Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

The Company's common stock, $0.001 par value per share, its only class of common equity, is quoted on the NASDAQ Global Market tier of The Nasdaq Stock Market LLC (“NASDAQ”) under the symbol “ICON”. The following table sets forth the high and low sales prices per share of the Company's common stock for the periods indicated, as reported on NASDAQ:

		High			Low
Year Ended December 31, 2006
Fourth Quarter		$	20.39		$	14.49
Third Quarter			17.00			12.64
Second Quarter			18.09			13.70
First Quarter			14.89			9.51
Year Ended December 31, 2005
Fourth Quarter		$	10.64		$	7.66
Third Quarter			10.21			6.30
Second Quarter			6.98			4.16
First Quarter			5.50			4.25

 

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Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

 

Not applicable.

Item 9A. Controls and Procedures

(a) Evaluation of disclosure controls and procedures.

The Company, under the supervision and with the participation of its management, including its principal executive officer and principal financial officer, evaluated the effectiveness of the design and operation of its disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 (the "Exchange Act")) as of the end of the period covered by this report. Based on this evaluation, the principal executive officer and principal financial officer concluded that the Company's disclosure controls and procedures (as defined in Exchange Act Rule 13a-15d and 15d-15(e)) were effective at the reasonable assurance level at December 31, 2006.

(b) Changes in internal control and financial reporting.

The principal executive officer and principal financial officer also conducted an evaluation of internal control over financial reporting, as defined in Exchange Act Rule 13a-15(f) and 15d-15(f) (“Internal Control”), to determine whether any changes in Internal Control occurred during the quarter ended December 31, 2006 that have materially affected or which are reasonably likely to materially affect Internal Control. Based on that evaluation, there has been no such change during the quarter ended December 31, 2006.

(c) Management's report on internal control over financial reporting.

 

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MANAGEMENT'S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

 

March 14, 2007

 

To the Stockholders of Iconix Brand Group, Inc.

 

        The management of Iconix Brand Group, Inc. is responsible for establishing and maintaining adequate internal control over financial reporting, including the preparation, integrity, objectivity and fair presentation of the financial statements and other financial information presented in this report. The financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America and reflect the effects of certain judgments and estimates made by management.

 

        In order to ensure that our internal control over financial reporting is effective, management regularly assesses such controls and did so most recently for our financial reporting as of December 31, 2006. This assessment was based on criteria for effective internal control over financial reporting described in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, referred to as COSO. Our assessment included the documentation and understanding of our internal control over financial reporting. We have evaluated the design effectiveness and tested the operating effectiveness of internal controls to form our conclusion.

 

        Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that pertain to maintaining records that, in reasonable detail, accurately and fairly reflect transactions and dispositions of assets, providing reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, assuring that receipts and expenditures are being made in accordance with authorizations of our management and directors and providing reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of assets that could have a material effect on our financial statements.

 

        Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

        Based on this assessment, management has concluded that our internal controls and procedures over financial reporting are effective in timely alerting them to material information required to be included in our periodic SEC filings and that information required to be disclosed by us in these periodic filings is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms and that our internal controls are effective to provide reasonable assurance that our financial statements are fairly presented in conformity with generally accepted accounting principles.

 

        The Audit Committee of our Board of Directors, which consists of independent, non-executive directors, meets regularly with management and the independent accountants to review accounting, reporting, auditing and internal control matters. The committee has direct and private access to both internal and external auditors.

 

        BDO Seidman, LLP, independent accountants of our financial statements, has reported on management's assessment with respect to the effectiveness of our internal control over financial reporting as of December 31, 2006.

 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Stockholders

Iconix Brand Group, Inc.

New York, New York

We have audited management's assessment, included in the accompanying Management's Report on Internal Control Over Financial Reporting, that Iconix Brand Group, Inc. maintained effective internal control over financial reporting as of December 31, 2006, based on the criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management's assessment and an opinion on the effectiveness of the Company's internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management's assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, management's assessment that Iconix Brand Group, Inc. maintained effective internal control over financial reporting as of December 31, 2006, is fairly stated, in all material respects, based on the criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2006, based on the criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Iconix Brand Group, Inc. as of December 31, 2006 and 2005 and the related consolidated statements of income, stockholders' equity, and cash flows for the years ended December 31, 2006 and 2005, and the 11-month period ended December 31, 2004 and our report dated March 14, 2007 expressed an unqualified opinion thereon. 

 

/s/ BDO Seidman, LLP

 

New York, New York

March 14, 2007

 

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Item 9B. Other Information

 

 

 

Item 10. Directors, Executive Officers and Corporate Governance

 

Our executive officers and directors and their respective ages and positions are as follows:

 

Name		Age		Position(s)
Neil Cole		49		Chairman of the Board, President and Chief Executive Officer
David Conn		39		Executive Vice President
Warren Clamen		42		Chief Financial Officer
Andrew Tarshis		41		Senior Vice President and General Counsel
Deborah Sorell Stehr		44		Senior Vice President - Business Affairs and Licensing
Barry Emanuel 1,3		65		Director
Steven Mendelow 1, 2, .3		64		Director
Drew Cohen 1, 2		38		Director
F. Peter Cuneo 2, 3		62		Director
Mark Friedman 1, 3		43		Director

 

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(1)  Member of nominating/governance committee. (2)  Member of audit committee. (3)  Member of compensation committee.

 

Neil Cole has served as Chairman of the Company's Board of Directors and as its Chief Executive Officer and President since the Company's public offering in February 1993. In addition, from February through April 1992, Mr. Cole served as its Acting President and as a member of its Board of Directors. Mr. Cole also served as Chairman of the Board, President, Treasurer and a Director of New Retail Concepts, Inc., the company from which we acquired the Candie's trademark in 1993, from its inception in April 1986 until it was merged with and into our Company in August 1998. In 2001, Mr. Cole founded The Candie's Foundation, for the purpose of educating teenagers as to the risks and consequences of teen pregnancy. In April 2003, Mr. Cole, without admitting or denying the SEC's allegations, consented to the entry by the SEC of an administrative order in which Mr. Cole agreed to cease and desist from violating or causing any violations or future violation of certain books and records and periodic reporting provisions and the anti-fraud provisions of the Securities Exchange Act of 1934. Mr. Cole also paid a $75,000 civil monetary fine. Mr. Cole received a Bachelor of Science degree in political science from the University of Florida in 1978 and his Juris Doctor from Hofstra law school in 1982.

 

David Conn has served as the Company's Executive Vice President since rejoining the Company in May 2004. Prior thereto, from June 2000 until May 2004, Mr. Conn was employed at Columbia House, one of the world's largest licensees of content for music and film, where he oversaw its internet business and was responsible for online advertising, sales promotion and customer retention on the internet. During his tenure at Columbia House, it grew to become one of the ten largest e-commerce sites on the internet. Prior to that, Mr. Conn served as Vice President of Marketing for the Company from 1995 to 2000. Mr. Conn has also been active in the Direct Marketing Association, serving on its ethics policy committee and, prior to joining the Company in 1995, he held marketing positions with The Discovery Channel and CCM, a New York based marketing and promotion agency. Mr. Conn received his Bachelor of Arts degree from Boston University in 1990.

 

Warren Clamen has served as the Company's Chief Financial Officer since joining the Company in March 2005. From June 2001 until March 2005, Mr. Clamen served as Vice President of Finance for Columbia House, and from December 1998 to June 2001, he was Vice President of Finance of Marvel Entertainment, Inc., one of the world's largest public licensing companies. Prior to that time, Mr. Clamen served as the Director, International Management for Biochem Pharma Inc., a public company located in Montreal, Canada that has its shares traded on NASDAQ, and as a Senior Manager at Richter, Usher and Vineberg, an accounting firm also located in Montreal, Canada. Mr. Clamen is a certified public accountant and a chartered accountant. He received a Bachelor of Commerce degree in 1986 and a Graduate Diploma in public accounting in 1988, each from McGill University in Montreal.

 

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Andrew Tarshis has served as our Senior Vice President and General Counsel since September 2006. From July 2005, when he joined us in connection with our acquisition of the Joe Boxer brand, until September 2006, he served as our Senior Vice President, business affairs and associate counsel. Prior to joining us, from May 2001 to July 2005, Mr. Tarshis served as Senior Vice President and General Counsel to Windsong Allegiance Group, LLC and, from December 1998 to May 2001, he served as a general attorney for Toys R Us, Inc. Mr. Tarshis received his Bachelor of Arts degree from the University of Michigan, Ann Arbor in 1988 and his Juris Doctor degree from the University of Connecticut School of Law in 1992.

 

Deborah Sorell Stehr has served as our Senior Vice President—Business Affairs and Licensing since September 2006. Since joining the Company in December 1998, she served as Vice President and General Counsel from December 1998 until November 1999, and then served as Senior Vice President and General Counsel until September 2006. Ms. Sorell Stehr has also been the Secretary since 1999 and on the Board of Directors of numerous of our subsidiaries. From September 1996 to December 1998, Ms. Sorell Stehr was Associate General Counsel with Nine West Group Inc., a women’s footwear corporation with sales of approximately $2.0 billion, where Ms. Sorell Stehr was primarily responsible for overseeing legal affairs relating to domestic and international contracts, intellectual property, licensing, general corporate matters, litigation and claims. Prior to joining Nine West Group, Ms. Sorell Stehr practiced law for nine years at private law firms in New York City and Chicago in the areas of corporate law and commercial litigation. Ms. Sorell Stehr received her A.B. in politics from Princeton University in 1984 and her Juris Doctor degree from the Northwestern University School of Law in 1987.

 

 Barry Emanuel has served on the Company's Board of Directors since May 1993. For more than the past five years, Mr. Emanuel has served as President of Copen Associates, Inc., a textile manufacturer located in New York, New York. Mr. Emanuel was a director of New Retail Concepts, Inc. from 1992 until its merger with the Company in 1998. He received his Bachelor of Science degree from the University of Rhode Island in 1962.

