject to vesting based on our achievement
of certain designated performance goals. Both grants are subject to forfeiture
upon the termination of Mr. Cole’s employment under certain circumstances. In
addition, Mr. Cole’s ability to sell or otherwise transfer the common stock
underlying the restricted stock units and the performance stock units while
he
is employed by us is subject to certain restrictions. The grant of 216,639
additional performance stock units and the common stock issuable thereunder
is
subject to stockholder approval of either an increase in the number of shares
of
common stock available for issuance under our 2006 Equity Incentive Plan or
another incentive plan that would cover such grants. Mr. Cole will also be
entitled to various benefits, including benefits available to our other senior
executives and certain automobile, air travel and life insurance benefits.
In
addition to his salary and benefits, Mr. Cole is eligible to receive an annual
cash bonus for each completed calendar year provided we establish (subject
to
shareholder approval) an incentive bonus plan intended to satisfy the
requirements of Section 162(m) of the Internal Revenue Code of 1986, as amended,
including as a performance goal thereunder the targets specified in the
employment agreement. The bonus shall be a percentage of the base salary
determined based on the level of our consolidated earnings before interest,
taxes, depreciation and amortization of fixed assets and intangible assets
achieved for such year against a target level established for such year by
the
compensation committee of the Board, in its sole discretion, but with prior
consultation with Mr. Cole, as follows:
|
Annual
Level of Targeted EBITDA Achieved
|
%
of Base Salary
|
|
|
|
|
less
than 80%
|
0%
|
|
80%
(threshold)
|
50%
|
|
90%
|
75%
|
|
100%
(target)
|
100%
|
|
105%
|
110%
|
|
110%
|
122.50%
|
|
115%
|
135%
|
|
120%
or more (maximum)
|
150%
|
Mr.
Cole’s annual bonus, if earned, will be paid in a lump sum cash payment in the
calendar year following the calendar year for which it is earned.
Under
Mr.
Cole’s new employment agreement, if we terminate Mr. Cole’s employment for
“cause” or by Mr. Cole without “good reason”, he will receive his earned and/or
accrued and unpaid compensation, other than any bonus compensation, then due
to
him and shares of common stock in respect of any of his already vested
restricted stock. If we terminate Mr. Cole’s employment without cause or by
him for good reason, he will receive, in addition to the foregoing, an amount
equal to two times his base salary then in effect plus any previously earned
but
unpaid annual bonus for a prior fiscal year and a pro-rata annual bonus for
the
year of termination, and, if such termination or resignation occurs prior to
January 1, 2011, two times the average of the annual bonus amounts he received
for the two prior completed fiscal years. In addition, that portion of his
performance stock units subject to vesting in the year of termination based
on
performance goals achieved as of the date of termination, and 75% of his
unvested restricted stock units, will vest. If his employment is terminated
by
us without cause or by him for good reason within 12 months of a change in
control, the amount of his base salary-related payment will increase to three
times, instead of two times, his base salary then in effect and that portion
of
his performance stock units that would vest in the year of termination or in
the
future based on performance goals achieved as of the date of the change of
control, and all of his unvested restricted stock units, will vest, and if
such
change in control occurs prior to January 1, 2011, he will also receive three
times the average of the annual bonus amounts he received for the three prior
completed fiscal years.
If
Mr. Cole’s employment terminates as a result of his disability or death, he
or his estate will be entitled to any previously earned and unpaid compensation
then due to him. In addition, certain of his restricted stock will vest.
The
new
employment agreement with Mr. Cole also contains certain non-competition and
non-solicitation covenants restricting such activities for periods equal to
the
term of the agreement and any renewal period plus one and two years,
respectively, after the agreement is terminated for any reason.
DIRECTOR
COMPENSATION
Effective
May 1, 2007, the compensation committee determined that for each full year
of
service as a director of our company, each non-employee member of the Board
would receive a cash payment of $40,000, payable 50% on or about each January
1
and 50% on or about each July 1, and 4,000 restricted shares of common stock
vesting 100% on July 1 of each year. In addition, the compensation
committee determined that the audit committee chair would receive an annual
stipend of $15,000, and the chairs of the compensation committee and nominating
and governance committee would recieve an annual stipend of $10,000, each
payable each July 1. Since these resolutions went into effect on May 1, 2007,
for the year ended December 31, 2007, the compensation committee determined
that
the cash payments and number of restricted shares issued be pro-rated and be
paid upon and vest, respectively, on November 1, 2007.
The
following table sets forth compensation information for 2007 for each member
of
our Board of Directors who is not also an executive officer. Our executive
officers do not receive additional compensation for serving on the board. See
Summary Compensation Table and Grants of Plan-Based Awards Table for disclosures
related to our chairman of the board, president and chief executive officer,
Neil Cole.
|
Name
|
|
|
Fees
Earned or Paid in Cash
($)
|
|
|
Stock
Awards
($)
(1)
|
|
|
Option
Awards
($)
|
|
|
Non-Equity
Incentive Plan Compensation
($)
|
|
|
Change
in Pension Value and Nonqualified Deferred Compensation
Earnings
|
|
|
All
Other Compensation
($)
|
|
|
Total
($)
|
|
|
Barry
Emanuel
|
|
$
|
38,133
|
|
$
|
51,885
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
$
|
90,018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Steven
Mendelow
|
|
$
|
54,633
|
|
$
|
51,885
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
$
|
106,548
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Drew
Cohen
|
|
$
|
49,633
|
|
$
|
51,885
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
$
|
101,518
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F.
Peter Cuneo
|
|
$
|
39,633
|
|
$
|
197,722
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
$
|
237,355
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mark
Friedman
|
|
$
|
48,133
|
|
$
|
197,722
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
$
|
245,855
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
James
A. Marcum
|
|
$
|
9,205
|
|
$
|
13,889
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
$
|
23,094
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Represents
the dollar amount recognized by us for
financial statement purchases for fiscal 2007 in accordance with FAS
123R.
|
Item
12.
Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
The
following table presents information regarding beneficial ownership of our
common stock as of February 26, 2008 by each of our directors, each of our
“named executive officers,” all of our executive officers and directors, as a
group, and each person known by us to beneficially hold five percent or more
of
our common stock, based on information obtained from such persons.
Unless
indicated below, to our knowledge, the persons and entities named in the table
have sole voting and sole investment power with respect to all securities
beneficially owned, subject to community property laws where applicable. The
shares “beneficially owned” by a person are determined in accordance with the
definition of “beneficial ownership” set forth in the regulations of the SEC
and, accordingly, shares of our common stock subject to options, warrants or
other convertible securities that are exercisable or convertible within 60
days
as of February 26, 2008 are deemed to be beneficially owned by the person
holding such securities and to be outstanding for purposes of determining such
holder's percentage ownership. The same securities may be beneficially owned
by
more than one person. Shares of common stock subject to options, warrants,
restricted stock units, restricted stock awards or convertible securities that
are not exercisable or do not vest within 60 days from February 26, 2008 are
not
included in the table below as shares “beneficially owned”.
Percentage
ownership of our common stock is based on the 57,391,675 shares of common stock
outstanding as of February 26, 2008. The address for each beneficial owner,
unless otherwise noted, is c/o Iconix Brand Group, Inc. at 1450 Broadway, New
York, New York 10018.
BENEFICIAL
OWNERSHIP TABLE
|
Name
of Beneficial Owner
|
|
|
Amount
and Nature of
Beneficial
Ownership
|
|
|
Percent
of Class
|
|
|
|
|
|
|
|
|
|
|
|
Neil
Cole
|
|
|
3,516,075
|
(1)
|
|
5.8
|
%
|
|
David
Conn
|
|
|
227,401
|
(2)
|
|
*
|
|
|
Warren
Clamen
|
|
|
115,354
|
(3)
|
|
*
|
|
|
Andrew
Tarshis
|
|
|
12,699
|
(4)
|
|
*
|
|
|
Deborah
Sorell Stehr
|
|
|
129,717
|
(5)
|
|
*
|
|
|
Barry
Emanuel
|
|
|
247,853
|
(6)
|
|
*
|
|
|
Steven
Mendelow
|
|
|
292,688
|
(7)
|
|
*
|
|
|
Drew
Cohen
|
|
|
108,382
|
(8)
|
|
*
|
|
|
F.
Peter Cuneo
|
|
|
60,000
|
|
|
*
|
|
|
Mark
Friedman
|
|
|
22,364
|
|
|
*
|
|
|
James
A. Marcum
|
|
|
14,544
|
|
|
|
|
|
Fred
Alger Management, Inc.
Alger
Associates, Inc.
111
Fifth Avenue
New
York, New York 10003
|
|
|
5,247,000
|
(9)
|
|
9.1
|
%
|
|
Baron
Capital Group, Inc.
767
Fifth Avenue
New
York, NY 10153
|
|
|
3,250,000
|
(10)
|
|
5.7
|
%
|
|
|
|
|
|
|
|
|
|
|
All
directors and executive officers as a group (11 persons)
|
|
|
4,747,077
|
(11)
|
|
7.7
|
%
|
|
*
|
|
Less
than 1%
|
|
|
|
|
|
1)
|
|
Includes
3,485,875 shares of common stock issuable upon exercise of options
and
20,000 shares of common stock owned by Mr. Cole’s children. Does not
include shares held in Mr. Cole’s account under our 401(k) savings plan
over which he has no current voting or investment
power.
|
|
|
|
|
|
(2)
|
|
Includes
225,000 shares of common stock issuable upon exercise of
options.
|
|
|
|
|
|
(3)
|
|
Includes
110,000 shares of common stock issuable upon exercise of options.
|
|
|
|
|
|
(4)
|
|
Includes
10,000 shares of common stock issuable upon exercise of options.
|
|
|
|
|
|
(5)
|
|
Includes
125,000 shares of common stock issuable upon exercise of options.
Does not
include shares held in Ms. Sorell Stehr’s account under our 401(k) savings
plan over which she has no current voting or investment
power.
|
|
|
|
|
|
(6)
|
|
Includes
241,173 shares of common stock issuable upon exercise of
options.
|
|
|
|
|
|
(7)
|
|
Includes
200,250 shares of common stock issuable upon exercise of options
and
60,750 shares of common stock owned by C&P Associates, with which Mr.
Mendelow and his wife are affiliated and over whose securities they
exercise shared voting and investment control.
|
|
|
|
|
|
(8)
|
|
Includes
95,000 shares of common stock issuable upon exercise of
options.
|
|
|
|
|
|
(9)
|
|
Based
on a Schedule 13G filed by Fred Alger Management, Inc. and Alger
Associates, Incorporated on January 15, 2008.
|
|
|
|
|
|
(10)
|
|
Baron
Capital Group, Inc. (“BCG”) is deemed to have beneficial ownership of
these shares, which are held by BCG or entities that it controls.
BCG
disclaims beneficial ownership of the shares held by its controlled
entities (or the investment advisory clients thereof) to the extent
that
persons other than BCG hold such shares. The information provided
is based
upon a Schedule 13G filed February 14, 2008, by BCG and its
affiliates: Bamco, Inc.; Baron Small Cap Fund; and Ronald
Baron.
|
|
|
|
|
|
(11)
|
|
Includes
4,492,298 shares of common stock issuable upon exercise of
options.
|
Equity
Compensation Plans
The
following table provides certain information with respect to all of our equity
compensation plans in effect as of December 31, 2007.
|
Plan
Category
|
|
Number
of securities to be
issued
upon exercise of
outstanding
options, warrants and rights
(a)
|
|
Weighted-average
exercise
price of
outstanding
options, warrants and rights
(b)
|
|
Number
of securities remaining
available
for issuance under
equity
compensation plans
(excluding
securities reflected in column (a))
(c)
|
|
|
|
|
|
|
|
|
|
|
|
Equity
compensation plans approved by security holders:
|
|
|
4,037,343
|
|
|
4.55
|
|
|
6,469,052
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
compensation plans not approved by security holders
(1)
:
|
|
|
1,336,100
|
|
|
5.92
|
|
|
25,000
(2
|
)
|
|
Total
|
|
|
5,373,443
|
|
|
4.34
|
|
|
6,494,052
|
|
|
(1)
|
Represents
the aggregate number of shares of common stock issuable upon exercise
of
individual arrangements with option and warrant holders, including
640,500
options issued under the terms of our 2001 Stock Option Plan. These
options and warrants are up to three years in duration, expire at
various
dates through December 28, 2015, contain anti-dilution provisions
providing for adjustments of the exercise price under certain
circumstances and have termination provisions similar to options
granted
under stockholder approved plans. See Note 1 of Notes to Consolidated
Financial Statements for a description of our Stock Option
Plans.
|
|
|
|
|
(2)
|
Represents
shares eligible for issuance upon the exercise of options that may
be
granted under our 2001 Stock Option
Plan.
|
Item
13.
Certain
Relationships and Related Transactions, and Director
Independence
Pursuant
to its charter, our audit committee must review and approve, where appropriate,
all related party transactions.
On
May 1,
2003, we granted Kenneth Cole Productions, Inc. the exclusive worldwide
license to design, manufacture, sell, distribute and market footwear under
its
Bongo brand. The chief executive officer and chairman of Kenneth Cole
Productions is Kenneth Cole, who is the brother of Neil Cole, our Chief
Executive Officer and President. During fiscal 2007 and fiscal 2006, we received
$0.7 million and $1.4 million in royalties from Kenneth Cole Productions,
respectively
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 us $434,000 December 31, 2007. The Candie's Foundation will
pay-off the entire borrowing from us in 2008 although additional advances will
be made as and when necessary. Mr. Cole's wife, Elizabeth Cole, performs
services for the foundation but without compensation.
Director
Independence
Board
of Directors
Our
Board
of Directors has determined that Barry Emanuel, Steven Mendelow, Drew Cohen,
F.
Peter Cuneo, Mark Friedman, and James A. Marcum meet the definition of
"independent directors" as defined under the standards of independence set
forth
in the Marketplace Rules of the NASDAQ Stock Market.
Item
14. Principal Accounting Fees and Services
Audit
Fees
.
