PART I
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 17 brands through
its wholly-owned subsidiaries: Candie's®, Bongo®, Badgley Mischka®, Joe Boxer®,
Rampage®, Mudd®, London Fog®, Mossimo®, Ocean Pacific®/OP®, Danskin®, Rocawear®,
Cannon®, Royal Velvet®, Fieldcrest®, Charisma®, Starter® and Waverly®, which it
licenses directly to leading retailers (herein referred to as
direct-to-retail), wholesalers and suppliers for use across a wide range of
product categories, including apparel, footwear, sportswear, fashion
accessories, home products and decor, and beauty and fragrance. In addition,
Scion, a joint venture in which the Company has a 50% investment, owns the
Artful Dodger™ brand; Hardy Way, a joint venture in which the Company has a 50%
investment, owns the Ed Hardy® brands, and IPH Unltd, a joint venture in which
the Company has a 51% investment, owns the Ecko® and Zoo York®
brands. Products bearing the Company’s and its joint ventures’ brands
are sold across a variety of distribution channels, from the mass tier to the
luxury market. The Company and its joint ventures support their 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 the brands by entering into strategic licenses
with partners that have the responsibility for manufacturing and distributing
the licensed products. Licensees are 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 and that they are capable of
exceeding minimum sales targets and royalties that the Company generally
requires.
The Company plans to continue to build
its brand portfolio by acquiring additional brands. In assessing potential
acquisitions or investments, the Company primarily evaluates the strength of the
target brand as well as the expected viability and sustainability of future
royalty streams. The Company believes that this focused approach allows it to
screen a wide pool of consumer brand candidates, quickly evaluate acquisition
targets and efficiently complete due diligence for potential
acquisitions.
In addition, the Company also seeks to
monetize its brands through international licenses, partnerships and other
arrangements, such as joint ventures. Since September 2008 the
Company has established three 50% owned international joint ventures: Iconix
China, Iconix Latin America and Iconix Europe.
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 15 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
|
|
March 2007
|
|
Rocawear
|
|
October
2007
|
|
Official-Pillowtex brands
(Cannon, Royal Velvet, Fieldcrest and Charisma)
|
|
December
2007
|
|
Starter
|
|
October
2008
|
|
Waverly
|
In add
ition to the acquisitions above, the
Company has acquired ownership interest in the following brands through its
investments in joint ventures:
|
Date
Acquired/Invested
|
|
Brand
|
|
Investment
/ Joint Venture
|
|
Iconix's
Investment
|
|
November
2007
|
|
Artful
Dodger
|
|
Scion
|
|
50%
|
|
May
2009
|
|
Ed
Hardy
|
|
Hardy
Way
|
|
50%
|
|
October
2009
|
|
Ecko
and Zoo York
|
|
IPH
Unltd
|
|
51%
|
Further, the Company formed the
following joint ventures to develop and market the brands in specific
international markets:
|
Date
Created
|
|
Investment
/ Joint Venture
|
|
Iconix's
Investment
|
|
September
2008
|
|
Iconix
China
|
|
50%
|
|
December
2008
|
|
Iconix
Latin America
|
|
50%
|
|
December
2009
|
|
Iconix
Europe
|
|
50%
|
Through its licensing model, the Company
has eliminated inventory risk and substantially reduced the operating exposure
associated with traditional operating companies, improved its cash flows
and net income margins, and
ben
efited from the model's scalability, all
of which enables the Company to leverage new business 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.
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®,
Starter® and Waverly® 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 and
entering into joint ventures or other partnerships, each of which 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’ distribution
and retail presence and optimizing its licensees’ sales through innovative
marketing that increases consumer awareness and
loyalty;
|
|
·
|
continue its
international expansion
through additional licenses,
partnerships, joint ventures and other arrangements with leading retailers
and wholesalers worldwide;
and
|
|
·
|
continue
acquiring consumer brands or the rights to such 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, 2009, the combined
brand portfolio of the Company and its joint ventures consisted of the following
21 iconic consumer brands:
Wholly-owned
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 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 for Candie’s is Kohl’s Department Stores, Inc., herein referred
to as 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. Candie’s
shop-in-shops are in all Kohl’s stores, creating a brand specific shopping
experience. 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, Hayden
Panetierre, and most recently for 2009 and going forward for 2010, Britney
Spears.
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. In February 2010, the Company signed an exclusive direct-to-retail license
agreement with Kmart Corporation, herein referred to as Kmart, a wholly-owned
subsidiary of Sears Holding Corporation, for the brand in the United States and
its territories covering apparel, accessories and other categories.
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
, Vanessa Minnillo,
Kim Kardashian and Jesse McCartney. The brand is also being developed
internationally primarily through our joint ventures.
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
19 Badgley Mischka licenses, including a direct-to-retail license with the Home
Shopping Network for a diffusion brand, American Glamour by Badgley Mischka.
Badgley Mischka designs have been worn by
such celebrities as
Angelina Jolie, Catherine Zeta Jones, Halle Berry, Kate Winslet, Ashley and Mary
Kate Olsen, Teri Hatcher, and most recently, Eva Longoria, Carrie Underwood,
Lauren Hutton, Angelica Huston and Brooke Shields. The brand is also
being developed internationally primarily through our joint
ventures.
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. Since August
2001, Kmart has held the exclusive license for the brand in the United States
covering apparel, fashion accessories and home products for men, women, teens
and children. In September 2006, the Company expanded the license with Kmart to
extend the brand into Sears stores. The brand is also being developed
internationally primarily through our joint ventures.
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 14 wholesalers in the United States and to partners in Thailand and the
Middle East. Supermodels Petra Nemcova and Gisele Bundchen have been the
spokespeople for the Rampage brand and have modeled for its campaigns for the
past few seasons. Currently, the spokesperson for the brand is Bar
Rafaeli. The brand is also being developed internationally primarily
through our joint ventures.
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. In November 2008,
the Company entered into a multi-year licensing agreement with Kohl’s under
which Kohl’s became the exclusive U.S. retailer for apparel, fashion
accessories, jewelry and eyewear.
The brand
was
launched
at Kohl’s
in
July
2009 and is currently
sold
in
all U.S. stores in
25 categories.
Mudd footwear will continue
to be distributed through mid-level department stores such as JC Penney, Kohl’s
and specialty stores. The brand is also being developed
internationally primarily through our joint ventures.
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 primarily
through the department store channel. The Company has 16 London Fog
licenses, including a direct-to-retail license agreement with Hudson’s Bay
Corporation in Canada, covering apparel, accessories and lifestyle
products. The brand is also being developed internationally through
our joint ventures.
Mossimo.
Mossimo is known as a contemporary,
active and youthful lifestyle brand and is one of the largest apparel brands in
the U.S.. The brand was established in 1986 and acquired by the Company in
October 2006. Since 2000, Target Corporation, herein referred to as Target, has
held the exclusive Mossimo license in the U.S., covering apparel products for
men, women and children, including casual sportswear, denim, swimwear, bodywear,
watches, handbags and other fashion accessories.
The brand is also licensed to wholesale
partners in Australia, New
Zealand
, the Philippines,
and Japan.
The
brand is also being developed internationally through our joint
ventures.
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. In 2008, the U.S. OP business was converted to a
direct-to-retail license with Wal-Mart Stores, Inc., herein referred to as
Wal-Mart. In Spring 2008, OP launched exclusively in select Wal-Mart stores in
the U.S, and was expanded to all stores in the U.S., Canada, Mexico and
Argentina during 2009.
In addition, OP has licenses covering
Japan, the Middle East region, and other terrirtories around the
world.
For 2009,
the marketing campaign featured six young Hollywood celebrities including Anna
Lynne McCord, Sophia Bush, Solange Knowles, Joel Madden, Brody Jenner and Cody
Liney.
Danskin
. Danskin, the Company’s oldest brand,
is a 126 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, mid-tier,
specialty and sporting goods stores, as well as through
Danskin.com. In addition, the Danskin Now brand has been licensed to
Wal-Mart on a direct-to-retail basis for apparel and fitness
equipment. In January 2009, the Danskin Now brand was repositioned
and re-launched at Wal-Mart with an expanded assortment of products and new
spokesperson Gabrielle Reece.
Rocawear.
Rocawear is a leading urban lifestyle
apparel brand established by Shawn “Jay-Z” Carter and his partners in 1999. The
Company acquired the Rocawear brand in March 2007. The Rocawear brand is
currently licensed in the United States in 30 categories,, including men’s,
women’s and kids’ apparel, outerwear, footwear, jewelry, handbags and fragrance.
Rocawear products are sold primarily through better department and specialty
stores.
The brand is also
licensed to wholesale partners in
the Middle East, Russia, Australia and
New Zealand, and is also being developed internationally through our joint
ventures. The founder, Jay-Z, remains actively involved in the brand
as an owner of the core licensee, and serves as the brand’s creative director
pursuant to an endorsement and services agreement signed in March
2007. Jay-Z was featured in Rocawear’s 2009 advertising
campaign.
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. When the Company acquired
Cannon, it was distributed in over 1,000 regional department stores, including
Meijer, ShopKo, Mervyn’s and Steinmart, as well as in Wal-Mart and Costco. In
February 2008, the Company signed a direct-to-retail license with Kmart for
Cannon to be sold exclusively in both Kmart and Sears stores. Cannon
was established in 1887, making it the Company’s third oldest
brand.
The brand
is also licensed to wholesale partners in
Thailand, Singapore, Philippines,
Indonesia, Greece and South Africa.
Royal
Velvet.
Royal Velvet is a
distinctive luxury home textile brand that strives to deliver the highest
quality to consumers. Royal Velvet products include towels, sheets,
rugs and shams. The Royal Velvet towel has been an industry standard
since 1954. The core licensee for Royal Velvet is Li & Fung Limited, which
in February 2008 established an exclusive distribution arrangement with Bed Bath
& Beyond Inc. for certain Royal Velvet products. Brooke Shields
and her family were featured in the most recent Royal Velvet advertising
campaign.
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 direct-to-retail license in the United States since Spring 2005.
The brand is also licensed
to wholesale partners in
Thailand, Singapore, New Zealand, Greece
and South Africa, and is also being developed internationally through our joint
ventures. The Fieldcrest brand was created in 1883, making it the
Company’s second oldest brand.
Charisma.
Charisma home textiles were introduced
in the 1970's and are known for their quality materials and classic
designs. In February 2009, the Company signed a direct-to-retail
license with Costco Wholesale Corporation, herein referred to as Costco, for
certain Charisma products to be sold in Costco stores and on costco.com in the
U.S. and its territories, Canada, the United Kingdom, Japan, Mexico, South
Korea, Taiwan and Australia. In addition, the brand continues to be
distributed through better department stores such as
Bloomingdales. Jason Lewis was featured in the most recent Charisma
advertising campaign.
Starter.
Starter, founded in 1971, is
one of the original brands in licensed team sports merchandise and is a highly
recognized brand of athletic apparel and footwear. The Company acquired Starter
in December 2007. At the time of the acquisition, the brand was
distributed in the United States primarily at Wal-Mart through a number of
different wholesale licensees. In July 2008, the brand was licensed to Wal-Mart
on a direct-to-retail basis. In Spring 2009, the Starter brand had an expanded
re-launch in all U.S. Wal-Mart stores, supported by an advertising campaign
featuring Tony Romo, quarterback of the Dallas Cowboys. The brand is also being
developed internationally through our joint ventures.
Waverly.
Founded in 1923, Waverly is a premier
home fashion and lifestyle brand and one of the most recognized names in home
decor. Waverly has two direct-to-retail agreements, Waverly Home with Target,
which was recently renewed with Target for a term that expires in 2015, and
Waverly Home Classics with Lowe's Companies, Inc. for a variety of select home
furnishings. Waverly also has licenses for products including fabric,
window treatments and bedding that are sold through retailers such as Jo-Ann’s
and JC Penney as well as interior design rooms.
Brands Owned by the Company’s Joint
Ventures
Scion LLC
Scion is a brand management and
licensing company formed by the Company with Shawn “Jay-Z” Carter in March 2007
to buy, create, develop and license brands across a spectrum of consumer product
categories. In November 2007, Scion, through its wholly-owned subsidiary, Artful
Holdings LLC,
purchased
the Artful Dodger brand
, a high end urban apparel brand. The
brand is licensed in the United States for in a number of apparel
categories.
Artful
Dodger has also been licensed to wholesale partners and distributors in Canada
and Europe.
Hardy Way
In May
2009, the Company acquired
a 50% interest in Hardy Way
, the owner of the Ed Hardy brands and
trademarks.
Don Ed Hardy and his artwork date back
to 1967 when he transformed the tattoo business into an artistic medium. He
began licensing his name and artwork for apparel in 2003 and today
the
Ed Hardy
brand
is
recognized by its
tattoo inspired lifestyle products.
Over the past five years, Ed Hardy has developed into a global consumer products
brand sold in over 58 countri
es and 50 different
categories.
IPH Unltd
In October 2009, the Company, through
the newly formed joint venture company IPH Unltd, acquired a 51% controlling
stake in the
Ecko portfolio
of brands, including
the
Ecko
brands
and Zoo York.
The founder and chief designer, Marc
Ecko, remains actively involved in the brands, and serves as the chief creative
officer of IPH Unltd.
The Ecko
brands
. Founded in 1993 by
Marc Ecko, Seth Gerszberg and their partners, Ecko and its various diffusion
brands (e.g. Ecko Unltd, Ecko Red, Ecko Function, among others) are
marketed and sold
to a
wide spectrum of consumers
in
various lifestyle
categories
,
including active-athletic, streetwear,
collegiate/preppy and denim fashion.
There are currently 20 licenses for Ecko
products in the United States, including men’s, women’s and kids’ apparel,
outerwear, underwear and footwear. Ecko products are sold primarily through
better department and specialty stores.
The
Ecko brands are
also licensed to wholesale partners in
Japan, Latin America,
Australia, India, South Africa and other countries throughout the
world.
Zoo York
. Zoo York is an East Coast
based action lifestyle brand, named for the graffiti-art infused counterculture
of 1970’s New York City. There are currently 8 licenses for Zoo York
products, including men’s, women’s and kids’ apparel and footwear. In
December 2009, the brand was licensed to Li & Fung USA for the core men’s
apparel category, beginning January 1, 2010 for an initial term of five
years. Among its current spokespeople is Zered Bassett, a world
renowned skateboarder on the Zoo York skateboard team.
International Joint
Ventures
Iconix China
In September 2008, the Company and Novel
Fashions Holdings Limited, herein referred to as Novel, formed a joint venture,
herein referred to as Iconix China, to develop, exploit and market the Company's
brands in the People’s Republic of China, Hong Kong, Macau and Taiwan, herein
referred to as the China territory. Iconix China seeks to maximize
brand monetization through investment, whereby Iconix China receives a minority
equity stake in local operating companies in exchange for the rights to one or
more of the Company’s brands in the China territory and brand management
support. Since September 2008, Iconix China has completed three
separate investments for its Rampage, London Fog and Rocawear
brands.
Iconix Latin America
In December 2008, the Company
contributed substantially all rights to its wholly-owned brands in Mexico,
Central America, South America, and the Caribbean, herein referred to as the
Latin America territory, to Iconix Latin America, a newly formed wholly-owned
subsidiary. Also in December 2008 and shortly after the formation of
Iconix Latin America, New Brands America LLC, herein referred to as New Brands,
an affiliate of the Falic Group, purchased a 50% interest in Iconix Latin
America, to assist the Company in developing, exploiting, marketing
and licensing the Company's brands in the Latin America
territory. Iconix Latin America has a total of 18 licenses for
various consumer products for the Bongo, Joe Boxer, Mossimo, Danskin, Rocawear,
Cannon, Fieldcrest and Starter brands.
Iconix Europe
In December 2009, the
Company contributed substantially all rights to its wholly-owned brands in
all member states and candidate states of the European Union, and certain other
European countries, herein referred to as the European territory, to Iconix
Europe, a newly formed wholly-owned subsidiary of the Company. Also
in December 2009 and shortly after the formation of Iconix Europe, an investment
group led by The Licensing Company and Albion Equity Partners LLC, purchased a
50% interest in Iconix Europe through Brand Investments Vehicle Group 3 Limited
to assist the Company in developing, exploiting, marketing and
licensing the Company's brands in the European territory.
Iconix Europe has a total of 13 licenses
for various consumer products for the Joe Boxer, London Fog, Ocean Pacific/OP,
Danskin, Rocawear, Cannon, Fieldcrest, Royal Velvet, Charisma and Starter
brands.
Other
Bright Star
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, 2009, 2008, and 2007 Bright Star’s agency commissions
represented approximately 1%, 1% and 2%, respectively, of the Company’s
revenues.
Licensing and other
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 direct-to-retail
and traditional wholesale licenses. Typically, in a direct-to-retail license,
the Company grants exclusive rights to one of its brands to a single national
retailer for a broad range of product categories. For example, the Candie’s
brand is licensed exclusively to Kohl’s in the United States across
approximately 25 product categories. Direct-to-retail licenses provide retailers
with proprietary rights to national brands and favorable economics.
Proprietary brands also typically receive greater support from retailers,
including premium shelf space and strong in-store presentations. In a
traditional wholesale license, the Company grants rights to a single or small
group of related product categories to a wholesale supplier, who is permitted to
sell licensed products to multiple stores within an approved channel of
distribution. For example, the Company licenses the Rocawear brand to numerous
wholesale suppliers for products ranging from footwear and apparel to handbags
and fragrances, for sale and distribution primarily to department and specialty
stores.
Each of the Company’s licenses has a
stipulated territory or territories, as well as distribution channels in which
the licensed products may be sold. Currently, most of the Company’s licenses are
U.S. based licenses, but the Company also seeks to monetize its trademarks
internationally through licenses, partnerships, and other arrangements, such as
joint ventures.
Beginning in 2008 and continuing through
2009, the Company entered into three international joint
ventures. For further information, see above for discussion on Iconix
China, Iconix Latin America and Iconix Europe.
The Company's licenses typically require
the licensee to pay the Company royalties based upon net sales with 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 January 1, 2010 the Company and its joint
ventures had a contractual right to receive approximately $600 million of
aggregate minimum royalty revenue through the balance of all of their current
licenses, excluding any renewals.
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 typically
maintains the right in its licenses to preview and approve all product,
packaging and other presentations of the licensed mark. Moreover, in many of its
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.
For the year ended December 31, 2009,
the Company’s largest direct-to-retail licenses were with Target for the Mossimo
brand, Wal-Mart for the Starter, OP and Danskin brands, and Kohl’s for the
Candie’s brand, which collectively represented approximately 37% of total
revenue for the period. The Company’s largest wholesale licenses were
for Rocawear’s men’s apparel, and children and junior sportswear, and Royal
Velvet and Cannon home furnishings, which collectively represented approximately
18% of total revenue for the period.
Key direct-to-retail
licenses
Wal-Mart licenses
Revenue
generated by the Company’s three licenses with Wal-Mart, accounted for 23%, 3%,
and 3% of the Company’s revenue for fiscal 2009, fiscal 2008 and fiscal 2007,
respectively. The following is a description of these
licenses:
Starter
. In December 2007, the
Company entered into a license agreement with Wal-Mart granting Wal-Mart the
exclusive right to design, manufacture, sell and distribute a broad range of
apparel and accessories under the Starter trademark in the United States, Canada
and Mexico. The initial term of this license expires on December 31, 2013,
subject to Wal-Mart’s option to renew for up to three additional consecutive
terms of five years, each contingent on Wal-Mart meeting specified performance
and minimum sales standards. The agreement also provides for minimum
royalties that Wal-Mart is obligated to pay the Company for each contract
year.
Ocean
Pacific/OP
. In
August 2007, the Company entered into an exclusive license agreement with
Wal-Mart granting Wal-Mart the right to design, manufacture, sell and distribute
a broad range of apparel and accessories under the Ocean Pacific/OP marks in the
United States. The agreement also grants Wal-Mart rights to use the brands in
Brazil, China and India, as well as the right of first negotiation with respect
to other international territories. The initial term of this license expires on
June 30, 2011, subject to Wal-Mart’s option to renew for up to three additional
two year terms, each contingent on Wal-Mart meeting specified performance and
minimum sales standards. The agreement also provides for minimum
royalties that Wal-Mart is obligated to pay the Company for each contract
year.