 

Steven Mendelow has served on the Company's Board of Directors since December 1999. He has been a principal with the accounting firm of Konigsberg Wolf & Co. and its predecessor, which is located in New York, New York, since 1972. Mr. Mendelow was a director of New Retail Concepts, Inc. from 1992 until its merger with the Company in 1998. He also serves as a director of several privately held companies. He is a member of the board of directors of Soldiers For the Truth, a trustee of The Washington Institute for Near East Studies and actively involved with the Starlight Starbright Children's Foundation. He received a Bachelor of Science degree in business administration from Bucknell University in 1964 where he was elected to Delta Mu Delta, the national Economics Honor Society.

 

Drew Cohen has served on the Company's Board of Directors since April 2004. He is the General Manager of Music Theatre International, which represents the dramatic performing rights of classic properties such as “West Side Story,” and “Fiddler on the Roof,” and licenses over 50,000 performances a year around the world. Before joining Music Theatre International in September 2002, Mr. Cohen was from July 2001 the Director of Investments for Big Wave NV, an investment management company, and prior to that, General Manager for GlassNote Records, an independent record company. Mr. Cohen received a Bachelor of Science degree from Tufts University in 1990, his Juris Doctor from Fordham Law School in 1993, and a Masters Degree in business administration from Harvard Business School in 2001.

 

 

F. Peter Cuneo has served as one of our directors since October 2006. He has served as the Vice Chairman of the Board of Directors of Marvel Entertainment, Inc., a publicly traded entertainment company active in motion pictures, television, publishing, licensing and toys, since June 2003, and prior thereto, he served as the President and Chief Executive Officer of Marvel Entertainment from July 1999 to December 2002. Mr. Cuneo has also served as the Chairman of Cuneo & Co., L.L.C., a private investment firm, since July 1997 and previously served on the Board of Directors of WaterPik Technologies, Inc., a New York Stock Exchange company engaged in designing, manufacturing and marketing health care products, swimming pool products and water-hearing systems, prior to its sale earlier in 2006. Mr. Cuneo currently serves as the Vice Chairman of the Alfred University Board of Trustees, and he received a Bachelor of Science degree from Alfred University in 1967 and a Masters degree in business administration from Harvard Business School in 1973.

 

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Mark Friedman has served as one of our directors since October 2006. He has been the Managing Partner of Trilea Partners LLC, an investment and consulting firm, since May 2006. Previously, he was with Merrill Lynch since 1996, serving in various capacities including, most recently, as group head of its U.S. equity research retail team where he specialized in analyzing and evaluating specialty retailers in the apparel, accessory and home goods segments. Prior thereto, he specialized in similar services for Lehman Brothers Inc. and Goldman, Sachs & Co. Mr. Friedman has been ranked on the Institutional Investor All-American Research Team as one of the top-rated sector analysts and received a Bachelor of Business Administration degree from the University of Michigan in 1986 and a Masters degree in business administration from The Wharton School, University of Pennsylvania in 1990.

 

Election of officers

Our board elects our officers on an annual basis and our officers serve until their successors are duly elected and qualified. No family relationships exist among any of our officers or directors.

Election of directors

Our board of directors is currently comprised of six directors. At each annual meeting of stockholders, the successors to the directors then serving are elected to serve from the time of their election and qualification until the next annual meeting following their election or until their successors have been duly elected and qualified, or until their earlier death, resignation or removal. All of our current directors have been elected to serve until the annual meeting of stockholders to be held in 2007.

 Committees of the Board of Directors

 

The Company's bylaws authorize its Board of Directors to appoint one or more committees, each consisting of one or more directors. The Company's Board of Directors currently has three standing committees: an audit committee, nominating/governance committee and a compensation committee, each of which has adopted written charters. The audit committee charter and the nominating/governance committee charter are both currently available on the Company’s website.

 

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 Audit committee

The Company's audit committee’s responsibilities include:

●

appointing, replacing, overseeing and compensating the work of a firm to serve as the registered independent public accounting firm to audit the Company's financial statements;

 

●

discussing the scope and results of the audit with the independent registered public accounting firm and reviewing with management and the independent registered public accounting firm the Company's interim and year-end operating results;

 

●

considering the adequacy of the Company's internal accounting controls and audit procedures; and

 

●

approving (or, as permitted, pre-approving) all audit and non-audit services to be performed by the independent registered public accounting firm.

The members of the Company's audit committee are Messrs. Mendelow, Cuneo and Cohen, and Mr. Mendelow currently serves as its chairperson. Each member of the audit committee is an “independent director” under the marketplace rules of NASDAQ applicable to companies whose securities are listed on the NASDAQ Global Market. The Company's Board of Directors has also determined that Mr. Mendelow is the “audit committee financial expert,” as that term is defined under applicable SEC rules and NASDAQ Marketplace Rules, serving on its audit committee.

 

Nominating/governance committee

 

The Company's nominating/governance committee's responsibilities include:

 

●

identifying, evaluating and recommending nominees to serve on the Board and committees of the Board;

●

conducting searches for appropriate directors and evaluating the performance of the Board and of individual directors; and

●

reviewing developments in corporate governance practices, evaluating the adequacy of the Company's corporate governance practices and reporting and making recommendations to the Board concerning corporate governance matters.

 

The members of the Company's nominating/governance committee are Messrs. Mendelow, Cohen, Emanuel and Friedman, and Mr. Cohen currently serves as its chairperson.

 

Compensation committee

 

The Company's compensation committee's responsibilities include:

 

●

setting the chief executive officer's compensation based on the achievement of corporate objectives;

●

reviewing and recommending approval of the compensation of the Company's other executive officers;

●

administering our stock option and stock incentive plans;

●

reviewing and making recommendations to the Board with respect to the Company’s overall compensation objectives, policies and practices, including with respect to incentive compensation and equity plans; and

●

evaluating the chief executive officer's performance in light of corporate objectives.

 

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The members of the Company's compensation committee are Messrs. Mendelow, Cohen, Cuneo and Friedman, and Mr. Friedman currently serves as its chairperson.

 

Section 16(a) Benefical Ownership Reporting Compliance

 

Section 16(a) of the Exchange Act requires the Company's officers and directors, and persons who beneficially own more than 10% of a registered class of the Company's equity securities, to file reports of ownership and changes in ownership with the SEC. Officers, directors and greater than 10% owners are required by certain SEC regulations to furnish the Company with copies of all Section 16(a) forms they file.

 

Based solely on the Company's review of the copies of such forms received by it, the Company believes that during the Current Year, there was compliance with the filing requirements applicable to its officers, directors and 10% common stockholders, except with respect to shares of common stock previously transferred out of a purported escrow account  and sold without Mr. Cole's knowledge or authorization.

 

Corporate governance policies

 

The Company has adopted a written code of business conduct that applies to its officers, directors and employees, responsive to Section 406 of the Sarbanes-Oxley Act of 2002 and the rules of the SEC. In addition, the Company has established an ethics web site at www.ethicspoint.com . To assist individuals in upholding the code of conduct and to facilitate reporting, the Company has also established an on-line anonymous and confidential reporting mechanism that is hosted at www.ethicspoint.com and an anonymous and confidential telephone hotline at 800-963-5864. Copies of the Company's code of business conduct are available, without charge, upon written request directed to the Company's corporate secretary at Iconix Brand Group, Inc., 1450 Broadway, New York, NY 10018.

 

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Item 11. Executive Compensation

 

Compensation Discussion and Analysis

This Compensation Discussion and Analysis section is intended to provide information about our compensation objectives, policies and practices for our principal executive officer, our principal financial officer and our three other most highly compensated executive officers and our former executive vice president (we refer to these officers as our “Named Executive Officers”) that will place in context the information contained in the tables that follow this discussion.

 

Philosophy and Objectives

We seek to deliver fair and competitive compensation for our employees and executives, including our Named Executive Officers, by structuring compensation around one fundamental goal: incentivizing our executives to build stockholder value over the long term. Our ability to attract, motivate and retain employees and executives with the requisite skills and experience to develop, expand and execute business opportunities for us is essential to our growth and success. We believe that we offer attractive career opportunities and challenges for our employees, but we are mindful that the best talent will always have a choice as to where they wish to pursue their careers, and fair and competitive compensation is an important element of job satisfaction.

 

While our compensation program includes short-term elements, such as annual base salary, and in some cases, an annual incentive cash bonus, a significant aspect of our employees’ compensation includes longer term elements such as equity-based awards through grants of restricted stock and stock options. We believe that our compensation program contributes to our employees’ and Named Executive Officers’ incentive to execute on our goals and perform their job functions with excellence and integrity.

 

We have entered into written employment agreements with our Named Executive Officers, Neil Cole, David Conn, Warren Clamen, Andrew Tarshis and Deborah Sorell Stehr. In addition, we entered into a written employment agreement with William Sweedler, former executive vice president and a former director, which agreement was terminated in June 2006, after which Mr. Sweedler was employed by us as a non-executive part-time employee for a transition period ending in September 2006. See “- Narrative to Summary Compensation Table and Plan-Based Awards Table - Employment Agreements” for a description of these employment agreements and related information.

 

Forms of Compensation Paid to Named Executive Officers During 2006

During the last fiscal year, we provided our Named Executive Officers with the following forms of compensation:

 

Base salary. Base salary represents amounts paid during the fiscal year to Named Executive Officers as direct guaranteed compensation under their employment agreements for their services to us.

 

Equity-based awards. Awards of shares of restricted stock and stock options are made under our 2006 Equity Incentive Plan, which was approved by our stockholders in August 2006, or under other our other option plans depending upon the amount of equity to be granted under the respective plans. Shares of restricted stock were issued subject to a vesting schedule and cannot be sold until and to the extent the shares have vested. In 2006, we awarded shares of restricted stock to three of the Named Executive Officers in connection with the renewal of their employment agreements vesting over the respective terms of those agreements.

 

Cash bonuses. Two of our Named Executive Officers in 2006 have a contractual right to receive a cash bonus, one based upon our performance, and the other a guaranteed amount. Mr. Cole has waived receipt of the bonus for 2006 to which he would have been entitled under his employment agreement.

 

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Perquisites and other personal benefits. During 2006, our Named Executive Officers received, to varying degrees, a limited amount of perquisites and other personal benefits that we paid on their behalf. These included, among other things:

 

·	payments of life insurance premiums;

·	car allowances; and

·	a corporate car and driver.