The
aggregate fees billed by BDO Seidman, LLP for professional services rendered
for
the audit of the Company's annual financial statements for fiscal 2007 and
fiscal 2006, internal controls over financial reporting and the reviews of
the
financial statements included in the Company's Forms 10-Q, comfort letter and
consents related to SEC registration statements and other capital raising
activities for fiscal 2007 and fiscal 2006 totaled approximately
$1,023,000 and $990,000 respectively.
Audit-Related
Fees
.
There were approximately $189,000 and $105,000 aggregate fees billed by BDO
Seidman, LLP for assurance and related services that are reasonably related
to
the performance of the audit or review of the Company's financial statements
for
fiscal 2007 and fiscal 2006, respectively, and that are not disclosed in the
paragraph captions "Audit Fees" above. The majority of the audit-related fees
in
fiscal 2007 were related to the audits of the financial statements for Fiscal
2007 acquisitions, whereas the majority of the audit-related fees in Fiscal
2006
were related to the audit of the financial statements of IP Holdings and
Candie's Foundation.
Tax
Fees
.
The
aggregate fees billed by BDO Seidman, LLP for professional services rendered
for
tax compliance, for fiscal 2007 and fiscal 2006, were approximately $55,000,
and
$35,000, respectively. The aggregate fees billed by BDO Seidman, LLP for
professional services rendered for tax advice and tax planning, for fiscal
2007
and fiscal 2006, were $0 and $0, respectively.
All
Other Fees
.
There
were no fees billed by BDO Seidman, LLP for products and services, other than
the services described in the paragraphs captions "Audit Fees", "Audit-Related
Fees", and "Tax Fees" above for fiscal 2007 and fiscal 2006.
The
Audit
Committee has established its pre-approval policies and procedures, pursuant
to
which the Audit Committee approved the foregoing audit services provided by
BDO
Seidman, LLP in fiscal 2007. Consistent with the Audit Committee's
responsibility for engaging the Company's independent auditors, all audit and
permitted non-audit services require pre-approval by the Audit Committee. The
full Audit Committee approves proposed services and fee estimates for these
services. The Audit Committee chairperson or their designee has been designated
by the Audit Committee to approve any services arising during the year that
were
not pre-approved by the Audit Committee. Services approved by the Audit
Committee chairperson are communicated to the full Audit Committee at its next
regular meeting and the Audit Committee reviews services and fees for the fiscal
year at each such meeting. Pursuant to these procedures, the Audit Committee
approved all the foregoing audit services and permissible non-audit services
provided by BDO Seidman, LLP.
Notes
to Consolidated Financial Statements
Information
as of and for the Years Ended December 31, 2007, 2006 and
2005
(dollars
are in thousands (unless otherwise noted), except per share
data)
The
Company
Iconix
Brand Group, Inc (the “Company”) is in the business of licensing and marketing
intellectual property. The Company currently owns sixteen brands, Candie's®,
Bongo®, Badgley Mischka®, Joe Boxer®, Rampage®, Mudd®, London Fog®, Mossimo®,
Ocean Pacific®, Danskin®, Rocawear®, Cannon®, Royal Velvet®, Fieldcrest®,
Charisma®, and Starter® which it licenses to third parties for use in connection
with a variety of apparel, fashion accessories, footwear, beauty and fragrance,
and home products and decor. In addition, the Artful Dodger™ brand is owned by
Scion LLC, a joint venture in which the Company has a 50% investment (see Note
5). Furthermore, the Company also arranges through its wholly-owned subsidiary
Bright Star Footwear, Inc. ("Bright Star") for the manufacture of footwear
products for mass market and discount retailers under the private label brand
of
the retailer.
The
Company's business strategy, as a licensing and marketing company, is to
maximize the value of its intellectual property by entering into strategic
licenses with partners who have been selected based upon the Company's belief
that they will be able to produce and sell quality products in the categories
of
their specific expertise. This licensing strategy is designed to permit the
Company to operate its licensing business with minimal working capital, no
inventory, production or distribution costs or risks, and utilizing only a
small
group of core employees.
1.
Summary of Significant Accounting Policies
Principles
of consolidation
The
consolidated financial statements include the accounts of the Company, its
wholly owned subsidiaries, and, in accordance with FIN 46, “Consolidation of
Variable Interest Entities- revised” (“FIN 46R”), the Company consolidates a
joint venture in which it is the primary beneficiary. All significant
intercompany transactions and balances have been eliminated in
consolidation.
Business
Combinations
The
purchase method of accounting requires that the total purchase price of an
acquisition be allocated to the assets acquired and liabilities assumed based
on
their fair values on the date of the business acquisition. The results of
operations from the acquired businesses are included in the accompanying
consolidated statements of income from the acquisition date. Any excess of
the
purchase price over the estimated fair values of the net assets acquired is
recorded as goodwill.
For
the
period January 1, 2005 through December 31, 2007, the Company completed ten
acquisitions. Notes 2, 3, 4, and 6 to the financial statements contain a more
comprehensive discussion of the Company's acquisitions. The acquisitions and
the
acquisition dates are as follows:
|
Acquisitions
|
|
Acquisition
date
|
|
|
|
|
|
Joe
Boxer
|
|
July
22, 2005
|
|
Rampage
|
|
September
16, 2005
|
|
Mudd
|
|
April
11, 2006
|
|
London
Fog Trademark
|
|
August
28, 2006
|
|
Mossimo
|
|
October
31, 2006
|
|
Ocean
Pacific
|
|
November
6, 2006
|
|
Danskin
|
|
March
10, 2007
|
|
Rocawear
|
|
March
30, 2007
|
|
Pillowtex
brands (Cannon, Royal Velvet, Fieldcrest, and Charisma)
|
|
October
3, 2007
|
|
Starter
|
|
December
17, 2007
|
In
addition, on November 7, 2007, Scion LLC, a joint venture in which the Company
has a 50% investment, acquired the Artful Dodger brand. See Note 5.
Use
of Estimates
The
preparation of the consolidated financial statements in conformity with
accounting principles generally accepted in the United States 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. The Company reviews all significant
estimates affecting the financial statements on a recurring basis and records
the effect of any adjustments when necessary.
Effective
July 1, 2005 the Company had a change in estimate of the useful lives of both
the Candie's and Bongo trademarks to indefinite life. See
Goodwill and Other Intangibles
below.
Cash
Cash
consists of short-term, highly liquid financial instruments with insignificant
interest rate risk that are readily convertible to cash and have maturities
of
six months or less from the date of purchase.
Marketable
Securities
Marketable
securities, which are accounted for as available-for-sale, are stated at fair
value in accordance with Statement of Financial Accounting Standards No. 115,
“Accounting for Certain Investments in Debt and Equity Securities,” and consist
of 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 the Company’s statement of operations.
As
of
December 31, 2007, the Company held $10.9 million in marketable securities.
Although these auction rate securities continue to pay interest according to
their stated terms, based on a third-party valuation of these specific auction
rate securities as of December 31, 2007, the Company recorded an unrealized
pre-tax loss of $2.1 million in other comprehensive loss as a reduction to
shareholders’ equity to reflect a temporary decline in value reflecting a failed
auction due to sell orders exceeding buy orders. The Company believes the
decrease in fair value is temporary due to general macroeconomic market
conditions, as the underlying securities have maintained their investment grade
rating. These funds will not be available to us until a successful auction
occurs or a buyer is found outside the auction process. As these instruments
have failed to auction and may not auction successfully in the near future,
the
Company has classified its marketable securities as non-current.
There
were no such investments as of December 31, 2006.
In
November and December 2005, the Company invested $0.7 million in equity
securities of certain public companies that are categorized as available for
sale. In December 2005, the Company sold certain of these shares and
approximately $0.1 million was recorded as realized gain in fiscal 2006. The
aggregate fair value of these investments approximates their respective carrying
value. In October 2006, the Company completed the acquisition of Mossimo, Inc.,
and the Company held shares in Mossimo, Inc. were included as part of the equity
consideration.
Concentration
of Credit Risk
Financial
instruments which potentially subject the Company to concentration of credit
risk consist principally of temporary cash investments and accounts receivable.
The Company places its cash and cash equivalents in investment-grade, short-term
debt instruments with high quality financial institutions. The Company performs
ongoing credit evaluations of its customers' financial condition and, generally,
require no collateral from our customers. The allowance for non-collection
of
accounts receivable is based upon the expected collectability of all accounts
receivable.
For
the
year ended December 31, 2007 (“fiscal 2007”), one licensee accounted for 14% of
the Company’s revenue, compared to two licensees which accounted for 24% and 14%
of the Company's revenue, respectively for the year ended December 31, 2006
(“fiscal 2006”), compared to two licensees which accounted for 28% and 15% of
the Company’s revenue for the year ended December 31, 2005 (“fiscal
2005”).
Accounts
Receivable
Accounts
receivable are reported at amounts the Company expects to be collected, net
of
allowance for non-collection from customers.
Derivatives
The
Company’s primary objective for holding derivative financial instruments is to
manage interest rates risks. The Company does not use financial instruments
for
trading or other speculative purposes. The Company uses derivative financial
instruments to hedge the variability of anticipated cash flows of a forecasted
transaction (a “cash flow hedge”). The Company’s strategy related to derivative
financial instruments has been to
use interest
rate swaps to effectively convert a portion of outstanding variable-rate debt
to
fixed-rate debt to take advantage of lower interest rates.
The
derivatives used by the Company as part of its risk management strategies are
highly effective hedges because all the critical terms of the derivative
instruments match those of the hedged item. On the date the derivative contract
is entered into, the Company designates the derivative as a cash flow hedge.
Changes in derivative fair values are deferred and recorded as a component
of
accumulated other comprehensive income until the associated hedged transactions
impact the income statement, at which time the deferred gains and losses are
reclassified to interest expense. Any ineffective portion of a hedging
derivative’s changes in fair value will be immediately recognized. The fair
values of the derivatives, which are based on quoted market prices, are reported
as other assets.
Restricted
Stock
Compensation
cost for restricted stock is measured using the quoted market price of the
Company’s stock at the date the common stock is issued. The compensation cost is
recognized over the period between the issue date and the date any restrictions
lapse.
Deferred
Financing Costs
The
Company incurred costs (primarily professional fees and placement agent fees)
in
connection with borrowings under a term loan facility, convertible bond
offering, and other bond financings. These costs have been deferred and are
being amortized using the interest method over the life of the related
debt.
Property,
Equipment and Depreciation
Property
and equipment are stated at cost less accumulated depreciation and amortization.
Depreciation and amortization are determined by the straight line method over
the estimated useful lives of the respective assets ranging from three to seven
years. Leasehold improvements are amortized by the straight-line method over
the
initial term of the related lease or estimated useful life, whichever is
less.
Impairment
of Long-Lived Assets
When
circumstances mandate, the Company evaluates the recoverability of its
long-lived assets, other than goodwill and other indefinite life intangibles
(discussed below), by comparing estimated future undiscounted cash flows with
the assets' carrying value to determine whether a write-down to market value,
based on discounted cash flow, is necessary.
Goodwill
and Other Intangibles
Goodwill
represents the excess of purchase price over the fair value of net assets
acquired in business combinations accounted for under the purchase method of
accounting. The Company tests at least annually our goodwill and indefinite
life
trademarks for impairment through the use of discounted cash flow models. Other
intangibles with determinable lives, including license agreements and
non-compete agreements, are amortized on a straight-line basis over the
estimated useful lives of the assets (currently ranging from 1.5 to 10 years).
The
changes in the carrying amount of goodwill for the years ended December 31,
2007
and 2006 are as follows:
|
(000’s
omitted)
|
|
|
Year
Ended
December
31,
2007
|
|
|
Year
Ended
December
31,
2006
|
|
|
Beginning
Balance
|
|
$
|
93,593
|
|
$
|
32,835
|
|
|
Acquisitions
|
|
|
30,785
|
|
|
60,758
|
|
|
Net
adjustments to purchase price of prior period acquisitions
|
|
|
4,520
|
|
|
-
|
|
|
Ending
Balance
|
|
$
|
128,898
|
|
$
|
93,593
|
|
Goodwill
was initially tested in the first quarter of Fiscal 2003 for impairment upon
adoption of SFAS No. 142. There have been no impairments to the carrying amount
of goodwill in any period. In fiscal 2005, due to the change in the business
model, the Company operates as a single integrated business, and as such has
one
operating segment which is also used as the reporting unit for purposes of
evaluating goodwill impairment. The fair value of the reporting unit is
determined using discounted cash flow analysis and estimates of sales proceeds.
The annual evaluation of goodwill is performed on October 1, the beginning
of
the Company's fourth fiscal quarter.
The
Candie's and Bongo trademarks had previously been amortized on a straight-line
basis over their estimated useful lives of approximately 20 years. Effective
July 1, 2005, the Company changed for accounting purposes, the estimated useful
lives of the Candie's and Bongo trademarks to be an indefinite life. Accordingly
the recorded value of these trademarks will no longer be amortized, but instead
will be tested for impairment on an annual basis. In arriving at the conclusion
to use an indefinite life management considered among other things, the
Company's new licensing business model which has expanded the extent of
potential use of these brand names in future years. This has been initially
evidenced by the Candie’s licensing contract signed with Kohl's Department
Stores (“Kohl's”) in late 2004, which has very rapidly expanded the Candie’s
name to over 18 product categories in almost 700 Kohl's retail locations.
Further the Candie's brand has been present in the US market since 1970s.
Similarly, the Bongo brand has expanded from a predominantly jeanswear brand
to
a broad variety of product groups and multiple licenses in the U.S. and
internationally. Brand recognition for both of these brands is very high, has
been generally stable for an extended period of time, and the Company expects
this consumer recognition and acceptance to remain stable or grow in the future
based on anticipated broader distribution and product line expansion. As of
December 31, 2007 the net book value of the Candie's and Bongo trademarks
totaled $14.4 million.
Revenue
Recognition
The
Company has entered into various trade name 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.
Bright
Star acts as an agent and therefore only net commission revenue is recognized.
Revenue is recognized upon shipment with related risk and title passing to
the
customers.
Taxes
on Income
The
Company uses the asset and liability approach of accounting for income taxes
and
provides deferred income taxes for temporary differences that will result in
taxable or deductible amounts in future years based on the reporting of certain
costs in different periods for financial statement and income tax purposes.