Danskin
Now
. As part of
the Danskin brand acquisition in March 2007, the Company acquired a license with
Wal-Mart, which commenced in 2003. Pursuant to the license,
Wal-Mart was granted the exclusive right to manufacture, market and sell through
Wal-Mart stores located in the United States and its territories, Canada,
Central America and Argentina, a broad range of active apparel and related
products under the Danskin Now trademark. In July 2008, the Company
entered into a new license agreement with Wal-Mart for the period commencing
January 1, 2009 and continuing through December 31, 2010, subject to Wal-Mart’s
option to renew for up to three additional two year terms, each contingent on
Wal-Mart meeting specified performance and minimum sales standards. Further, the
licensed territory was expanded from the prior agreement to include Canada,
Central America and Argentina. The new license also provides for
guaranteed annual minimum royalties that Wal-Mart is obligated to pay the
Company for each contract year.
Target licenses
Revenue
generated by the Company’s three licenses with Target, accounted for 10%, 11%,
and 14% of the Company’s revenue for fiscal 2009, fiscal 2008 and fiscal 2007,
respectively. The following is a description of these
licenses:
Mossimo.
As part of the Company's
acquisition of the Mossimo trademarks in October 2006, the Company
acquired the license with Target, which was originally signed in 2000 and was
subsequently amended and restated 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. In January 2009, Target renewed the
license through January 31, 2012. If Target is current with payments of its
obligations under the license, Target has the right to renew the 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 a guaranteed minimum royalty for each
contract year.
Fieldcrest.
As part of the Company's
acquisition of Official-Pillowtex in October 2007, the Company acquired the
license with Target for the Fieldcrest brand, which commenced in March 2004.
Pursuant to this license, Target has the exclusive right to produce and
distribute substantially all Fieldcrest-branded home furnishing products sold in
the United States, its territories and possessions through Target retail stores.
In November 2009, Target renewed the license for an additional five year period,
expiring January 31, 2015.
Waverly.
As part of the Company's
acquisition of Waverly in October 2008, the Company acquired the license
with Target for the Waverly brand, which was originally signed in April 2005 and
was subsequently amended and restated in February 2008, and again in September
2008. Pursuant to this license, Target has the exclusive right to produce and
distribute substantially all Waverly Home-branded home furnishing products sold
in the United States, its territories and possessions through Target retail
stores. The current term of this license expires on January 31, 2011, and was
recently renewed for a term that expires in 2015. Target’s has an
option to renew it for one additional term of one year.
Kohl’s licenses
Revenue
generated by the Company’s two licenses with Kohl’s, accounted for 8%, 6%, and
8% of the Company’s revenue for fiscal 2009, fiscal 2008 and fiscal 2007,
respectively. The following is a description of these
licenses:
Candie’s.
In December 2004, the
Company entered into a license agreement with Kohl’s for an initial term of five
years expiring January 29, 2011. 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. In November 2009, the license agreement was amended
to extend the term for an additional five year period expiring on January 29,
2016. Kohl’s also has the option to renew the license for up to two additional
consecutive terms of five years contingent on Kohl's meeting specified
performance and minimum sale standards. The agreement, as amended, also provides
for minimum royalties and advertising payments that Kohl’s is obligated to pay
the Company for 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.
Mudd
. In November 2008, the
Company entered into a license agreement with Kohl’s granting Kohl’s the
exclusive right to design, manufacture, sell and distribute a broad range of
Mudd-branded apparel and accessories in the United States and its territories.
The initial term of this license expires on January 31, 2015, subject to Kohl’s
option to renew for up to three additional consecutive terms of five
years. The agreement also provides for minimum royalties that Kohl’s
is obligated to pay the Company for each contract year.
Kmart/Sears licenses
Revenue
generated by the Company’s three licenses with Kmart, accounted for 6%, 5%, and
6% of the Company’s revenue for fiscal 2009, fiscal 2008 and fiscal 2007,
respectively. The following is a description of these
licenses:
Joe
Boxer.
As part
of the Company's acquisition of Joe Boxer in July 2005, the Company acquired the
license with Kmart, which commenced in August 2001, pursuant to which Kmart
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 that was due to expire in December
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. The new license also provides for guaranteed
annual minimums and provides for the expansion of Joe Boxer’s distribution into
Sears stores.
Cannon.
In February 2008, the
Company entered into a license agreement with Kmart granting Kmart the exclusive
right to design, manufacture, sell and distribute a broad range of home
furnishings under the Cannon trademark in the United States and Canada. The
initial term of this license expires on February 1, 2014, subject to Kmart’s
option to renew for up to three additional consecutive terms of five years, each
contingent on Kmart meeting specified performance and minimum sale
standards. The agreement also provides for minimum royalties that
Kmart is obligated to pay the Company for each contract year. The
Cannon brand was fully launched in both Kmart and Sears stores in the Company’s
third fiscal quarter of 2009.
Bongo
. In February
2010, the Company entered into a license agreement
with Kmart granting Kmart the exclusive
right to design, manufacture, sell and distribute a broad range of apparel,
accessories and other categories under the Bongo trademark in the United States
and its territories. The initial term of this license expires on February 1,
2016. The agreement also provides for minimum royalties that Kmart is
obligated to pay the Company for each contract year. The Bongo brand
is expected to launch in Sears stores during Fall 2010.
Key wholesale
licenses
Li & Fung
USA.
As part of the
Company's acquisition of Official-Pillowtex in October 2007, the Company
acquired the licenses with Li & Fung USA for the Royal Velvet and Cannon
brands. Pursuant to these licenses, Li & Fung USA has the exclusive
right to produce and distribute Cannon branded home furnishing products in
certain countries outside of the United States and Canada and the worldwide
right to produce and distribute home furnishing products under the Royal Velvet
marks. The initial terms of the licenses expire on December 31, 2013, subject to
Li & Fung USA's option to renew for additional three years terms for Royal
Velvet and additional five year terms for Cannon. Total revenue
generated from these licenses with Li & Fung USA accounted for 9%, 11%, and
4% of the Company’s overall revenue in the years ended December 31, 2009, 2008
and 2007, respectively.
Marketing
The Company believes that marketing is a
critical element in maximizing brand value to its licensees and to the Company.
The Company’s in-house marketing team tailors advertising for each of the
Company’s brands, and each year 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
entertainers, result in increased sales and consumer awareness of its brands.
Because of the Company’s established relationships with celebrities,
entertainers, agents, managers, 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. With
respect to its joint ventures, the Company works with its joint venture partners
with respect to marketing, advertising and trend direction.
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, running Internet advertisements and promoting public relations
events, securing product placements and developing sweepstakes and media
contests 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
, as well as in popular lifestyle and
entertainment magazines such as
People, Us
Weekly
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. In 2009, television
commercials aired featuring Brittney Spears for Candie’s at Kohl’s and Tony Romo
for Starter at Wal-Mart. Further, the Company markets certain of its
brands online, through email blasts, banner advertisements, online sweepstakes
and gift with purchase programs. 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 for 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 its brand
management and marketing functions to foster its ability to develop innovative
and creative marketing and brand support for each existing brand. This structure
can be leveraged to support future acquisitions with limited 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 and Rocawear, the Company has contracted the
exclusive services of the designers who founded the respective brands to control
creative direction. IPH Unltd has contracted the exclusive services
of the designer who founded the Ecko portfolio of brands. Hardy Way
has contracted the exclusive services of the artist who founded the Ed Hardy
brand.
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, herein referred to as the SEC, under applicable law as
soon as reasonably practicable after it files such material. The Company’s
website also contains information about its history, investor relations,
governance and links to access copies of its publicly filed
documents. Further, 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, operated by the Company or its licensees, 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.
Competition
The Company’s brands are all subject to
extensive competition by various domestic and foreign brands. Each of its brands
has many competitors within each of its specific distribution channels that span
a broad variety of product categories including the apparel and home
furnishings and decor industries. For example, while Rampage may compete
with Guess 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 in the luxury
market, such as Vera Wang. Other of our brands (such as Danskin), which are
distributed both at the mass level (through the diffusion brand Danskin Now) and
at the department and specialty store level, 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.
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, licenses 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 wholly-owned trademarks
are owned by six subsidiaries and three international joint ventures in their
respective territories. 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, Starter and Waverly related
trademarks; and Official-Pillowtex owns the Fieldcrest, Royal Velvet, Cannon and
Charisma trademarks, each for numerous categories of goods. The Ed
Hardy related trademarks are owned by the Hardy Way joint venture, of which the
Company owns 50%. The Ecko and Zoo York related trademarks are owned
by the IPH Unltd joint venture, of which the Company owns 51%. 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 and its
joint ventures intend to renew these registrations as appropriate prior to
expiration. In addition, the Company’s subsidiaries and joint ventures register
their trademarks in other countries and regions around the
world.
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
licensees whose actual sales royalties exceed minimum royalties, is subject to
seasonal fluctuations. The results of operations in any quarter therefore will
not necessarily be indicative of the results that may be achieved for a full
fiscal year or any future quarter.
Employees
As of December 31, 2009, the Company had
a total of
66 full-time
employees. Of these 6
5
employees, 5 were named executive officers of the Company. The
remaining employees are senior managers, middle management, marketing, and
administrative personnel. None of the Company’s employees are 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)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Revenues from external
customers:
|
|
|
|
|
|
|
|
|
|
|
United
States
|
|
$
|
218,693
|
|
|
$
|
195,856
|
|
|
$
|
150,376
|
|
|
Other
|
|
|
13,365
|
|
|
|
20,905
|
|
|
|
9,628
|
|
|
|
|
$
|
232,058
|
|
|
$
|
216,761
|
|
|
$
|
160,004
|
|
For a
discussion as to our long-lived assets, see Note 4 to our Notes to
Consolidated Financial Statements.
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.
Our revenues are 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 or sales
royalties 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, herein referred
to
as our term loan
facility, and
the
asset-backed notes issued by our subsidiary IP Holdings, herein referred to as
our asset-backed notes
. Further, this failure may
impact
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, Starter and Waverly 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 asset-backed 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, 2009, our
consolidated balance sheet reflects debt of approximately $662.4 million,
including secured debt of $402.5 million ($217.6 million under our term loan
facility, $94.9 million under asset-backed notes issued by our subsidiary, IP
Holdings, and $90.0 million under a promissory note, herein referred to as the
promissory note, issued by IPH Unltd), primarily all of which was incurred in
connection with our acquisition activities. In accordance with FSP APB 14-1, our
1.875% convertible senior subordinated notes due 2012, herein referred to as the
convertible notes, are included in our $662.4 million of consolidated debt at a
net debt carrying value of $247.7 million; however, the principal amount owed to
the holders of our convertible senior subordinated notes is $287.5 million. We
may also assume or incur additional debt, including secured debt, in the future
in connection with, or to fund, future acquisitions. Our debt
obligations:
|
|
•
|
could impair our
liquidity;
|
|
|
•
|
could make it more difficult for
us to satisfy our other
obligations;
|
|
|
•
|
require us to dedicate a
substantial portion of our cash flow to payments on our debt obligations,
which reduces the availability of our cash flow to fund working capital,
capital expenditures and other corporate
requirements;
|
|
|
•
|
could impede us from obtaining
additional financing in the future for working capital, capital
expenditures, acquisitions and general corporate
purposes;
|
|
|
•
|
impose restrictions on us with
respect to the use of our available cash, including in connection with
future acquisitions;
|
|
|
•
|
make us more vulnerable in the
event of a downturn in our business prospects and could limit our
flexibility to plan for, or react to, changes in our licensing markets;
and
|
|
|
|
|
|
|
•
|
could
place us at a
competitive disadvantage when compared to our competitors who have less
debt.
|
While we
believe that by virtue of the guaranteed minimum and percentage royalty payments
due to us under our licenses we will generate sufficient revenues from our
licensing operations to satisfy our obligations for the foreseeable future, in
the event that we were to fail in the future to make any required payment under
agreements governing our indebtedness or fail to comply with the financial and
operating covenants contained in those agreements, we would be in default
regarding that indebtedness. A debt default could significantly diminish the
market value and marketability of our common stock and could result in the
acceleration of the payment obligations under all or a portion of our
consolidated indebtedness. In the case of our term loan facility, it would
enable the lenders to foreclose on the assets securing such debt, including the
Ocean Pacific/OP, Danskin, Rocawear, Starter, Mossimo and Waverly trademarks, as
well as the trademarks acquired by us in connection with the
Official-Pillowtex
We have experienced rapid growth in
recent years. If we fail to manage this or any future growth, our business and
operating results could be harmed.
Our business has grown dramatically over
the past several years. For example, our revenue increased from $
160.0
million for the year e
nded December 31, 2007 to
$232.1
million for
the year ended
December 31, 2009
. Our
growth has largely resulted from our acquisition of new brands of various sizes.
Since October 2004, we acquired 15 of the
21
iconic brands
(or rights to use those brands and
trademarks)
we
and our joint ventures
currently own and increased our total
number of licenses from approximately 18 to approximately
255
. In addition to these acquisitions, in
November 2007, Scion purchased the Artful Dodger brand through its wholly-owned
sub
sidiary, Artful
Holdings;
in May 2009, we
acquired a 50% interest in Hardy Way, the owner of the Ed Hardy brand and
trademarks
; and in October
2009 we acquired a 51% controlling interest in IPH Unltd, the owner of the Ecko
and Zoo York brands and trademarks
.
In addition, since September 2008 we
have formed three international 50% owned joint ventures: Iconix China, Iconix
Latin America, and Iconix Europe.
Furthermore, we continue to evaluate and
pursue appropriate acquisition opportunities to the extent we believe that such
opportunities would be in the best interests of our company and our
stockholders.
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
their fair values and
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. In addition
as we continue to grow larger, we will likely need 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
ben
efits due to integration or licensing
difficulties.
A key component of our growth strategy
is the acquisition of additional trademarks. Historically, we have been involved
in numerous acquisitions of varying sizes. We continue to explore new
acquisitions. However, as our competitors continue to pursue our brand
management model, acquisitions may become more expensive and suitable
acquisition candidates could become more difficult to find. In
addition, even if we successfully acquire additional trademarks or the rights to
use additional trademarks, we may not be able to achieve or maintain
profitability levels that justify our investment in, or realize planned
ben
efits 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
ben
efits to us, its potential licensing
scale and credit worthiness of licensee base, acquisitions, whether they be of
additional intellectual property assets or of the companies that own them,
entail numerous risks, any of which could detrimentally affect our results of
operations and/or the value of our equity. These risks include, among
others:
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unanticipated costs associated
with the target acquisition;
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negative effects on reported
results of operations from acquisition related charges and amortization of
acquired intangibles;
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diversion of management’s
attention from other business
concerns;
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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;
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adverse effects on existing
licensing relationships;
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potential difficulties associated
with the retention of key employees, and the assimilation of any other
employees, who may be retained by us in connection with or as a result of
our acquisitions; and
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risks of entering new domestic and
international markets (whether it be with respect to new licensed product
categories or new licensed product distribution channels) or markets in
which we have limited prior
experience.
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When we acquire intellectual property
assets or the companies that own them, our due diligence reviews are subject to
inherent uncertainties and may not reveal all potential risks. We may
therefore fail to discover or inaccurately assess undisclosed or contingent
liabilities, including liabilities for which we may have responsibility as a
successor to the seller or the target company. As a successor, we may
be responsible for any past or continuing violations of law by the seller or the
target company, including violations of decency laws. Although we
generally attempt to seek contractual protections through representations,
warranties and indemnities, we cannot be sure that we will obtain such
provisions in our acquisitions or that such provisions will fully protect us
from all unknown, contingent or other liabilities or costs. Finally,
claims against us relating to any acquisition may necessitate our seeking claims
against the seller for which the seller may not indemnify us or that may exceed
the scope, duration or amount of the sellers indemnification
obligations.
Acquiring additional trademarks could
also have a significant effect on our financial position and could cause
substantial fluctuations in our quarterly and yearly operating results.
Acquisitions could result in the recording of significant goodwill and
intangible assets on our financial statements, the amortization or impairment of
which would reduce our reported earnings in subsequent years. No assurance can
be given with respect to the timing, likelihood or financial or business effect
of any possible transaction. Moreover, as discussed below, our ability to grow
through the acquisition of additional trademarks will also depend on the
availability of capital to complete the necessary acquisition arrangements. In
the event that we are unable to obtain debt financing on acceptable terms for a
particular acquisition, we may elect to pursue the acquisition through the
issuance by us of shares of our common stock (and, in certain cases, convertible
securities) as equity consideration, which could dilute our common stock because
it could reduce our earnings per share, and any such dilution could reduce the
market price of our common stock unless and until we were able to achieve
revenue growth or cost savings and other business economies sufficient to offset
the effect of such an issuance. As a result, there is no guarantee that our
stockholders will achieve greater returns as a result of any future acquisitions
we complete.
We may require additional capital to
finance the acquisition of additional brands and our inability to raise such
capital on
ben
eficial terms or at all could restrict
our growth.
We may, in the future, require
additional capital to help fund all or part of potential 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 guarantee 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 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
direct-to-retail 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 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
and joint
ventures
, 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.
Further, the rights to our brands in
the
Latin America
territory, the
China
territory and the European territory
are controlled primarily
through our joint ventures in these regions and while we believe that our
partnerships in these areas will enable us to better protect our trademarks in
countries covered by the ventures, we do not control
these
joint venture compan
ies
and thus most decisions relating to the
use and enforcement of the marks in these countries will be subject to the
approval of our local partners.
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 Wal-Mart, Target, Kohl’s
and Kmart, were our four largest direct-to-retail licensees during the year
ended December 31, 2009, representing approximately 23%, 10%, 8% and 6%,
respectively, of our total revenue for such period, while Li & Fung USA
was our largest wholesale licensee, representing approximately 9% of our total
revenue for such period. Our license agreement with Target for the Mossimo
trademark grants it the exclusive U.S. license for substantially all
Mossimo-branded products for a current term expiring in January 2012; our second
license agreement with Target for the Fieldcrest mark grants it the exclusive
U.S. license for substantially all Fieldcrest-branded products for a term
expiring in January 2015; and our third license agreement with Target grants it
the exclusive U.S. license for Waverly Home for a broad range of Waverly
Home-branded products for a term expiring in January 2015. Our license agreement
with Wal-Mart for the Ocean Pacific and OP trademarks grants it the exclusive
license in the U.S., Canada, Mexico, China, India and Brazil for substantially
all Ocean Pacific/OP-branded products for an term expiring June 30, 2011;
our second license agreement with Wal-Mart for the Danskin Now trademark grants
it the exclusive license in the U.S., Canada, Argentina, and Central America for
substantially all Danskin Now-branded products for an initial term expiring
December 2010; and our third license agreement with Wal-Mart for the Starter
trademark grants it the exclusive license in the U.S., Canada and Mexico for
substantially all Starter-branded products for an initial term expiring December
2013. Our license agreement with Kohl’s for the Candie’s trademark grants it the
exclusive U.S. license for a wide variety of Candie’s-branded product categories
for a term expiring in January 2016, and our license agreement with Kohl’s for
the Mudd trademark grants it the exclusive U.S. license for a wide variety of
Mudd-branded product categories for an initial term expiring in January
2015. Our license agreement with Kmart grants it the exclusive U.S. license
with respect to the Joe Boxer trademark for a wide variety of product categories
for a term expiring in December 2010 and our license agreement with Kmart for
the Cannon trademark granted the exclusive license in the U.S. and Canada for a
wide variety of product categories for an initial term expiring February 1,
2014. Our license agreements with Li & Fung USA grant it the
exclusive worldwide license with respect to our Royal Velvet trademarks for a
variety of products sold exclusively at Bed Bath & Beyond in the U.S.,
and the exclusive license (in many countries outside of the U.S. and
Canada) for the Cannon trademark for a variety of products. The term for each of
these licenses with Li & Fung USA expires on December 31, 2013.
Because we are dependent on these licensees for a significant portion of our
licensing revenue, if any of them were to have financial difficulties affecting
its ability to make guaranteed payments, or if any of these licensees decides
not to renew or extend its existing agreement with us, our revenue and cash
flows could be reduced substantially.