Objectives of Our Compensation Program

The compensation paid to our Named Executive Officers is primarily structured into two broad categories:

 

·	base salary; and

·	incentive compensation, primarily in the form of equity-based awards under our various equity incentive and stock option plans; to a much lesser degree, certain of our Named Executive Officers also have received cash bonuses.

Our overall compensation program with respect to our Named Executive Officers is designed to achieve the following objectives:

 

·	to attract, retain and motivate highly qualified executives through both short-term and long-term incentives that reward company and individual performance;

·	to emphasize equity-based compensation to more closely align the interests of executives with those of our stockholders;

·	to support and encourage our financial growth and development;

·	to motivate our Named Executive Officers to continually provide excellent performance throughout the year;

·	to ensure continuity of services of Named Executive Officers so that they will contribute to, and be a part of, our long-term success; and

·	to manage fixed compensation costs through the use of performance and equity-based compensation.

Determination of Compensation for Named Executive Officers

Compensation of chief executive officer. During 2006, the compensation of Mr. Cole, the chairman, president and chief executive officer was based on Mr. Cole’s employment agreement and the general principles of the Company’s executive compensation program. In determining the salary and other forms of compensation for Mr. Cole, the nominating/governance committee, (the predecessor of the compensation committee that was re-formed as a separate committee in December 2006) took into consideration Mr. Cole’s substantial experience and performance in the industry in general and with us in particular. The nominating/governance committee also considered the increased responsibilities of Mr. Cole as a result of our diversification and growth. The nominating/governance committee believes that Mr. Cole’s compensation as our principal executive officer reflects our performance during 2006 and his significant contributions to that performance.

 

Overall compensation program. Compensation of our executive officers, including the Named Executive Officers, has been determined by the Board of Directors pursuant to recommendations made by the chief executive officer and the nominating/governance committee until December 13, 2006, and thereafter the compensation committee, and in accordance with the terms of the respective employment agreements of certain executive officers in effect prior to the re-formation of the committee. The compensation committee is responsible for, among other things, reviewing and recommending approval of the compensation of our executive officers; administering our equity incentive and stock option plans; reviewing and making recommendations to the Board of Directors with respect to incentive compensation and equity incentive and stock option plans, and evaluating our chief executive officer’s performance in light of corporate objectives, and setting our chief executive officer’s compensation based on the achievement of corporate objectives.

 

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With respect to the Named Executive Officers, their compensation is based upon what we believe is a competitive base salary in view of our recent change of business strategy and accelerated growth goals. In conjunction with our compensation committee, we have assessed our total compensation program, and its components, and believe that it operates well to serve both our goals and the current, short-term and long-term compensation needs of the executive officers. It is our intention to develop in the future a more structured bonus program for all our employees, including our Named Executive Officers based, in part, upon the achievement of performance goals.

 

Compensation amounts for Named Executive Officers are determined according to the level of seniority and position of the Named Executive Officer. Relatively greater emphasis is typically placed on the equity-based components of compensation so as to put a greater portion of total pay based on company and individual performance. We believe the combination of a competitive base compensation, coupled with an opportunity to significantly enhance overall individual compensation if individual and company performance warrant, yields an attractive compensation program that facilitates our recruitment and retention of talented executive personnel.

 

The total compensation amount for our Named Executive Officers is also established relative to officers at levels above and below them, which we believe rewards them for increased levels of knowledge, experience and responsibility. To create an atmosphere of fairness in our compensation setting, we endeavor to maintain as much parity in compensation as possible among Named Executive Officers and other officers although we do permit some deviation in individual total compensation amounts to reward particular executives for individual personal achievement and growth.

 

Base salary. The base salary of each of our Named Executive Officers is fixed pursuant to the terms of their respective employment agreements with us and, when a contract is up for, or otherwise considered for, renewal, upon a review of the executive’s abilities, experience and performance, as well as a review of salaries for executives in the marketplace for comparable positions at corporations which either compete with us in its business or of comparable size and scope of operations. The recommendations to the Board of Directors by the compensation committee (or, prior to its re-formation, the nominating/governance committee) with respect to base salary are based primarily on informal judgments reasonably believed to be in our best interests. In determining the base salaries of certain of our executives whose employment agreements were up for, or otherwise considered for, renewal, the nominating/governance considered our performance and growth plans. Base salaries are used to reward superior individual performance of each Named Executive Officer on a day-to-day basis during the year, and to encourage them to perform at their highest levels. We also use our base salary as an incentive to attract top quality executives and other management employees from other companies. Moreover, base salary (and increases to base salary) are intended to recognize the overall experience, position within the Company, and expected contributions of each Named Executive Officer to us.

 

In 2006, the following were contractual increases in the base salaries of our Named Executive Officers as set forth on the table below:

 

Named Executive Officer		2005 Base Salary			2006 Base Salary			Change in Base Salary			Percentage of 2005 Base Salary
Neil Cole		$	750,000(1)		$	550,000		$	(200,000	)		(27	%)
David Conn			225,000			275,000			50,000			22	%
Warren Clamen			225,000			275,000			50,000			22	%
Andrew Tarshis			225,000			275,000			50,000			22	%
Deborah Sorell Stehr			215,000			220,000			5,000			2	%

 

(1) Includes additional salary of $250,000 paid to Mr. Cole during 2005 pursuant to his employment agreement.

Equity-based awards. We currently make equity awards to our Named Executive Officers pursuant to our 2006 Equity Incentive Plan, which provides for awards in the form of stock options, stock appreciation rights, restricted stock, unrestricted stock, stock units including restricted stock units, and performance awards to eligible persons. The mix of cash and equity-based awards, as well as the types of equity-based awards, granted to our Named Executive Officers varies from year to year. Consideration has been given to various factors, such as the relative merits of cash and equity as a device for retaining and motivating the Named Executive Officers, the practices of other companies, individual performance, an individual’s pay relative to others, contractual commitments pursuant to employment or other agreements, and the value of already-outstanding grants of equity in determining the size and type of equity-based awards to each Named Executive Officer.

 

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All equity-based compensation we issued to our Named Executive Officers in 2006 took the form of restricted stock and stock option grants. In prior years, we typically placed particular emphasis on the grant of stock options. In 2006, we began to change the form of equity compensation to restricted stock primarily because of the increased stock-based compensation expense associated with stock options and similar instruments under SFAS No. 123(R), “Accounting for share-based payment.” This accounting standard, which we adopted as of January 1, 2006, requires us to record as compensation expense the grant date fair value of a stock option over the life of the option.

 

As described above, we provide a substantial portion of Named Executive Officer compensation in the form of equity awards because the compensation committee (and its predecessor, the nominating/governance committee) has determined that such awards serve to encourage our executives to create value for our Company over the long-term, which aligns the interests of Named Executive Officers with those of our stockholders.

 

Generally, we make three types of equity-based grants to our Named Executive Officers:

 

·	initial grants when a Named Executive Officer is hired;

·	annual performance based grants; and

·	retention grants, which are typically made in connection with employment agreement renewals.

An initial grant when an executive officer is hired or otherwise becomes a Named Executive Officer serves to help us to recruit new executives and to reward existing officers upon promotion to higher levels of management. Because these initial grants are structured as an incentive for employment, the amount of these grants may vary from executive to executive depending on the particular circumstances of the Named Executive Officer and are usually recommended by the Chief Executive Officer and approved by the appropriate committee. While initial grants of equity awards have been made in prior years, no initial grants were awarded to any of our Named Executive Officers in 2006. Annual, time-vested grants of equity awards, as well as retention grants made in connection with renewals of employment agreements are designed so as to compensate our Named Executive Officers for their contributions to our long-term performance.

 

Generally, restricted stock and stock option awards granted to Named Executive Officers as either initial or annual performance grants or in connection with employment agreement renewals vest in equal installments over the term of the agreement, or a period determined by the nominating/governance committee or compensation committee, typically beginning on the first anniversary of the date of grant. Restricted stock grants for 2006 were as follows: Warren Clamen - 10,971 shares vesting over a two year period; Andrew Tarshis - 18,461 shares vesting over a three year period; Deborah Sorell Stehr - 9,230 shares vesting over a two year period.

 

Cash bonuses. To the extent not covered by employment agreements with our executive officers, the compensation committee determines bonuses for our executive officers based on our overall performance, profitability, and other qualitative and quantitative measurements, including individual performance goals relating to our budget and financial objectives. In determining the amount of bonuses awarded, the compensation committee considers our revenues and profitability for the applicable period and each executive’s contribution to our success. Our chairman, president and chief executive officer has waived receipt of the bonus for 2006 he would have been entitled to under his employment agreement, one Named Executive Officer received a $50,000 cash bonus of which $25,000 was guaranteed and another Named Executive Officer received a $25,000 discretionary bonus.

 

Post-termination compensation. We have entered into employment agreements with each of the Named Executive Officers. Each of these agreements provides for certain payments and other benefits if the executive’s employment terminates under certain circumstances, including, in the event of a “change in control”. See “Executive Compensation - Narrative to Summary Compensation Table and Plan-Based Awards Table - Employment Agreements" and “Executive Compensation - Potential Payments Upon Termination or Change in Control” for a description of the severance and change in control benefits.

 

Perquisites. The perquisites provided to our executive officers are described below. All such perquisites are provided in accordance with the executives’ employment agreements. Below is a list of material perquisites, personal benefits and other items of compensation we provided to our Named Executive Officers in 2006, the total amount of each such item paid to all named executive officers and an explanation as to why we chose to pay the item.

 

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Perquisite, Other Benefit or Other Item of Compensation (1)		Aggregate Amount of This Perquisite Paid to All Named Executive Officers in 2006			Additional Explanation for Offering Certain Perquisites
Car allowances		$	66,612			Serves to defray the cost of owning and operating an automobile often used for business purposes; prevents us from having to own and maintain a fleet of automobiles and is a taxable benefit for the Named Executive Officer.
Corporate Car and Driver		$	44,325
Life Insurance Premiums		$	21,420

 

(1)	Perquisites are generally granted as part of our executive recruitment and retention efforts.