Valuation allowances are recorded when uncertainty regarding their realizability
exists.
The
Company adopted FIN 48 beginning January 1, 2007. The implementation of FIN
48
did not have a significant impact on the Company’s financial position or results
of operations. At December 31, 2007, the total unrecognized tax benefit was
$1.1
million. However, the liability is not recognized for accounting purposes
because the related deferred tax asset has been fully reserved in prior years.
The Company is continuing its 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 year ended
December 31, 2007. The Company files federal and state tax returns and is
generally no longer subject to tax examinations for fiscal years prior to
2003.
|
(000’s
omitted)
|
|
|
|
|
Uncertain
tax positions at December 31, 2006
|
|
$
|
780
|
|
|
Increases
during 2007
|
|
|
320
|
|
|
Decreases
during 2007
|
|
|
-
|
|
|
Uncertain
tax positions at December 31, 2007
|
|
$
|
1,100
|
|
Stock-Based
Compensation
Pursuant
to a provision in SFAS No. 123(R), "Accounting for Stock-Based Compensation",
prior to 2006, the Company had elected to continue using the intrinsic-value
method of accounting for stock options granted to employees in accordance with
Accounting Principles Board Opinion 25, "Accounting for Stock Issued to
Employees." Accordingly, the compensation cost for stock options had been
measured as the excess, if any, of the quoted market price of the Company's
stock at the date of the grant over the amount the employee must pay to acquire
the stock. Under this approach, the Company only recognized compensation expense
for stock-based awards to employees for options granted at below-market prices,
with the expense recognized over the vesting period of the options.
In
December 2005, the Company's Board of Directors approved the accelerated vesting
of all employee stock options previously granted under the Company's various
non-qualified stock option plans, which would have been unvested as of December
31, 2005. As a result, all options granted as of December 31, 2005, except
those
based on performance became exercisable immediately. The number of shares,
exercise prices and other terms of the options subject to the acceleration
remain unchanged. The acceleration of such option vesting resulted in an
additional $0.5 million of compensation expense being reflected in pro-forma
net
income for fiscal 2005 shown in the table below, an amount that would have
otherwise been recorded as compensation expense in the years ending December
31,
2006 and 2007 had no impact on compensation recognition in 2005. The purpose
of
accelerating the vesting of these options was to enable to Company the avoid
recognizing stock based compensation expense associated with these options
in
future periods after the Company adopted SFAS No 123 (R).
The
stock-based employee compensation cost that would have been included in the
determination of net income if the fair value based method had been applied
to
all awards, as well as the resulting pro forma net income and earnings per
share
using the fair value approach, are presented in the following table. The pro
forma adjustments for compensation cost have not been offset by a related income
tax benefit, consistent with the manner in which the Company recorded its
provision for income taxes in Fiscal 2005. These pro forma amounts may not
be
representative of future disclosures since the estimated fair value of stock
options is amortized to expense over the vesting period, and additional options
may be granted in future years. The fair value for these options was estimated
at the date of grant using a Black-Scholes option-pricing model with the
weighted-average assumptions presented in Note 11.
|
(000’s
omitted, except per share information)
|
|
Year
ended December 31,
2005
|
|
|
Net
income - as reported
|
|
$
|
15,943
|
|
|
Add:
Stock-based employee Compensation included in reported net
income
|
|
|
-
|
|
|
Deduct:
Stock-based employee compensation determined under the fair value
based
method
|
|
|
(9,601
|
)
|
|
Pro
forma net income
|
|
$
|
6,342
|
|
|
|
|
|
|
|
|
Basic
earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
As
reported
|
|
$
|
0.51
|
|
|
Pro
forma
|
|
$
|
0.20
|
|
|
|
|
|
|
|
|
Diluted
earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
As
reported
|
|
$
|
0.46
|
|
|
Pro
forma
|
|
$
|
0.18
|
|
Fair
Value of Financial Instruments
The
carrying amounts reported in the consolidated balance sheets for cash and cash
equivalents, marketable securities, accounts receivable and accounts
payable approximate fair value because of the immediate or short-term maturity
of these financial instruments. The carrying amount reported for long-term
debt
approximates fair value because, in general, the interest on the underlying
instruments fluctuates with market rates. In instances where long-term debt
carries fixed interest rates, the obligation is recorded at the present value
of
the future payments, which approximates fair value.
Earnings
Per Share
Basic
earnings per share includes no dilution and is computed by dividing net income
available to common shareholders by the weighted average number of common shares
outstanding for the period. Diluted earnings per share reflect, in periods
in
which they have a dilutive effect, the effect of common shares issuable upon
exercise of stock options, warrants and restricted stock. The difference between
reported basic and diluted weighted-average common shares results from the
assumption that all dilutive stock options, warrants, and restricted stock
outstanding were exercised into common stock.
Advertising
Campaign Costs
All
costs
associated with production for the Company’s national advertising campaigns are
expensed during the periods when the activities take place. All other
advertising costs such as print and online media are expensed as incurred.
Advertising expenses for fiscal 2007, fiscal 2006, and fiscal 2005 amounted
to
$14.5 million $7.9 million, and $2.9 million, respectively.
New
Accounting Standards
In
September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements," which
establishes a framework for measuring fair value in generally accepted
accounting principles and expands disclosures about fair value measurements.
SFAS No. 157 defines fair value as the price that would be received to sell
an
asset or paid to transfer a liability in an orderly transaction between market
participants at the measurement date. SFAS No. 157 is effective for financial
statements issued for fiscal years beginning after November 15, 2007, and
interim periods within those fiscal years. Management is evaluating the impact
adopting SFAS 157 will have on the Company’s results of operations and financial
position.
In
February 2007, the FASB issued SFAS 159, “The Fair Value Option for Financial
Asset and Financial Liability: Including an amendment to FASB Statement No.
115”
(“SFAS 159”). The standard permits all entities to elect to measure certain
financial instruments and other items at fair value with changes in fair value
reported in earnings. SFAS 159 is effective as of the beginning of the first
fiscal year that begins after November 15, 2007. Management is evaluating the
impact adopting SFAS 159 will have on the Company’s results of operations and
financial position.
In
December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business
Combinations” (“SFAS 141R”), which requires an acquirer to do the following:
expense acquisition related costs as incurred; to record contingent
consideration at fair value at the acquisition date with subsequent changes
in
fair value to be recognized in the income statement; and any adjustments to
the
purchase price allocation are to be recognized as a period cost in the income
statement. SFAS 141R applies prospectively to business combinations for which
the acquisition date is on or after beginning of the first annual reporting
period beginning on or after December 15, 2008. Earlier application is
prohibited. At the date of adoption, SFAS 141R is expected to have a material
impact on our results of operations and our financial position due to the
Company’s acquisition strategy.
In
December, 2007, the FASB issued Statement No. 160, “Noncontrolling Interests in
Consolidated Financial Statements—an amendment of ARB No. 51 .” This statement
establishes accounting and reporting standards for the noncontrolling interest
in a subsidiary and for the deconsolidation of a subsidiary. This statement
is
effective prospectively, except for certain retrospective disclosure
requirements, for fiscal years beginning after December 15, 2008. Management
is
evaluating the impact adopting SFAS 160 will have on the Company’s results of
operations and financial position.
Presentation
of Prior Year Data
Certain
reclassifications have been made to conform prior year data to the current
presentation.
2. Acquisition
Of Danskin
On
March
9, 2007, the Company completed its acquisition of the Danskin trademarks from
Danskin, Inc. and Danskin Now, Inc. Danskin is a 125 year-old iconic brand
of
women's activewear, legwear, dancewear, yoga apparel and fitness equipment.
The
brand is sold through better department, specialty and sporting goods stores,
and directly by Triumph Apparel Corporation (formerly known as Danskin, Inc.)
(“Triumph”) through freestanding Danskin boutiques and Danskin.com. In
connection with the acquisition, the Company acquired Danskin Now, Inc.'s
license of the Danskin Now® brand of apparel and fitness equipment to Wal-Mart
Stores.
The
purchase price for the acquisition was $70 million in cash and contingent
additional consideration of up to $15 million based on certain criteria relating
to the achievement of revenue and performance targets through 2011 involving
the
licensing of the Danskin brand, all or a portion of which contingent
consideration, if earned, may be paid in shares of the Company's common
stock. The effect of this contingent additional consideration will, if criteria
is met, be recognized as an increase to goodwill. The cash portion of the
purchase price was self-funded from the Company's cash reserves. Upon closing,
a
subsidiary of the Company entered into a license agreement with Triumph granting
Triumph the right to continue to operate its wholesale business and freestanding
retail stores under the Danskin marks acquired by the Company in the
acquisition.
|
(000's
omitted except share and warrant
information)
|
|
|
|
|
|
|
Cash
paid at closing to sellers
|
|
|
|
|
$
|
70,000
|
|
|
Fair
value of 12,500 shares of $.001 par value common stock, at $19.33
fair
market value per share issued as a cost of the
acquisition
|
|
$
|
241
|
|
|
|
|
|
Fair
value of 30,000 warrants ($20.18 exercise price) issued as a cost
of the
acquisition
|
|
|
284
|
|
|
|
|
|
Fair
value of 133,334 warrants ($8.81 exercise price) issued as a cost
of the
acquisition
|
|
|
1,976
|
|
|
|
|
|
Total
equity consideration
|
|
|
|
|
|
2,501
|
|
|
Other
costs of the acquisition
|
|
|
|
|
|
1,782
|
|
|
Total
|
|
|
|
|
$
|
74,283
|
|
The
purchase price was allocated to the estimated fair value of the assets acquired
as follows:
(000's
omitted)
|
Trademarks
|
|
$
|
71,700
|
|
|
License
agreements
|
|
|
1,700
|
|
|
Goodwill
|
|
|
883
|
|
|
Total
allocated purchase price
|
|
$
|
74,283
|
|
The
Danskin trademark has been determined by management to have an indefinite useful
life and accordingly, consistent with SFAS 142, no amortization is being
recorded in the Company's consolidated income statements. The licensing
contracts are being amortized on a straight-line basis over the remaining
contractual period of approximately 3 to 5 years. The goodwill 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 goodwill. The $0.9 million of goodwill is deductible
for
income tax purposes.
For
unaudited pro-forma information presenting a summary of the Company's
consolidated results of operations as if the acquisition and related financing
had occurred on January 1, 2006, see Note 6.
3. Acquisition
Of Rocawear
On
March
30, 2007, the Company completed its acquisition of the Rocawear brand and
certain of the assets and rights related to the business of designing,
marketing, licensing and/or managing the Rocawear brand from Rocawear Licensing
LLC (“RLC”).
The
purchase price for the acquisition was $204 million in cash with contingent
additional consideration of up to $35 million based on certain criteria relating
to the achievement of revenue and performance targets through 2012 involving
the
licensing of the Rocawear assets, all of which contingent consideration, if
earned, is to be paid in shares of the Company's common stock. The effect of
this contingent additional consideration will, if criteria is met, be recognized
as an increase to goodwill. The cash portion of the purchase price was funded
pursuant to the Company's credit agreement with Lehman Brothers Inc. and Lehman
Commercial Paper Inc., which consists of a term loan facility in an aggregate
principal amount of $212.5 million. For further details on this credit
agreement, see Note 8. Upon the closing, a subsidiary of the Company entered
into a license agreement, expiring in March 2012, with Roc Apparel Group,
LLC (“Roc Apparel”), an affiliate of RLC, in which it granted Roc Apparel the
exclusive right to use the Rocawear assets in connection with the design,
manufacture, market and sale of menswear apparel products in the United States,
its territories and possessions and military installations throughout the world.
Further, upon closing, the Company committed an amount of $5.0 million to fund
its investment in Scion LLC, a joint venture formed by the Company with Shawn
Carter, a principal of RLC, which will operate as a brand management and
licensing company to identify brands to be acquired across a broad spectrum
of
consumer product categories. This investment was funded in November 2007. See
Note 5. During December 2007, the Company accrued $3.0 million, to be paid
in
shares to the sellers of Rocawear, as part of contingent consideration relating
to the achievement of certain revenue targets. This $3.0 million has been
recorded as additional goodwill and an increase in accrued liabilities, and
will
be credited to additional paid-in-capital once the shares are issued subsequent
to year end.
|
(000's
omitted except share and warrant
information)
|
|
|
|
|
|
|
Cash
paid at closing to sellers
|
|
|
|
|
$
|
204,000
|
|
|
Fair
value of 144,100 shares of $.001 par value common stock, at $20.81
fair
market value per share issued to be paid to sellers as part of contingent
consideration
|
|
|
3,000
|
|
|
|
|
|
Fair
value of 12,500 shares of $.001 par value common stock, at $20.40
fair
market value per share issued as a cost of acquisition
|
|
|
255
|
|
|
|
|
|
Fair
value of 55,000 warrants ($20.40 exercise price) issued as a cost
of the
acquisition
|
|
|
562
|
|
|
|
|
|
Fair
value of 133,334 warrants ($8.81 exercise price) issued as a cost
of the
acquisition
|
|
|
2,109
|
|
|
|
|
|
Total
equity consideration
|
|
|
|
|
|
5,926
|
|
|
Other
costs of the acquisition
|
|
|
|
|
|
3,208
|
|
|
Total
|
|
|
|
|
$
|
213,134
|
|
The
purchase price was allocated to the estimated fair value of the assets acquired
as follows:
|
(000's
omitted)
|
|
|
|
|
|
|
|
|
|
Trademarks
|
|
$
|
200,000
|
|
|
License
agreements
|
|
|
5,100
|
|
|
Non-compete
agreement
|
|
|
3,000
|
|
|
Goodwill
|
|
|
5,034
|
|
|
Total
allocated purchase price
|
|
$
|
213,134
|
|
The
Rocawear trademark has been determined by management to have an indefinite
useful life and accordingly, consistent with SFAS 142, no amortization is being
recorded in the Company's consolidated income statements. The license agreements
are being amortized on a straight-line basis over the remaining contractual
period of approximately 4 years. 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 goodwill. The $5.0 million of goodwill is deductible for income tax
purposes.
For
unaudited pro-forma information presenting a summary of the Company's
consolidated results of operations as if the acquisition and related financing
had occurred on January 1, 2006, see Note 6.