We are dependent upon our chief
executive officer and other key executives. If we lose the services of these
individuals we may not be able to fully implement our business plan and future
growth strategy, which would harm our business and
prospects.
Our success as a marketer and licensor
of intellectual property is largely due to the efforts of Neil Cole, our
president, chief executive officer and chairman. Our continued success is
largely dependent upon his continued efforts and those of the other key
executives he has assembled. Although we have entered into an employment
agreement with Mr. Cole, expiring on December 31, 2012, as well as
employment agreements with other of our key executives, there is no guarantee
that we will not lose their services. To the extent that any of their services
become unavailable to us, we will be required to hire other qualified
executives, and we may not be successful in finding or hiring adequate
replacements. This could impede our ability to fully implement our business plan
and future growth strategy, which would harm our business and
prospects.
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 a term expiring on January 31, 2012,
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 net income or increase our net
loss.
As of December 31, 2009, goodwill
represented approximately $170.7 million, or approximately 9% of our total
consolidated assets, and trademarks and other intangible assets represented
approximately $1,254.7 million, or approximately 70% of our total consolidated
assets. Under current U.S. GAAP accounting standards, goodwill and indefinite
life intangible assets, including some of our trademarks, are no longer
amortized, but instead are subject to impairment evaluation based on related
estimated fair values, with such testing to be done at least annually. While, to
date, no impairment write-downs have been necessary, any write-down of goodwill
or intangible assets resulting from future periodic evaluations would, as
applicable, either decrease our net income or increase our net loss and those
decreases or increases could be material.
We may not be able to pay the cash
portion of the conversion price upon any conversion of the $287.5 million
pri
ncipal amount of our
convertible 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
will be required to pay when our convertible notes become due in June 2012. Upon
conversion of the convertible notes, we will be required to pay to the holder of
such notes a cash payment equal to the par value of the convertible notes. This
part of the payment must be made in cash, not in shares of our common stock. As
a result, we will be required to pay a minimum of $287.5 million 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 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 note holders 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 could constitute a default
under the terms of our other debt.
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 purchased hedge instruments, herein referred to as
convertible note hedges, from affiliates of Merrill Lynch, Pierce,
Fenner & Smith Incorporated and Lehman Brothers Inc. At such time, the
hedging transactions were expected, but were not guaranteed, to eliminate the
potential dilution upon conversion of the convertible notes. Concurrently, we
entered into warrant transactions with the hedge
counterparties.
On September 15, 2008 and
October 3, 2008, respectively, Lehman Brothers Holdings Inc., or Lehman
Holdings, and its subsidiary, Lehman Brothers OTC Derivatives Inc., or Lehman
OTC, filed for protection under Chapter 11 of the United States Bankruptcy
Code in the United States Bankruptcy Court in the Southern District of New York,
herein referred to as the bankruptcy court. On September 17, 2009, we filed
proofs of claim with the bankruptcy court relating to the Lehman OTC convertible
note hedges. We had purchased 40% of the convertible note hedges from
Lehman OTC, or the Lehman note hedges, and we had sold 40% of the warrants to
Lehman OTC. Lehman OTC’s obligations under the Lehman note hedges are guaranteed
by Lehman Holdings. If the Lehman note hedges are rejected or terminated in
connection with the Lehman OTC bankruptcy, we would have a claim against Lehman
OTC and Lehman Holdings, as guarantor, for the damages and/or close-out values
resulting from any such rejection or termination. While we intend to pursue any
claim for damages and/or close-out values resulting from the rejection or
termination of the Lehman note hedges, at this point in the Lehman bankruptcy
cases it is not possible to determine with accuracy the ultimate recovery, if
any, that we may realize on potential claims against Lehman OTC or Lehman
Holdings, as guarantor, resulting from any rejection or termination of the
Lehman note hedges. We also do not know whether Lehman OTC will assume or reject
the Lehman note hedges, and therefore cannot predict whether Lehman OTC intends
to perform its obligations under the Lehman note hedges. As a result, if Lehman
OTC does not perform such obligations and the price of our common stock exceeds
the $27.56 conversion price (as adjusted) of the convertible notes, the
effective conversion price of the convertible notes (which is higher than the
actual $27.56 conversion price due to these hedges) would be reduced and our
existing stockholders may experience dilution at the time or times the
convertible notes are converted. The extent of any such dilution would depend,
among other things, on the then prevailing market price of our common stock and
the number of shares of common stock then outstanding, but we believe the impact
will not be material and will not affect our income statement presentation. We
are not otherwise exposed to counterparty risk related to the Lehman
bankruptcies. We currently believe, although there can be no assurance, that the
bankruptcy filings and their potential impact on these entities will not have a
material adverse effect on our financial position, results of operations or cash
flows. We will continue to monitor the bankruptcy filings of Lehman Holdings and
Lehman OTC.
Moreover, in connection with the warrant
transactions with the counterparties, to the extent that the price of our common
stock exceeds the strike price of the warrants, the warrant transactions could
have a dilutive effect on our earnings per share.
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 convertible 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 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 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, 2009, 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
is outstanding
. 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.
We do not anticipate paying cash
dividends on our common stock.
You should not rely on an investment in
our common stock to provide dividend income, as we have not paid any cash
dividends on our common stock and do not plan to pay any in the foreseeable
future. Instead, we plan to retain any earnings to maintain and expand our
existing licensing operations, further develop our trademarks and finance the
acquisition of additional trademarks. Accordingly, investors must rely on sales
of their common stock after price appreciation, which may never occur, as the
only way to realize any return on their investment.
Due to the recent downturn in the
market, certain of the marketable securities we own may take longer to auction
than initially anticipated, if at all.
Marketable securities consist of auction
rate securities, herein referred to as ARS. From the third quarter of 2007 to
the present, our balance of ARS failed to auction due to sell orders exceeding
buy orders, and the insurer of the ARS exercised its put option to replace the
underlying securities of the auction rate securities with its preferred
securities. Further, although the ARS had paid cash dividends according to their
stated terms, the payment of cash dividends ceased after July 31,
2009
, and would
be
resumed
only
if the board of directors of the insurer
declares such cash dividends to be payable at a later date.
The insurer’s board of
directors
temporarily
reinstated
dividend
payments
for the 4-week
period from December 23, 2009 to January 15, 2010
.
In
January 2010
, we commenc
ed a lawsuit against the
broker-
dealer of these ARS
alleging
,
among other things,
fraud
, and
seeking full recovery of the $13.0
million face value of the ARS, as well as legal costs and punitive
damages. These funds will not be available to us
unless
a successful auction occurs, a buyer is
found outside the auction process, or if we realize recovery through settlement
or legal judgment
of the
action being brought against the broker
. As a result, $13.0 million of our ARS
have been written down to approximately $7.0 million, based on our evaluation,
as an unrealized pre-tax loss to reflect a temporary decrease in fair value,
reflected as an accumulated other comprehensive loss of $6.0 million in the
stockholders’ equity section of our consolidated balance sheet. We estimated the
fair value of our ARS using the present value of the weighted average of several
scenarios of recovery based on our assessment of the probability of each
scenario. We believe this decrease in fair value is temporary due to general
macroeconomic market conditions. Further, we have the ability and intent to
hold the securities until an anticipated full redemption. However, there
are no assurances that a successful auction will occur, that we can find a buyer
outside the auction process, or that we will realize full recovery through
settlement or legal judgment.
A portion of
our revenues are generated outside of the United States,
by our joint ventures and certain of our licensees,
in countries that
may have volatile currencies or other risks.
A portion
of our revenue is attributable to activities in territories and countries
outside of the United States by certain of our joint ventures and our licensees.
The fact that some of our revenue and certain business
operations of our joint ventures and certain licensees are
conducted outside of the United States may expose them to
several additional risks, including, but not limited to social, political,
regulatory and economic conditions or in laws and policies governing foreign
trade and investment in the territories and countries where our joint
ventures or certain licensees currently have operations or will
in the future operate. U.S. laws and regulations relating to investment and
trade in foreign countries could also change to our detriment. Any of these
factors could have a negative
impact on the business and operations
of our joint ventures and certain
of our licensees operations, which could also adversely i
mpact our results of
operations
. Increase of
revenu
es generated in
foreign markets
may
also increase
our
exposure to risks
related to foreign currencies, such as fluctuations in currency exchange
rates
. In the
past, we and our joint ventures have attempted to have
contracts that relate to activities outside of the United States
denominated in U.S. currency, however, we do not know to the extent that we will
be able to continue this as we increase our contracts with foreign
licensees
. We
cannot predict the effect that future exchange rate fluctuations will have on
our operating results
A decline in general economic conditions
resulting in a decrease in consumer-spending levels and an inability to access
capital may adversely affect our business.
Many economic factors beyond our control
may impact our forecasts and actual performance. These factors include consumer
confidence, consumer spending levels, employment levels, availability of
consumer credit, recession, deflation, inflation, a general slowdown of the U.S.
economy or an uncertain economic outlook. Furthermore, changes in the credit and
capital markets, including market disruptions, limited liquidity and interest
rate fluctuations, may increase the cost of financing or restrict our access to
potential sources of capital for future acquisitions.
Item 1B. Unresolved Staff
Comments
None.
Item 2. Properties
On November 9, 2007, we entered
into a new lease agreement covering approximately 30,550 square feet of office
and showroom space at 1450 Broadway in New York, New York, herein referred to as
the new headquarters. The term of the lease runs through June 30,
2024 and provides for total aggregate annual base rental payments for such space
of approximately $27.4 million (ranging from approximately $1.5 million for the
first year following the rent commencement date to approximately $2.2 million,
on annualized basis, in the last year of the lease). We will also be
required to pay our proportionate share of any increased taxes attributed to the
premises.
In addition, in connection with the
Starter acquisition, we 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,
Arkansas with an annual rent of $149,000 which was terminated in the first
quarter of 2009. We began subletting the office space at 1350 Broadway beginning
January 1, 2009. We also acquired 5,994 square feet of office space in
Santa Monica, California in connection with the Mossimo merger, which was
terminated in the first quarter of 2009. We also acquired approximately 4,500
square feet of office space at 261 Fifth Ave in New York, New York in
connection with the Waverly acquisition with an annual rent of approximately
$0.2 million. This space is currently being sublet.
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, 2011.
Item 3. Legal
Proceedings
In August 2004, the Company commenced a
lawsuit in the Superior Court of California, Los Angeles County, against
Unzipped’s former manager, supplier and distributor Sweet, Azteca and ADS and
Hubert Guez, a principal of these entities and former member of the Company’s
board of directors (collectively referred to as the Guez defendants) alleging
numerous causes of action, including fraud, breach of contract, breach of
fiduciary duty and trademark infringement. Sweet, Azteca and ADS filed
counterclaims against the Company claiming damages resulting from, among other
things, a variety of alleged contractual breaches.
In April 2007, a jury returned a verdict
of approximately $45 million in the Company’s favor on every claim that the
Company pursued, and against the Guez defendants on every counterclaim they
asserted. Additionally, the jury found that all of the Guez defendants acted
with “malice, fraud or oppression” with regard to each of the tort claims
asserted by the Company and, in addition, awarded the Company $5 million in
punitive damages against Guez personally.
In November 2007, the Court, among other
things, reduced the total damages awarded against the Guez defendants by
approximately 50% and reduced the amount of punitive damages assessed against
Guez to $4 million. The Court also entered judgments against Guez in the amount
of approximately $11 million and ADS in the amount of approximately $1.3
million. It also entered judgment against all of the Guez defendants on every
counterclaim that they pursued in the litigation, including ADS’s and Azteca’s
unsuccessful efforts to recover against Unzipped any account balances claimed to
be owed, totaling approximately $3.5 million and Sweet’s efforts to accelerate
the principal balance of a note and other fees totaling approximately $15
million (these orders are collectively referred to as the “judgments”). The
Court also issued an order confirming an additional aggregate of approximately
$6.8 million of the jury’s verdicts against Sweet and Azteca (referred to as the
“confirmed verdicts”) but declined to enter judgment against these entities
since it had ordered a new trial with regard to certain of the jury’s other
damage awards against these entities.
In May 2008, the Court awarded the
Company statutory litigation costs (jointly and severally against the Guez
defendants) of approximately $650,000. In October 2008, the Court granted the
Company’s petition for attorneys’ fees with respect to approximately $7.7
million of fees (mostly against Sweet and Azteca), but did not award any
non-statutory (contractual) costs. In December 2008, the earlier judgments were
amended to add the cost award against all the Guez defendants, as well as
$100,000 of attorneys’ fees awarded against ADS.
In sum, the trial court entered judgment
in the Company’s favor of over $12 million and has confirmed, but not reduced to
judgment, additional amounts owed of approximately $15 million, which consists
of the confirmed verdicts plus the fee and cost awards against Sweet and Azteca.
All of these amounts accrue interest at an annual rate of 10%. All parties have
filed notices of appeal. The Company’s notice of appeal related to, among other
things, those parts of the jury’s verdicts vacated by the Court. In December
2008, the Company also filed a notice of appeal from the Court’s orders relating
to attorneys’ fees awarded against ADS, statutory costs and non-statutory costs.
The Guez defendants have posted an aggregate of approximately $51.7 million in
undertakings with the Court to secure the judgments. The Company is unable
to pursue collection of the monetary portions of the judgments during the
pendency of the appeals.
The Company intends to vigorously pursue
its appeals, and vigorously defend against the Guez defendants’
appeal.
Normal Course
litigation
From time to time, the Company is also
made a party to litigation incurred in the normal course of business. While any
litigation has an element of uncertainty, the Company believes that the final
outcome of any of these routine matters will not have a material effect on the
Company’s financial position or future liquidity.
Item 4.
Submission of
Matters to a Vote of Security Holders.
None.
Notes to Consolidated Financial
Statements
Information as of and for the Years
Ended December 31, 2009, 2008 and 2007
(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, through its wholly-owned subsidiaries, currently owns seventeen brands:
Candie's®, Bongo®, Badgley Mischka®, Joe Boxer®, Rampage®, Mudd®, London Fog®,
Mossimo®, Ocean Pacific/OP®, Danskin®, Rocawear®, Cannon®, Royal Velvet®,
Fieldcrest®, Charisma®, Starter®, and Waverly®, 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, Scion
LLC (“Scion”), a joint venture in which the Company has a 50% investment, owns
the Artful Dodger™ brand; Hardy Way LLC (“Hardy Way”), a joint venture in which
the Company has a 50% investment, owns the Ed Hardy® brands, and IP Holdings
Unltd LLC (“IPH Unltd”), a joint venture in which the Company has a 51%
investment, owns the Ecko® and Zoo York® brands. 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'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. Further, the
Company also seeks to monetize its trademarks internationally through licenses,
partnerships, and other arrangements, such as joint
ventures.
1. Summary of Significant Accounting
Policies
Changes in Accounting
In the first quarter of 2009, the
Company adopted the U.S. GAAP provisions of accounting for convertible debt
instruments that may be settled in cash upon conversion, herein referred to
accounting for convertible debt, which changed the accounting for convertible
debt instruments with cash settlement features, effective for the year ended
December 31, 2009 (“2009”) and applied retrospectively as applicable. This
accounting for convertible debt applies to the Company’s previously issued
1.875% convertible senior subordinated notes (“Convertible Notes”). In
accordance with ASC Topic 470-20, the Company recognized the liability component
of its Convertible Notes at fair value. The liability component is recognized as
the fair value of a similar instrument that does not have a conversion feature
at issuance. The equity component, which is the value of the conversion feature
at issuance, is recognized as the difference between the proceeds from the
issuance of the Convertible Notes and the fair value of the liability component,
after adjusting for the deferred tax impact. The Convertible Notes were issued
at a coupon rate of 1.875%, which was below that of a similar instrument that
does not have a conversion feature. The Company recognizes an effective
interest rate of 7.85% on the carrying amount of the Convertible
Notes. The effective rate is based on the rate for a similar
instrument that does not have a conversion feature. As such, the valuation of
the debt component, using the income approach, resulted in a debt discount of
$73.4 million at inception. The debt discount is amortized over the expected
life of the debt, which is also the stated life of the debt. See Note 5 for
further discussion.
As a result of applying ASC Topic 470-20
retrospectively to all periods presented, the Company recognized the following
incremental effects on individual line items on the Consolidated Balance Sheet
as of December 31, 2008:
|
(000’s omitted)
|
|
Before change in
accounting
|
|
|
Adjustment
|
|
|
After change in
accounting
|
|
|
Non-current deferred income tax
liabilities
|
|
$
|
99,604
|
|
|
$
|
18,865
|
|
|
$
|
118,469
|
|
|
Long-term debt, less current
maturities
|
|
|
594,664
|
|
|
|
(49,438
|
)
|
|
|
545,226
|
|
|
Additional
paid-in-capital
|
|
|
491,936
|
|
|
|
41,299
|
|
|
|
533,235
|
|
|
Retained
earnings
|
|
|
131,094
|
|
|
|
(10,736
|
)
|
|
|
120,358
|
|
The impact of implementing ASC Topic
470-20 on the Consolidated Income Statement for the years ended December 31,
2008 (“2008”) and December 31, 2007 (“2007”) has increased interest expense by
approximately $11.8 million and $5.7 million, respectively, and decreased the
provision for income taxes by approximately $4.6 million and $2.2 million,
respectively, the net result of which decreased net income by approximately $7.2
million and $3.5 million, respectively, and decreased diluted earnings per share
by approximately $0.12 and $0.06, respectively.
The impact of
implementing ASC Topic 470-20 on the Consolidated Statement of Cash Flows for
2008 and 2007 has increased amortization of the convertible note discount by
$11.8 million and $5.7 million, respectively, and decreased the provision for
income taxes by $4.6 million and $2.2 million, respectively, on the Consolidated
Statement of Cash Flows.
Principles of
Consolidation
The consolidated financial statements
include the accounts of the Company, its wholly-owned subsidiaries, and, in
accordance with U.S. GAAP and accounting for variable interest entities and
majority owned subsidiaries, the Company consolidates two joint ventures (Scion
and IPH Unltd; see Note 2 for explanation) in which it is the primary
ben
eficiary. The Company uses the equity
method of accounting to account for those investments and joint ventures which
are not required to be consolidated under U.S. GAAP. All significant
intercompany transactions and balances have been eliminated in
consolidation.
Business Combinations, Joint Ventures
and Investments
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, 2007 through
December 31, 2009, the Company completed eight acquisitions. Note 2 to the
financial statements contains a more comprehensive discussion of the Company's
2009 acquisitions and investments. The acquisitions and the acquisition dates
are as follows:
Since January 1, 2007, the Company has
acquired the following 8 brands:
|
Date
acquired
|
|
Brand
|
|
March 2007
|
|
Danskin
|
|
March 2007
|
|
Rocawear
|
|
October
2007
|
|
Official-Pillowtex brands
(Cannon, Royal Velvet, Fieldcrest and Charisma)
|
|
December
2007
|
|
Starter
|
|
October
2008
|
|
Waverly
|
In addition to the acquisitions above,
the Company has acquired ownership interest in the following brands through its
investments in joint ventures:
|
Date
Acquired/Invested
|
|
Brand
|
|
Investment
/ Joint Venture
|
|
Iconix's
Investment
|
|
November
2007
|
|
Artful
Dodger
|
|
Scion
(Note 2)
|
|
50%
|
|
May
2009
|
|
Ed
Hardy
|
|
Hardy
Way (Note 2)
|
|
50%
|
|
October
2009
|
|
Ecko
and Zoo York
|
|
IPH
Unltd (Note 2)
|
|
51%
|
Further, the Company established the
following joint ventures to develop and market the Company’s brands in specific
international markets:
|
Date
Created
|
|
Investment
/ Joint Venture
|
|
Iconix's
Investment
|
|
September
2008
|
|
Iconix
China (Note 2)
|
|
50%
|
|
December
2008
|
|
Iconix
Latin America (Note 2)
|
|
50%
|
|
December
2009
|
|
Iconix
Europe (Note 2)
|
|
50%
|
For
further information on the Company’s accounting for joint ventures and
investments, see Note 2.