 

Other matters. The nominating/goverance committee and the compensation committee and Board of Directors did not engage outside compensation consultants for advice in 2006 but did consider available comparable company data in making compensation related decisions in 2006. The Board of Directors has not established a policy for the adjustment of any compensation award or payment if the relevant performance measures on which they are based are restated or adjusted. The Board has not established any security ownership guidelines for executive officers.

 

Compensation Committee Interlocks and Insider Participation

 

During the year ended December 31, 2006, none of our Named Executive Officers served on the board of directors or the compensation committee of any other entity that has officers that serve on our Board of Directors or on its compensation committee or its nominating/governance committee, which is the committee of our board whose responsibilities previously included those relating to compensation. In addition, none of the members of our compensation committee and nominating/governance committee were formerly, or during the year ended December 31, 2006, one of our officers or employed by us.

 

Compensation Committee Report

 

The compensation committee of the Board of Directors has reviewed and discussed with management the Compensation Discussion and Analysis for the year ended December 31, 2006. Based on such reviews and discussions, the committee recommended to the Board that the Compensation Discussion and Analysis be included in this Annual Report as Form 10-K for filing with the SEC.

 

By the committee.
		Mark Friedman, Chairperson
		Steven Mendelow
		Barry Emanuel
		F. Peter Cuneo

 

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SUMMARY COMPENSATION TABLE

 

The following table includes information for 2006 with respect to our Named Executive Officers.

       

Summary Compensation Table

 

Name and Principal Position		Year			Salary ($)			Bonus ($)			Stock Awards ($)			Option Awards ($)			Non-Equity Incentive Plan Compensation ($)			Change in Pension Value and Nonqualified Deferred Compensation Earnings ($)			All Other Compensation ($)			Total ($)
					(a)			(b)			(c)			(d)			(e)			(f)			(g)			(h)
Neil Cole (1)			Fiscal 2006		$	550,000			-			-			-			-			-		$	65,745(2)		$	615,745
Chief Executive Officer
David Conn			Fiscal 2006		$	265,486		$	50,000			-			-			-			-		$	18,000		$	333,486
Executive Vice President
Warren Clamen			Fiscal 2006		$	243,250		$	25,000		$	16,667			-			-			-		$	18,000		$	302,917
Chief Financial Officer
Andrew Tarshis			Fiscal 2006		$	239,819			-		$	24,999			-			-			-		$	18,000		$	282,818
Senior Vice President
Deborah Sorell Stehr			Fiscal 2006		$	220,000			-		$	16,665			-			-			-		$	12,612		$	249,277
Senior Vice President-Business Affairs and Licensing
William Sweedler			Fiscal 2006		$	580,833	(3)		-			-		$	1,445,341	(4)		-			-			-		$	2,026,174
Former Executive Vice President

(a)	Salary includes, as applicable, base salary, pro-rated salaries for changes made to base salary during the year, as defined in the employment agreements.

 

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(b)

Bonuses are discretionary, fixed incentive, and/or percentage incentive, as provided for in the applicable employment agreements. For the year ended December 31, 2006, Mr. Conn and Mr. Clamen each received bonuses, which were determined by the employment agreements and the nominating/governance committee of the Board of Directors.

 

(c)

The amounts shown in this column represent the dollar amounts recognized as an expense by us for financial statement reporting purposes in the year ended December 31, 2006 with respect to shares of restricted stock as determined pursuant to Financial Accounting Standards Board Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment (“SFAS 123(R)”). See Note 13 to the Consolidated Financial Statements included in this Form 10-K for a discussion of the relevant assumptions used in calculating grant date fair value pursuant to SFAS 123(R).

 

(d)	Option awards include, as applicable, Company options and equity-based compensation instruments that have option-like features. For the year ended December 31, 2006, Mr. Sweedler received options as part of the terms of his employment.

 

(e)	Non-equity incentive plan compensation represents the dollar value of all amounts earned during the fiscal year pursuant to non-equity incentive plans. There was no such compensation for the year ended December 31, 2006.

 

(f)

Change in pension value and non-qualified deferred compensation earnings represents the aggregate increase in actuarial value to the named executive officer of all defined benefit and actuarial plans accrued during the year and earnings on non-qualified deferred compensation. There are no defined benefit plans, actuarial plans, or non-qualified deferred compensation for the year ended December 31, 2006.

 

(g)	All other compensation includes, as applicable, car allowances, corporate car and driver and life insurance premiums (see the list of perquisites above).

(h)	Total compensation represents all compensation from us earned by the Named Executive Officer for the year.

(1)	Mr. Cole has waived receipt of the bonus for 2006 he would have been entitled to under his employment agreement.

(2)	Represents Company paid premiums on a life insurance policy for the benefit of the beneficiaries of Mr. Cole, as well as corporate car and driver.
(3)	Represents Mr. Sweedler’s salary of $247,500 for 2006 earned through the end of his employment on September 16, 2006, and $333,333 in consulting fees paid in connection with the acquisition of Ocean Pacific on November 6, 2006.

 

(4)	Represents the fair value of the warrants vested in connection with the acquisition of Ocean Pacific pursuant to his consulting agreement.

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GRANTS OF PLAN-BASED AWARDS

 

The following table sets forth information for 2006 with respect to grants of awards to the Named Executive Officers under our equity incentive and stock option plans.

 

					Estimated Future Payouts Under Non-Equity Incentive Plan Awards									Estimated Future Payouts Under Equity Incentive Plan Awards
Name		Grant Date			Threshold ($)			Target ($)			Maximum ($)			Threshold (#)			Target (#)			Maximum (#)			All Other Stock Awards: Number of Shares of Stock or Units (#)(2)			All Other Option Awards: Number of Securities Underlying Options (#)			Exercise or Base Price of Option Awards ($/Sh) ($)			Closing Price of Common Stock Units on Date of Grant ($)			Grant Date Fair Value of Stock and Option Awards
Neil Cole			-			-			-			-			-			-			-			-			-			-			-			-
David Conn			-			-			-			-			-			-			-			-			-			-			-			-
Warren Clamen			10/26/06			-			-			-			-			-			-			10,971			-			-		$	18.23		$	200,000
Andrew Tarshis			09/22/06			-			-			-			-			-			-			18,461			-			-		$	16.25		$	300,000
Deborah Sorell Stehr			09/22/06			-			-			-			-			-			-			9,230			-			-		$	16.25		$	150,000
William Sweedler			09/18/06			-			-			-			-			-			-			-			400,000(1)		$	8.81			-		$	3,500,000

 

(1)	This amount represents the total warrants granted to Mr. Sweedler as part of his consulting agreement in connection with the acquisition of Ocean Pacific.

 

(2)	Awards reflect restricted stock granted in connection with the renewal of employment agreements with Mr. Clamen, Mr. Tarshis, and Ms. Stehr. These grants are one-time retention grants.

 

NARRATIVE TO SUMMARY COMPENSATION TABLE AND PLAN-BASED AWARDS TABLE

 

Employment Agreements

 

On March 29, 2005, we entered into an employment agreement with Neil Cole, which provides for him to serve as our President and Chief Executive Officer for a term expiring on December 31, 2007, at an annualized base salary of $500,000 in 2005, $550,000 in 2006 and $600,000 in 2007. In addition, Mr. Cole's employment agreement provided for us to pay him additional salary of $250,000 in four equal installments during 2005, all of which has been paid. Under the employment agreement, for each year in which we meet at least 100% of targeted earnings before interest, taxes, depreciation and amortization of fixed assets and intangible assets, or EBITDA, as determined by its Board of Directors, Mr. Cole is also entitled to a bonus as follows: $100,000 for 2005, $150,000 for 2006 and $200,000 for 2007. Mr. Cole received this bonus for 2005. In addition, Mr. Cole will receive a bonus equal to 5% of the amount, if any, by which our actual EBITDA for a fiscal year exceeds the greater of (a) the targeted EBITDA for that year, and (b) the highest amount of actual EBITDA previously achieved for a fiscal year during the term of his employment agreement, provided that prior negative EBITDA amounts will reduce the actual EBITDA in the year for which the determination is made in determining whether and by how much the amounts set forth in (a) and (b) were exceeded. Mr. Cole is also entitled to customary benefits, including participation in management incentive and benefit plans, reimbursement for automobile expenses, reasonable travel and entertainment expenses and a life insurance policy benefiting his designated beneficiaries in the amount of $5,000,000. The employment agreement provides that Mr. Cole will receive an amount equal to three times his annual compensation, less $100, plus accelerated vesting or payment of deferred compensation, options, stock appreciation rights and any other benefits payable to Mr. Cole, in the event that within twelve months of a “change in control” Mr. Cole is terminated by us without “cause” or if he terminates his agreement for “good reason,” as all such terms are defined in the employment agreement. Pursuant to the agreement, Mr. Cole was also granted immediately exercisable ten-year stock options to purchase 800,000 shares of our common stock at $4.62 per share. We have also agreed with Mr. Cole that, if we are sold and immediately thereafter Mr. Cole is no longer employed by us or our successor in the capacity in which he was employed prior to the sale, he will be entitled to a payment equal to 5% of the sale price in the event that sale price is at least $5.00 per share or the equivalent thereof with respect to an asset sale, and Mr. Cole has agreed not to compete with us for a period of twelve months after any sale resulting in such payment to him.

 

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On April 17, 2004, we entered into an employment agreement, subsequently amended on December 29, 2005, with David Conn, which, as amended, provides for him to serve as our Executive Vice President of until May 18, 2008, subject to earlier termination as provided in the agreement. The amended agreement provides for Mr. Conn to receive an annualized base salary of: (i) $250,000 during the period December 29, 2005 until May 17, 2006; (ii) $275,000 during the period May 18, 2006 through May 17, 2007 and (iii) $300,000 during the period May 18, 2007 through May 17, 2008, as well as a guaranteed bonus of $25,000 per year, and a car allowance. He was also granted immediately exercisable ten-year stock options to purchase 100,000 shares of our common stock at $10.19 per share. In addition, his employment agreement with us provides that, if, within twelve months of a “change in control,” Mr. Conn's employment is terminated by us without “cause,” as such terms are defined in his employment agreement, we are obligated to make a lump-sum severance payment to him equal to $100 less than “three times his annualized includable compensation for the base period” (as defined in Section 280G of the Internal Revenue Code of 1986), subject to certain limitations for any “excess parachute payment.” His agreement with us also contains certain non-compete and non solicitation provisions.