4. Acquisition
Of Pillowtex Brands
On
October 3, 2007, the Company completed its acquisition of all of the issued
and
outstanding limited liability company interests (the “Company Interests”) of
Official-Pillowtex LLC (“Official-Pillowtex” or “Pillowtex”), from the owners of
such Company Interests (the “Pillowtex Sellers”). Official Pillowtex is the
owner of a portfolio of home brands including four primary brands, Cannon,
Royal
Velvet, Fieldcrest and Charisma and numerous other home brands including St.
Mary's and Santa Cruz. The closing of this transaction occurred following the
early termination of the statutory waiting period required under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended.
The
purchase price for the acquisition was $232.1 million in cash with contingent
additional consideration of up to $15 million based on certain criteria relating
to the achievement of revenue and performance targets through June 30, 2009
involving the licensing of the Pillowtex assets, all of which contingent
consideration, if earned, is to be paid in cash. The effect of this contingent
additional consideration will, if criteria is met, be recognized as an increase
to goodwill.
In
accordance with the terms of the Purchase Agreement, on the Pillowtex closing
date, the Company paid an aggregate of approximately $232.1 million in cash
as
the purchase price for the Company Interests, of which approximately $9.0
million which was deposited into an escrow account, together with any interest
and any other income earned thereon, will be paid to the Pillowtex Sellers
by
the U.S. Bank National Association, an escrow agent, on the twelve (12) month
anniversary of the Pillowtex closing date, less any amounts due to the Company
pursuant to the Pillowtex Sellers' indemnification obligations to the
Company.
In
connection with the Company’s purchase of Official Pillowtex, the Company
pledged its membership interests in Official Pillowtex, as well as its
membership interests in another of the Company’s wholly-owned subsidiaries,
Mossimo Holdings LLC, to the lenders under the Company’s term loan facility (see
Note 8). These two subsidiaries also became guarantors of the Company’s
obligations under the term loan facility (see Note 8), and their guarantees
are
secured by a pledge of, among other things, the Official Pillowtex portfolio
of
brands and the Mossimo brand, respectively.
|
(000's
omitted except share and warrant
information)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
paid at closing to sellers
|
|
|
|
|
$
|
232,100
|
|
|
Fair
value of 12,500 shares of $.001 par value common stock, at $23.66
fair
market value per share issued as a cost of acquisition
|
|
|
296
|
|
|
|
|
|
Fair
value of 55,000 warrants ($23.66 exercise price) issued as a cost
of the
acquisition
|
|
|
651
|
|
|
|
|
|
Total
equity consideration
|
|
|
|
|
|
947
|
|
|
Other
estimated costs of the acquisition
|
|
|
|
|
|
2,178
|
|
|
Total
|
|
|
|
|
$
|
235,225
|
|
The
preliminary purchase price allocation to the fair value of the assets acquired
and liabilities assumed is as follows:
|
(000's
omitted)
|
|
|
|
|
|
|
|
|
|
Trademarks
|
|
$
|
212,000
|
|
|
License
agreements
|
|
|
7,100
|
|
|
Accounts
receivable
|
|
|
1,273
|
|
|
Deferred
revenue
|
|
|
(8,152
|
)
|
|
Goodwill
|
|
|
23,004
|
|
|
Total
|
|
$
|
235,225
|
|
The
Cannon, Royal Velvet, Fieldcrest, and Charisma trademarks have each been
determined by management to have an indefinite useful life and accordingly,
consistent with SFAS 142, no amortization is being recorded in the Company's
consolidated income statements. The license agreements are being amortized
on a
straight-line basis over the remaining contractual period of approximately
6
years. 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 goodwill. The $23.0 million
of goodwill is deductible for income tax purposes.
For
unaudited pro-forma information presenting a summary of the Company's
consolidated results of operations as if the acquisition and related financing
had occurred on January 1, 2006, see Note 6.
5.
Joint Venture and Acquisition of Artful Dodger
In
March
2007, the Company had committed an amount of $5.0 million to fund the 50%
investment in the common equity shares of Scion LLC, a joint venture formed
by
the Company with Shawn Carter, which will operate as a brand management and
licensing company to identify brands to be acquired across a broad spectrum
of
consumer product categories. As consideration for Mr. Carter’s 50% investment in
Scion, he contributed a license in perpetuity, with certain performance
requirements, for the name “Shawn Carter”. At inception, the Company determined
that it would consolidate Scion since the Company effectively holds a 100%
equity interest and is the primary beneficiary in the variable interest entity
as defined by FIN 46, “Consolidation of Variable Interest Entities- revised”
(“FIN 46R”). The impact of consolidating the joint venture into the Company’s
consolidated statement of income increased licensing income by $0.2 million,
due
to the completion of the acquisition of the Artful Dodger brand in November
2007
(see below). The impact of consolidating the joint venture on the Company’s
consolidated balance sheet
has
increased current assets by $2.4 million, non-current assets by $15.5 million,
and current liabilities by $2.0 million.
On
November 7, 2007 (the “AH Closing Date”), Artful Holdings LLC (“AH”), a wholly
owned subsidiary of Scion LLC, completed its acquisition of the intellectual
property assets of Sovereign State LLC (“Sovereign”) associated with the Artful
Dodger brand from Fashion Bureau Overseas NY, Inc. and Pan Mellowtex LLC, the
principals of Sovereign. The purchase price of this acquisition was
approximately $15.0 million, of which $13.5 million was paid in cash on the
AH
Closing Date, with $1.5 million deferred and payable upon the occurrence of
certain events. The Artful Dodger trademark is estimated to have a useful life
of 15 years. To finance this acquisition, the Company made available to AH
an
interest bearing senior secured term loan facility in the aggregate principal
amount of $12 million pursuant to that certain Note and Security Agreement
(as
amended, restated or otherwise modified from time to time, referred to as the
“AH Note”) executed by AH in favor of the Company on the AH Closing Date. The
facility consists of two tranches, one in the principal amount of $10.5 million
which was advanced to AH by the Company on the AH Closing Date, and the other
in
the principal amount of $1.5 million. The second tranche is available for
borrowing by AH provided that no Event of Default (as defined in the AH Note)
has occurred and is continuing at the time of such request. The obligations
are
guaranteed by Scion LLC, the sole manager/member of AH, and are also guaranteed,
in part, by a manager of Scion LLC. The issuance of the loan facility was a
reconsideration event under FIN 46R; the Company once again determined that
it
was the primary beneficiary and continued to consolidate the joint venture.
As
of December 31, 2007, the Company’s equity at risk was approximately $16
million. The carrying value of the consolidated assets that are collateral
for
the variable interest entity’s obligations totaled $15.5 million comprised of a
trademark. The assets of the Company are not available to the variable
interest entity's creditors.
6. Acquisition
Of Starter and Unaudited Pro-formas
On
December 17, 2007, the Company completed its acquisition of certain of the
assets and rights related to the Starter Seller’s (as defined below) business of
designing, marketing, licensing and/or managing the Starter brand of marks
and
intellectual property and related names (the “Starter Assets”) of Exeter Brands
Group LLC, an Oregon limited liability company (the “Seller”), and NIKE, Inc.,
an Oregon corporation (“Starter Parent”) pursuant to an Asset Purchase Agreement
(the “Starter Purchase Agreement”) dated November 15, 2007 by and among the
Company, Starter Seller and Starter Parent.
In
accordance with the terms of the Starter Purchase Agreement, the Company paid
to
the Seller $60,000,000 in cash and assumed certain liabilities of the Seller
related to the Starter Assets. The cash portion of the purchase price was
funded pursuant to additional borrowings of $63.2 million under the Company's
credit agreement with Lehman Brothers Inc. and Lehman Commercial Paper Inc.,.
For further details on this credit agreement, see Note 8.
In
accordance with the terms of the Purchase Agreement, the entered into a
transitional license agreement with Seller in which it granted Seller the
non-exclusive right to use the Starter Assets in connection with the
manufacture, marketing, distribution, promotion, advertisement and sale of
men’s
and boy’s apparel. This transitional license agreement expires on August 31,
2008.
|
(000's
omitted except share and warrant
information)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
paid at closing to sellers
|
|
|
|
|
$
|
60,000
|
|
|
Fair
value of 12,500 shares of $.001 par value common stock, at $20.02
fair
market value per share issued as a cost of acquisition
|
|
|
250
|
|
|
|
|
|
Fair
value of 30,000 warrants ($20.02 exercise price) issued as a cost
of the
acquisition
|
|
|
304
|
|
|
|
|
|
Total
equity consideration
|
|
|
|
|
|
554
|
|
|
Other
estimated costs of the acquisition
|
|
|
|
|
|
1,080
|
|
|
Total
|
|
|
|
|
$
|
61,634
|
|
The
preliminary purchase price allocation to the fair value of the assets acquired
and liabilities assumed is as follows:
|
(000's
omitted)
|
|
|
|
|
|
|
|
|
|
Trademarks
|
|
$
|
59,500
|
|
|
License
agreements
|
|
|
270
|
|
|
Goodwill
|
|
|
1,864
|
|
|
Total
|
|
$
|
61,634
|
|
The
Starter trademark has been determined by management to have an indefinite useful
life and accordingly, consistent with SFAS 142, no amortization will be recorded
in the Company's consolidated income statements. The license agreements are
being amortized on a straight-line basis over the remaining contractual period
of approximately 1.5 years. 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 goodwill. The $1.9 million of goodwill is deductible for income tax
purposes.
The
following unaudited pro-forma information presents a summary of the Company's
consolidated results of operations as if the Danskin, Rocawear, Pillowtex,
and
Starter acquisitions (See Note 2, 3, 4, and 6) and their related financings
had
occurred on January 1, 2006, and as if the Mudd, Mossimo and Ocean Pacific
acquisitions and their related financings had occurred on January 1, 2005.
These
pro forma results have been prepared for comparative purposes only and do not
purport to be indicative of the results of operations which actually would
have
resulted had the acquisitions occurred on January 1, 2006, or which may result
in the future.
|
|
|
Year
ended
|
|
Year
ended
|
|
Year
ended
|
|
|
|
|
December
31,
|
|
December
31,
|
|
December
31,
|
|
(000’s
omitted, except per share
information)
|
|
2007
|
|
2006
|
|
2005
|
|
|
Licensing
and commission revenues
|
|
$
|
207,295
|
|
$
|
190,124
|
|
$
|
97,596
|
|
|
Operating
income
|
|
$
|
156,804
|
|
$
|
123,416
|
|
$
|
42,708
|
|
|
Net
Income
|
|
$
|
77,379
|
|
$
|
50,399
|
|
$
|
21,364
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per common share
|
|
$
|
1.36
|
|
$
|
1.15
|
|
$
|
0.51
|
|
|
Diluted
earnings per common share
|
|
$
|
1.26
|
|
$
|
1.02
|
|
$
|
0.47
|
|
7. Trademarks
and Other Intangibles, net
Trademarks
and other intangibles, net consist of the following:
|
|
|
|
|
December
31, 2007
|
|
December
31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
|
|
Gross
|
|
|
|
Gross
|
|
|
|
|
|
|
Lives
in
|
|
Carrying
|
|
Accumulated
|
|
Carrying
|
|
Accumulated
|
|
|
(000's
omitted)
|
|
Years
|
|
Amount
|
|
Amortization
|
|
Amount
|
|
Amortization
|
|
|
Trademarks:
|
|
|
|
|
|
|
|
|
|
|
|
|
Indefinite
life trademarks
|
|
|
indefinite
(1)
|
|
$
|
1,007,625
|
|
$
|
9,498
|
|
$
|
464,210
|
|
$
|
9,498
|
|
|
Definite
life trademarks
|
|
|
10-15
|
|
|
18,897
|
|
|
856
|
|
|
3,397
|
|
|
494
|
|
|
Non-compete
agreements:
|
|
|
2-15
|
|
|
10,075
|
|
|
4,585
|
|
|
7,075
|
|
|
3,000
|
|
|
Licensing
agreements:
|
|
|
1.5-6
|
|
|
21,093
|
|
|
4,897
|
|
|
6,923
|
|
|
1,387
|
|
|
Domain
names
|
|
|
5
|
|
|
570
|
|
|
223
|
|
|
570
|
|
|
108
|
|
|
|
|
|
|
|
$
|
1,058,260
|
|
$
|
20,059
|
|
$
|
482,175
|
|
$
|
14,487
|
|
Amortization
expense for intangible assets was $5.6 million, $2.2 million, and $1.7 million
for fiscal 2007, fiscal 2006, and Fiscal 2005, respectively. The trademarks
of
Joe Boxer, Rampage, Mudd, London Fog, Mossimo, Ocean Pacific, Danskin, Rocawear,
Cannon, Royal Velvet, Fieldcrest, Charisma, and Starter 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, the related intangible asset will be tested for impairment at least
annually, with any related impairment charge recorded to the statement of
operations at the time of determining such impairment. Effective July 1, 2005,
the Company had a change in estimate of the useful lives of the Candie's and
Bongo trademarks to indefinite life. When acquired in 1981, the Candie's
trademark was estimated to have a useful life of 20 years. Bongo, acquired
in
1998, was also estimated at that time to have a useful life of 20 years.
Amortization expense for intangible assets subject to amortization for each
of
the years in the five-year period ending December 31, 2012 are estimated to
be
$7.1 million, $6.8 million, $6.6 million, $4.8 million, and $2.8 million,
respectively.
|
(1)
|
The
amortization for Candie’s and Bongo trademarks is as of June 30, 2005.
Effective July 1, 2005, the Company changed their useful lives to
indefinite.
|
8. Debt
Arrangements
The
Company's debt is comprised of the
following:
|
|
|
December
31,
|
|
|
(000’s
omitted)
|
|
2007
|
|
2006
|
|
|
Convertible
Notes
|
|
$
|
281,714
|
|
$
|
-
|
|
|
Term
Loan Facility
|
|
|
270,751
|
|
|
-
|
|
|
Asset-Backed
Notes
|
|
|
137,505
|
|
|
155,857
|
|
|
Sweet
Note (Note 13)
|
|
|
12,186
|
|
|
3,170
|
|
|
Kmart
Note
|
|
|
-
|
|
|
3,781
|
|
|
Total
Debt
|
|
$
|
702,156
|
|
$
|
162,808
|
|
Convertible
Senior Subordinated 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 2012 (the
“Convertible Notes”) in a private offering to certain institutional investors.