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.
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 three 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
accounting for certain investments in debt and equity securities under U.S.
GAAP, and consist of auction rate securities (“ARS”). Temporary changes in fair
market value are recorded as other comprehensive income or loss, whereas other
than temporary markdowns will be realized through the Company’s income
statement.
See Note 3 for discussion of the
Company’s marketable securities.
Concentration of Credit
Risk
Financial instruments which potentially
subject the Company to concentration of credit risk consist principally of
short-term cash investments and accounts receivable. The Company places its cash
in investment-grade, short-term instruments with high quality financial
institutions. The Company performs ongoing credit evaluations of its customers'
financial condition and, generally, requires no collateral from its customers.
The allowance for
non-collection of accounts receivable is based upon the expected collectability
of all accounts receivable.
For 2009, two licensees accounted for
23% and 10%, respectively, of the Company’s revenue, compared to two licensees
which accounted for 11% and 11%, respectively, of the Company’s revenue in 2008,
compared to one licensee which accounted for 14% of the Company's revenue in
2007.
Accounts Receivable
Accounts receivable are reported at
amounts the Company expects to be collected, net of allowance for doubtful
accounts, based on the Company’s ongoing discussions with its licensees, and
evaluation of each licensee’s payment history and account aging. For
the years ended December 31, 2009 and 2008, the Company’s allowance for doubtful
accounts was $4.7 million and $0.5 million, respectively.
At December 31, 2009, one licensee
accounted for 23% of the Company’s accounts receivable, compared to one licensee
which accounted for 10% of the Company's accounts receivable at December 31,
2008.
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 caps 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 common 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.
Stock-Based
Compensation
Stock-based compensation expense, in
accordance with accounting for share-based payment under U.S. GAAP, is
calculated using the Black-Scholes valuation model based on awards ultimately
expected to vest, reduced for estimated forfeitures, and expensed on a
straight-line basis over the requisite service period of the
grant. Forfeitures are estimated at the time of grant based on the
Company’s historical forfeiture experience and will be revised in subsequent
periods if actual forfeitures differ from those estimates. The
Company will use alternative models if grants have characteristics that cannot
be reasonably estimated using this model.
Treasury Stock
Treasury stock is recorded at
acquisition cost. Gains and losses on disposition are recorded as increases or
decreases to additional paid-in capital with losses in excess of previously
recorded gains charged directly to retained earnings.
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.
Operating
Leases
Total
rent payments under operating leases that include scheduled payment increases
and rent holidays are amortized on a straight-line basis over the term of the
lease. Landlord allowances are amortized by the straight-line method over
the term of the lease as a reduction of rent expense.
Impairment of Long-Lived
Assets
If 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, if
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 certain trademarks, license agreements and
non-compete agreements, are evaluated for possibility of impairment, and are
otherwise amortized on a straight-line basis over the estimated useful lives of
the assets (currently ranging from 1.5 to 15 years).
The changes in the carrying amount of
goodwill for 2009 and 2008 are as follows:
|
(
in
000’s
)
|
|
2009
|
|
|
2008
|
|
|
Beginning
balance
|
|
$
|
144,725
|
|
|
$
|
128,898
|
|
|
Acquisitions
|
|
|
714
|
|
|
|
914
|
|
|
Sales
|
|
|
(2,345
)
|
|
|
|
-
|
|
|
Net adjustments to purchase price
of prior period acquisitions
|
|
|
27,643
|
|
|
|
14,913
|
|
|
Ending
balance
|
|
$
|
170,737
|
|
|
$
|
144,725
|
|
On October 30, 2009, the Company
consummated a transaction in which it acquired a 51% controlling
interest
in the Ecko portfolio of
brands
, including Ecko and
Zoo York,
through its
consolidated subsidiary IPH Unltd. See note 2 for detail on this
transaction. In allocating the purchase price of the Company’s 2009
investment in 51% of the Ecko portfolio (including the Ecko trademarks and the
Zoo York trademark), $0.7 million was allocated to goodwill, which is deductible
for income tax purposes. During 2009, in accordance with the terms of
the acquisition of Danskin, the former owners of Danskin earned $12.0 million
of the Company’s common
stock
in contingent
consideration as a result of the brand achieving specific performance
thresholds. During 2009, in accordance with the terms of the
acquisition of Rocawear, the former owners of Rocawear earned $9.6 million in
contingent consideration as a result of the brand achieving specific
performance thresholds. Also during 2009, in accordance with the
terms of the acquisition of the Official-Pillowtex brands, the former owners of
the Official-Pillowtex brands earned $
8
.3 million in contingent consideration
as a result of the brands achieving specific performance
thresholds. In addition, the Company reversed over-accruals from
prior period acquisitions against goodwill.
In September 2009, the Company entered
into a perpetual license and purchase option agreement with a licensee for its
Joe Boxer trademark covering the Canadian territory. As a result of
this transaction, the Company reduced its balance of goodwill associated with
the acquisition of the Joe Boxer brand by $0.4 million. In December
2009, the Company contributed substantially all rights to its brands in all
member states and candidate states of the European Union (“European Territory”)
to form Iconix Europe LLC, a 50% joint venture. See Note 2 for
further detail of this transaction. As a result of this transaction,
the Company reduced its balance of goodwill associated with all acquired
trademarks in the European Territory by $1.9 million.
In allocating the purchase price of the
Company’s 2008 acquisition of the Waverly brand, $0.9 million was allocated to
goodwill. During 2008, in accordance with the terms of the
acquisition of Rocawear, the former owners of Rocawear earned $6.8 million in
contingent consideration as a result of the brand achieving specific
performance thresholds. Also during 2008, in accordance with the
terms of the acquisition of the Official-Pillowtex brands, the former owners of
the Official-Pillowtex brands earned $6.7 million in contingent consideration as
a result of the brands achieving specific performance
thresholds.
During
2007, $0.9 million, $2.1 million, $23.0 million, and $1.8 million were allocated
to goodwill for the acquisitions of Danskin, Rocawear, the Official-Pillowtex
brands, and Starter, respectively. Further, in accordance with the
terms of the acquisition of Rocawear, the former owners of Rocawear earned $3.0
million in contingent consideration as a result of meeting specific performance
thresholds.
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 with consideration of market participant data.
The annual evaluation of goodwill is performed on October 1, the beginning of
the Company's fourth fiscal quarter.
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.
Revenue is not recognized unless collectability is reasonably
assured.
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.
Earnings Per Share
Basic earnings per share includes no
dilution and is computed by dividing net income available to common stockholders
by the weighted average number of common shares outstanding for the period.
Diluted earnings per share reflect, in periods in which they have a dilutive
effect, the effect of 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, convertible debt 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 when the advertisement occurs. Advertising expenses
for 2009, 2008, and 2007 amounted to $25.8 million, $21.9 million, and $14.5
million, respectively.
Comprehensive Income
Comprehensive income includes certain
gains and losses that, under U.S. GAAP, are excluded from net income as such
amounts are recorded directly as an adjustment to stockholders’
equity. The Company’s comprehensive income is primarily comprised of
net income and the change in fair value of its marketable securities and cash
flow hedge.
The
following table summarizes the components of our accumulated other comprehensive
income, net of applicable taxes as of:
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
Cash
flow hedge adjustment
|
|
|
71
|
|
|
|
(91
|
)
|
|
Changes
in fair value of securities
|
|
|
(4,103
|
)
|
|
|
(3,789
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
other comprehensive income
|
|
$
|
(4,032
|
)
|
|
$
|
(3,880
|
)
|
The following table summarizes our total comprehensive income, net of applicable
taxes for the years ended:
|
|
|
December
31,
|
|
|
December
31,
|
|
|
|
|
2009
|
|
|
2008
(1)
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
income attributable to
|
|
|
|
|
|
|
|
Iconix
Brand Group, Inc.
|
|
$
|
74,959
|
|
|
$
|
68,626
|
|
|
Comprehensive
income attributable to
|
|
|
|
|
|
|
|
|
|
non-controlling
interests
|
|
|
594
|
|
|
|
-
|
|
|
Comprehensive
income
|
|
$
|
75,553
|
|
|
$
|
68,626
|
|
|
(1)
As adj
usted for adoption of ASC
Topic 470-20,
effective for 2009 and applied retrospectively as
applicable
|
New Accounting
Standards
In December 2007, the FASB
issued guidance under ASSC Topic 810 Consolidation as it relates to
non-controlling i
nterests
in consolidated financial s
tatements
. This guidance
establish
es
accounting and reporting standards for
the non
-
controlling
interest (previously referred to as
minority interest) in a subsidiary and for the deconsolidation of a subsidiary.
It clarified that a non-controlling interest in a subsidiary is an
ownership interest in the consolidated entity that should be reported as equity,
not as a liability, in the consolidated financial statements. It also requires
disclosure on the face of the consolidated statement of operations of the
amounts of consolidated net income attributable to both the parent and
the noncontrolling interest. This guidance also establishes a single
method of accounting for changes in a parent’s ownership interest in a
subsidiary that do not result in deconsolidation. The Company adopted this
guidance as required on January 1, 2009 and the results are included
herein.
In December 2007, the FASB issued
guidance ASC Topic 805 Business Combinations, 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. This guidance 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. The provisions of this guidance are reflected herein
as it relates to the acquisition of Ecko and Zoo York.
In April 2009, the FASB issued guidance
under ASC Topic 825 Financial Instruments. This guidance requires that
disclosures about the fair value of a company’s financial instruments be made
whenever summarized financial information for interim reporting periods is
made. This guidance is effective for interim reporting periods ending
after June 15, 2009, and its requirements are reflected
herein.
In April 2009, the FASB issued guidance
under ASC Topic 820 Fair Value Measurements and Disclosures as it relates to
determining fair value when the volume and level of activity for the asset or
liability have significantly decreased and identifying transactions that are not
orderly. This guidance does not change the definition of fair value, but
provides additional guidance for estimating fair value in accordance with ASC
Topic 820 when the volume and level of activity for the asset or liability have
significantly decreased. This guidance is effective for interim and annual
reporting periods ending after June 15, 2009, and its requirements are reflected
herein.
In April 2009, the FASB issued guidance
under ASC Topic 320 Investments – Debt and Equity Securities as it relates to
the recognition and presentation of other-than-temporary impairments. This
guidance amends the other-than-temporary impairment guidance in U.S. GAAP for
debt securities and provides additional disclosure requirements for
other-than-temporary impairments for debt and equity securities. This guidance
addresses the determination as to when an investment is considered impaired,
whether that impairment is other than temporary, and the measurement of an
impairment loss. This guidance is effective for interim and annual reporting
periods ending after June 15, 2009, and its requirements are reflected
herein.
In May 2009, the FASB issued guidance
under ASC Topic 855 Subsequent Events. This guidance establishes
principles and requirements for subsequent events, which are events or
transactions that occur after the balance sheet date but before financial
statements are issued or are available to be issued. In particular, this
guidance sets forth (a) the period after the balance sheet date during which
management of a reporting entity shall evaluate events or transactions that may
occur for potential recognition or disclosure in the financial statements, (b)
the circumstances under which an entity shall recognize events or transactions
occurring after the balance sheet date in its financial statements, and (c) the
disclosures that an entity shall make about events or transactions that occurred
after the balance sheet date. This guidance is effective for interim or annual
financial periods ending after June 15, 2009 and is to be applied prospectively.
The adoption of this guidance did not have a material impact on the Company’s
results of operations or its financial position.
In June 2009, the FASB issued guidance
under ASC Topic 810 Consolidation as it relates to variable interest entities
(“VIE”). This guidance amends the consolidation guidance for VIE’s by
requiring an on-going qualitative assessment of which entity has the power to
direct matters that most significantly impact the activities of a VIE and has
the obligation to absorb losses or
ben
efits that could be potentially
significant to the VIE. This guidance is effective for the Company
beginning in 2010. The Company is currently assessing the impact of the standard
on its financial statements.
In June 2009, the FASB issued
guidance under ASC Topic 105 Generally Accepted Accounting Principles as it
relates to the FASB’s accounting standards codification. This
standard replaces previously established guidance, and establishes only two
levels of U.S. generally accepted accounting principles (“GAAP”), authoritative
and non-authoritative. The FASB Accounting Standards Codification (the
“Codification”) will become the source of authoritative, nongovernmental GAAP,
except for rules and interpretive releases of the Securities and Exchange
Commission (“SEC”), which are sources of authoritative GAAP for SEC registrants.
All other non-grandfathered, non-SEC accounting literature not included in the
Codification will become non-authoritative. This standard is effective for
financial statements for interim or annual reporting periods ending after
September 15, 2009. The Company began to use the new guidelines and
numbering system prescribed by the Codification when referring to GAAP in the
third quarter of 2009. As the Codification was not intended to change or alter
existing GAAP, it will not have any impact on the Company’s consolidated
financial statements.
In August
2009, the FASB issued guidance under ASC Topic 820 regarding measuring
liabilities at fair value.” This guidance provides clarification that in
circumstances in which a quoted price in an active market for the identical
liability is not available, a reporting entity is required to measure fair value
using a valuation technique that uses the quoted price of the identical
liability when traded as an asset, quoted prices for similar liabilities or
similar liabilities when traded as assets, or another valuation technique that
is consistent with the principles of ASC Topic 820. This guidance is
effective for the first reporting period (including interim periods) beginning
after issuance. The adoption of this guidance is not expected to have a material
impact on the Company’s results of operations or financial
position.
In
October 2009, the FASB issued ASU No. 2009-13, “Revenue Recognition (Topic 605)
– Multiple Deliverable Revenue Arrangements.” ASU No. 2009-13 eliminates the
residual method of allocation and requires that arrangement consideration be
allocated at the inception of the arrangement to all deliverables using the
relative selling price method and expands the disclosures related to multiple
deliverable revenue arrangements. ASU No. 2009-13 is effective prospectively for
revenue arrangements
entered
into or materially modified in fiscal years beginning on or after June 15, 2010,
with earlier adoption permitted. The adoption of ASU No. 2009-13 is not expected
to have a material impact on the Company’s results of operations or financial
position.
In
January 2010, the FASB issued guidance under ASC Topic 810 regarding scope
clarification for accounting and reporting for decreases in ownership of a
subsidiary. This guidance clarifies that the scope of the decrease in
ownership provisions of ASC Topic 810 applies to a subsidiary or group of assets
that is a business, a subsidiary that is a business that is transferred to an
equity method investee or a joint venture or an exchange of a group of assets
that constitutes a business for a noncontrolling interest in an entity. This
guidance is effective as of the beginning of the period in which an entity
adopts this guidance or, if this guidance has been previously adopted, the first
interim or annual period ending on or after December 15, 2009, applied
retrospectively to the first period that the entity adopted this guidance
, and its requirements are reflected
herein.
In
January 2010, the FASB issued guidance under ASC Topic 820 to improve
disclosures for fair value measurements. This guidance requires new
disclosures regarding transfers in and out of the Level 1 and 2 and activity
within Level 3 fair value measurements and clarifies existing disclosures of
inputs and valuation techniques for Level 2 and 3 fair value measurements. This
guidance also includes conforming amendments to employers’ disclosures about
postretirement benefit plan assets. The new disclosures and clarifications of
existing disclosures are effective for interim and annual reporting periods
beginning after December 15, 2009, except for the disclosure of activity within
Level 3 fair value measurements, which is effective for fiscal years beginning
after December 15, 2010, and for interim periods within those
years.
Presentation of Prior Year
Data
Certain reclassifications have been made
to conform prior year data to the current presentation.
2. Investments and Joint
Ventures
Scion
Scion is a brand management and
licensing company formed by the Company with Shawn “Jay-Z” Carter in March 2007
to buy, create and develop brands across a spectrum of consumer product
categories. On November 7, 2007, Scion, through its wholly-owned subsidiary
Artful Holdings LLC (“Artful Holdings”), purchased Artful Dodger, an exclusive,
high end urban apparel brand for a purchase price of $15.0 million. Concurrent
with the acquisition of Artful Dodger, Artful Holdings entered into a
license agreement covering all major apparel categories for the United
States. This license was transitioned to a new licensee during the
third quarter of 2009.
The brand has also been licensed to
wholesale partners and distributors in Canada and Europe.
At inception, the Company determined
that it would consolidate Scion since, under ASC Topic 810 “Consolidation”,
it is the primary
ben
eficiary of the variable interest
entity.
In March 2009, the Company, through its
investment in Scion, effectively acquired a 16.6% interest in one of its
licensees for $1. The Company has determined that this entity is a variable
interest entity as defined by
ASC Topic 810. However, the
Company is not the primary
ben
eficiary. The investment in
this entity is accounted for under the cost method of accounting. As
part of the transaction, the Company and its Scion partner each contributed
approximately $2.1 million to Scion, totaling approximately $4.1 million, which
was deposited as cash collateral under the terms of the entity’s financing
agreements. The total contributed cash of approximately $4.1 million,
which is owned by Scion, is included as short-term restricted cash in the
Company’s balance sheet. The Company’s maximum exposure for this
investment is $2.1 million, the amount of the original
guarantee.
In December 2007, the FASB issued
guidance under ASC Topic 810 regarding non-controlling interests in consolidated
financial statements. This guidance requires the recognition of a
non-controlling interest (formerly known as a “minority interest”) as equity in
the consolidated financial statements and separate from the parent’s
equity. For 2009, the amount of net loss attributable to the
non-controlling interest is approximately $0.7 million and has been included in
net income attributable to non-controlling interest in the Consolidated Income
Statement.
The impact of consolidating the joint
venture in 2008 decreased net income by $0.1 million.
At December 31, 2009, the impact of
consolidating the joint venture on the Company’s Consolidated Balance
Sheet has increased current assets by $4.6 million, non-current assets by
$14.2 million and current liabilities by $1.3 million. At December
31, 2008, the impact of consolidating the joint venture on the Company’s
consolidated balance sheet had increased current assets by $3.5 million,
non-current assets by $15.3 million and current liabilities by $2.3
million.
As of December 31, 2009 and 2008, the
Company’s equity at risk in Scion was approximately
$17.1
million and $16.0 million,
respectively. At December 31, 2009 and 2008, the carrying value of the
consolidated assets that are collateral for the variable interest entity’s
obligations total $13.7 million and $14.7 million, respectively, which is
comprised of the Artful Dodger trademark. The assets of the
Company are not available to the variable interest entity's
creditors.
Iconix China
In September 2008, the Company and Novel
Fashions Holdings Limited (“Novel”) formed a joint venture (“Iconix China”) to
develop and market the Company's brands in the People’s Republic of China, Hong
Kong, Macau and Taiwan (the “China Territory”). Pursuant to the terms of this
transaction, the Company contributed to Iconix China substantially all rights to
its brands in the China Territory and committed to contribute $5.0 million, and
Novel committed to contribute $20 million. Upon closing of the
transaction, the Company contributed $2.0 million and Novel contributed $8.0
million. In September 2009, the parties amended the terms of the
transaction to eliminate the obligation of the Company to make any additional
contributions and to reduce Novel’s remaining contribution commitment to $9.0
million, payable as follows: $4.0 million payable on or prior to August 1, 2010,
$3.0 million payable on or prior to June 1, 2011, and $2.0 million payable on or
prior to June 1, 2012. Each of these payments is subject to reduction
based on the funding requirements of the venture and the mutual agreement of the
parties.
At inception, the Company determined, in
accordance with
ASC Topic 810, based on the corporate
structure, voting rights and contributions of the Company and Novel, that Iconix
China is a variable interest entity and not subject to consolidation, as, under
ASC Topic 810, the Company is not the primary
ben
eficiary of Iconix China. The
Company has recorded its investment under the equity method of
accounting.
At December 31, 2009, the Company’s
maximum exposure for this joint venture was
$6.
5 million. At December 31, 2008, the
Company’s maximum exposure was $7.7 million.
At December 31, 2009, Iconix China’s
balance sheet included approximately $5.7 million in current assets, $22.6
million in total assets, $0.4 million in current liabilities, and $0.4 million
in total liabilities. At December 31, 2008, Iconix China’s balance
sheet included approximately $8.3 million in current assets, $25.1 million in
total assets, $1.2 million in current liabilities, and $1.2 million in total
liabilities.