 

Effective March 9, 2005, we entered into an employment agreement, subsequently amended on October 27, 2006, with Warren Clamen, which, as amended, provides for him to serve as our Chief Financial Officer until October 27, 2008, subject to earlier termination as specified in the agreement. The employment agreement provides for Mr. Clamen to receive a base salary of $275,000 per year for the year ending October 27, 2007 and no less than $300,000 for the year ending October 27, 2008, plus certain fringe benefits. In addition, he is eligible to participate in any executive bonus program that we have in effect during the term of his employment agreement. Pursuant to his employment agreement, in March 2005, we granted Mr. Clamen ten-year stock options to purchase 200,000 shares of our common stock at $5.06 per share, subject to earlier termination under certain conditions if Mr. Clamen ceases to be employed by us, half of which options vested immediately and the other half vested as of June 1, 2005. Pursuant to the amendment in October 2006, we also issued to Mr. Clamen 10,971 shares of our restricted common stock, which vest in two equal annual installments commencing on October 27, 2007. The amended agreement provides that Mr. Clamen will receive an amount equal to three times his annual compensation; less $100, plus accelerated vesting or payment of deferred compensation, options, stock appreciation rights and any other benefits payable to Mr. Clamen, in the event that, within twelve months of a “change of control,” Mr. Clamen’s employment is terminated by us without “cause” as such terms are defined in the amended agreement. His employment agreement also provides for Mr. Clamen to receive certain severance payments if we terminate the agreement other than for “cause” as defined in the agreement.

 

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On September 22, 2006, we entered into a new employment agreement with Andrew Tarshis, which provides for him to serve as our Senior Vice President and General Counsel until September 22, 2009 and provides for him to receive an annual base salary of no less than $275,000 during the first year of the term and $300,000 during the second and third years of the term. Pursuant to his employment agreement, we also issued to Mr. Tarshis 18,461 shares of our restricted common stock, which vest in three equal annual installments commencing on the first year anniversary of the agreement. Under the agreement, Mr. Tarshis is also eligible for a bonus consistent with other executive officers, as well as customary benefits, including participation in management incentive and benefit plans, a monthly car allowance of $1,500 and reasonable business related travel and entertainment expenses. In addition, his employment agreement with us provides that, if, within twelve months of a “change in control,” Mr. Tarshis’s employment is terminated by us without “cause” or Mr. Tarshis terminates his employment with us for “good reason,” as all such terms are defined in his employment agreement, we are obligated to make a lump-sum severance payment to him equal to $100 less than three times his “annualized includable compensation for the base period” (as defined in Section 280G of the Internal Revenue Code of 1986), subject to certain limitations for any “excess parachute payment” plus accelerated vesting of the 18,461 shares of restricted stock issued to him. His agreement with us also contains certain non-compete and non-solicitation provisions.

 

On October 28, 2005, we entered into an employment agreement, subsequently amended on September 22, 2006, with Deborah Sorell Stehr, which, as amended, provides for her to serve as our Senior Vice President—Business Affairs until December 31, 2008 and provides for her to receive a base salary for performance based upon a four-day work week, as follows: (a) during the period from January 1, 2006 through December 31, 2006, at the annual rate of not less than $220,000, (b) during the period from January 1, 2007 through December 31, 2007, at an annual rate of not less than $230,000, and (c) during the period from January 1, 2008 through December 31, 2008 at the annual rate of not less than $250,000. Pursuant to her employment agreement, in October 2005, we granted Ms. Stehr immediately exercisable ten-year stock options to purchase 60,000 shares of our common stock at $8.03 per share, and, pursuant to its amendment, in September 2006 we also issued to Ms. Stehr 9,230 shares of our restricted common stock, which vest in two equal annual installments commencing on December 31, 2007. Under the amended agreement, Ms. Stehr remains eligible for a bonus consistent with other executive officers, as well as customary benefits, including participation in management incentive and benefit plans, a monthly car allowance of $1,500 and reasonable travel and entertainment expenses. The agreement provides that Ms. Stehr will receive an amount equal to three times her annual compensation, less $100, plus accelerated vesting or payment of deferred compensation, options, stock appreciation rights and any other benefits payable to Ms. Stehr, in the event that, within twelve months of a “change of control,” Ms. Stehr’s employment is terminated by us without “cause” or Ms. Stehr terminates her employment agreement with us for “good reason,” as all such terms are defined in the agreement.

 

Item 14. Principal Accountant Fees and Services

 

Audit Fees. The aggregate fees billed by BDO Seidman, LLP ("BDO") for professional services rendered for the audit of the Company's annual financial statements for the Current Year and the Prior Year,  internal controls over financial reporting and the reviews of the financial statements included in the Company's Forms 10-Q, comfort letter and consents related to SEC registration statements and other capital raising activities for the Current Year and the Prior Year totaled approximately $990,000, and $394,000 respectively.

 

Audit-Related Fees.  There were approximately $105,000 and $168,700 aggregate fees billed by BDO Seidman, LLP for assurance and related services that are reasonably related to the performance of the audit or review of the Company's financial statements for the Current Year and the Prior Year, respectively, and that are not disclosed in the paragraph captions "Audit Fees" above. The majority of the audit-related fees were related to the audit of the financial statements of IP Holdings and Candie's Foundation. 

 

Tax Fees. The aggregate fees billed by BDO Seidman, LLP for professional services rendered for tax compliance, for the Current Year and the Prior Year , were approximately $35,000, and $62,000, respectively. The aggregate fees billed by BDO Seidman, LLP for professional services rendered for tax advice and tax planning, for the Current Year and the Prior Year, were $0 and $3,000, respectively.

 

All Other Fees. There were no fees billed by BDO Seidman, LLP for products and services, other than the services described in the paragraphs captions "Audit Fees", "Audit-Related Fees", and "Tax Fees" above for the Current Year and the Prior Year.

 

The Audit Committee has established its pre-approval policies and procedures, pursuant to which the Audit Committee approved the foregoing audit services provided by BDO Seidman, LLP in Current Year. Consistent with the Audit Committee's responsibility for engaging the Company's independent auditors, all audit and permitted non-audit services require pre-approval by the Audit Committee. The full Audit Committee approves proposed services and fee estimates for these services. The Audit Committee chairperson or their designee has been designated by the Audit Committee to approve any services arising during the year that were not pre-approved by the Audit Committee. Services approved by the Audit Committee chairperson are communicated to the full Audit Committee at its next regular meeting and the Audit Committee reviews services and fees for the fiscal year at each such meeting. Pursuant to these procedures, the Audit Committee approved all the foregoing audit services and permissible non-audit services provided by BDO Seidman, LLP.

 

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PART IV

Item 15. Exhibits, Financial Statement Schedules 

(a) Documents included as part of this Annual Report

 

1. The following consolidated financial statements are included in this Annual Report:

 

- Report of Independent Registered Public Accounting Firm

 

- Consolidated Balance sheets - December 31, 2006 and 2005

 

- Consolidated Income Statements for the years ended December 31, 2006, and 2005, and the 11-months ended December 31, 2004

 

- Consolidated Statements of Stockholders' Equity for the ended December 31, 2006 and 2005, and the 11-months ended December 31, 2004

 

- Consolidated Statements of Cash Flows for the year ended December 31, 2006 and 2005, and, the 11-months ended December 31, 2004

 

- Notes to consolidated Financial Statements

 

2. The following financial statement schedules are included in this Annual Report:

 

- Report of Independent Registered Public Accounting Firm on Financial Statement Schedule

 

- Schedule for the year ended December 31, 2006 and 2005, and the 11-Months ended December 31, 2004

 

- Schedule II Valuation and qualifying accounts

 

All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and therefore have been omitted.

 

3. See the Index to Exhibits for a list of exhibits filed as part of this Annual Report.

 

(b) See Item (a) 3 above.

 

(c) See Item (a) 2 above.

 

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Index to Exhibits

Exhibit Numbers		Description
1.1		Purchase Amendment dated December 7, 2006 by and among Iconix Brand Group, Inc., Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated, Lehman Brothers Inc. and the other parties on the signature page thereto (1)
2.1		Asset Purchase Agreement dated October 29, 2004 by and among B.E.M. Enterprise, Ltd., Escada (USA) Inc., the Company and Badgley Mischka Licensing LLC (2)
2.2		Asset Purchase Agreement dated July 22, 2005 by and among the Company, Joe Boxer Company, LLC, Joe Boxer Licensing, LLC, JBC Canada Holdings, LLC, Joe Boxer Canada, LP, and William Sweedler, David Sweedler, Alan Rummelsburg, Joseph Sweedler and Arnold Suresky (3)
2.3		Asset Purchase Agreement dated September 16, 2005 by and among the Company, Rampage Licensing LLC, Rampage.com, LLC, Rampage Clothing Company, Larry Hansel, Bridgette Hansel Andrews, Michelle Hansel, Paul Buxbaum and David Ellis (4)
2.4		Merger Agreement dated as of March 31, 2006 by and among the Company Moss Acquisition Corp., Mossimo, Inc., and Mossimo Giannulli (5)+
2.5		Asset Purchase Agreement dated as of March 31, 2006, between the Company and Mudd (USA) LLC (6)
2.6		Amendment dated April 11, 2006 to Asset Purchase Agreement dated as of March 31, 2006 between the Company and Mudd (USA), LLC. (7)
2.7		Asset Purchase Agreement, dated as of August 21, 2006, between the Company and London Fog Group, Inc, (8)
2.8		Asset Purchase Agreement, dated as of October 31, 2006, between Iconix Brand Group, Inc., The Warnaco Group, Inc. and Ocean Pacific Apparel Corp. (including the forms of the Note and the Registration Rights Agreement) (34) +
3.1		Certificate of Incorporation (9)
3.2		Restated and Amended By-Laws (10)
4.1		Rights Agreement dated January 26, 2000 between the Company and Continental Stock Transfer and Trust Company (11)+
4.2		Fifth Amended and Restated Indenture dated of August 28, 2006 by and between IP Holdings LLC, as issuer, and Wilmington Trust Company as Trustee. (8)
10.1		1997 Stock Option Plan of the Company (13)*
10.2		2000 Stock Option Plan of the Company (14)*
10.3		2001 Stock Option Plan of the Company (15)*
10.4		2002 Stock Option Plan of the Company (16)*
10.5		Non-Employee Director Stock Incentive Plan (17)*
10.6		Candie's, Inc. 401(K) Savings Plan (18)
10.7		Employment Agreement between Neil Cole and the Company dated March 29, 2005 (19)*
10.8		Employment Agreement between the Company and William Sweedler (20)*
10.9		Employment Agreement between Deborah Sorell Stehr and the Company dated October 28, 2005 (26)*
10.10		Amendment dated September 22, 2006 to the Employment Agreement dated October 28, 2005 between the Company and Deborah Sorell Stehr (31)*
10.11		Employment Agreement between Warren Clamen and the Company (21)*
10.12		Amendment dated October 27, 2006 to the Employment Agreement between the Company and Warren Clamen. (27)*