The net proceeds received by the Company from the offering were approximately
$281.1 million.
The
Convertible Notes bear interest at an annual rate of 1.875%, payable
semi-annually in arrears on June 30 and December 31 of each year, beginning
December 31, 2007. The Convertible Notes will be convertible into cash and,
if
applicable, shares of the Company's common stock based on a conversion rate
of
36.2845 shares of the Company's common stock, subject to customary adjustments,
per $1,000 principal amount of the Convertible Notes (which is equal to an
initial conversion price of approximately $27.56 per share) only under the
following circumstances: (1) during any fiscal quarter beginning after September
30, 2007 (and only during such fiscal quarter), if the closing price of the
Company's common stock for at least 20 trading days in the 30 consecutive
trading days ending on the last trading day of the immediately preceding fiscal
quarter is more than 130% of the conversion price per share, which is $1,000
divided by the then applicable conversion rate; (2) during the five business day
period immediately following any five consecutive trading day period in which
the trading price per $1,000 principal amount of the Convertible Notes for
each
day of that period was less than 98% of the product of (a) the closing price
of
the Company's common stock for each day in that period and (b) the conversion
rate per $1,000 principal amount of the Convertible Notes; (3) if specified
distributions to holders of the Company's common stock are made, as set forth
in
the indenture governing the Convertible Notes (“Indenture”); (4) if a “change of
control” or other “fundamental change,” each as defined in the Indenture,
occurs; (5) if the Company chooses to redeem the Convertible Notes upon the
occurrence of a “specified accounting change,” as defined in the Indenture; and
(6) during the last month prior to maturity of the Convertible Notes. If the
holders of the Convertible Notes exercise the conversion provisions under the
circumstances set forth, the Company will need to remit the lower of the
principal balance of the Convertible Notes or their conversion value to the
holders in cash. As such, the Company would be required to classify the entire
amount outstanding of the Convertible Notes as a current liability in the
following quarter. The evaluation of the classification of amounts outstanding
associated with the Convertible Notes will occur every quarter.
Upon
conversion, a holder will receive an amount in cash equal to the lesser of
(a)
the principal amount of the Convertible Note or (b) the conversion value,
determined in the manner set forth in the Indenture. If the conversion value
exceeds the principal amount of the Convertible Note on the conversion date,
the
Company will also deliver, at its election, cash or the Company's common stock
or a combination of cash and the Company's common stock for the conversion
value
in excess of the principal amount. In the event of a change of control or other
fundamental change, the holders of the Convertible Notes may require the Company
to purchase all or a portion of their Convertible Notes at a purchase price
equal to 100% of the principal amount of the Convertible Notes, plus accrued
and
unpaid interest, if any. If a specified accounting change occurs, the Company
may, at its option, redeem the Convertible Notes in whole for cash, at a price
equal to 102% of the principal amount of the Convertible Notes, plus accrued
and
unpaid interest, if any. Holders of the Convertible Notes who convert their
Convertible Notes in connection with a fundamental change or in connection
with
a redemption upon the occurrence of a specified accounting change may be
entitled to a make-whole premium in the form of an increase in the conversion
rate.
Pursuant
to Emerging Issues Task Force (“EITF”) 90-19, “Convertible Bonds with Issuer
Option to Settle for Cash upon Conversion” (“EITF 90-19”), EITF 00-19,
“Accounting for Derivative Financial Instruments Indexed to, and Potentially
Settled in, a Company's Own Stock” (“EITF 00-19”), and EITF 01-6, “The Meaning
of Indexed to a Company's Own Stock” (“EITF 01-6”), the Convertible Notes are
accounted for as convertible debt in the accompanying Condensed Consolidated
Balance Sheet and the embedded conversion option in the Notes has not been
accounted for as a separate derivative. For a discussion of the effects of
the
Convertible Notes and the convertible note hedge and warrants discussed below
on
earnings per share, see Note 12.
At
December 31, 2007, the balance of the Convertible Notes was $281.7
million.
In
connection with the sale of the Convertible Notes, the Company entered into
hedges for the Convertible Notes (“Convertible Note Hedges”) with respect to its
common stock with two entities (the “Counterparties”). Pursuant to the
agreements governing these Convertible Note Hedges, the Company has purchased
call options (the “Purchased Call Options”) from the Counterparties covering up
to approximately 10.4 million shares of the Company's common stock. These
Convertible Note Hedges are designed to offset the Company's exposure to
potential dilution upon conversion of the Convertible Notes in the event that
the market value per share of the Company's common stock at the time of exercise
is greater than the strike price of the Purchased Call Options (which strike
price corresponds to the initial conversion price of the Convertible Notes
and
is simultaneously subject to certain customary adjustments). On June 20, 2007,
the Company paid an aggregate amount of approximately $76.3 million of the
proceeds from the sale of the Convertible Notes for the Purchased Call Options,
of which $26.7 million was included in the balance of deferred income tax assets
and will be recognized over the term of the Convertible Notes.
The
Company also entered into separate warrant transactions with the Counterparties
whereby the Company, pursuant to the agreements governing these warrant
transactions, sold to the Counterparties warrants (the “Sold Warrants”) to
acquire up to 3.6 million shares of the Company's common stock, at a strike
price of $42.40 per share of the Company's common stock. The Sold Warrants
will
become exercisable on September 28, 2012 and will expire by the end of 2012.
The
Company received aggregate proceeds of approximately $37.5 million from the
sale
of the Sold Warrants on June 20, 2007.
The
Convertible Note Hedge transactions and the warrant transactions were separate
transactions, entered into by the Company with the Counterparties, and as such
are not part of the terms of the Convertible Notes and will not affect the
holders' rights under the Convertible Notes. In addition, holders of the
Convertible Notes will not have any rights with respect to the Purchased Call
Options or the Sold Warrants. As a result of these transactions, the Company
recorded a reduction to additional paid-in-capital of $12.1
million.
If
the
market value per share of the Company's common stock at the time of conversion
of the Convertible Notes is above the strike price of the Purchased Call
Options, the Purchased Call Options entitle the Company to receive from the
Counterparties net shares of the Company's common stock, cash or a combination
of shares of the Company's common stock and cash, depending on the consideration
paid on the underlying Convertible Notes, based on the excess of the then
current market price of the Company's common stock over the strike price of
the
Purchased Call Options. Additionally, if the market price of the Company's
common stock at the time of exercise of the Sold Warrants exceeds the strike
price of the Sold Warrants, the Company will owe the Counterparties net shares
of the Company's common stock or cash, not offset by the Purchased Call Options,
in an amount based on the excess of the then current market price of the
Company's common stock over the strike price of the Sold Warrants.
These
transactions will generally have the effect of increasing the conversion price
of the Convertible Notes to $42.40 per share of the Company's common stock,
representing a 100% percent premium based on the last reported sale price of
the
Company’s common stock of $21.20 per share on June 14, 2007.
Term
Loan Facility
In
connection with the acquisition of the Rocawear brand, in March 2007, the
Company entered into a $212.5 million credit agreement (the “Credit Agreement”
or “Term Loan Facility”) with Lehman Brothers Inc. and Lehman Commercial
Paper Inc. (“LCPI”). At the time, the Company pledged to LCPI 100% of the
capital stock owned by the Company in OP Holdings and Management Corporation,
a
Delaware corporation (“OPHM”), and Studio Holdings and Management Corporation, a
Delaware corporation (“SHM”). The Company's obligations under the Credit
Agreement are guaranteed by each of OPHM and SHM, as well as by two of its
other
subsidiaries, OP Holdings LLC, a Delaware limited liability company (“OP
Holdings”), and Studio IP Holdings LLC, a Delaware limited liability company
("Studio IP Holdings").
On
October 3, 2007, in connection with the
acquisition of the Company Interests of Official-Pillowtex with the proceeds
of
the Convertible Notes, the Company pledged to LCPI 100% of the capital stock
owned by the Company in Mossimo Holdings and Management Corporation, a Delaware
corporation (“MHM”), and Pillowtex Holdings and Management Corporation, a
Delaware corporation (“PHM”). As a result, the Company's obligations under the
Credit Agreement are guaranteed by each of OPHM, SHM, MHM, and PHM as well
as by
four of its other subsidiaries, OP Holdings LLC, a Delaware limited liability
company (“OP Holdings”), Studio IP Holdings LLC, a Delaware limited liability
company (“Studio IP Holdings”), Mossimo Holdings LLC (“Mossimo Holdings”),
a Delaware limited liability company, and Official Pillowtex LLC, a
Delaware limited liability company.
On
December 17, 2007, in connection with the acquisition of the Starter brand,
the
Company borrowed $63.2 million pursuant to the Term Loan Facility (“Additional
Borrowing”). The net proceeds received by the Company from the Additional
Borrowing were $60 million. At the time of such Additional Borrowing, there
was
already outstanding under the Term Loan Facility a term loan in the principal
amount equal to $211.4 million.
The
guarantees are secured by a pledge to LCPI of, among other things, the Ocean
Pacific, Danskin, Rocawear, Mossimo, Cannon, Royal Velvet, Fieldcrest, Charisma,
and Starter 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, with minimum principal payable in equal
quarterly installments in annual aggregate amounts equal to 1.00% of the
aggregate principal amount of the loans outstanding, in addition to an annual
payment equal to 50% of the excess cash flow from the Term Loan Facility group,
with any remaining unpaid principal balance to be due on April 30, 2013. The
Term Loan Facility can be prepaid, without penalty, at any time.
The
interest rate as of December 31, 2007 was 7.08%. At December 31, 2007, the
balance of the Term Loan Facility was $270.8 million. 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.
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. This hedge instrument
caps the Company’s exposure to rising interest rates at 6.00% for LIBOR for 50%
of the forecasted outstanding balance of the Term Loan Facility (“Interest Rate
Cap”). Based on management’s assessment, the Interest Rate Cap qualifies for
hedge accounting under Statement of Financial Accounting Standards 133
“Accounting for Derivative Instruments and Hedging Transactions”. On a quarterly
basis, the value of the hedge is adjusted to reflect its current fair value,
with any adjustment flowing through other comprehensive income. At December
31,
2007, the fair value of the interest rate cap was $55,000, resulting in an
other
comprehensive loss of $273,000, which is reflected in the Consolidated Balance
Sheet and Statement of Stockholders’ Equity, respectively.
Asset-Backed
Notes
The
financing for certain of the Company's acquisitions has been accomplished
through private placements by its subsidiary, IP Holdings LLC ("IP
Holdings") of Asset-Backed Notes secured by intellectual property assets
(trade names, trademarks, license agreements and payments and proceeds with
respect thereto relating to the Candie’s, Bongo, Joe Boxer, Rampage, Mudd and
London Fog brands) of IP Holdings. At December 31, 2007, the balance of the
Asset-Backed Notes was $137.5 million.
Cash
on
hand in the bank account of IP Holdings is restricted at any point in time
up to
the amount of the next debt principal and interest payment required under the
Asset-Backed Notes. Accordingly, $5.2 million and $4.3 million as of December
31, 2007 and December 31, 2006, respectively, have been disclosed as restricted
cash within the Company's current assets. Further, in connection with IP
Holdings' issuance of Asset-Backed Notes, a reserve account has been established
and the funds on deposit in such account will be applied to the last principal
payment with respect to the Asset-Backed Notes. Accordingly, $15.2 million
and
$11.7 million as of December 31, 2007 and December 31, 2006, respectively,
have
been disclosed as restricted cash within other assets on the Company's balance
sheets.
Interest
rates and terms on the outstanding principal amount of the Asset-Backed Notes
as
of December 31, 2007 are as follows: $48.2 million principal amount bears
interest at a fixed interest rate of 8.45% with a six year term, $21.3 million
principal amount bears interest at a fixed rate of 8.12% with a six year term,
and $68.0 million principal amount bears interest at a fixed rate of 8.99%
with
a six and a half year term.
Neither
the Company nor any of its subsidiaries (other than IP Holdings) is obligated
to
make any payment with respect to the Asset-Backed Notes, and the assets of
the
Company and its subsidiaries (other than IP Holdings) are not available to
IP
Holdings' creditors. The assets of IP Holdings are not available to the
creditors of the Company or its subsidiaries (other than IP
Holdings).
The
Sweet Note
On
April
23, 2002, the Company acquired the remaining 50% interest in Unzipped from
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 Sweet
note. Prior to August 5, 2004, Unzipped was managed by Sweet pursuant to the
Management Agreement, which obligated Sweet to manage the operations of Unzipped
in return for, commencing in 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 is 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/Guez
litigation. See Note 13.
The
judgment also stated that the Sweet Note (originally $11 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
this 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 and recorded the expense as a special charge. The Company
further increased the Note by approximately $2.8 million to record the related
interest and included the charge in interest expense. The Sweet Note as of
December 31, 2007 is approximately $12.2 million and included in Current portion
of Long Term Liabilities.
In
addition, the Company was awarded a judgment of approximately $12.2 million
for
claims made by it against Hubert Guez and Apparel Distribution Services, Inc.
As
a result, the Company recorded a receivable of approximately $12.2 million
and
recorded the benefit in special charges. This receivable is included in other
assets - non-current.
The
Kmart Note
In
connection with the acquisition of Joe Boxer in July 2005, the Company assumed
a
promissory note, dated August 13, 2001, in the principal amount of $10.8
million that originated with the execution of the Kmart license by the former
owners of Joe Boxer. The note provides for interest at 5.12% and is payable
in three equal annual installments, on a self-liquidating basis, on the last
day
of each year commencing on December 31, 2005 and continuing through
December 31, 2007. Payments due under the note may be off-set against
any royalties owed under the Kmart license. As of December 31, 2007 the
remaining principle due to Kmart under the note was entirely off-set against
royalties collectible under the Kmart license.