For 2009, Iconix China’s statement of
operations reflects $0.2 million in revenue and approximately $2.0 million in
operating expenses. As a result, for 2009, the Company recorded an
equity loss of approximately $0.9 million on its equity investment in the Iconix
China joint venture. For 2008, the Company recorded an equity loss of
approximately $0.5 million on its equity investment in the Iconix China joint
venture.
Iconix Latin America
In December 2008, the Company
contributed substantially all rights to its brands in Mexico, Central
America, South America, and the Caribbean (the “Latin America Territory”) to
Iconix Latin America LLC (“Iconix Latin America”), a then newly formed
subsidiary of the Company. On December 29, 2008, New Brands America
LLC (“New Brands”), an affiliate of the Falic Group, purchased a 50% interest in
Iconix Latin America. In consideration for its 50% interest in Iconix
Latin America, New Brands agreed to pay $6.0 million to the
Company. New Brands paid $1.0 million upon closing of this
transaction and has committed to pay an additional $5.0 million over the
30-month period following closing. As of December 31, 2009, the
balance owed to the Company under this obligation is $3.5 million. The
current portion of $2.5 million is included in the Consolidated Balance Sheet in
prepaid advertising and other and the long term portion of $1.0 million is
included in other assets – non-current.
Based on the corporate structure, voting
rights and contributions of the Company and New Brands, Iconix Latin America is
not subject to consolidation. This conclusion was based on the
Company’s determination that the entity met the criteria to be considered a
“business,” and therefore was not subject to consolidation due to the “business
scope exception” of
ASC Topic 810. As such, the Company has
recorded its investment under the equity method of
accounting.
At December 31, 2009, Iconix Latin
America’s balance sheet included approximately $1.0 million in current assets,
$1.2 million in total assets, $0.2 million in current liabilities, and $0.2
million in total liabilities. For 2009, Iconix Latin America’s
statement of operations reflects that it had approximately $1.7 million in
revenue and approximately $0.2 million in operating expenses. As a
result, during 2009, the Company recorded equity earnings of approximately $0.8
million on its equity investment in the Iconix Latin America joint venture,
representing the Company’s 50% equity interest in Iconix Latin
America.
Ed Hardy
In May 2009, the Company acquired a 50%
interest in Hardy Way LLC (“Hardy Way”), the owner of the Ed Hardy brands and
trademarks, for $17.0 million, comprised of $9.0 million in cash and 588,688
shares of the Company’s common stock valued at $8.0 million. In
addition, the sellers of the 50% interest may be entitled to receive an
additional $1.0 million in shares of the Company’s common stock pursuant to an
earn-out based on royalties received by Hardy Way for the year ending December
31, 2009. As of December 31, 2009, the Company has determined that
the sellers had met the threshold of royalties received by Ed Hardy to trigger
this earn-out. As such, the Company has accrued $1.0 million in
accounts payable and accrued expenses on the Consolidated Balance Sheet as of
December 31, 2009.
Based on the corporate structure, voting
rights and contributions of the Company and Hardy Way, Hardy Way is not subject
to consolidation. This conclusion was based on the Company’s
determination that the entity met the criteria to be considered a
“business,” and therefore was not subject to consolidation due to the “business
scope exception” of
ASC Topic 810. As such, the Company has
recorded its investment under the equity method of
accounting.
At December 31, 2009, Hardy Way’s
balance sheet included approximately $1.9 million in current assets, $1.9
million in total assets, $0.2 million in current liabilities, and $0.2 million
in total liabilities. For 2009, Hardy Way’s statement of operations
reflects that it had approximately $8.0 million in revenue
and approximately $0.5 million in operating
expenses.
As a result, during 2009, the Company
recorded equity earnings of approximately $3.7 million on its equity investment
in the Hardy Way joint venture, representing the Company’s 50% equity interest
in Hardy Way.
As of December 31, 2009, the Company’s
equity at risk in Hardy Way was approximately $19.7 million.
IPH Unltd
In October 2009, the Company
consummated, through a newly formed subsidiary, IPH Unltd, a transaction with
the sellers of the Ecko portfolio of brands, including Ecko and Zoo York (the
“Ecko Assets”), pursuant to which the sellers sold and/or contributed the Ecko
Assets to IPH Unltd joint venture in exchange for a 49% membership interest in
IPH Unltd and $63.5 million in cash which had been contributed to IPH Unltd by
the Company. As a result of this transaction, the Company owns a 51%
controlling membership interest in IPH Unltd. In addition, IPH Unltd
borrowed $90.0 million from a third party to repay certain indebtedness of the
sellers. Approximately $0.7 million in costs associated with this
transaction have been expensed in 2009, and is reflected in selling, general and
administrative expenses in the Consolidated Income
Statement.
The following table is a reconciliation
of cash paid to sellers and the fair value of the sellers non-controlling
interest
:
|
Cash
paid to sellers
|
|
$
|
63,500
|
|
|
Fair
value of 49% non-controlling interest to sellers
|
|
|
57,959
|
|
|
|
|
$
|
121,459
|
|
The
estimated fair value of the assets
acquired, less long-term debt issued, is allocated
as follows:
|
Trademarks
|
|
$
|
203,515
|
|
|
License
agreements
|
|
|
6,830
|
|
|
Non-compete
agreement
|
|
|
400
|
|
|
Goodwill
|
|
|
714
|
|
|
Long-term
debt issued
|
|
|
(90,000
|
)
|
|
|
|
$
|
121,459
|
|
ASC Topic 810
affirms that consolidation is
appropriate when one entity has a controlling financial interest in another
entity.
The
Company
owns a 51%
membership interest in
IPH
Unltd
compared
to the minority owner’s
49% membership interest.
Further, the Company believes that the
voting and veto rights of the minority shareholder are merely protective in
nature and does not provide them with substantive participating rights in IPH
Unltd. As such, IPH Unltd is subject to consolidation with the
Company, which is reflected in the Consolidated Balance Sheet as of December 31,
2009, and the Consolidated Income Statement, Consolidated Statement of
Stockholders’ Equity, and the Consolidated Statement of Cash Flows for
2009.
In accordance with ASC Topic 810, the
Company recognizes the non-controlling interest of IPH Unltd as equity in the
consolidated financial statements and separate from the parent’s
equity. For 2009, the amount of net income attributable to the
non-controlling interest is approximately $1.3 million and has been included in
net income attributable to non-controlling interest in the Consolidated Income
Statement. For 2009, IPH Unltd’s statement of operations reflects
that it had approximately $5.9 million in revenue, approximately $0.8 million in
operating expenses, and approximately $1.2 million in interest
expense.
The Ecko
and Zoo York trademarks have been determined by management to have an indefinite
useful life and accordingly, consistent with ASC Topic 350, no amortization is
being recorded in the Company’s consolidated income statements. The goodwill and
trademarks are subject to a test for impairment on an annual basis. Any
adjustments resulting from the finalization of the purchase price allocations
will affect the amount assigned to the Company’s Consolidated Income Statement.
The $0.7 million of goodwill is deductible for income tax
purposes. The licensing contracts are being amortized on a
straight-line basis over the remaining contractual periods of approximately 1 to
9 years.
At December 31, 2009, the impact of
consolidating the joint venture on the Company’s Consolidated Balance
Sheet has increased current assets by $15.4 million, non-current assets by
$211.2 million, current liabilities by $21.2 million and total liabilities by
$101.2 million.
As of December 31, 2009, the Company’s
equity at risk in IPH Unltd was approximately
$
61.5 million, respectively. At December
31, 2009, the carrying value of the consolidated assets that are collateral for
the variable interest entity’s obligations total $210.3 million, which is
comprised of trademarks and license agreements. The assets of the
Company are not available to the variable interest entity's
creditors.
Iconix Europe
In December 2009, the Company
contributed substantially all rights to its brands in the European Territory to
Iconix Europe LLC, a newly formed wholly-owned subsidiary of the Company
(“Iconix Europe”). Also in December 2009 and shortly after the
formation of Iconix Europe, an investment group led by The Licensing Company and
Albion Equity Partners LLC purchased a 50% interest in Iconix Europe through
Brand Investments Vehicles Group 3 Limited (“BIV”), to assist the
Company in developing, exploiting, marketing and licensing the Company's
brands in the European Territory. In consideration for its 50%
interest in Iconix Europe, BIV agreed to pay $4.0 million, of which $3.0 million
was paid upon closing of this transaction in December 2009, the remaining $1.0
million to be paid in December 2010, and is included in prepaid advertising and
other on the Company’s Consolidated Balance Sheet at December 31,
2009. As a result of this transaction, the Company recognized a gain
of approximately $7.0 million which is included in licensing and other revenue
on the Consolidated Income Statement.
The Company’s maximum exposure for this
investment is
$13.3
million.
At inception, the Company determined, in
accordance with ASC 810, based on the corporate structure, voting rights and
contributions of the Company and BIV, that Iconix Europe is not a variable
interest entity and not subject to consolidation. The Company has
recorded its investment under the equity method of
accounting.
At December 31, 2009, Iconix Europe’s
balance sheet included approximately $26.5 million in total
assets.
Unaudited
Pro-formas
The following unaudited pro-forma
information presents a summary of the Company’s consolidated results of
operations as if the Danskin, Rocawear, Pillowtex, Starter, Ecko and Zoo York
acquisitions and their related financings had occurred on January 1, 2007.
They do not give effect to the Company’s October 2008 acquisition of the Waverly
brand, the Company’s May 2009 investment in Hardy Way, the owner of the Ed Hardy
brands, the Company’s sale of the Joe Boxer trademark in Canada in September
2009, or the Iconix Europe transaction, as such pro forma disclosure is not
material
. 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, 2007, or which may result in the
future.
|
(000's
omitted, except per share information)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Licensing
and other revenue
|
|
$
|
263,892
|
|
|
$
|
262,435
|
|
|
$
|
252,408
|
|
|
Operating
income
|
|
$
|
180,231
|
|
|
$
|
181,988
|
|
|
$
|
199,250
|
|
|
Net
income
|
|
$
|
89,921
|
|
|
$
|
84,313
|
|
|
$
|
96,629
|
|
|
Net
income attributable to non-controlling interest
|
|
$
|
7,561
|
|
|
$
|
10,488
|
|
|
$
|
11,282
|
|
|
Net
income attributable to Iconix Brand Group, Inc.
|
|
|
82,360
|
|
|
|
73,825
|
|
|
|
85,347
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per common share
|
|
$
|
1.25
|
|
|
$
|
1.28
|
|
|
$
|
1.50
|
|
|
Diluted
earnings per common share
|
|
$
|
1.21
|
|
|
$
|
1.21
|
|
|
$
|
1.39
|
|
3. Fair Value
Measurements
SFAS No. 157 “Fair Value Measurements”
(“SFAS 157”) (ASC Topic 820), which the Company adopted on January 1, 2008,
establishes a framework for measuring fair value and requires expanded
disclosures about fair value measurement. While SFAS 157 does not require any
new fair value measurements in its application to other accounting
pronouncements, it does emphasize that a fair value measurement should be
determined based on the assumptions that market participants would use in
pricing the asset or liability. As a basis for considering market participant
assumptions in fair value measurements, SFAS 157 established the following fair
value hierarchy that distinguishes between (1) market participant assumptions
developed based on market data obtained from sources independent of the
reporting entity (observable inputs) and (2) the reporting entity's own
assumptions about market participant assumptions developed based on the best
information available in the circumstances (unobservable
inputs):
Level 1: Observable inputs such as
quoted prices for identical assets or liabilities in active
markets
Level 2: Other inputs that are
observable directly or indirectly, such as quoted prices for similar assets or
liabilities or market-corroborated inputs
Level 3: Unobservable inputs for which
there is little or no market data and which requires the owner of the assets or
liabilities to develop its own assumptions about how market participants would
price these assets or liabilities
The valuation techniques that may be
used to measure fair value are as follows:
(A) Market approach - Uses prices and
other relevant information generated by market transactions involving identical
or comparable assets or liabilities
(B) Income approach - Uses valuation
techniques to convert future amounts to a single present amount based on current
market expectations about those future amounts, including present value
techniques, option-pricing models and excess earnings method
(C) Cost approach - Based on the amount
that would currently be required to replace the service capacity of an asset
(replacement cost)
To determine the fair value of certain
financial instruments, the Company relies on Level 2 inputs generated by market
transactions of similar instruments where available, and Level 3 inputs using an
income approach when Level 1 and Level 2 inputs are not available. The Company’s
assessment of the significance of a particular input to the fair value
measurement requires judgment and may affect the valuation of financial assets
and financial liabilities and their placement within the fair value hierarchy.
The following table summarizes the instruments measured at fair value at
December 31, 2009:
|
Carrying Amount as of
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2009
|
|
|
|
|
|
|
|
|
|
Valuation
|
|
(
000's omitted
)
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Technique
|
|
Marketable
Securities
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
6,988
|
|
(B)
|
|
Cash Flow
Hedge
|
|
$
|
-
|
|
|
$
|
1
|
|
|
$
|
-
|
|
(A)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2008
|
|
|
|
|
|
|
|
|
|
Valuation
|
|
(
000's omitted
)
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Technique
|
|
Marketable
Securities
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
7,522
|
|
(B)
|
|
Cash Flow
Hedge
|
|
$
|
-
|
|
|
$
|
1
|
|
|
$
|
-
|
|
(A)
|
Marketable
Securities
Marketable securities, which are
accounted for as available-for-sale, are stated at fair value in accordance with
ASCTopic 320 and consist of auction rate securities (“ARS”). Temporary changes
in fair market value are recorded as other comprehensive income or loss, whereas
other than temporary markdowns will be realized through the Company’s income
statement.
As of December 31, 2009, the Company
held ARS with a face value of $13.0 million and a fair value of approximately
$7.0 million. In December 2008, the insurer of the ARS exercised its
put option to replace the underlying securities of the ARS with its preferred
securities. Although the ARS had paid cash dividends according to their stated
terms, during the second quarter of 2009, the Company received notice from the
insurer that payment of cash dividends ceased as of July 31, 2009 and would be
resumed only if the board of directors of the insurer declared such cash
dividends to be payable at a later date. The insurer’s board of directors
temporarily reinstated dividend payments for the 4-week period from December 23,
2009 to January 15, 2010.
In
January 2010
,
the Company
commenc
ed a lawsuit against the
broker-
dealer of these ARS
alleging
,
among other things,
fraud
, and
seeking full recovery of the $13.0
million face value of the ARS, as well as legal costs and punitive
damages
(see Note
10)
.
Prior to the cessation of cash dividend
payments, the Company estimated the fair value of its ARS with a discounted cash
flow model where the Company used the expected rate of cash dividends to be
received. As the cash dividend payments have ceased, the Company has
changed its methodology for estimating the fair value of the
ARS. Beginning June 30, 2009, the Company estimated the fair value of
its ARS using the present value of the weighted average of several scenarios of
recovery based on management’s assessment of the probability of each
scenario. The Company considered a variety of factors in its model
including: credit rating of the issuer and insurer, comparable market data (if
available), current macroeconomic market conditions, quality of the underlying
securities, and the probabilities of several levels of recovery and
reinstatement of the cash dividend payments. As a result of its
evaluation, during 2009 the Company has recorded an unrealized pre-tax loss of
approximately $0.5 million in accumulated other comprehensive loss as a
reduction to stockholders’ equity to reflect a temporary decline in the fair
value of the ARS. The Company believes the decrease in fair value is
temporary due to general macroeconomic market conditions. Further,
the Company has the ability and intent to hold the ARS until an anticipated full
redemption. These funds will not be available to the Company unless a successful
auction occurs, a buyer is found outside the auction process,
or if
recovery is realized
through settlement or legal
judgment
of the action
brought against the broker-dealer. As the ARS have failed to auction and may not
auction successfully in the near future, the Company has classified its ARS as
non-current. The Company continues to monitor the auction rate securities market
and considers its impact, if any, on the fair value of its ARS. The
following table summarizes the activity for the period:
|
Auction Rate Securities
(000's omitted)
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Balance at beginning of
period
|
|
$
|
7,522
|
|
|
$
|
10,920
|
|
|
Additions
|
|
|
-
|
|
|
|
-
|
|
|
Gains (losses) reported in
earnings
|
|
|
-
|
|
|
|
-
|
|
|
Losses reported in accumulated
other comprehensive loss
|
|
|
(534
|
)
|
|
|
(3,398
|
)
|
|
Balance at end of
period
|
|
$
|
6,988
|
|
|
$
|
7,522
|
|
Cash Flow Hedge
On July 26, 2007, the Company purchased
a hedge instrument from Lehman Brothers Special Financing Inc. (“LBSF”) to
mitigate the cash flow risk of rising interest rates on the Term Loan Facility
(see Note 6 for a description of this credit agreement). This hedge instrument
caps the Company’s exposure to rising interest rates at 6.00% for LIBOR for 50%
of the forecasted outstanding balance of the Term Loan Facility (“Interest Rate
Cap”). Based on management’s assessment, the Interest Rate Cap qualifies for
hedge accounting under ASC Topic 815. On a quarterly basis, the value
of the hedge is adjusted to reflect its current fair value, with any adjustment
flowing through other comprehensive income. The fair value of this instrument is
obtained by comparing the characteristics of this cash flow hedge with similarly
traded instruments, and is therefore classified as Level 2 in the fair value
hierarchy. At December 31, 2009, the fair value of the Interest Rate Cap was
approximately $1. On October 3, 2008, LBSF filed a petition for bankruptcy
protection under Chapter 11 of the United States Bankruptcy Code. The Company
currently believes that the LBSF bankruptcy filing and its potential impact on
LBSF will not have a material adverse effect on the Company’s financial
position, results of operations or cash flows.
Financial
Instruments
At December 31, 2009 and 2008, the
fair values of cash and cash equivalents, receivables and accounts payable and
accrued expenses approximated their carrying values due to the short-term nature
of these instruments. The fair value of the note receivable from New Brands (see
Note 3) approximates its $3.5 million carrying value; the fair value of the note
receivable due from the purchasers of the Canadian trademark for Joe Boxer
approximates its $4.0 million carrying value. The estimated fair
values of other financial instruments subject to fair value disclosures,
determined based on broker quotes or quoted market prices or rates for the same
or similar instruments, and the related carrying amounts are as
follows:
|
(000's omitted)
|
|
December
31, 2009
|
|
|
December 31, 2008
|
|
|
|
|
Carrying Amount
|
|
|
Fair Value
|
|
|
Carrying Amount
|
|
|
Fair Value
|
|
|
Long-term debt, including current
portion
|
|
$
|
662,379
|
|
|
$
|
650,732
|
|
|
$
|
618,589
|
|
|
$
|
534,098
|
|
Financial instruments expose the Company
to counterparty credit risk for nonperformance and to market risk for changes in
interest. The Company manages exposure to counterparty credit risk through
specific minimum credit standards, diversification of counterparties and
procedures to monitor the amount of credit exposure. The Company’s financial
instrument counterparties are substantial investment or commercial banks with
significant experience with such instruments.
Non-Financial Assets and
Liabilities
On January 1, 2009, the Company adopted
the provisions of ASC Topic 820 with respect to its non-financial assets and
liabilities requiring non-recurring adjustments to fair value using a market
participant approach. The Company uses a discounted cash flow model with level 3
inputs to measure the fair value of its non-financial assets and
liabilities. The Company had no impairment adjustments in 2009.
The Company also adopted the provisions of ASC 820 as it relates to purchase
accounting for its acquisitions. The Company has goodwill, which is
tested for impairment at least annually, as required by ASC Topic
350. Further, in accordance with ASC Topic 350, the Company’s
indefinite-lived trademarks are tested for impairment at least annually, on an
individual basis as separate single units of accounting. Similarly,
consistent with ASC Topic 360 as it relates to accounting for the impairment or
disposal of long-lived assets, the Company assesses whether or not there is
impairment of the Company’s definite-lived trademarks. There was no
impairment, and therefore no write-down, of any of the Company’s long-lived
assets during 2009.