 

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Exhibit Numbers		Description
10.13		Employment Agreement between the Company and David Conn (22)*
10.14		Employment Agreement between the Company and Andrew Tarshis (31)*
10.15		Option Agreement of Neil Cole dated November 29, 1999 (18)*
10.16		Stock Issuance and Registration Rights Agreement dated as of August 28, 2006, by and among the Registrant and DDJ Capital Management, LLC (8)
10.17		Iconix Brand Group, Inc. 2006 Equity Incentive Plan (30)
10.18		Restricted Stock Agreement dated September 22, 2006 between the Company and Andrew Tarshis (31)*
10.19		Restricted Stock Agreement dated September 22, 2006 between the Company and Deborah Sorell Stehr. (31)*
10.20		Form of Restricted Stock Agreement for officers under the Iconix Brand Group, Inc. 2006 Equity Incentive Plan (32)*
10.21		Form of Restricted Stock Agreement for Directors under the Iconix Brand Group, Inc. 2006 Equity Incentive Plan (32)*
10.22		Common Stock Purchase Warrant issued to UCC Consulting Corporation (9)
10.23		Limited Liability Company Operating Agreement of Unzipped Apparel LLC (23)
10.24		Equity Acquisition Agreement between Michael Caruso & Co., Inc., the Company and Sweet Sportswear, LLC dated as of April 23, 2002. (24)
10.25		8% Senior Subordinated Note due 2012 of the Company payable to Sweet Sportswear, LLC. (24)
10.26		Collateral Pledge Agreement dated October 18, 2002 between the Company., Michael Caruso & Co., and Sweet Sportswear LLC. (24)
10.27		Agreement for Sale of Unzipped Interest to TKO Apparel, Inc. (22)
10.28		Stock Purchase Agreement between the Company and certain designees of TKO Apparel, Inc. (22)
10.29		Letter Agreement dated October 29, 2004 among UCC Funding Corporation, Content Holdings, Inc., the Company and Badgley Mischa Licensing LLC. (2)
10.30		Form of Option Agreement under the Company's 1997 Stock Option Plan (19)*
10.31		Form of Option Agreement under the Company's 2000 Stock Option Plan (19) *
10.32		Form of Option Agreement under the Company's 2001 Stock Option Plan (19)*
10.33		Form of Option Agreement under the Company's 2002 Stock Option Plan. (19)*
10.34		Option Agreement dated July 22, 2005 between the Company and William Sweedler (20)*
10.35		Lease with respect to the Company's executive offices (26)
10.36		Promissory Note issued by Joe Boxer Licensing, LLC in favor of Kmart Corporation (26)
10.37		Termination and Settlement Agreement dated as of April 27, 2006 among the Company, Moss Acquisition Corp. and Cherokee Inc. (28)
10.38		Agreement dated June 2, 2006 among the Company, UCC Consulting, Content Holdings, James Haran and Robert D’Loren (29)
10.39		Purchase and Sale Agreement dated June 2, 2006 by and among the Company, content Holdings, Robert D’Loren, Seth Burroughs and Catherine Twist (29)
10.40		Stock Purchase Warrant dated June 2, 2006 issued to Content Holdings (29)
10.41		Stock Purchase Warrant dated June 2, 2006 issued to James Haran (29)
10.42		Non-Competition and Non-Solicitation Agreement between the Company and Neil Cole* (7)
10.43		Agreement dated June 8, 2006 between the Company and William Sweedler (29)
10.44		Registration Rights Agreement dated October 31, 2006 among the Registrant, Mossimo Giannulli and Edwin Lewis (12)

 

 

 

 

 

 

 

 

 

 

Exhibit Numbers		Description
10.45		Loan and Security Agreement dated as of October 31, 2006 among Mossimo Holdings LLC, Mossimo Management LLC, and Merrill Lynch Mortgage Capital Inc., as agent and lender (12)+
10.46		Guaranty dated as of October 31, 2006 by the Registrant in favor of Merrill Lynch Mortgage Capital Inc., as agent (12)
10.47		Amendment to Employment Agreement between the Company and David Conn (35)
21		Subsidiaries of the Company. (36)
23		Consent of BDO Seidman, LLP. (36)
31.1		Certification of Chief Executive Officer Pursuant To Rule 13a-14 Or 15d-14 Of The Securities Exchange Act Of 1934, As Adopted Pursuant To Section 302 Of The Sarbanes-Oxley Act Of 2002. (36)
31.2		Certification of Principal Financial Officer Pursuant To Rule 13a-14 Or 15d-14 Of The Securities Exchange Act Of 1934, As Adopted Pursuant To Section 302 Of The Sarbanes-Oxley Act Of 2002. (36)
32.1		Certification of Chief Executive Officer Pursuant To 18 U.S.C. Section 1350, As Adopted Pursuant To Section 906 Of The Sarbanes-Oxley Act Of 2002 (36)
32.2		Certification of Principal Financial Officer Pursuant To 18 U.S.C. Section 1350, As Adopted Pursuant To Section 906 Of The Sarbanes-Oxley Act Of 2002 (36)
99.1		Note Purchase Agreement by and among IP Holdings LLC, Iconix Brand Group, Inc. and Mica Funding, LLC, dated April 11, 2006 (33)+
99.2		Note Purchase Agreement by and among IP Holdings LLC, Iconix Brand Group, Inc. and Mica Funding, LLC, dated August 28, 2006 (8)+
99.3		Lock-up Agreement dated October 31, 2006 by and among the Registrant, Moss Acquisition Corp.., Mossimo Giannulli and Edwin Lewis (12)
99.4		Agreement for Creative Director Services dated as of October 31, 2006 by and among the Registrant, Mossimo, Inc. and Mossimo Giannulli (12)

---

(1)	Filed as an exhibit to the Company's Current Report on Form 8-K for the event dated December 7, 2006 and incorporated by reference herein.

 

(2)	Filed as an exhibit to the Company’s Quarterly Report on Form 10-Q for the quarter ended October 31, 2004 and incorporated herein by reference.

 

(3)	Filed as an exhibit to the Company's Current Report on Form 8-K for the event dated July 22, 2005 and incorporated by reference herein.

 

(4)	Filed as an exhibit to the Company's Current Report on Form 8-K for the event dated September 16, 2005 and incorporated by reference herein.

 

(5)	Filed as an exhibit to the Company's Current Report on Form 8-K for the event dated March 31, 2006 (SEC accession No. 0000950117-06-001668)) and incorporated by reference herein.

 

(6)	Filed as an exhibit to the Company's Current Report on Form 8-K for the event dated March 31, 2006 (SEC Accession No. 0000950117-06-001669) and incorporated by reference herein.

 

(7)	Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2006 and incorporated by reference herein.

 

(8)	Filed as an exhibit filed to the Company's Current Report on Form 8-K for the event dated August 28, 2006 and incorporated by reference herein.

 

(9)	Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2005 and incorporated by reference herein.

 

70

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(10)	Filed as an exhibit to the Company’s Annual Report on Form 10-K for the year ended January 31, 2000, and incorporated by reference herein.

 

(11)	Filed as an exhibit to the Company's Current Report on Form 8-K for the event dated January 26, 2000 and incorporated by reference herein.

 

(12)	Filed as an exhibit to the Company's Current Report on Form 8-K for the event dated October 31, 2006 ( SEC accession no. 0001144204-06-045497) and incorporated by reference herein.

 

(13)	Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the quarter ended October 31, 1997, and incorporated by reference herein.

 

(14)	Filed as Exhibit A to the Company's definitive Proxy Statement dated July 18, 2000 as filed on Schedule 14A and incorporated by reference herein.

 

(15)	Filed as an exhibit to the Company's Annual Report on Form 10-K for the year ended January 31, 2002 and incorporated by reference herein.

 

(16)	Filed as Exhibit B to the Company's definitive proxy statement dated May 28, 2002 as filed on Schedule 14A and incorporated by reference herein.

 

(17)	Filed as Appendix B to the Company's definitive Proxy Statement dated July 2, 2001 as filed on Schedule 14A and incorporated by reference herein.

 

(18)	Filed as an exhibit to the Company's Annual Report on Form 10-K for the year ended January 31, 2003 and incorporated by reference herein.

 

(19)	Filed as an exhibit to the Company's Annual Report on Form 10-K for the period ended December 31, 2004 and incorporated by reference herein.

 

(20)	Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2005 and incorporated by reference herein.

 

(21)	Filed as an exhibit to the Company's Current Report on Form 8-K for the event dated March 9, 2005 and incorporated by reference herein.

 

(22)	Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the quarter ended July 31, 2004 and incorporated by reference herein.

 

(23)	Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the quarter ended October 31, 1998 and incorporated by reference herein.

 

(24)	Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the quarter ended October 31, 2002 and incorporated by reference herein.

 

(25)	Filed as an exhibit to the Company's Current Report on Form 8-K for the event dated December 29, 2005 and incorporated by reference herein.

 

(26)	Filed as an exhibit to the Company's Annual Report on Form 10-K for the period ended December 31, 2005 and incorporated by reference herein.

 

(27)	Incorporated by reference to the applicable exhibit filed with the Company’s Current Report on Form 8-K for the event dated October 27, 2006.