Debt
Maturities
(In
000's)
The
Company's debt maturities are the following:
|
(000’s
omitted)
|
|
Total
|
|
2008
|
|
2009
|
|
2010
|
|
2011
|
|
2012
|
|
thereafter
|
|
|
Convertible
Notes
|
|
$
|
281,714
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
281,714
|
|
$
|
-
|
|
|
Term
Loan Facility
|
|
|
270,751
|
|
|
19,972
|
|
|
2,746
|
|
|
2,746
|
|
|
2,746
|
|
|
2,746
|
|
|
239,795
|
|
|
Asset-Backed
Notes
|
|
|
137,505
|
|
|
20,408
|
|
|
22,231
|
|
|
24,216
|
|
|
26,380
|
|
|
33,468
|
|
|
10,802
|
|
|
Sweet
Note (Note 13)
|
|
|
12,186
|
|
|
12,186
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
Total
Debt
|
|
$
|
702,156
|
|
$
|
52,566
|
|
$
|
24,977
|
|
$
|
26,962
|
|
$
|
29,126
|
|
$
|
317,928
|
|
$
|
250,597
|
|
9.
Unzipped Apparel, LLC (
“Unzipped”
)
Equity
Investment
On
October 7, 1998, the Company formed Unzipped with its then joint venture partner
Sweet Sportswear, LLC (“Sweet”), the purpose of which was to market and
distribute apparel under the Bongo label. The Company and Sweet each had a
50%
interest in Unzipped. Pursuant to the terms of the joint venture, the Company
licensed the Bongo trademark to Unzipped for use in the design, manufacture
and
sale of certain designated apparel products.
Acquisition
On
April
23, 2002, the Company acquired the remaining 50% interest in Unzipped from
Sweet
for a purchase price of three million shares of the Company's common stock
and
$11 million in debt evidenced by the Sweet Note. See Note 13. In connection
with
the acquisition of Unzipped, the Company filed a registration statement with
the
Securities and Exchange Commission ("SEC") for the three million shares of
the
Company's common stock issued to Sweet, which was declared effective by the
SEC
on July 29, 2003.
Related
Party Transactions
Prior
to
August 5, 2004, Unzipped was managed by Sweet pursuant to a management agreement
(the “Management Agreement”). Unzipped also had a supply agreement with Azteca
Productions International, Inc. ("Azteca") and a distribution agreement with
Apparel Distribution Services, LLC ("ADS"). All of these entities are owned
or
controlled by Hubert Guez.
On
August
5, 2004, Unzipped terminated the Management Agreement with Sweet, the supply
agreement with Azteca and the distribution agreement with ADS and commenced
a
lawsuit against Sweet, Azteca, ADS and Hubert Guez. See Note 13.
There
were no transactions with these related parties during fiscal 2007, fiscal
2006,
and fiscal 2005.
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 in special charges.
As
a
result of the judgment, the balance of the $11 million principal amount Sweet
Note, originally issued by the Company upon the acquisition of Unzipped from
Sweet in 2002, including interest, was changed from approximately $3.2 million
to approximately $12.2 million as of December 31, 2007. Of this increase,
approximately $6.2 was attributed to the principal of the Sweet Note and the
expense was recorded as expense as a special charge. The remaining $2.8 million
of the increase was attributed to related interest on the Sweet Note and
recorded as interest expense. The full $12.2 million current balance of the
Sweet Note, including interest, as of December 31, 2007 is included in the
current portion of Long Term Liabilities.
In
addition, the Company was awarded a judgment of approximately $12.2 million
for
claims made by it against Hubert Guez and Apparel Distribution Services, Inc.
As
a result, the Company recorded a receivable of approximately $12.2 million
and
recorded the benefit in special charges. This receivable is included in Other
Assets - non-current.
Special
charges in 2007 also include legal expenses relating to this litigation of
approximately $3.4 million.
10. Special
Charges
Special
charges consist of legal expenses, net of write-offs, related to the Unzipped
litigation. For fiscal 2007, the Company recorded a benefit to special charges
of $6.0 million, compared to Fiscal 2006 and Fiscal 2005 where the Company
recorded expenses of $2.5 million and $1.5 million, respectively. See
Note 9 for explanation of the write-offs and legal expenses related to the
Unzipped litigation.
11. Stockholders'
Equity
Public
Offering
On
December 13, 2006 the Company completed a public offering of common stock
pursuant to registration statements that were declared effective by the SEC.
All
10,784,750 shares of common stock offered in the final prospectus were sold
at
$18.75 per share. Net proceeds from the offering amounted to approximately
$189.5 million.
Stock
Options
The
Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
The
fair
value for these options and warrants (as described below) was estimated at
the
date of grant using a Black-Scholes option-pricing model with the following
weighted-average assumptions:
|
|
Year
ended December 31,
|
|
|
2007
|
|
2006
|
|
2005
|
|
Expected
Volatility
|
.40
|
|
.30
- .50
|
|
.30
- .55
|
|
Expected
Dividend Yield
|
0%
|
|
0%
|
|
0%
|
|
Expected
Life (Term)
|
5
-
7 years
|
|
3
-
5 years
|
|
3
-
5 years
|
|
Risk-Free
Interest Rate
|
4.75%
|
|
3.00
- 4.75%
|
|
3.00
- 4.75%
|
The
weighted-average fair value of options granted (at their grant date) during
fiscal 2006 and fiscal 2005 was $11.87 and $7.36 per share, respectively. There
were no options granted during fiscal 2007.
In
1989,
the Company's Board of Directors adopted, and its stockholders approved, the
Company's 1989 Stock Option Plan (the “1989 Plan”). The 1989 Plan, as amended in
1990, provides for the granting of incentive stock options (“ISO's”) and limited
stock appreciation rights (“Limited Rights”), covering up to 222,222 shares of
common stock. The 1989 Plan terminated on August 1, 1999.
Under
the
1989 Plan, ISO's were to be granted at not less than the market price of the
Company's Common Stock on the date of the grant. Stock options not covered
by
the ISO provisions of the 1989 Plan (“Non-Qualifying Stock Options” or “NQSO's”)
were granted at prices determined by the Board of Directors.
In
1997,
the Company's stockholders approved the Company's 1997 Stock Option Plan (the
“1997 Plan”). The 1997 Plan authorizes the granting of common stock options to
purchase up to 3,500,000 shares of Company common stock. All employees,
directors, independent agents, consultants and attorneys of the Company,
including those of the Company's subsidiaries, are eligible to be granted NQSO's
under the 1997 Plan. ISO's may be granted only to employees of the Company
or
any subsidiary of the Company. The 1997 Plan terminated in 2007.
In
2000,
the Company's stockholders approved the Company's 2000 Stock Option Plan (the
"2000 Plan"). The 2000 Plan authorizes the granting of common stock options
to
purchase up to 2,000,000 shares of Company common stock. All employees,
directors, independent agents, consultants and attorneys of the Company,
including those of the Company's subsidiaries, are eligible to be granted NQSO's
under the 2000 Plan. The 2000 Plan terminates in 2010.
In
2001,
the Company adopted the 2001 Stock Option Plan (the "2001 Plan"). The 2001
Plan
authorizes the granting of common stock options to purchase up to 2,000,000
shares of Company common stock. All employees, directors, independent agents,
consultants and attorneys of the Company, including those of the Company's
subsidiaries, are eligible to be granted NQSO's under the 2001 Plan. The 2001
Plan terminates in 2011.
In
2002,
the Company's stockholders approved the Company's 2002 Stock Option Plan (the
"2002 Plan"). The 2002 Plan authorizes the granting of common stock options
to
purchase up to 2,000,000 shares of Company common stock. All employees,
directors, independent agents, consultants and attorneys of the Company,
including those of the Company's subsidiaries, are eligible to be granted ISO's
and NQSO's under the 2002 Plan. The 2002 Plan terminates in 2012.
In
2006,
the Company's stockholders approved the Company's 2006 Equity Incentive Plan
(the "2006 Plan"). The 2006 Plan authorizes the granting of common stock options
to purchase up to 2,000,000 shares of Company common stock, of which no more
than 500,000 shares may be granted as ISO’s. All employees, directors,
independent agents, consultants and attorneys of the Company, including those
of
the Company's subsidiaries, are eligible to be granted NQSO's and other
stock-based awards under the 2006 Plan, and employees are also eligible to
be
granted ISO’s under the 2006 Plan. No new awards may be granted under the Plan
after July 2016.
The
options that were granted under the Plans expire between five and ten years
from
the date of grant.
Summaries
of the Company's stock options, warrants and performance related options
activity, and related information for fiscal 2007, fiscal 2006, and fiscal
2005
follows:
|
Options
|
|
Weighted-Average
|
|
|
|
|
Options
|
|
Exercise
Price
|
|
|
|
|
|
|
|
|
|
Outstanding
January 1, 2005
|
|
|
5,467,626
|
|
$
|
2.52
|
|
|
Granted
|
|
|
2,905,501
|
|
|
7.10
|
|
|
Canceled
|
|
|
(142,500
|
)
|
|
2.63
|
|
|
Exercised
|
|
|
(708,877
|
)
|
|
2.14
|
|
|
Expired
|
|
|
(15,125
|
)
|
|
0.74
|
|
|
Outstanding
December 31, 2005
|
|
|
7,506,625
|
|
$
|
4.31
|
|
|
Granted
|
|
|
43,000
|
|
|
16.99
|
|
|
Canceled
|
|
|
(17,750
|
)
|
|
2.28
|
|
|
Exercised
|
|
|
(1,762,243
|
)
|
|
4.55
|
|
|
Expired
|
|
|
-
|
|
|
-
|
|
|
Outstanding
December 31, 2006
|
|
|
5,769,632
|
|
$
|
4.35
|
|
|
Granted
|
|
|
-
|
|
|
-
|
|
|
Canceled
|
|
|
(12,000
|
)
|
|
16.80
|
|
|
Exercised
|
|
|
(651,089
|
)
|
|
5.02
|
|
|
Expired
|
|
|
-
|
|
|
-
|
|
|
Outstanding
December 31, 2007
|
|
|
5,106,543
|
|
$
|
4.23
|
|
|
Exercisable
at December 31, 2007
|
|
|
5,021,875
|
|
$
|
4.18
|
|
The
weighted average contractual term (in years) of options outstanding as of
December 31, 2007, 2006, and 2005, were 5.57, 6.00, and 7.03 respectively.
The
weighted average contractual term (in years) of options exercisable as of
December 31, 2007, 2006, and 2005, were 5.54, 5.97, and 7.02
respectively.
The
total
fair value of options vested during fiscal 2007, fiscal 2006, and fiscal 2005,
were $0.1 million, $0.02 million, and $6.84 million, respectively.
Cash
received from option exercise under all share-based payment arrangements for
fiscal 2007, fiscal 2006, and fiscal 2005, was $3.2 million, $4.0 million,
and
$1.6 million respectively. A tax benefit of approximately $1.2 million and
$2.4
million for fiscal 2007 and fiscal 2006, respectively, were share-based payment
arrangements. The total amount of tax benefits to be realized for the tax
deductions from option exercise of the share-based payment arrangements for
the
year ended December 31, 2008 is expected to be approximately $6.5
million.
The
aggregate intrinsic value is calculated as the difference between the market
price of our common stock as of December 31, 2007 and the exercise price of
the
underlying options. At December 31, 2007, 2006, and 2005, the aggregate
intrinsic value of options exercised was $9.5 million, $40.9 million, and $5.7
million, respectively. At December 31, 2007, 2006, and 2005, the aggregate
intrinsic value of options exercisable was $77.4 million, $84.9 million, and
$43.7 million, respectively. In addition, the aggregate intrinsic value of
options outstanding was $78.8 million, $86.8 million, and $44.1 million at
December 31, 2007, 2006, and 2005, respectively.
Warrants
|
|
|
Weighted-Average
|
|
|
|
|
Warrants
|
|
Exercise
Price
|
|
|
|
|
|
|
|
|
|
Outstanding
January 1, 2005
|
|
|
-
|
|
$
|
-
|
|
|
Granted
|
|
|
1,275,000
|
|
|
6.56
|
|
|
Canceled
|
|
|
-
|
|
|
-
|
|
|
Exercised
|
|
|
-
|
|
|
-
|
|
|
Expired
|
|
|
-
|
|
|
-
|
|
|
Outstanding
December 31, 2005
|
|
|
1,275,000
|
|
$
|
6.56
|
|
|
Granted
|
|
|
654,110
|
|
|
11.53
|
|
|
Canceled
|
|
|
-
|
|
|
-
|
|
|
Exercised
|
|
|
(1,129,935
|
)
|
|
6.29
|
|
|
Expired
|
|
|
-
|
|
|
-
|
|
|
Outstanding
December 31, 2006
|
|
|
799,175
|
|
$
|
11.02
|
|
|
Granted
|
|
|
436,668
|
|
|
21.38
|
|
|
Canceled
|
|
|
-
|
|
|
-
|
|
|
Exercised
|
|
|
(968,943
|
)
|
|
11.34
|
|
|
Expired
|
|
|
-
|
|
|
-
|
|
|
Outstanding
December 31, 2007
|
|
|
266,900
|
|
$
|
16.76
|
|
|
Exercisable
at December 31, 2007
|
|
|
266,900
|
|
$
|
16.76
|
|
All
warrants issued in connection with acquisitions are recorded at fair market
value using the Black Scholes model and are recorded as part of purchase
accounting. See Notes 2, 3, 4, and 6. 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.
The
weighted average contractual term (in years) of warrants outstanding as of
December 31, 2007, 2006 and 2005 were 7.39, 8.87 and 9.03, respectively. The
weighted average contractual term (in years) of warrants exercisable as of
December 31, 2007, 2006 and 2005 were 7.39, 8.83 and 9.17,
respectively.
The
fair
value of warrants vested during fiscal 2007, Fiscal 2006, and Fiscal 2005 were
$5.9 million, $8.3 million and $2.4 million, respectively.
Cash
received from warrants exercised under all share-based payment arrangements
for
fiscal 2007 and fiscal 2006 was $0.4 million and $5.1 million,
respectively.