4. Trademarks and Other
Intangibles, net
Trademarks and other intangibles, net
consist of the following:
|
|
|
|
December 31,
2009
|
|
|
December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
|
|
Gross
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
Lives in
|
|
Carrying
|
|
|
Accumulated
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
(000's omitted)
|
Years
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indefinite life
trademarks
|
Indefinite
(1)
|
|
$
|
1,229,695
|
|
|
$
|
9,498
|
|
|
$
|
1,035,382
|
|
|
$
|
9,498
|
|
|
Definite life
trademarks
|
10-15
|
|
|
19,571
|
|
|
|
3,715
|
|
|
|
19,561
|
|
|
|
2,252
|
|
|
Non-compete
agreements
|
2-15
|
|
|
10,475
|
|
|
|
7,644
|
|
|
|
10,075
|
|
|
|
6,098
|
|
|
Licensing
agreements
|
1-9
|
|
|
29,023
|
|
|
|
13,338
|
|
|
|
22,193
|
|
|
|
9,136
|
|
|
Domain
names
|
5
|
|
|
570
|
|
|
|
450
|
|
|
|
570
|
|
|
|
337
|
|
|
|
|
|
$
|
1,289,334
|
|
|
$
|
34,645
|
|
|
$
|
1,087,781
|
|
|
$
|
27,321
|
|
(1)
The
amortization for the Candie’s and Bongo trademarks is as of June 30,
2005. Effective July, 1 2005, the Company changed their useful lives
to indefinite.
In September 2009, the Company entered
into a perpetual license and purchase option agreement with a licensee for
its Joe Boxer trademark covering the Canadian territory in exchange for
approximately $5.1 million. As a result of this transaction, the
balance of the Company’s indefinite life trademarks was reduced by approximately
$1.0 million, representing the cost basis for the Joe Boxer trademark for the
Canadian territory; further, goodwill of approximately $0.4 million
was written off in connection with this transaction. In addition, as
a result of this transaction, a gain of approximately $3.7 million was
recognized in licensing and other revenue on the Consolidated Income
Statement.
In October 2009, the Company
consummated, through a newly formed subsidiary, IPH, a transaction with the
sellers of the Ecko portfolio of brands, pursuant to which the sellers sold
and/or contributed the Ecko portfolio of brands to IPH Unltd in exchange for a
49% membership interest in IPH Unltd and $63.5 million in cash which had been
contributed to IPH Unltd by the Company. As a result of this
transaction, the Company owns 51% of the membership interest in IPH Unltd and is
consolidated in the Company consolidated financial statements. In
addition, IPH Unltd borrowed $90.0 million from a third party to repay certain
indebtedness of the sellers. As a result of this transaction, the
Company increased its indefinite life trademarks by $203.5 million, its
licensing agreements by $6.8 million, and its non-compete agreements by $0.4
million. See note 2 for further explanation of this
transaction.
In December 2009, the Company
contributed substantially all rights to its brands in the European Territory to
Iconix Europe, a newly formed wholly-owned subsidiary. Concurrently
with this transaction, a 50% membership interest was sold to BIV (see note 2 for
further explanation of this transaction). As a result of this
transaction, the balance of the Company’s indefinite lived trademarks was
reduced by approximately $8.3 million, representing the aggregate cost basis for
the Company’s indefinite life trademarks for the European
Territory.
Amortization expense for intangible
assets for 2009, 2008 and 2007 was $7.3 million, $7.3 million and $5.6 million.
The trademarks of Candie’s, Bongo, Joe Boxer, Rampage, Mudd, London Fog,
Mossimo, Ocean Pacific, Danskin, Rocawear, Cannon, Royal Velvet, Fieldcrest,
Charisma, Starter, Waverly, Ecko and Zoo York have been determined to have an
indefinite useful life and accordingly, consistent with SFAS 142, no
amortization will be recorded in the Company's consolidated income statements.
Instead, each of these intangible assets are tested for impairment at least
annually on an individual basis as separate single units of accounting, with any
related impairment charge recorded to the statement of operations at the time of
determining such impairment. Similarly, consistent with SFAS 144
“Accounting for the Impairment or Disposal of Long-Lived Assets”, there was no
impairment of the definite-lived trademarks.
Amortization expense for intangible
assets subject to amortization
, using the straight-line
method,
for each of the
years in the five-year
period ending December 31, 2014 are estimated to be $7.0 million, $5.4 million,
$3.3
million, $2.7 million, and
$1.8
million,
respectively.
5
. Debt
Arrangements
The Company's debt is comprised of
the following:
|
|
|
December
31,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Convertible Notes (Note
1)
|
|
$
|
247,696
|
|
|
$
|
233,999
|
|
|
Term Loan
Facility
|
|
|
217,632
|
|
|
|
255,307
|
|
|
Asset-Backed
Notes
|
|
|
94,865
|
|
|
|
117,097
|
|
|
Promissory
Note
|
|
|
90,000
|
|
|
|
-
|
|
|
Sweet Note (Note
7)
|
|
|
12,186
|
|
|
|
12,186
|
|
|
Total Debt
|
|
$
|
662,379
|
|
|
$
|
618,589
|
|
Convertible Notes
On June 20, 2007, the Company completed
the issuance of $287.5 million principal amount of the Company's Convertible
Notes in a private offering to certain institutional investors. The net proceeds
received by the Company from the offering were approximately $281.1
million.
The Convertible Notes bear interest at
an annual rate of 1.875%, payable semi-annually in arrears on June 30 and
December 31 of each year, beginning December 31, 2007. However, the Company
recognizes an effective interest rate of 7.85% on the carrying amount of the
Convertible Notes. The effective rate is based on the rate for a
similar instrument that does not have a conversion feature (see Note
1). The Convertible Notes will be convertible into cash and, if
applicable, shares of the Company's common stock based on a conversion rate of
36.2845 shares of the Company's common stock, subject to customary adjustments,
per $1,000 principal amount of the Convertible Notes (which is equal to an
initial conversion price of approximately $27.56 per share) only under the
following circumstances: (1) during any fiscal quarter beginning after September
30, 2007 (and only during such fiscal quarter), if the closing price of the
Company's common stock for at least 20 trading days in the 30 consecutive
trading days ending on the last trading day of the immediately preceding fiscal
quarter is more than 130% of the conversion price per share, which is $1,000
divided by the then applicable conversion rate; (2) during the five business day
period immediately following any five consecutive trading day period in which
the trading price per $1,000 principal amount of the Convertible Notes for each
day of that period was less than 98% of the product of (a) the closing price of
the Company's common stock for each day in that period and (b) the conversion
rate per $1,000 principal amount of the Convertible Notes; (3) if specified
distributions to holders of the Company's common stock are made, as set forth in
the indenture governing the Convertible Notes (“Indenture”); (4) if a “change of
control” or other “fundamental change,” each as defined in the Indenture,
occurs; (5) if the Company chooses to redeem the Convertible Notes upon the
occurrence of a “specified accounting change,” as defined in the Indenture; and
(6) during the last month prior to maturity of the Convertible Notes. If the
holders of the Convertible Notes exercise the conversion provisions under the
circumstances set forth, the Company will need to remit the lower of the
principal balance of the Convertible Notes or their conversion value to the
holders in cash. As such, the Company would be required to classify the entire
amount outstanding of the Convertible Notes as a current liability in the
following quarter. The evaluation of the classification of amounts outstanding
associated with the Convertible Notes will occur every
quarter.
Upon conversion, a holder will receive
an amount in cash equal to the lesser of (a) the principal amount of the
Convertible Note or (b) the conversion value, determined in the manner set forth
in the Indenture. If the conversion value exceeds the principal amount of the
Convertible Note on the conversion date, the Company will also deliver, at its
election, cash or the Company's common stock or a combination of cash and the
Company's common stock for the conversion value in excess of the principal
amount. In the event of a change of control or other fundamental change, the
holders of the Convertible Notes may require the Company to purchase all or a
portion of their Convertible Notes at a purchase price equal to 100% of the
principal amount of the Convertible Notes, plus accrued and unpaid interest, if
any. If a specified accounting change occurs, the Company may, at its option,
redeem the Convertible Notes in whole for cash, at a price equal to 102% of the
principal amount of the Convertible Notes, plus accrued and unpaid interest, if
any. Holders of the Convertible Notes who convert their Convertible Notes in
connection with a fundamental change or in connection with a redemption upon the
occurrence of a specified accounting change may be entitled to a make-whole
premium in the form of an increase in the conversion rate.
Pursuant to guidance issued under ASC
Topic 815, the Convertible Notes are accounted for as convertible debt in the
accompanying Consolidated Balance Sheet and the embedded conversion option in
the Convertible Notes has not been accounted for as a separate derivative. For a
discussion of the effects of the Convertible Notes and the Convertible Note
Hedge and Sold Warrants discussed below on earnings per share, see Note
7.
In June 2008, the FASB issued guidance
under ASC Topic 815 regarding the determination of whether an instrument (or an
embedded feature) is indexed to an entity’s own stock. This guidance provides
that an entity should use a two step approach to evaluate whether an
equity-linked financial instrument (or embedded feature) is indexed to its own
stock, including evaluating the instrument’s contingent exercise and settlement
provisions. It also clarifies on the impact of foreign currency denominated
strike prices and market-based employee stock option valuation instruments on
the evaluation. This guidance is effective for fiscal years beginning after
December 15, 2008. The Company has evaluated the impact of this
guidance, and has determined it has no impact on the Company’s results of
operations and financial position in 2009, and will have no impact on the
Company’s results of operations and financial position in future fiscal
periods.
At December 31, 2009 and 2008, the
amount of the Convertible Notes accounted for as a liability was $247.7 million
and $234.0 million, and is reflected on the Consolidated Balance Sheets as
follows:
|
|
|
December
31,
|
|
|
(000’s omitted)
|
|
2009
|
|
|
2008
|
|
|
Equity component carrying
amount
|
|
$
|
41,309
|
|
|
$
|
41,309
|
|
|
Unamortized
discount
|
|
|
39,804
|
|
|
|
53,501
|
|
|
Net debt carrying
amount
|
|
|
247,696
|
|
|
|
233,999
|
|
For 2009 and 2008, the Company recorded
additional non-cash interest expense of $13.1 million and $12.2 million,
respectively, representing the difference between the stated interest rate on
the Convertible Notes and the rate for a similar instrument that does not
have a conversion feature.
For both 2008 and 2009, cash interest
expense relating to the Convertible Notes was approximately $5.4
million.
The Convertible Notes do not provide for
any financial covenants.
In connection with the sale of the
Convertible Notes, the Company entered into hedges for the Convertible Notes
(“Convertible Note Hedges”) with respect to its common stock with two entities,
one of which was Lehman Brothers OTC Derivatives Inc. (“Lehman OTC” and together
with the other counterparty, the “Counterparties”). Pursuant to the agreements
governing these Convertible Note Hedges, the Company purchased call options (the
“Purchased Call Options”) from the Counterparties covering up to approximately
10.4 million shares of the Company's common stock of which 40% were purchased
from Lehman OTC. These Convertible Note Hedges are designed to offset the
Company's exposure to potential dilution upon conversion of the Convertible
Notes in the event that the market value per share of the Company's common stock
at the time of exercise is greater than the strike price of the Purchased Call
Options (which strike price corresponds to the initial conversion price of the
Convertible Notes and is simultaneously subject to certain customary
adjustments). On June 20, 2007, the Company paid an aggregate amount of
approximately $76.3 million of the proceeds from the sale of the Convertible
Notes for the Purchased Call Options, of which $26.7 million was included in the
balance of deferred income tax assets at June 30, 2007 and is being recognized
over the term of the Convertible Notes. As of December 31, 2009, the balance of
deferred income tax assets related to this transaction was $13.4
million.
The Company also entered into separate
warrant transactions with the Counterparties whereby the Company, pursuant to
the agreements governing these warrant transactions, sold to the Counterparties
warrants (the “Sold Warrants”) to acquire up to 3.6 million shares of the
Company's common stock of which 40% were sold to Lehman OTC, at a strike price
of $42.40 per share of the Company's common stock. The Sold Warrants will become
exercisable on September 28, 2012 and will expire by the end of 2012. The
Company received aggregate proceeds of approximately $37.5 million from the sale
of the Sold Warrants on June 20, 2007.
Pursuant to guidance issued under ASC
Topic 815 Derivatives and Hedging as it relates to accounting for derivative
financial instruments indexed to, and potentially settled in, a company’s own
stock, the Convertible Note Hedge and the proceeds received from the issuance of
the Sold Warrants were recorded as a charge and an increase, respectively, in
additional paid-in capital in stockholders’ equity as separate equity
transactions. As a result of these transactions, the Company recorded a net
reduction to additional paid-in-capital of $12.1 million in June
2007.
The Company has evaluated the
impact of adopting guidance issued under ASC Topic 815 regarding embedded
features as it relates to the Sold Warrants, and has determined it has no
impact on the Company’s results of operations and financial position in 2009,
and will have no impact on the Company’s results of operations and financial
position in future fiscal periods.
As the Convertible Note Hedge
transactions and the warrant transactions were separate transactions entered
into by the Company with the Counterparties, they are not part of the terms of
the Convertible Notes and will not affect the holders' rights under the
Convertible Notes. In addition, holders of the Convertible Notes will not have
any rights with respect to the Purchased Call Options or the Sold
Warrants.
If the market value per share of the
Company's common stock at the time of conversion of the Convertible Notes is
above the strike price of the Purchased Call Options, the Purchased Call Options
entitle the Company to receive from the Counterparties net shares of the
Company's common stock, cash or a combination of shares of the Company's common
stock and cash, depending on the consideration paid on the underlying
Convertible Notes, based on the excess of the then current market price of the
Company's common stock over the strike price of the Purchased Call Options.
Additionally, if the market price of the Company's common stock at the time of
exercise of the Sold Warrants exceeds the strike price of the Sold Warrants, the
Company will owe the Counterparties net shares of the Company's common stock or
cash, not offset by the Purchased Call Options, in an amount based on the excess
of the then current market price of the Company's common stock over the strike
price of the Sold Warrants.
These transactions will generally have
the effect of increasing the conversion price of the Convertible Notes to $42.40
per share of the Company's common stock, representing a 100% percent premium
based on the last reported sale price of the Company’s common stock of $21.20
per share on June 14, 2007.
On September 15, 2008 and October 3,
2008, respectively, Lehman Brothers Holdings Inc. (“Lehman Holdings”) and its
subsidiary, Lehman OTC, filed for protection under Chapter 11 of the United
States Bankruptcy Code in the United States Bankruptcy Court in the Southern
District of New York (“Bankruptcy Court”). On September 17, 2009, the Company
filed proofs of claim with the Bankruptcy Court relating to the Lehman OTC
Convertible Note Hedges. The Company will continue to monitor the
bankruptcy filings of Lehman Holdings and Lehman OTC with respect to such
claims. The Company currently believes that the bankruptcy filings and
their potential impact on these entities will not have a material adverse effect
on the Company’s financial position, results of operations or cash flows. The
terms of the Convertible Notes and the rights of the holders of the Convertible
Notes are not affected in any way by the bankruptcy filings of Lehman Holdings
or Lehman OTC.
Term Loan Facility
In connection with the acquisition of
the Rocawear brand, in March 2007, the Company entered into a $212.5 million
credit agreement with Lehman Brothers Inc., as lead arranger and
bookrunner, and Lehman Commercial Paper Inc. (“LCPI”), as syndication agent and
administrative agent (the “Credit Agreement” or “Term Loan Facility”). At the
time, the Company pledged to LCPI, for the
ben
efit of the lenders under the Term Loan
Facility (the “Lenders”), 100% of the capital stock owned by the Company in its
subsidiaries, OP Holdings and Management Corporation, a Delaware corporation
(“OPHM”), and Studio Holdings and Management Corporation, a Delaware corporation
(“SHM”). The Company's obligations under the Credit Agreement are guaranteed by
each of OPHM and SHM, as well as by two of its other subsidiaries, OP Holdings
LLC, a Delaware limited liability company (“OP Holdings”), and Studio IP
Holdings LLC, a Delaware limited liability company ("Studio IP
Holdings").
On October 3, 2007, in connection with
the acquisition of Official-Pillowtex, a Delaware limited liability company
(“Official-Pillowtex”), with the proceeds of the Convertible Notes, the Company
pledged to LCPI, for the
ben
efit of the Lenders, 100% of the capital
stock owned by the Company in Mossimo, Inc., a Delaware corporation (“MI”), and
Pillowtex Holdings and Management Corporation, a Delaware corporation (“PHM”),
each of which guaranteed the Company’s obligations under the Credit Agreement.
Simultaneously with the acquisition of Official-Pillowtex, each of Mossimo
Holdings LLC, a Delaware limited liability company (“Mossimo Holdings”),
and Official-Pillowtex guaranteed the Company’s obligations under the Credit
Agreement. On September 10, 2008, PHM was converted into a Delaware
limited liability company, Pillowtex Holdings and Management LLC (“PHMLLC”), and
the Company’s membership interest in PHMLLC was pledged to LCPI in place of the
capital stock of PHM.
On December 17, 2007, in connection with
the acquisition of the Starter brand, the Company borrowed an additional $63.2
million pursuant to the Term Loan Facility (the “Additional Borrowing”). The net
proceeds received by the Company from the Additional Borrowing were $60
million.
As of December 31, 2009, the Company may
borrow an additional $36.8 million under the terms of the Term Loan
Facility.
The guarantees under the Term Loan
Facility are secured by a pledge to LCPI, for the
ben
efit of the Lenders, of, among other
things, the Ocean Pacific/OP, Danskin, Rocawear, Mossimo, Cannon, Royal Velvet,
Fieldcrest, Charisma, Starter and Waverly trademarks and related intellectual
property assets, license agreements and proceeds therefrom. Amounts outstanding
under the Term Loan Facility bear interest, at the Company’s option, at the
Eurodollar rate or the prime rate, plus an applicable margin of 2.25% or 1.25%,
as the case may be, per annum. The Credit Agreement provides that the Company is
required to repay the outstanding term loan in equal quarterly installments in
annual aggregate amounts equal to 1.00% of the aggregate principal amount of the
loans outstanding, subject to adjustment for prepayments, in addition to an
annual payment equal to 50% of the excess cash flow from the subsidiaries
subject to the Term Loan Facility, as described in the Credit Agreement, with
any remaining unpaid principal balance to be due on April 30, 2013 (the “Loan
Maturity Date”). Upon completion of the Convertible Notes offering, the Loan
Maturity Date was accelerated to January 2, 2012. The Term Loan Facility can be
prepaid, without penalty, at any time. On March 11, 2008, the Company paid to
LCPI, for the
ben
efit of the Lenders, $15.6 million,
representing 50% of the excess cash flow from the subsidiaries subject to the
Term Loan Facility for 2007. As a result of such payment, the Company is no
longer required to pay the quarterly installments described above. The Term Loan
Facility requires the Company to repay the principal amount of the term loan
outstanding in an amount equal to 50% of the excess cash flow of the
subsidiaries subject to the Term Loan Facility for the most recently completed
fiscal year. On March 13, 2009, the Company paid to LCPI, for the
ben
efit of the Lenders, $38.7 million,
representing 50% of the excess cash flow from the subsidiaries subject to the
Term Loan Facility for the year ended December 31, 2008. As of
December 31, 2009, $46.8 million has been classified as current portion of
long-term debt, which represents 50% of the estimated excess cash flow for 2009
of the subsidiaries subject to the Term Loan Facility. The aggregate
amount of 50% of the excess cash flow for all four quarters in 2009 will be paid
during the first quarter of 2010. For 2009, 2008 and 2007, the
effective interest rate of the Term Loan Facility was 3.05%, 5.81%, and 7.53%,
respectively. At December 31, 2009, the balance of the Term Loan
Facility was $217.6 million. As of December 31, 2009, the Company was in
compliance with all material covenants set forth in the Credit Agreement. The
$272.5 million in proceeds from the Term Loan Facility were used by the Company
as follows: $204.0 million was used to pay the cash portion of the initial
consideration for the acquisition of the Rocawear brand; $2.1 million was used
to pay the costs associated with the Rocawear acquisition; $60 million was used
to pay the consideration for the acquisition of the Starter brand; and $3.9
million was used to pay costs associated with the Term Loan Facility. The costs
of $3.9 million relating to the Term Loan Facility have been deferred and are
being amortized over the life of the loan, using the effective interest method.