 

(28)	Filed as an exhibit to the Company’s Current Report on Form 8-K for the event dated April 27, 2006 and incorporated by reference herein.

 

(29)	Filed as an exhibit to the Company’s Current Report on Form 8-K for the event dated June 2, 2006 and incorporated by reference herein.

 

(30)	Filed as Annex B to the Company’s definitive proxy statement on Schedule 14A filed with the SEC on July 19, 2006 and incorporated by reference herein.

 

(31)	Filed as an exhibit filed to the Company’s Current Report on Form 8-K for the event dated September 22, 2006 and incorporated by reference herein.

 

71

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(32)	Filed as an exhibit to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2006 and incorporated by reference herein.

 

(33)	Filed as an exhibit to the Company’s Current Report on Form 8-K for the event dated April 11, 2006 and incorporated by reference herein.

 

(34)	Filed as an exhibit to the Company's Current Report on Form 8-K for the event dated October 31, 2006 ( SEC accession no. 0001144204-06-0455507) and incorporated by reference herein.

 

(35)	Filed as an exhibit to the Company's current report on Form 8-K for the event dated December 29, 2005 and incorporated by reference herein.

(36)	Filed herewith.

 

* Denotes management compensation plan or arrangement.

+ Schedules and exhibits have been omitted pursuant to Item 601(b)(2) of Regulation S-K. Iconix Brand Group, Inc. hereby undertakes to furnish supplementally to the Securities and Exchange Commission copies of any of the omitted schedules and exhibits upon request by the Securities and Exchange Commission.

 

72

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Annual Report on Form 10-K

Item 8, 15(a)(1) and (2), (c) and (d)

List of Financial Statements and Financial Statement Schedule

Year ended December 31, 2006

Iconix Brand Group, Inc. and Subsidiaries

 

---

 

Iconix Brand Group, Inc. and Subsidiaries

 

Form 10-K

Index to Consolidated Financial Statements and Financial Statement Schedule

 

The following consolidated financial statements of Iconix Brand Group Inc. and subsidiaries are included in Item 15:

 

Report of Independent Registered Public Accounting Firm		F-3
Consolidated Balance Sheets - December 31, 2006 and 2005		F-4
Consolidated Income Statements for the years ended December 31, 2006 and 2005, and the 11-months ended December 31, 2004		F-5
Consolidated Statements of Stockholders' Equity for the years ended December 31, 2006 and 2005, and the 11-months ended December 31, 2004		F-6
Consolidated Statements of Cash Flows for the years ended December 31, 2006 and 2005, and the 11-months ended December 31, 2004		F-7
Notes to Consolidated Financial Statements		F-9

The following consolidated financial statement schedule of Iconix Brand Group, Inc. and subsidiaries is included in Item 15(d):

 

Report of Independent Registered Public Accounting Firm on Financial Statement Schedule for the year ended December 31, 2006 and 2005, and the 11-months ended December 31, 2004	S-1
Schedule II Valuation and qualifying accounts	S-2

 

All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and therefore have been omitted.

 

F-2

---

 

Report of Independent Registered Public Accounting Firm

 

Board of Directors and Stockholders

Iconix Brand Group, Inc.

New York, New York

 

We have audited the accompanying consolidated balance sheets of Iconix Brand Group, Inc. as of December 31, 2006 and 2005 and the related consolidated statements of income, stockholders' equity, and cash flows for the years ended December 31, 2006 and 2005, and the 11-Months ended December 31, 2004 These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Iconix Brand Group, Inc. at December 31, 2006 and 2005, and the results of its operations and its cash flows for the years ended December 31, 2006 and 2005, and the 11-Months ended December 31, 2004, in conformity with accounting principles generally accepted in the United States of America.

As described in Note 1, in 2006 the Company adopted the provisions of Statement of Financial Accounting Standards No. 123 (R), “Share-Based Payments,” utilizing the modified prospective transition method effective January 1, 2006.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Iconix Brand Group, Inc.'s internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated March 14, 2007 expressed an unqualified opinion thereon.

 

/s/BDO Seidman, LLP

 

March 14, 2007

New York, New York

 

F-3

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Iconix Brand Group, Inc. and Subsidiaries

Consolidated Balance Sheets

(in thousands, except par value)

		December 31,
		2006			2005
Assets
Current Assets:
Cash (including restricted cash of $4,268 in 2006 and $4,094 in 2005)		$	77,840		$	11,687
Marketable securities			-			553
Accounts receivable, net of reserve of $1,633 in 2006 and $260 in 2005			14,548			3,532
Due from affiliate			297			193
Promissory note receivable			1,000			-
Deferred income tax assets			3,440			3,716
Prepaid advertising and other			2,704			2,664
Total Current Assets			99,829			22,345
Property and equipment:
Furniture, fixtures and equipment			2,769			2,027
Less: Accumulated depreciation and amortization			(1,385	)		(1,175	)
			1,384			852
Other Assets:
Restricted cash			11,659			4,982
Goodwill			93,593			32,835
Trademarks and other intangibles, net			467,688			139,281
Deferred financing costs, net			3,355			3,597
Non-current deferred income tax assets			17,970			11,978
Other			5,574			1,374
			599,839			194,047
Total Assets		$	701,052		$	217,244
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses		$	7,043		$	3,360
Accounts payable, subject to litigation			4,886			4,886
Deferred revenue			1,644			4,782
Current portion of long-term debt			22,132			13,705
Total current liabilities			35,705			26,733
Deferred income taxes			59,054			4,201
Long-term debt, less current maturities			140,676			85,414
Long term deferred revenue			160			-
Total Liabilities			235,595			116,348
Contingencies and commitments
Stockholders' Equity
Common stock, $.001 par value - shares authorized 75,000; shares issued 56,227 and 35,540 respectively			57			36
Additional paid-in capital			468,881			136,842
Retained deficit			(2,814	)		(35,315	)
Less: Treasury stock - 198 shares at cost			(667	)		(667	)
Total stockholders' equity			465,457			100,896
Total Liabilities and Stockholders' Equity		$	701,052		$	217,244

See accompanying notes to consolidated financial statements.

 

F-4

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Iconix Brand Group, Inc. and Subsidiaries

Consolidated Income Statements

(in thousands, except earnings per share data)

		Year			Year			11-Months
		Ended			Ended			Ended
		12/31/2006			12/31/2005			12/31/2004
Licensing and commission revenue		$	80,694		$	30,156		$	10,553
Net sales			-			-			58,427
Net revenue			80,694			30,156			68,980
Cost of goods sold			-			-			55,795
Gross profit			80,694			30,156			13,185
Selling, general and administrative expenses (net of recovery pursuant to an agreement of $438 and $7,566 in the year ended 12/31/2005 and for the 11-Months ended 12/31/2004, respectively)			24,527			13,329			9,948
Special charges			2,494			1,466			295
Operating income			53,673			15,361			2,942
Other expenses:
Interest income			(1,243	)		(295	)		(24	)
Interest expense			15,080			4,823			2,725
Net interest expense			13,837			4,528			2,701
Gain on sales of marketable securities			-			(75	)		-
			13,837			4,453			2,701
Income before income taxes			39,836			10,908			241
Provision (benefit) for income taxes			7,335			(5,035	)		-
Net income		$	32,501		$	15,943		$	241
Earnings per share:
Basic		$	0.81		$	0.51		$	0.01
Diluted		$	0.72		$	0.46		$	0.01
Weighted average number of common shares outstanding:
Basic			39,937			31,284			26,851
Diluted			45,274			34,773			28,706

See accompanying notes to consolidated financial statements.

 

F-5

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Iconix Brand Group, Inc. and Subsidiaries

Consolidated Statements of Stockholders' Equity

(in thousands)

 

		Common Stock						Additional Paid - in			Retained			Treasury
		Shares			Amount			Capital			Deficit			Stock			Total
Balance at January 31, 2004			25,915		$	26		$	71,008		$	(51,499)		$	(667)		$	18,868
Issuance of common stock to designees of TKO
Apparel, Inc.			1,000			1			2,184			-			-			2,185
Issuance of common stock to B.E.M. Enterprises, Ltd.
for asset acquisition			215			1			949			-			-			950
Issuance of stock options to a non-employee related to
the above asset acquisition			-			-			133			-			-			133
Issuance of common stock to a non-employee			10			-			25			-			-			25
Exercise of stock options			1,109			1			1,745			-			-			1,746
Issuance of common stock to directors			44			-			110			-			-			110
Net income			-			-			-			241			-			241
Balance at December 31, 2004			28,293			29			76,154			(51,258)			(667)			24,258
Issuance of common stock related to
Acquisition of Joe Boxer ®			4,350			4			36,232			-			-			36,236
Issuance of common stock related to
Acquisition of Rampage ®			2,171			2			20,148			-			-			20,150
Warrants issued to non-employees
related to acquisitions			-			-			2,441			-			-			2,441
Options granted to a non-employee			-			-			173			-			-			173
Exercise of stock options			709			1			1,584			-			-			1,585
Issuance of common stock to directors			17			-			110			-			-			110
Net income			-			-			-			15,943			-			15,943
Balance at December 31, 2005			35,540		$	36		$	136,842		$	(35,315)		$	(667)		$	100,896
Issuance of common stock related to
Acquisition of Mudd ®			3,269			3			47,859			-			-			47,862
Issuance of common stock related to
Acquisition of London Fog  Trademarks®			482			1			7,106			-			-			7,107
Issuance of common stock related to
Acquisition of Mossimo ®			3,609			4			67,528			-			-			67,532
Issuance of new stock			10,785			11			189,512			-			-			189,523
Cancellation of shares issued in business acquisition			-			-			(150)									(150)
Exercise of stock options and warrants			2,446			2			9,099			-			-			9,101
Warrants issued to non-employees
related to the acquisition of Mudd ®			-			-			4,596			-			-			4,596
Warrants issued to non-employees
related to the acquisition of Mossimo ®			-			-			2,232			-			-			2,232
Warrants issued to non-employees related to the acquisition of OP ®			-			-			1,445			-			-			1,445
Stock option compensation expense			-			-			182			-			-			182
Tax benefit of stock option exercises			-			-			2,380			-			-			2,380
Amortization expense in connection with restricted stock			96			-			250			-			-			250
Net income			-			-			-			32,501			-			32,501
Balance at December 31, 2006			56,227		$	57		$	468,881		$	(2,814	)	$	(667	)	$	465,457

See accompanying notes to consolidated financial statements.