Performance
Related Options
|
|
|
Weighted-Average
|
|
|
|
|
Performance
Related Options
|
|
Exercise
Price
|
|
|
|
|
|
|
|
|
|
Outstanding
January 1, 2005
|
|
|
-
|
|
$
|
-
|
|
|
Granted
|
|
|
1,200,000
|
|
|
8.81
|
|
|
Canceled
|
|
|
-
|
|
|
-
|
|
|
Exercised
|
|
|
-
|
|
|
-
|
|
|
Expired
|
|
|
-
|
|
|
-
|
|
|
Outstanding
December 31, 2005
|
|
|
1,200,000
|
|
$
|
8.81
|
|
|
Granted
|
|
|
-
|
|
|
-
|
|
|
Canceled
|
|
|
(1,200,000
|
)
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
-
|
|
|
Expired
|
|
|
-
|
|
|
-
|
|
|
Outstanding
December 31, 2006
|
|
|
-
|
|
$
|
-
|
|
|
Granted
|
|
|
-
|
|
|
-
|
|
|
Canceled
|
|
|
-
|
|
|
-
|
|
|
Exercised
|
|
|
-
|
|
|
-
|
|
|
Expired
|
|
|
-
|
|
|
-
|
|
|
Outstanding
December 31, 2007
|
|
|
-
|
|
$
|
-
|
|
There
were no performance related options outstanding for employees as of December
31,
2007 and 2006. The weighted average contractual term (in years) of performance
related options outstanding at December 31, 2005, was 9.56. No performance
related options were exercisable as of December 31, 2007, 2006, and
2005.
At
December 31, 2007, 2006, and 2005, the aggregate intrinsic value of performance
related options outstanding was $0, $0 and $1.7 million, respectively. In
addition, the aggregate intrinsic value of performance related options
exercisable was $0 as of December 31, 2007, 2006, and 2005.
At
December 31, 2007, December 31, 2006, and December 31, 2005, exercisable stock
options totaled 5,021,875, 5,646,964, and 7,439,957, and had weighted average
exercise prices of $4.18, $4.27, and $4,31 per share, respectively.
At
December 31, 2007, 1,772,888, 1,394,108, 682,250, and 484,221 common shares
were
reserved for issuance on exercise of stock options under the 2006, 2002, 2001,
and 2000 Stock Option Plan, respectively.
Restricted
stock
Compensation
cost for restricted stock is measured as the excess, if any, of the quoted
market price of our stock at the date the common stock is issued over the amount
the employee must pay to acquire the stock (which is generally zero). The
compensation cost, net of projected forfeitures, is recognized over the period
between the issue date and the date any restrictions lapse, with compensation
cost for grants with a graded vesting schedule recognized on a straight-line
basis over the requisite service period for each separately vesting portion
of
the award as if the award was, in substance, multiple awards. The restrictions
do not affect voting and dividend rights.
The following tables summarize information about unvested restricted stock
transactions (shares in thousands):
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
Weighted
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
Average
|
|
|
|
|
|
|
Grant
Date
|
|
|
|
Grant
Date
|
|
|
|
|
Shares
|
|
Fair
Value
|
|
Shares
|
|
Fair
Value
|
|
|
Nonvested,
January 1
|
|
|
95,655
|
|
$
|
17.46
|
|
|
-
|
|
$
|
-
|
|
|
Granted
|
|
|
107,182
|
|
|
20.68
|
|
|
95,655
|
|
|
17.46
|
|
|
Vested
|
|
|
(53,308
|
)
|
|
18.58
|
|
|
-
|
|
|
-
|
|
|
Forfeited
|
|
|
(5,402
|
)
|
|
18.51
|
|
|
-
|
|
|
-
|
|
|
Non-vested,
December 31
|
|
|
144,127
|
|
|
19.41
|
|
|
95,655
|
|
|
17.46
|
|
The
Company has awarded restricted shares of common stock to certain employees.
The
awards have restriction periods tied to employment and vest over a period of
2-3
years. The cost of the restricted stock awards, which is the fair market value
on the date of grant net of estimated forfeitures, is expensed ratably over
the
vesting period. During fiscal 2007 and fiscal 2006, the Company awarded 107,182
and 95,655 restricted shares, respectively, with a vesting period of 2-3 years
and a fair market value of approximately $2.2 million and $1.7 million. As
of
December 31, 2007, 53,308 restricted stock grants had vested.
Unearned
compensation expense related to restricted stock grants for fiscal 2007 and
fiscal 2006 was approximately $1.7 million and $0.3 million, respectively.
An additional amount of $1.9 million is expected to be expensed evenly over
a
period of approximately 2-3 years.
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.
Stock
Repurchase Program
On
September 15, 1998, the Company's Board of Directors authorized the repurchase
of up to two million shares of the Company's Common Stock, which was replaced
with a new agreement on December 21, 2000, authorizing the repurchase of up
to
three million shares of the Company's Common Stock. In fiscal 2007 and fiscal
2006, no shares were repurchased in the open market.
12. Earnings
Per Share
Basic
earnings per share includes no dilution and is computed by dividing net income
available to common shareholders by the weighted average number of common shares
outstanding for the period. Diluted earnings per share reflect, in periods
in
which they have a dilutive effect, the effect of common shares issuable upon
exercise of stock options and warrants. The difference between reported basic
and diluted weighted-average common shares results from the assumption that
all
dilutive stock options outstanding were exercised and all convertible bonds
have
been converted into common stock.
As
of
December 31, 2007, of the total potentially dilutive shares related to stock
options and warrants, 0.1 million were anti-dilutive, compared to none as of
December 31, 2006, and 7.3 million as of December 31, 2005.
Warrants
issued in connection with the Company’s convertible note financing were
anti-dilutive and therefore not included in this calculation. Portions of the
convertible note that would be subject to conversion to common stock were
anti-dilutive as of the year ended December 31, 2007 and therefore not included
in this calculation.
A
reconciliation of shares used in calculating basic and diluted earnings per
share follows:
|
|
|
For
the Year Ended
|
|
|
(000's
omitted)
|
|
December
31,
|
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
Basic
|
|
|
56,694
|
|
|
39,937
|
|
|
31,284
|
|
|
Effect
of exercise of stock options
|
|
|
4,323
|
|
|
5,241
|
|
|
3,489
|
|
|
Effect
of exercise of warrants
|
|
|
115
|
|
|
-
|
|
|
-
|
|
|
Effect
of contingent common stock issuance
|
|
|
144
|
|
|
-
|
|
|
-
|
|
|
Effect
of assumed vesting of restricted stock
|
|
|
150
|
|
|
96
|
|
|
-
|
|
|
|
|
|
61,426
|
|
|
45,274
|
|
|
34,773
|
|
13. Commitments
and Contingencies
Sweet
Sportswear/Unzipped litigation
On
August 5, 2004, the Company, along with its subsidiaries, Unzipped, Michael
Caruso & Co., referred to as Caruso, and IP Holdings, collectively referred
to as the plaintiffs, commenced a lawsuit in the Superior Court of California,
Los Angeles County, against Unzipped's former manager, former supplier and
former distributor, Sweet, Azteca and ADS, respectively, and a principal of
these entities and former member of the Company's board of directors, Hubert
Guez, collectively referred to as the Guez defendants. The Company pursued
numerous causes of action against the Guez defendants, including breach of
contract, breach of fiduciary duty, trademark infringement and others and sought
damages in excess of $20 million. On March 10, 2005, Sweet, Azteca and ADS,
collectively referred to as cross-complainants, filed a cross-complaint against
the Company claiming damages resulting from a variety of alleged contractual
breaches, among other things.
In
January 2007, a jury trial was commenced, and on April 10, 2007, the jury
returned a verdict of approximately $45 million in favor of the Company and
its
subsidiaries, finding in favor of the Company and its subsidiaries on every
claim that they pursued, and against the Guez defendants on every counterclaim
asserted. Additionally, the jury found that all of the Guez defendants acted
with malice, fraud or oppression with regard to each of the tort claims asserted
by the Company and its subsidiaries, and on April 16, 2007, awarded plaintiffs
$5 million in punitive damages against Mr. Guez personally. The Guez defendants
filed post-trial motions seeking, among other things, a new trial. Through
a set
of preliminary rulings dated September 27, 2007, the Court granted in part,
and
denied in part, the Guez defendants’ post trial motions, and denied plaintiffs’
request that the Court enhance the damages awarded against the Guez defendants
arising from their infringement of plaintiffs’ trademarks. Through these
rulings, the Court, among other things, reduced the amount of punitive damages
assessed against Mr. Guez to $4 million, and reduced the total damages awarded
against the Guez defendants by approximately 50%.
The
Court
adopted these preliminary rulings as final on November 16, 2007. On the same
day, the Court entered judgment against Mr. Guez in the amount of $10,964,730
and ADS in the amount of $1,272,420, and against each of the Guez defendants
with regard to each and every claim that they pursued in the litigation
including, without limitation, ADS’s and Azteca’s unsuccessful efforts to
recover against Unzipped any account balances claimed to be owed, totaling
approximately $3.5 million including interest (collectively, the “Judgments”).
In entering the Judgments, the Court upheld the jury’s verdict in favor of the
Company relating to its writedown of the senior subordinated note due 2012,
issued by the Company to Sweet in connection with the Company’s acquisition of
Unzipped for Unzipped Fiscal Year 2004. The monetary portion of the Judgments
accrues interest at a rate of 10% per annum from the date of the Judgments’
entry. Also on November 16, 2007, the Court issued a Memorandum Order wherein
it
upheld an aggregate of approximately $7,000,000 of the jury’s verdicts against
Sweet and Azteca, but declined to enter judgment against these entities since
it
had ordered a new trial with regard to certain other damage awards entered
against these entities by the jury. On March 7, 2008, the Court is scheduled
to
hear the attorneys’ fees and costs petitions filed by the Company and its
subsidiaries.
On
November 21, 2007, the Guez defendants filed a notice of appeal. They also
filed
a $49,090,491 undertaking with the Court, consisting primarily of a $43,380,491
personal surety given jointly by Gerard Guez and Jacqueline Rose Guez, bonding
the monetary portions of the Judgments. By Order dated December 17, the Court
determined that the undertaking was adequate absent changed circumstances.
This
determination serves to prevent the Company and its subsidiaries from pursuing
collection of the monetary portions of the Judgments during the pendency of
the
appeal. The Company and its subsidiaries filed a notice of appeal on November
26, 2007, appealing, among other things, those parts of the jury’s verdicts
vacated by the Court in connection with the Guez defendants’ post-trial motions.
The Company and its subsidiaries intend to vigorously pursue their appeal,
and
vigorously defend against the Guez parties’ appeal.
Bader/Unzipped
litigation
On
November 5, 2004, Unzipped commenced a lawsuit in the Supreme Court of New
York,
New York County, against Unzipped's former president of sales, Gary Bader,
alleging that Mr. Bader breached certain fiduciary duties owed to Unzipped
as
its president of sales, unfairly competed with Unzipped and tortiously
interfered with Unzipped's contractual relationships with its employees. On
October 5, 2005, Unzipped amended its complaint to assert identical claims
against Bader's company, Sportswear Mercenaries, Ltd. On October 14, 2005,
Bader
and Sportswear Mercenaries filed an answer containing counterclaims to
Unzipped's amended complaint, and a third-party complaint, which was dismissed
in its entirety on June 9, 2006, except with respect to a single claim that
it
owes Bader and Sportswear Mercenaries $72,000. Trial in this action is set
to
commence on April 28, 2008. The parties to this lawsuit have recently reached
a
settlement for which counsel is preparing a settlement agreement.
Redwood
Shoe litigation
This
litigation, which was commenced in January 2002, by Redwood Shoe Corporation
(“Redwood”), one of the Company's former buying agents of footwear, was
dismissed with prejudice by the court on February 15, 2007, pursuant to an
agreement in principle by the Company, Redwood, its affiliate, Mark Tucker,
Inc.
(“MTI”) and MTI's principal, Mark Tucker, to settle the matter. The proposed
settlement agreement provides for the Company to pay a total of $1.9 million
to
Redwood. The stipulation and order dismissing the action may be reopened should
the settlement agreement not be finalized and consummated by all of the parties.
The Company is awaiting receipt of the signed Settlement Agreement from the
other parties.
Bongo
Apparel, Inc. litigation
On
or
about June 12, 2006, Bongo Apparel, Inc. (“BAI”), filed suit in the Supreme
Court of the State of New York, County of New York, against the Company and
IP
Holdings alleging certain breaches of contract and other claims and seeks,
among
other things, damages of at least $25 million. The Company and IP Holdings
believe that, in addition to other defenses and counterclaims that they intend
to assert, the claims in the lawsuit are the subject of a release and settlement
agreement that was entered into by the parties in August 2005, and based upon
this belief, moved to dismiss most of BAI’s claims. In response to the motion to
dismiss, BAI made a cross-motion for partial summary judgment on some of its
claims. On April 25, 2007, the Court entered an order refusing to consider,
and
declining to accept BAI's summary judgment motion. On January 2, 2008, the
Supreme Court granted the Company’s and IP Holdings’ motion to dismiss BAI’s
lawsuit virtually in its entirety, holding that all but one claim against the
Company and five claims against IP Holdings were barred by the parties’ August
2005 release and settlement agreement or otherwise failed to state a claim.
As
to the sole remaining claim against the Company, BAI has indicated that it
will
be withdrawn against both the Company and IP Holdings. If the claim is not
withdrawn promptly, the Company and IP Holdings intend to move for its
dismissal. BAI has appealed the Supreme Court’s January 2, 2008 rulings, and the
Company and IP Holdings intend to vigorously defend against this
appeal.
Additionally,
on or about October 6, 2006, the Company and IP Holdings filed suit in the
U.S.
District Court for the Southern District of New York against BAI and its
guarantor, TKO Apparel, Inc. (“TKO”). In that complaint, the Company and IP
Holdings assert various contract, tort and trademark claims that arose as a
result of the failures of BAI with regard to the Bongo men's jeanswear business
and its wrongful conduct with regard to the Bongo women's jeanswear business.
The Company and IP Holdings are seeking monetary damages in an amount in excess
of $10 million and a permanent injunction with respect to the use of the Bongo
trademark. On January 4, 2007, the District Court denied the motion of BAI
and
TKO to dismiss the federal court action, and instead stayed the proceeding.
On
January 14, 2008, the Company and IP Holdings requested that the District Court
lift the stay. The Court scheduled a hearing on the matter on February 29,
2008,
which the Company plans to attend and will await a ruling from the Court
thereafter.