As of December 31, 2009, the subsidiaries subject to the Term Loan Facility were
Studio IP Holdings, SHM, OP Holdings, OPHM, Mossimo Holdings,
MI, Official-Pillowtex and PHMLLC (collectively, the “Term Loan
Facility Subsidiaries”). As of December 31, 2009, the Term Loan Facility
Subsidiaries, directly or indirectly, owned the following trademarks, excluding
certain territories covered by the Iconix China, Iconix Latin America, and
Iconix Europe joint ventures (see Note 2): Danskin, Rocawear, Starter, Ocean
Pacific/OP, Mossimo, Cannon, Royal Velvet, Fieldcrest, Charisma and
Waverly.
On July 26, 2007, the Company purchased
a hedge instrument to mitigate the cash flow risk of rising interest rates on
the Term Loan Facility. See Note 3 for further
information.
Asset-Backed Notes
The financing for certain of the
Company's acquisitions has been accomplished through private placements by its
subsidiary, IP Holdings LLC ("IP Holdings") of asset-backed notes
("Asset-Backed Notes") secured by intellectual property assets (trade
names, trademarks, license agreements and payments and proceeds with respect
thereto relating to the Candie’s, Bongo, Joe Boxer, Rampage, Mudd and London Fog
brands) of IP Holdings. At December 31, 2009, the balance of the Asset-Backed
Notes was $94.9 million, $24.2 million of which is included in the current
portion of long-term debt on the Consolidated Balance Sheet.
Cash on hand in the bank account of IP
Holdings is restricted at any point in time up to the amount of the next debt
principal and interest payment required under the Asset-Backed Notes.
Accordingly, $2.0 million and $0.9 million as of December 31, 2009 and December
31, 2008, respectively, are included as restricted cash within the Company's
current assets. Further, in connection with IP Holdings' issuance of
Asset-Backed Notes, a reserve account has been established and the funds on
deposit in such account will be applied to the final principal payment with
respect to the Asset-Backed Notes. Accordingly, as of December 31, 2009 and
2008, $15.9 million has been classified as non-current and disclosed as
restricted cash within other assets on the Company's Consolidated Balance
Sheets.
Interest rates and terms on the
outstanding principal amount of the Asset-Backed Notes as of December 31, 2009
are as follows: $32.5 million principal amount bears interest at a fixed
interest rate of 8.45% with a six year term, $14.3 million principal amount
bears interest at a fixed rate of 8.12% with a six year term, and $48.1 million
principal amount bears interest at a fixed rate of 8.99% with a six and a half
year term. The Asset-Backed Notes have no financial covenants by which the
Company or its subsidiaries need comply. The aggregate principal amount of the
Asset-Backed Notes is required to be fully paid by February 22,
2013.
Neither the Company nor any of its
subsidiaries (other than IP Holdings) is obligated to make any payment with
respect to the Asset-Backed Notes, and the assets of the Company and its
subsidiaries (other than IP Holdings) are not available to IP Holdings'
creditors. The assets of IP Holdings are not available to the creditors of the
Company or its subsidiaries (other than IP Holdings).
Promissory Note
I
n connection with the Ecko transaction,
IPH Unltd issued a promissory note (“Promissory Note”) to a third party creditor
for $90.0 million. IPH Unltd’s obligations under the Promissory Note
are secured by the Ecko portfolio of
trademarks and related intellectual
property assets
(including
Ecko and Zoo York), further guaranteed personally by the minority owner of IPH
Unltd. Amounts outstanding under the Promissory Note bear interest at
7.50% per annum, with minimum principal payable in equal quarterly installments
of $2.5 million, with any remaining unpaid principal balance and accrued
interest to be due on June 30, 2014, the Promissory Note maturity
date. The Promissory Note may be prepaid without penalty, and would
be applied to the scheduled quarterly principal payments in the order of their
maturity. As of December 31, 2009, the total principal balance of the
Promissory Note is $90.0 million, of which $10.0 million is included in the
current portion of long-term debt on the Consolidated Balance
Sheet.
Sweet Note
On April 23, 2002, the Company acquired
the remaining 50% interest in Unzipped (see Note 9) from Sweet Sportswear, LLC
(“Sweet”) for a purchase price comprised of 3,000,000 shares of its common stock
and $11.0 million in debt, which was evidenced by the Company’s issuance of the
8% Senior Subordinated Note due in 2012 (“Sweet Note”). Prior to August 5, 2004,
Unzipped was managed by Sweet pursuant to the Management Agreement (as defined
in Note 9), which obligated Sweet to manage the operations of Unzipped in return
for, commencing in the fiscal year ended January 31, 2003 (“Fiscal 2003”), an
annual management fee based upon certain specified percentages of net income
achieved by Unzipped during the three- year term of the agreement. In addition,
Sweet guaranteed that the net income, as defined in the agreement, of Unzipped
would be no less than $1.7 million for each year during the term, commencing
with Fiscal 2003. In the event that the guarantee was not met for a particular
year, Sweet was obligated under the Management Agreement to pay the Company the
difference between the actual net income of Unzipped, as defined, for such year
and the guaranteed $1.7 million. That payment, referred to as the shortfall
payment, could be offset against the amounts due under the Sweet Note at the
option of either the Company or Sweet. As a result of such offsets, the balance
of the Sweet Note was reduced by the Company to $3.1 million as of December 31,
2006 and $3.0 million as of December 31, 2005 and was reflected in Long-
term debt. This note bears interest at the rate of 8% per year and matures in
April 2012.
In November 2007, the Company received a
signed judgment related to the Sweet Sportswear/Unzipped litigation. See Note
10.
The judgment stated that the Sweet Note
(originally $11.0 million when issued by the Company upon the acquisition of
Unzipped from Sweet in 2002) should total approximately $12.2 million as of
December 31, 2007. The recorded balance of the Sweet Note, prior to any
adjustments related to the judgment was approximately $3.2 million. The Company
increased the Sweet Note by approximately $6.2 million and recorded the expense
as an expense related to specific litigation. The Company further increased the
Sweet Note by approximately $2.8 million to record the related interest and
included the charge in interest expense. As of December 31, 2009, the Sweet Note
is approximately $12.2 million and included in the current portion of long-term
debt.
The Sweet Note bears interest, which was
accrued for during 2009 and 2008 and included in accounts payable and accrued
expenses, at the rate of 8% per year.
In addition, in November 2007 the
Company was awarded a judgment of approximately $12.2 million for claims made by
it against Hubert Guez and Apparel Distribution Services, Inc. As a result, the
Company recorded a receivable of approximately $12.2 million and recorded the
ben
efit in special charges during the year
ended December 31, 2007. This receivable is included in other assets -
non-current and bears interest, which was accrued for during 2009 and 2008, at
the rate of 8% per year.
Debt Maturities
As of December 31, 2009, the Company’s
debt maturities on a calendar year basis are as follows:
|
(000’s
omitted)
|
|
Total
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
2014
|
|
|
Convertible Notes
1
|
|
$
|
247,696
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
247,696
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
Term Loan
Facility
|
|
|
217,632
|
|
|
|
46,849
|
|
|
|
-
|
|
|
|
170,783
|
|
|
|
-
|
|
|
|
-
|
|
|
Asset-Backed
Notes
|
|
|
94,865
|
|
|
|
24,216
|
|
|
|
26,380
|
|
|
|
33,468
|
|
|
|
10,801
|
|
|
|
-
|
|
|
Promissory
Note
|
|
|
90,000
|
|
|
|
10,000
|
|
|
|
10,000
|
|
|
|
10,000
|
|
|
|
10,000
|
|
|
|
50,000
|
|
|
Sweet Note
|
|
|
12,186
|
|
|
|
12,186
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Total Debt
|
|
$
|
662,379
|
|
|
$
|
93,251
|
|
|
|
36,380
|
|
|
|
461,947
|
|
|
|
20,801
|
|
|
|
50,000
|
|
1
reflects the net debt carrying amount of
the Convertible Notes on the Consolidated Balance Sheet as of December 31, 2009,
in accordance with accounting for convertible notes. The principal
amount owed to the holders of the Convertible Notes is $287.5
million.
6. Stockholders’
Equity
Public Offering
On June 9, 2009, the Company completed a
public offering of common stock pursuant to a registration statement that had
been declared effective by the Securities and Exchange
Commission. All 10,700,000 shares of common stock offered by the
Company in the final prospectus were sold at $15.00 per share. Net
proceeds to the Company from the offering amounted to approximately $152.8
million.
2009 Equity Incentive
Plan
On August 13, 2009, the Company's
stockholders approved the Company's 2009 Equity Incentive Plan ("2009
Plan”). The 2009 Plan authorizes the granting of common stock options or other
stock-based awards covering up to 3,000,000 shares of the Company’s common
stock. All employees, directors, consultants and advisors of the
Company, including those of the Company's subsidiaries, are eligible to be
granted non-qualified stock options and other stock-based awards (as defined)
under the 2009 Plan, and employees are also eligible to be granted incentive
stock options (as defined) under the 2009 Plan. No new awards may be granted
under the Plan after August 13, 2019.
Stockholder Rights
Plan
In January 2000, the Company's Board of
Directors adopted a stockholder rights plan. Under the plan, each stockholder
of common stock received a dividend of one right for each share of the
Company's outstanding common stock, entitling the holder to purchase one
thousandth of a share of Series A Junior Participating Preferred Stock, par
value, $0.01 per share of the Company, at an initial exercise price of $6.00.
The rights become exercisable and will trade separately from the common stock
ten business days after any person or group acquires 15% or more of the common
stock, or ten business days after any person or group announces a tender offer
for 15% or more of the outstanding common stock.
This plan expired by its
terms on January 26, 2010.
Stock Repurchase
Program
On November 3, 2008, the Company
announced that its Board of Directors had authorized the repurchase of up to $75
million of the Company's common stock over a period of approximately three
years. This authorization replaces any prior plan or authorization. The current
plan does not obligate the Company to repurchase any specific number of shares
and may be suspended at any time at management's discretion. During
2009 and 2008, the Company repurchased 200,000 and 258,200 shares for
approximately $1.5 million and $1.8 million, respectively. No shares
were repurchased by the Company during 2007.
Stock Options
The Black-Scholes option valuation model
was developed for use in estimating the fair value of traded options which have
no vesting restrictions and are fully transferable. In addition, option
valuation models require the input of highly subjective assumptions including
the expected stock price volatility. Because the Company's employee stock
options have characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions can materially
affect the fair value estimate, in management's opinion, the existing models do
not necessarily provide a reliable single measure of the fair value of its
employee stock options.
The fair value for these options and
warrants for all years was estimated at the date of grant using a Black-Scholes
option-pricing model with the following weighted-average
assumptions:
|
Expected
Volatility
|
|
|
30 - 45
|
%
|
|
Expected Dividend
Yield
|
|
|
0
|
%
|
|
Expected Life
(Term)
|
|
3 - 7 years
|
|
|
Risk-Free Interest
Rate
|
|
|
3.00 - 4.75
|
%
|
The options that the
Company granted under its plans expire at various times, either five,
seven or ten years from the date of grant, depending on the particular
grant.
Summaries of the Company's stock
options, warrants and performance related options activity, and related
information for the year ended December 31, 2009 are as
follows:
|
Options
|
|
|
|
|
Weighted-Average
|
|
|
|
|
Options
|
|
|
Exercise Price
|
|
|
|
|
|
|
|
|
|
|
Outstanding January 1,
2007
|
|
|
5,769,632
|
|
|
$
|
4.35
|
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
Canceled
|
|
|
(12,000
|
)
|
|
|
16.80
|
|
|
Exercised
|
|
|
(651,089
|
)
|
|
|
5.02
|
|
|
Expired/Forfeited
|
|
|
|
|
|
|
-
|
|
|
Outstanding December 31,
2007
|
|
|
5,106,543
|
|
|
$
|
4.23
|
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
Canceled
|
|
|
(12,000
|
)
|
|
|
16.96
|
|
|
Exercised
|
|
|
(1,199,405
|
)
|
|
|
3.92
|
|
|
Expired/Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
Outstanding December 31,
2008
|
|
|
3,895,138
|
|
|
$
|
4.29
|
|
|
Granted
|
|
|
35,000
|
|
|
|
13.77
|
|
|
Canceled/Forfeited
|
|
|
(8,000
|
)
|
|
|
16.96
|
|
|
Exercised
|
|
|
(828,059
|
)
|
|
|
3.84
|
|
|
Expired/Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
Outstanding December 31,
2009
|
|
|
3,094,079
|
|
|
$
|
4.48
|
|
|
Exercisable at December 31,
2009
|
|
|
3,090,745
|
|
|
$
|
4.48
|
|
The weighted average contractual term
(in years) of options outstanding as of December 31, 2009, 2008, and 2007, were
3.88, 4.66, and 5.57 respectively. The weighted average contractual term (in
years) of options exercisable as of December 31, 2009, 2008, and 2007,
were
3.87
, 4.
66, and 5.54
respectively.
The total fair value of options vested
during 2009 and 2007, was $0.2 million and $0.1 million,
respectively. No options vested during 2008.
Cash received from option exercise under
all share-based payment arrangements for 2009, 2008, and 2007 was $3.2 million,
$2.3 million, and $3.6 million respectively. A tax
ben
efit of approximately $3.6 million, $8.2
million and $1.2 million for 2009, 2008 and 2007, respectively, were share-based
payment arrangements.
The aggregate intrinsic value is
calculated as the difference between the market price of the Company’s common
stock as of December 31, 2009 and the exercise price of the underlying options.
At December 31, 2009, 2008, and 2007, the aggregate intrinsic value of options
exercised was $7.3 million, $7.0 million, and $9.5 million, respectively. At
December 31, 2009, 2008 and 2007 the aggregate intrinsic value of options
outstanding was $25.3 million, $21.4 million, and $78.8 million,
respectively. In addition, at December 31, 2009, 2008, and 2007, the
aggregate intrinsic value of options exercisable was $25.3 million, $21.4
million, and $77.4 million, respectively.
At December 31, 2009, 2008, and 2007,
exercisable stock options totaled 3,090,745, 3,895,138, and 5,021,875, and had
weighted average exercise prices of $5.03, $4.29, and $4.18 per share,
respectively.
Warrants
|
|
|
|
|
|
Weighted-Average
|
|
|
|
|
Warrants
|
|
|
Exercise Price
|
|
|
|
|
|
|
|
|
|
|
Outstanding January 1,
2007
|
|
|
799,175
|
|
|
|
11.02
|
|
|
Granted
|
|
|
436,668
|
|
|
|
21.38
|
|
|
Canceled
|
|
|
-
|
|
|
|
-
|
|
|
Exercised
|
|
|
(968,943
|
)
|
|
|
11.34
|
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
|
Outstanding December 31,
2007
|
|
|
266,900
|
|
|
|
16.76
|
|
|
Granted
|
|
|
20,000
|
|
|
|
6.65
|
|
|
Canceled
|
|
|
-
|
|
|
|
-
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
|
Outstanding December 31,
2008
|
|
|
286,900
|
|
|
|
16.99
|
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
Canceled
|
|
|
-
|
|
|
|
-
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
|
Outstanding December 31,
2009
|
|
|
286,900
|
|
|
|
16.99
|
|
|
Exercisable at December 31,
2009
|
|
|
286,900
|
|
|
|
16.99
|
|
All warrants issued in connection with
acquisitions are recorded at fair market value using the Black Scholes model and
are recorded as part of purchase accounting. Certain warrants are exercised
using the cashless method.
The Company values other warrants issued
to non-employees at the commitment date at the fair market value of the
instruments issued, a measure which is more readily available than the fair
market value of services rendered, using the Black Scholes model. The fair
market value of the instruments issued is expensed over the vesting
period.
The weighted average contractual term
(in years) of warrants outstanding and exercisable as of December 31, 2009, 2008
and 2007 were 5.97
,
6.97
and 7.39,
respectively.
The fair value of warrants vested during
2008 and 2007 were $0.1 million and $5.9 million, respectively. No
warrants vested during 2009.
Cash received from warrants exercised
under all share-based payment arrangements for 2007 was $0.4
million. No warrants were exercised during 2009 and
2008.
Restricted stock
Compensation cost for restricted stock
is measured as the excess, if any, of the quoted market price of the Company’s
stock at the date the common stock is issued over the amount the employee must
pay to acquire the stock (which is generally zero). The compensation cost, net
of projected forfeitures, is recognized over the period between the issue date
and the date any restrictions lapse, with compensation cost for grants with a
graded vesting schedule recognized on a straight-line basis over the requisite
service period for each separately vesting portion of the award as if the award
was, in substance, multiple awards. The restrictions do not affect voting and
dividend rights.
The following tables summarize
information about unvested restricted stock transactions (shares in
thousands):
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
Shares
|
|
|
Weighted
Average
Grant
Date Fair
Value
|
|
|
Shares
|
|
|
Weighted
Average
Grant
Date Fair
Value
|
|
|
Shares
|
|
|
Weighted
Average
Grant Date
Fair Value
|
|
|
Non-vested, January
1
|
|
|
1,513,983
|
|
|
$
|
18.96
|
|
|
|
144,127
|
|
|
$
|
19.41
|
|
|
|
95,655
|
|
|
$
|
17.46
|
|
|
Granted
|
|
|
842,036
|
|
|
|
14.05
|
|
|
|
1,721,198
|
|
|
|
18.98
|
|
|
|
107,182
|
|
|
|
20.68
|
|
|
Vested
|
|
|
(268,191
|
)
|
|
|
16.41
|
|
|
|
(272,563
|
)
|
|
|
18.90
|
|
|
|
(53,308
|
)
|
|
|
18.58
|
|
|
Forfeited/Canceled
|
|
|
(46,702
|
)
|
|
|
18.32
|
|
|
|
(78,779
|
)
|
|
|
20.31
|
|
|
|
(5,402
|
)
|
|
|
18.51
|
|
|
Non-vested, December
31
|
|
|
2,041,126
|
|
|
|
17.28
|
|
|
|
1,513,983
|
|
|
|
18.96
|
|
|
|
144,127
|
|
|
|
19.41
|
|
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
1
-5 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
2009, 2008 and
2007
, the Co
mpany awarded 842,036,
1,721,198
and
107,182
restricted shares,
respective
ly, with a
vesting period of 2-5
years
and a fair ma
rket value of
approximately $11.8 million, $32.7 million and $2.2
million.
C
ompensation expense related to
res
tricted stock grants for
2009, 2008 and 2007 was approximately $8.9 million, $9.1 million and
$1.7
million, respectively.
An additional amount of $
18.1
million is expected to be expensed
evenly ov
er a period of
approximately three
years.
During
2009, 2008 and
2007
, the Company withheld
s
hares valued at $0.7
million, $3.2 million
, and
$0, respectively, of its restricted common stock in connection with net share
settlement of restricted stock grants and option exercises.
Shares Reserved for
Issuance
At December 31, 2009, 2,173,978 common
shares were reserved for issuance under the 2009 Plan, and 76,653 common shares
were reserved for issuance of stock options under the 2006 Stock Option
Plan. There were no common shares available for issuance under
the 2002, 2001, and 2000 Stock Option Plans.
7. Earnings Per
Share
Basic earnings per share includes no
dilution and is computed by dividing net income available to common stockholders
by the weighted average number of common shares outstanding for the period.
Diluted earnings per share reflect, in periods in which they have a dilutive
effect, the effect of restricted stock-based awards and
common shares issuable upon exercise of
stock options and warrants. The difference between basic and diluted
weighted-average common shares results from the assumption that all dilutive
stock options outstanding were exercised and all convertible notes have been
converted into common stock.
As of December 31, 2009
, of the total potentially dilutive
shares related to restricted stock-based awards, stock option
s and warrants,
1.8 million were anti-dilutive, compared
to 1.9 million as of December 31, 2008 and 0.1 million as of December 31,
2007.
As of December 31, 2009, of the
performance related restricted stock-based awards issued in connection with the
Company’s new employment agreement with its chairman, chief executive officer
and president, 1.3 million of such awards (which is included in the total 1.8
million ant
i-dilutive
stock-based awards described above) were anti-dilutive and therefore not
included in this calculation.
Warrants issued in connection with the
Company’s Convertible Notes financing were anti-dilutive and therefore not
included in this calculation. Portions of the Convertible Notes that would be
subject to conversion to common stock were anti-
dilutive as of December 31,
2009
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,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Basic
|
|
|
65,763
|
|
|
|
57,810
|
|
|
|
56,694
|
|
|
Effect of exercise of stock
options
|
|
|
2,141
|
|
|
|
3,144
|
|
|
|
4,323
|
|
|
Effect of exercise of
warrants
|
|
|
-
|
|
|
|
-
|
|
|
|
115
|
|
|
Effect of contingent common stock
issuance
|
|
|
149
|
|
|
|
287
|
|
|
|
144
|
|
|
Effect of assumed vesting of
restricted stock
|
|
|
272
|
|
|
|
7
|
|
|
|
150
|
|
|
|
|
|
68,325
|
|
|
|
61,248
|
|
|
|
61,426
|
|
8. Unzipped Apparel, LLC (
“Unzipped”
)
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.
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 6. In connection with the acquisition of Unzipped,
the Company filed a registration statement with the Securities and Exchange
Commission ("SEC") for the three million shares of the Company's common stock
issued to Sweet, which was declared effective by the SEC on July 29,
2003.
Prior to August 5, 2004, Unzipped was
managed by Sweet pursuant to a management agreement (the “Management
Agreement”). Unzipped also had a supply agreement with Azteca Productions
International, Inc. ("Azteca") and a distribution agreement with 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 10.
There were no transactions with these
related parties during 2009, 2008 or 2007..
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
ben
efit to the “expenses related to
specific litigation”.
As a result of the judgment, in 2007 the
balance of the $11.0 million principal amount Sweet Note, originally issued by
the Company upon the acquisition of Unzipped from Sweet in 2002, including
interest, was increased from approximately $3.2 million to approximately $12.2
million as of December 31, 2007. Of this increase, approximately $6.2 million
was attributed to the principal of the Sweet Note and the expense was recorded
as an expense related to specific litigation. The remaining $2.8 million of the
increase was attributed to related interest on the Sweet Note and recorded as
interest expense. As of December 31, 2009, the full $12.2 million current
balance of the Sweet Note and $2.0 million of accrued interest are included in
the current portion of long term debt and accounts payable and accrued expenses,
respectively.
In addition, in November 2007 the
Company was awarded a judgment of approximately $12.2 million for claims made by
it against Hubert Guez and ADS. As a result, the Company recorded a receivable
of approximately $12.2 million and recorded the
ben
efit in special charges for 2007. As of
December 31, 2009, this receivable and the associated accrued interest of $2.0
million for 2009 are included in other assets - non-current.
9. Expenses Related to
Specific Litigation
Expenses related to specific litigation
consist of legal expenses and costs related to the Unzipped litigation. For
2009, the Company recorded expenses related to specific litigation of $0.1
million; for 2008, the Company recorded expenses related to specific litigation
of $0.9 million; and for 2007, the Company recorded a net
ben
efit related to specific litigation of
$6.0 million. See Note 9 for information relating to
Unzipped.
10. Commitments and
Contingencies
Sweet Sportswear/Unzipped
litigation
In August 2004, the Company commenced a
lawsuit in the Superior Court of California, Los Angeles County, against
Unzipped’s former manager, supplier and distributor Sweet, Azteca and ADS and
Hubert Guez, a principal of these entities and former member of the Company’s
board of directors (collectively referred to as the Guez defendants) alleging
numerous causes of action, including fraud, breach of contract, breach of
fiduciary duty and trademark infringement. Sweet, Azteca and ADS filed
counterclaims against the Company claiming damages resulting from, among other
things, a variety of alleged contractual breaches.
In April 2007, a jury returned a verdict
of approximately $45 million in the Company’s favor on every claim that the
Company pursued, and against the Guez defendants on every counterclaim they
asserted. Additionally, the jury found that all of the Guez defendants acted
with “malice, fraud or oppression” with regard to each of the tort claims
asserted by the Company and, in addition, awarded the Company $5 million in
punitive damages against Guez personally.
In November 2007, the Court, among
other things, reduced the total damages awarded against the Guez defendants by
approximately 50% and reduced the amount of punitive damages assessed against
Guez to $4 million. The Court also entered judgments against Guez in the amount
of approximately $11 million and ADS in the amount of approximately $1.3
million. It also entered judgment against all of the Guez defendants on every
counterclaim that they pursued in the litigation, including ADS’s and Azteca’s
unsuccessful efforts to recover against Unzipped any account balances claimed to
be owed, totaling approximately $3.5 million and Sweet’s efforts to accelerate
the principal balance of a note and other fees totaling approximately $15
million (these orders are collectively referred to as the “judgments”). The
Court also issued an order confirming an additional aggregate of approximately
$6.8 million of the jury’s verdicts against Sweet and Azteca (referred to as the
“confirmed verdicts”) but declined to enter judgment against these entities
since it had ordered a new trial with regard to certain of the jury’s other
damage awards against these entities.
In May 2008, the Court awarded the
Company statutory litigation costs (jointly and severally against the Guez
defendants) of approximately $650,000. In October 2008, the Court granted the
Company’s petition for attorneys’ fees with respect to approximately $7.7
million of fees (mostly against Sweet and Azteca), but did not award any
non-statutory (contractual) costs. In December 2008, the earlier judgments were
amended to add the cost award against all the Guez defendants, as well as
$100,000 of attorneys’ fees awarded against ADS.
In sum, the trial court entered judgment
in the Company’s favor of over $12 million and has confirmed, but not reduced to
judgment, additional amounts owed of approximately $15 million, which consists
of the confirmed verdicts plus the fee and cost awards against Sweet and Azteca.
All of these amounts accrue interest at an annual rate of 10%. All parties have
filed notices of appeal. The Company’s notice of appeal related to, among other
things, those parts of the jury’s verdicts vacated by the Court. In December
2008, the Company also filed a notice of appeal from the Court’s orders relating
to attorneys’ fees awarded against ADS, statutory costs and non-statutory costs.
The Guez defendants have posted an aggregate of approximately $51.7 million in
undertakings with the Court to secure the judgments. The Company is unable
to pursue collection of the monetary portions of the judgments during the
pendency of the appeals.
The Company intends to vigorously pursue
its appeals, and vigorously defend against the Guez defendants’
appeal.
Normal Course
litigation
From time to time, the Company is also
made a party to litigation incurred in the normal course of business. While any
litigation has an element of uncertainty, the Company believes that the final
outcome of any of these routine matters will not have a material effect on the
Company’s financial position or future liquidity.
11. Related Party
Transactions
Kenneth Cole Productions,
Inc.
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 Offic
er and President. During 2009, 2008 and
2007,
the Company
earned
$0.3 million, $ $1.1 million and $0.7
million in royalties from Kenneth Cole Productions, respectively
. This license expired by its
terms on December 31, 2009.
The Candie's Foundation, a charitable
foundation founded by Neil Cole for the purpose of raising national awareness
about the consequences of teenage pregnancy, owed the Company $0.8 million and
$0.8 million at December 31, 2009 and 2008, respectively. In February 2010, the
Candie’s
Foundation received a contribution of
approximately $0.7 million from a licensee of the Company. The
Candie's Foundation intends to pay-off the entire borrowing from the Company
during 2010, although additional advances will be made as and when
necessary.
Travel
The Company recorded expenses of
appro
ximately
$326
and $354 for
2009 and
2008, respectively, for the hire and use
of aircraft solely for business purposes owned by a company in which the
Company’s chairman, chief executive officer and president is the sole owner.
Management believes that all transactions were made on terms and conditions no
less favorable than those available in the marketplace from unrelated
parties. There were no such transactions in 2007.
12. Operating
Leases
Future net minimum lease payments under
non-cancelable operating lease agreements as of December 31, 2009 are
approximately as follows:
(000’s omitted)
|
Year ending December 31,
2010
|
|
$
|
2,444
|
|
|
Year ending December 31,
2011
|
|
|
1,639
|
|
|
Year ending December 31,
2012
|
|
|
1,828
|
|
|
Year ending December 31,
2013
|
|
|
1,886
|
|
|
Year ending December 31,
2014
|
|
|
1,932
|
|
|
Thereafter
|
|
|
19,204
|
|
|
Totals
|
|
$
|
28,933
|
|
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 $2.9
million, $1.6 million, and $1.0 million for 2009, 2008 and 2007,
respectively. Contingent rent amounts have been immaterial for all
periods.
13. 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. During 2009 and 2008, the Company made contributions to the
Savings Plan of
$45
and $27. The Company had no
contributions for 2007.
Stock-based awards are provided to
certain employees under the terms of the Company’s 2009 Plan and 2006 Equity
Incentive Plan. These plans are administered by the Compensation Committee of
the Board of Directors.
With respect to performance-based
restricted common stock units, the number of shares that ultimately vest and are
received by the recipient is based upon various performance criteria. Though
there is no guarantee that performance targets will be achieved, the Company
estimates the fair value of performance-based restricted stock based on the
closing stock price on the grant date. Over the performance period,
the number of shares of common stock that will ultimately vest and be issued
is adjusted upward or downward based upon the Company’s estimation of
achieving such performance targets. The ultimate number of shares delivered to
recipients and the related compensation cost recognized as an expense will be
based on the actual performance metrics as defined under the 2009 Plan and the
2006 Equity Incentive Plan. Restricted common stock units are unit awards
entitle the recipient to shares of common stock upon vesting annually over as
much as 5 years for time-based awards or over 5 years for performance-based
awards. The fair value of restricted common stock units is determined on the
date of grant, based on the Company’s closing stock price.
14. Income
Taxes
The Company accounts for income taxes in
accordance with ASC Topic 740. Under ASC Topic 740, 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 ASC Topic 740, 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. At December 31, 2009, the Company has a valuation allowance of
approximately $15.8 million to offset state and local tax net operating loss
carryforwards (“NOL”) which the Company believes are unlikely to be utilized in
the foreseeable fu
ture. The valuation allowance
increases
by $
3
.8 million during 2009
for the State NOLs
.
At December 31, 2009 the Company had
utilized all available federal NOL’s. As of December 31, 2009, the Company
has available state and local NOL
’s ranging from approximately
$
126.0
mi
llion to $166.0 million (inclusive of
$18.8
million from
exercises of stock options on the state level
for which any benefit
realized will be credited to additional paid in capital).
The income tax provision (
ben
efit) for federal, and state and local
income taxes in the consolidated income statements consists of the
following:
|
(000's
omitted)
|
|
Year Ended
December 31,
2009
|
|
|
Year Ended
December 31,
2008
|
|
|
Year Ended
December 31,
2007
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
23,650
|
|
|
$
|
13,559
|
|
|
$
|
5,890
|
|
|
State and
local
|
|
|
100
|
|
|
|
446
|
|
|
|
830
|
|
|
Foreign
|
|
|
338
|
|
|
|
-
|
|
|
|
|
|
|
Total
current
|
|
|
24,088
|
|
|
|
14,005
|
|
|
|
6,720
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
17,698
|
|
|
|
19,531
|
|
|
|
25,388
|
|
|
State and
local
|
|
|
(235)
|
|
|
|
641
|
|
|
|
(1,814
|
)
|
|
Total
deferred
|
|
|
17,463
|
|
|
|
20,172
|
|
|
|
23,574
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
provision
|
|
$
|
41,551
|
|
|
$
|
34,177
|
|
|
$
|
30,294
|
|
The significant components of net
deferred tax assets of the Company consist of the following:
|
|
|
December
31,
|
|
|
(000's
omitted)
|
|
2009
|
|
|
2008
|
|
|
State net operating loss
carryforwards
|
|
$
|
15,826
|
|
|
$
|
13,148
|
|
|
Receivable
reserves
|
|
|
1,867
|
|
|
|
208
|
|
|
Federal Foreign Tax
Credits
|
|
|
-
|
|
|
|
209
|
|
|
Federal Alternative Minimum Tax
Credits
|
|
|
-
|
|
|
|
1,130
|
|
|
Hedging
transaction
|
|
|
13,398
|
|
|
|
18,739
|
|
|
Intangibles
|
|
|
2,392
|
|
|
|
2,292
|
|
|
Contribution
carryover
|
|
|
-
|
|
|
|
87
|
|
|
Equity
compensations
|
|
|
5,762
|
|
|
|
2,576
|
|
|
Accrued compensation and
other
|
|
|
1,748
|
|
|
|
1,781
|
|
|
Total deferred tax
assets
|
|
|
40,993
|
|
|
|
40,170
|
|
|
Valuation
allowance
|
|
|
(15,826)
|
|
|
|
(13,052
|
)
|
|
Net deferred tax
assets
|
|
|
25,167
|
|
|
|
27,118
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks, goodwill and other
intangibles
|
|
|
(70,845)
|
|
|
|
(47,029
|
)
|
|
Depreciation
|
|
|
(991)
|
|
|
|
(1,098
|
)
|
|
Difference in cost basis of
acquired intangibles
|
|
|
(49,000)
|
|
|
|
(49,000
|
)
|
|
Convertible
Notes
|
|
|
(14,635)
|
|
|
|
(18,865
|
)
|
|
Investment in joint
ventures
|
|
|
(4,900)
|
|
|
|
(2,477
|
)
|
|
Total deferred tax
liabilities
|
|
|
(140,371)
|
|
|
|
(118,469
|
)
|
|
Total net deferred tax assets
(liabilities)
|
|
$
|
(115,204
)
|
|
|
$
|
(91,351
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet detail on
total net deferred tax assets (liabilities):
|
|
|
|
|
|
|
|
|
|
Current portion of net deferred
tax assets
|
|
$
|
1,886
|
|
|
$
|
1,655
|
|
|
Noncurrent portion of net deferred
tax assets
(liabilities)
|
|
$
|
(
117,090
)
|
|
|
$
|
(
93,006
|
)
|
The following is a rate reconciliation
between the amount of income tax provision at the Federal rate of 35% and
provision for (
ben
efit from) taxes on operating profit
(loss):
|
|
|
Year ended December,
31
|
|
|
(000's
omitted)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Income tax provision computed at
the federal rate of 35%
|
|
$
|
41,040
|
|
|
$
|
33,980
|
|
|
$
|
31,695
|
|
|
Increase (reduction) in income
taxes resulting from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State and local income taxes
(
ben
efit), net of federal income
tax
|
|
|
(4,013)
|
|
|
|
(1,007
|
)
|
|
|
(3,640
|
)
|
|
Increase in valuation
allowance
|
|
|
3,843
|
|
|
|
1,713
|
|
|
|
3,000
|
|
|
Tax credit
|
|
|
-
|
|
|
|
(304
|
)
|
|
|
-
|
|
|
Other, net
|
|
|
681
|
|
|
|
(205
|
)
|
|
|
(761
|
)
|
|
Total
|
|
$
|
41,551
|
|
|
$
|
34,177
|
|
|
$
|
30,294
|
|
Effective January 1, 2007,
the Company
adopted
guidance under ASC Topic 740-10 which
clarifies
the accounting
and disclosure for uncertainty in income
taxes. The adoption of this
interpretation did not have a material impact on our
financial
statements.
The Company files income tax returns in
the U.S. federal and various state and local
jurisdictions
. For federal income tax
purposes, the
2006,
2007, 2008 and 2009 tax
years remain open for examination by the tax authorities under the normal three
year statute of
limitations. For state tax
purposes, our 2005 through 2009 tax years remain open for examination by the tax
authorities under a four year statute of limitations.
At December 31, 2009, the total
unrecognized tax
ben
efit was approximately
$1.2_million. However, the liability is not recognized for accounting
purposes because the related deferred tax asset has been fully reserved in prior
years.
A reconciliation of the beginning and ending amount of
gross unrecognized tax benefits is as follows:
|
(000’s
omitted)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Uncertain tax positions at January
1
|
|
$
|
1,180
|
|
|
$
|
1,100
|
|
|
$
|
780
|
|
|
Increases during the
year
|
|
|
|
|
|
|
80
|
|
|
|
320
|
|
|
Decreases during the
year
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
Uncertain tax positions at
December 31
|
|
$
|
1,180
|
|
|
$
|
1,180
|
|
|
$
|
1,100
|
|
|
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 2009, 2008 and
2007. The Company does not believe that there will be a
material change in it unrecognized tax positions over the next twelve
months. All of the unrecognized tax
ben
efits, if recognized, would be
offset by the valuation
allowance.
|
15. 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,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Net sales by
category:
|
|
|
|
|
|
|
|
|
|
|
Direct-to-retail
license
|
|
$
|
110,921
|
|
|
$
|
54,270
|
|
|
$
|
53,952
|
|
|
Wholesale
license
|
|
|
108,100
|
|
|
|
151,714
|
|
|
|
103,639
|
|
|
Other (commissions, sales of
certain trademarks, sale of interest in subsidiary)
|
|
|
13,037
|
|
|
|
10,777
|
|
|
|
2,413
|
|
|
|
|
$
|
232,058
|
|
|
$
|
216,761
|
|
|
$
|
160,004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales by geographic
region:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United
States
|
|
$
|
218,693
|
|
|
$
|
195,856
|
|
|
$
|
150,376
|
|
|
Other
|
|
|
13,365
|
|
|
|
20,905
|
|
|
|
9,628
|
|
|
|
|
$
|
232,058
|
|
|
$
|
216,761
|
|
|
$
|
160,004
|
|
16. Unaudited Consolidated
Interim Financial Information
Unaudited interim consolidated financial
information 2009, 2008 and 2007 is summarized as follows:
|
|
|
First
Quarter
|
|
|
Second
Quarter
|
|
|
Third
Quarter
|
|
|
Fourth
Quarter
|
|
|
|
|
(in thousands except per share
data)
|
|
|
The year ended December 31,
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Licensing and other
revenue
|
|
$
|
50,501
|
|
|
$
|
56,408
|
|
|
$
|
59,367
|
|
|
$
|
65,782
|
|
|
Operating
income
|
|
|
34,177
|
|
|
|
38,957
|
|
|
|
38,344
|
|
|
|
41,087
|
|
|
Net income
|
|
|
15,649
|
|
|
|
19,291
|
|
|
|
20,454
|
|
|
|
19,716
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per
share
(
1
)
|
|
|
0.27
|
|
|
|
0.31
|
|
|
|
0.29
|
|
|
|
0.28
|
|
|
Diluted earnings per
share
(
1
)
|
|
|
0.26
|
|
|
|
0.30
|
|
|
|
0.28
|
|
|
|
0.27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The year ended December 31,
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Licensing and other
revenue
|
|
$
|
55,667
|
|
|
$
|
51,700
|
|
|
$
|
55,135
|
|
|
$
|
54,259
|
|
|
Operating
income
|
|
|
36,765
|
|
|
|
33,185
|
|
|
|
36,298
|
|
|
|
35,804
|
|
|
Net income
|
|
|
16,521
|
|
|
|
14,633
|
|
|
|
16,421
|
|
|
|
15,244
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per
share
(
1
)
|
|
|
0.29
|
|
|
|
0.26
|
|
|
|
0.28
|
|
|
|
0.26
|
|
|
Diluted earnings per
share
(
1
)
|
|
|
0.27
|
|
|
|
0.24
|
|
|
|
0.27
|
|
|
|
0.25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The year ended December 31,
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
|
|
|
|
14,787
|
|
|
|
15,245
|
|
|
|
17,485
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per
share
(
1
)
|
|
|
0.23
|
|
|
|
0.26
|
|
|
|
0.27
|
|
|
|
0.31
|
|
|
Diluted earnings per
share
(
1
)
|
|
|
0.21
|
|
|
|
0.24
|
|
|
|
0.25
|
|
|
|
0.28
|
|
(1)
Quarterly earnings per share amounts may not add to full year amounts due to
rounding.
17. Subsequent
Events
The Company has evaluated subsequent
events through February 26, 2010, the date the Company filed its Annual Report
on Form 10-K for the year ended December 31, 2009 with the Securities and
Exchange Commission. There have been no subsequent events after December
31, 2009 for which disclosure is required.