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.
|
14. Related
Party Transactions
|
On
May 1,
2003, the Company granted Kenneth Cole Productions, Inc. the exclusive worldwide
license to design, manufacture, sell, distribute and market footwear under
its
Bongo brand. The chief executive officer and chairman of Kenneth Cole
Productions is Kenneth Cole, who is the brother of Neil Cole, the Company's
Chief Executive Officer and President. During fiscal 2007, Fiscal 2006 and
Fiscal 2005, the Company received $0.7 million, $1.3 million and $1.4 million,
respectively, in royalties from Kenneth Cole Productions.
The
Candie's Foundation, a charitable foundation founded by Neil Cole for the
purpose of raising national awareness about the consequences of teenage
pregnancy, owed the Company $0.4 million at December 31, 2007. The Candie's
Foundation will pay-off the entire borrowing from the Company during 2008,
although additional advance will be made as and when necessary. Mr. Cole's
wife,
Elizabeth Cole, was employed by the Candie's Foundation at an annualized salary
of $0.1 million until May 2005. She continues to perform services for the
foundation but without compensation.
Future
net minimum lease payments under non-cancelable operating lease agreements
as of
December 31, 2007 are approximately as follows:
(000’s
omitted)
|
Year
ending December 31, 2008
|
|
$
|
1,583
|
|
|
Year
ending December 31, 2009
|
|
|
2,292
|
|
|
Year
ending December 31, 2010
|
|
|
2,234
|
|
|
Year
ending December 31, 2011
|
|
|
2,171
|
|
|
Year
ending December 31, 2012
|
|
|
1,633
|
|
|
Thereafter
|
|
|
21,081
|
|
|
Totals
|
|
$
|
30,994
|
|
The
leases require the Company to pay additional taxes on the properties, certain
operating costs and contingent rents based on sales in excess of stated
amounts.
Rent
expense was approximately $1.0 million, $0.7 million, and $0.5 million for
Fiscal 2007, fiscal 2006, and Fiscal 2005, respectively. Contingent rent amounts
have been immaterial for all periods.
|
16. Benefit
and Incentive Compensation Plans and
Other
|
The
Company sponsors a 401(k) Savings Plan (the “Savings Plan”) which covers all
eligible full-time employees. Participants may elect to make pretax
contributions subject to applicable limits. At its discretion, the Company
may
contribute additional amounts to the Savings Plan. The Company had no
contributions for fiscal 2007, fiscal 2006, and fiscal 2005.
At
December 31, 2007 the Company had available federal net operating loss
carryforwards (“NOL’s”) of approximately $18.8 million which were derived from
stock options exercises, for income tax purposes, which expire in the years
2009
through 2025. As of December 31, 2007, the Company had available state and
local
NOL’s ranging from approximately $76 million to $116 million (inclusive of $18.8
million from exercises of stock options).
The
Company accounts for income taxes in accordance with SFAS No. 109, “Accounting
for Income Taxes” (“SFAS 109”). Under SFAS 109, deferred tax assets and
liabilities are determined based on differences between the financial reporting
and tax basis of assets and liabilities and are measured using the enacted
tax
rates and laws that will be in effect when the differences are expected to
reverse. A valuation allowance is established when necessary to reduce deferred
tax assets to the amount expected to be realized. In determining the need for
a
valuation allowance, management reviews both positive and negative evidence
pursuant to the requirements of SFAS 109, including current and historical
results of operations, future income projections and the overall prospects
of
the Company's business. Based upon management's assessment of all available
evidence, including the Company's completed transition into a licensing
business, estimates of future profitability based on projected royalty revenues
from its licensees, and the overall prospects of the Company's business,
management is of the opinion that the Company will be able to utilize the
deferred tax assets in the foreseeable future, and as such do not anticipate
requiring a further valuation allowance. In fiscal 2007, the Company has
provided an additional valuation allowance of approximately $3 million to offset
state and local tax NOL’s which the Company believes are unlikely to be utilized
in the foreseeable future.
The
income tax provision (benefit) for federal, and state and local income taxes
in
the consolidated income statements consists of the following:
|
(000's
omitted)
|
|
Year
Ended
December
31,
2007
|
|
Year
Ended
December
31,
2006
|
|
Year
Ended
December
31,
2005
|
|
|
Current:
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
5,890
|
|
$
|
140
|
|
$
|
97
|
|
|
State
and local
|
|
|
830
|
|
|
-
|
|
|
-
|
|
|
Total
current
|
|
|
6,720
|
|
|
140
|
|
|
97
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
27,616
|
|
|
7,195
|
|
|
(4,274
|
)
|
|
State
and local
|
|
|
(1,814
|
)
|
|
-
|
|
|
(858
|
)
|
|
Total
deferred
|
|
|
25,802
|
|
|
7,195
|
|
|
(5,132
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
provision (benefit)
|
|
$
|
32,522
|
|
$
|
7,335
|
|
$
|
(5,035
|
)
|
The
Company's effective income tax rate differs from the federal statutory rate
primarily as a result of a decrease in the tax rate on certain deferred tax
liabilities.
The
significant components of net deferred tax assets of the Company consist of
the
following:
|
|
|
December
31,
|
|
|
(000's
omitted)
|
|
2007
|
|
2006
|
|
|
Net
operating loss carryforwards
|
|
$
|
16,866
|
|
$
|
26,596
|
|
|
Receivable
reserves
|
|
|
1,654
|
|
|
725
|
|
|
Depreciation
|
|
|
-
|
|
|
340
|
|
|
Federal
Alternative Minimum Tax Credits
|
|
|
958
|
|
|
-
|
|
|
Hedging
transaction
|
|
|
23,705
|
|
|
-
|
|
|
Intangibles
|
|
|
1,396
|
|
|
1,189
|
|
|
Contribution
carryover
|
|
|
378
|
|
|
307
|
|
|
Accrued
compensation and other
|
|
|
268
|
|
|
1,107
|
|
|
Total
deferred tax assets
|
|
|
45,225
|
|
|
30,264
|
|
|
Valuation
allowance
|
|
|
(16,625
|
)
|
|
(13,662
|
)
|
|
Net
deferred tax assets
|
|
|
28,600
|
|
|
16,602
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks,
goodwill and other intangibles
|
|
|
(24,310
|
)
|
|
(10,078
|
)
|
|
Depreciation
|
|
|
(108
|
)
|
|
-
|
|
|
Difference
in cost basis of acquired intangibles
|
|
|
(49,000
|
)
|
|
(49,000
|
)
|
|
Deferred
tax asset - acquisition related
|
|
|
-
|
|
|
4,832
|
|
|
Total
deferred tax liabilities
|
|
|
(73,418
|
)
|
|
(54,246
|
)
|
|
Total
net deferred tax assets (liabilities)
|
|
$
|
(44,818
|
)
|
$
|
(37,644
|
)
|
|
|
|
|
|
|
|
|
|
|
Current
portion of net deferred tax assets
|
|
$
|
7,442
|
|
$
|
3,440
|
|
|
Non
current portion of net deferred assets (liabilities)
|
|
$
|
(52,260
|
)
|
$
|
(41,084
|
)
|
The
following is a rate reconciliation between the amount of income tax provision
(benefit) at the Federal rate of 35% and provision for (benefit from) taxes
on
operating profit (loss):
|
|
|
Year
ended December, 31
|
|
|
(000's
omitted)
|
|
2007
|
|
2006
|
|
2005
|
|
|
Income
tax provision computed at the federal rate of 35%
|
|
$
|
33,697
|
|
$
|
13,544
|
|
$
|
3,709
|
|
|
Increase
(reduction) in income taxes resulting from:
|
|
|
|
|
|
|
|
|
|
|
|
State
and local income taxes (benefit), net of federal income
tax
|
|
|
(640
|
)
|
|
-
|
|
|
(944
|
)
|
|
Change
in valuation allowance
|
|
|
-
|
|
|
(6,200
|
)
|
|
(7,800
|
)
|
|
Other,
net
|
|
|
(535
|
)
|
|
(9
|
)
|
|
-
|
|
|
Total
|
|
$
|
32,522
|
|
$
|
7,335
|
|
$
|
(5,035
|
)
|
The
Company recognizes interest and penalties related to uncertain tax positions
in
income tax expense, which were zero for fiscal 2007, fiscal 2006, and fiscal
2005.
The
Company is subject to taxation in the U.S. and various state and local
jurisdictions. The Company remains subject to examination by U.S. federal and
state tax authorities for tax years 2003 through 2007.
18. 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 Year Ended
|
|
|
(000's
omitted)
|
|
December
31,
|
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
Net
sales by category:
|
|
|
|
|
|
|
|
|
Direct-to-retail
license
|
|
$
|
53,952
|
|
$
|
34,349
|
|
$
|
12,821
|
|
|
Wholesale
license
|
|
|
103,639
|
|
|
43,925
|
|
|
15,169
|
|
|
Other
(commissions)
|
|
|
2,413
|
|
|
2,420
|
|
|
2,166
|
|
|
|
|
$
|
160,004
|
|
$
|
80,694
|
|
$
|
30,156
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales by geographic region:
|
|
|
|
|
|
|
|
|
|
|
|
United
States
|
|
$
|
150,376
|
|
$
|
77,564
|
|
$
|
29,510
|
|
|
Other
|
|
|
9,628
|
|
|
3,130
|
|
|
646
|
|
|
|
|
$
|
160,004
|
|
$
|
80,694
|
|
$
|
30,156
|
|
|
19. Unaudited
Consolidated Interim Financial
Information
|
Unaudited
interim consolidated financial information for fiscal 2007 and fiscal 2006
is
summarized as follows:
|
|
|
First
Quarter
|
|
Second
Quarter
|
|
Third
Quarter
|
|
Fourth
Quarter
|
|
|
|
|
(in
thousands except per share data)
|
|
|
Fiscal
2007
|
|
|
|
|
|
|
|
|
|
|
Licensing
and commission revenue
|
|
$
|
30,841
|
|
$
|
39,071
|
|
$
|
42,681
|
|
$
|
47,411
|
|
|
Operating
income
|
|
|
22,359
|
|
|
29,729
|
|
|
29,320
|
|
|
40,381
|
|
|
Net
income
|
|
|
12,747
|
|
|
14,789
|
|
|
16,993
|
|
|
19,226
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share
|
|
|
0.23
|
|
|
0.26
|
|
|
0.30
|
|
|
0.33
|
|
|
Diluted
earnings per share
|
|
|
0.21
|
|
|
0.24
|
|
|
0.28
|
|
|
0.31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Licensing
and commission revenue
|
|
$
|
13,269
|
|
$
|
18,409
|
|
$
|
22,113
|
|
$
|
26,903
|
|
|
Operating
income
|
|
|
8,046
|
|
|
10,880
|
|
|
15,409
|
|
|
19,486
|
|
|
Net
income
|
|
|
7,357
|
|
|
8,345
|
|
|
7,946
|
|
|
8,853
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share
|
|
|
0.21
|
|
|
0.22
|
|
|
0.20
|
|
|
0.19
|
|
|
Diluted
earnings per share
|
|
|
0.18
|
|
|
0.19
|
|
|
0.18
|
|
|
0.17
|
|
20. Subsequent
Events
On
January 28, 2008, the Company entered into a new, five-year (subject to a
one-year extension) employment agreement, effective as of January 1, 2008,
with
Neil Cole, chairman of the board, president and chief executive officer, which
replaces his prior employment agreement that expired on December 31, 2007.
The
new employment agreement also supersedes and terminates the prior
non-competition and non-solicitation agreement between the Company and Mr.
Cole,
which, among other things, provided for him to receive 5% of the sale price
upon
a sale of the company under certain circumstances.
Under
the
new employment agreement, Mr. Cole is entitled to an annual base salary of
$1,000,000 and a signing bonus of $500,000, which is repayable in full or on
a
pro rata basis under certain circumstances. In addition, subject to stockholder
approval of an incentive bonus plan at the Company’s next annual meeting of
stockholders, Mr. Cole will be eligible to receive an annual cash bonus, not
to
exceed 150% of his base salary, based on the Company’s achievement of certain
annual performance-based goals.
Pursuant
to the terms of the new employment agreement, on February 19, 2008, Mr. Cole
also was granted time-vested restricted common stock units with a fair market
value on that date of $24.0 million (1,181,684 units) and
571,150 performance-based restricted common stock units with a fair market
value (as defined in the new employment agreement) on that date
of approximately $11.6 million. The restricted stock units will vest
in five substantially equal annual installments commencing on December 31,
2008,
subject to Mr. Cole’s continuous employment with the Company on the applicable
vesting date, and the performance stock units will be subject to vesting based
on the Company’s achievement of certain designated performance goals.
Both
grants are subject to forfeiture upon the termination of Mr. Cole's employment
under certain
circumstances.
In addition, Mr. Cole's ability to sell or otherwise transfer the common stock
underlying
the
restricted stock units and the performance stock units while he is employed
by
us is subject to certain
restrictions.
The grant of 216,639 additional performance stock units and the common stock
issuable
thereunder
is subject to stockholder approval of either an increase in the number of shares
of common stock
available
for issuance under our 2006 Equity Incentive Plan or another incentive plan
that
would cover such grants. Mr. Cole will also be entitled to various benefits,
including benefits available to our other senior executives of the Company
and
certain automobile, air travel and life insurance
benefits.
In
addition to his salary and benefits, Mr. Cole is eligible to receive an annual
cash bonus for each completed calendar year provided the Company establishes
(subject to shareholder approval) an incentive bonus plan intended to satisfy
the requirements of Section 162(m) of the internal revenue code of 1986, as
amended, including as a performance goal thereunder the targets specified in
the
employment agreement. The bonus shall be a percentage of the base salary
determined based on the level of the Company’s consolidated earnings before
interest, taxes, depreciation and amortization of fixed assets and intangible
assets achieved for such year against a target level established for such year
by the compensation committee of the board, in its sole discretion, but with
prior consultation with Mr. Cole. Mr. Cole’s annual bonus, if earned, will be
paid in a lump sum cash payment in the calendar year following the calendar
year
for which it is earned.