 

F-6

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Iconix Brand Group, Inc. and Subsidiaries

Consolidated Statements of Cash Flows (in thousands)

			Year Ended December 31, 2006			Year Ended December 31, 2005			11-Months Ended December 31, 2004
Cash flows provided by operating activities:
Net income		$	32,501		$	15,943		$	241
Depreciation of property and equipment			210			130			236
Amortization of intangibles			2,153			1,733			1,901
Amortization of deferred financing costs			792			-			-
Non-cash settlement of dispute			(150	)		-			-
Gain on sale of marketable securities			-			(75	)		-
Bad debt expense			1,373			260			-
Issuance of common stock to non-employee directors			-			110			110
Stock option compensation - employees			262			-			-
Stock option compensation non - employees			170			173			25
Recovery on receivable			-			-			(53	)
Reduction of settlement payment			-			-			(238	)
Write-off of impaired assets			-			95			-
Shortfall Payment against Guarantee			-			(438	)		(7,566	)
Shortfall Payment reserve			-			-			685
Accrued interest on long-term debt			831			(134	)		500
Deferred income tax benefit			4,969			(5,132	)		-
Changes in operating assets and liabilities, net of business acquisitions:
Accounts receivable			(6,095	)		(1,553	)		1,046
Due from affiliate			(104	)		34			103
Factored accounts receivable and payable to factor, net			-			3,865			5,088
Inventories			-			279			7,160
Prepaid advertising and other			125			(1,994	)		688
Other assets			(3,700	)		(7	)		(1,168	)
Deferred revenue			(3,138	)		3,003			(1,277	)
Due to related parties			-			-			(2,342	)
Accounts payable and accrued expenses			1,512			(310	)		(330	)
Net cash provided by operating activities			31,711			15,982			4,809
Cash flows used in investing activities:
Purchases of property and equipment			(739	)		(731	)		(30	)
Proceeds from the sale of equity securities of other entities			-			110			-
Purchases of equity securities of other entities			-			(663	)		-
Acquisition of Badgley Mischka			-			-			(372	)
Acquisition of Joe Boxer			-			(40,755	)		-
Acquisition of Rampage			-			(26,159	)		-
Acquisition of Mudd			(46,728	)		-			-
Acquisition of London Fog Trademarks			(31,034	)		-			-
Acquisition of Mossimo, net of cash acquired			(85,438	)		-			-
Acquisition of Ocean Pacific			(10,491	)		-			-
Purchase of other trademarks			(2,328	)		(320	)		(19	)
Net cash used in investing activities			(176,758	)		(68,518	)		(421	)
Cash flows (used in) provided by financing activities:
Revolving notes payable - bank			-			-			(12,775	)
Proceeds from long -term debt			168,000			85,489			3,600
Proceeds of loans from related parties			-			(2,465	)		2,465
Proceeds from exercise of stock options and warrants			9,101			1,585			1,746
Payment of long-term debt			(148,545	)		(17,134	)		(2,630	)
Proceeds from common stock issuance, net			189,523			-			2,185
Prepaid interest expense - long-term			-			-			(500	)
Restricted cash - Current			174			(3,564	)		(7	)
Restricted cash - Non Current			(6,677	)		(2,082	)		-
Deferred financing costs			(550	)		(1,968	)		(475	)
Net cash (used in) provided by financing activities			211,026			59,861			(6,391	)
Net increase (decrease) in cash			65,979			7,325			(2,003	)
Cash, beginning of year			7,593			268			2,271
Cash, end of year		$	73,572		$	7,593		$	268
Balance of restricted cash - Current			4,268			4,094			530
Total cash including restricted cash, end of year		$	77,840		$	11,687		$	798

 

See accompanying notes to consolidated financial statements.

 

F-7

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Supplemental disclosure of cash flow information:

		Year Ended			Year Ended			11-Months Ended
		12/31/2006			12/31/2005			12/31/2004
Cash paid during the year:
Income taxes		$	-		$	-		$	-
Interest		$	12,989		$	3,298		$	2,636

 

Supplemental disclosures of non-cash investing and financing activities:

 

		Year Ended 12/31/2006			Year Ended 12/31/2005			11-Months Ended 12/31/2004
Acquisitions:
Common stock issued		$	122,501		$	56,386		$	950
Options issued - acquisition cost		$	-		$	-		$	133
Warrants issued - acquisition cost		$	8,273		$	2,441		$	-
Liabilities assumed		$	51,871		$	14,193		$	-

 

See accompanying notes to consolidated financial statements.

 

F-8

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Iconix Brand Group, Inc and Subsidiaries

Notes to Consolidated Financial Statements

Information as of and for the Periods Ended December 31, 2006 and 2005

(dollars are in thousands (unless otherwise noted), except per share data)

The Company

Iconix Brand Group, Inc (the “Company”) is in the business of licensing and marketing intellectual property. The Company currently owns nine brands, Candie's®, Bongo®, Badgley Mischka®, Joe Boxer®, Rampage®, Mudd®, London Fog®, Mossimo®, and Ocean Pacific®, which it licenses to third parties for use in connection with a variety of apparel, and fashion products. The Company also arranges through its wholly-owned subsidiary Bright Star Footwear, Inc. ("Bright Star") for the manufacture of footwear products for mass market and discount retailers under the private label brand of the retailer.

The Company's business strategy, as a licensing and marketing company, is to maximize the value of its intellectual property by entering into strategic licenses with partners who have been selected based upon the Company's belief that they will be able to produce and sell quality products in the categories of their specific expertise. This licensing strategy is designed to permit the Company to operate its licensing business with minimal working capital, no inventory, production or distribution costs or risks, and utilizing only a small group of core employees. Prior to May 2003, the Company was engaged in the wholesale business of footwear and jeanswear.

On July 1, 2005, the Company changed its corporate name to Iconix Brand Group, Inc. and its NASDAQ symbol to ICON.

Beginning January 2005, the Company changed its business practices with respect to Bright Star, which resulted in a change in revenue recognition. Bright Star is now acting solely as an agent; accordingly, only net commission revenue is recognized.

 

1. Summary of Significant Accounting Policies

Fiscal Year End

On December 7, 2004, the Company announced that beginning January 1, 2005, it had changed its fiscal year ending on January 31, to a calendar year beginning on January 1st and ending on December 31st. The change was designed to align the Company's financial reporting with that of its existing licensees. As a result, the prior period was reported as the calendar year ended December 31, 2005 (the “Prior Year”). The prior year period ended on December 31, 2004 was reported as an 11- month period (the “11-month Prior Year”). For comparative purposes, unaudited condensed results of operations data for the period for the 11-Month period ended December 31, 2004 is presented in Note 22.

As a result of the Company's transition to a licensing business, and to a lesser extent, its change in fiscal year end and the change in its Bright Star revenue reporting, the Company's operating results for the most current year and prior year, are not comparable to the 11-month prior period, as applicable.

Principles of consolidation

The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany transactions and items have been eliminated in consolidation.

Business Combinations

The purchase method of accounting requires that the total purchase price of an acquisition be allocated to the assets acquired and liabilities assumed based on their fair values on the date of the business acquisition. The results of operations from the acquired businesses are included in the accompanying consolidated statements of income since the acquisition date. Any excess of the purchase price over the estimated fair values of the net assets acquired is recorded as goodwill.

 

F-9

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For the period February 1, 2004 through December 31, 2006, the Company completed seven acquisitions. Notes 3, 4, 5, 6, 7, 8, and 9 to the financial statements contain a full discussion of the Company's acquisitions. The acquisitions and the acquisition dates are as follows:

 

Acquisitions		Acquisition date
Badgley Mischka		October 29, 2004
Joe Boxer		July 22, 2005
Rampage		September 16, 2005
Mudd		April 11, 2006
London Fog Trademark		August 28, 2006
Mossimo		October 31, 2006
Ocean Pacific		November 6, 2006

Use of Estimates

The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The Company reviews all significant estimates affecting the financial statements on a recurring basis and records the effect of any adjustments when necessary.

Effective July 1, 2005 the Company had a change in estimate of the useful lives of both the Candie's and Bongo trademarks to indefinite life. See Goodwill and Other Intangibles below.

Marketable Equity Securities

In November and December 2005, the Company invested $663 in equity securities of certain public companies that are categorized as available for sale. In December 2005, the Company sold certain of these shares and $75 was recorded as realized gain in the Prior Year. The aggregate fair value of these investments approximates their respective carrying value. In October 2006, the Company completed the acquisition of Mossimo, Inc., and the Company held shares in Mossimo, Inc. were included as part of the equity consideration. See Note 8.

Concentration of Credit Risk

For the Current Year, two licensees accounted for 23.6% and 14.3% of the Company's net revenue, respectively, compared to two licensees which accounted for 27.9% and 14.6% in the Prior Year. On a comparable basis, no licensee exceeded 10% of the Company’s total net revenues in the 11-Month Prior Period.

 

Accounts Receivable

 

        Accounts receivable are reported at amounts the Company expects to be collected, net of allowance for non-collection from customers.

 

Restricted Stock

 

Compensation cost for restricted stock is measured as the excess, if any, of the quoted market price of our stock at the date the common stock is issued over the amount the employee must pay to acquire the stock. The compensation cost, net of projected forfeitures, is recognized over the period between the issue date and the date any restrictions lapse.

 

Deferred Financing Costs

The Company incurred costs (primarily professional fees and placement agent fees) in connection with bond financings that occurred during the Current Year and the Prior Year. These costs have been deferred and are being amortized using the interest method over the life of the related debt (7 years).

 

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.

 

F-10

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Impairment of Long-Lived Assets

When circumstances mandate, the Company evaluates the recoverability of its long-lived assets, other than goodwill and other indefinite life intangibles (discussed below), by comparing estimated future undiscounted cash flows with the assets' carrying value to determine whether a write-down to market value, based on discounted cash flow, is necessary. In the Prior Year, the Company wrote off leasehold improvements of $91 in connection with an office relocation. There have been no such write-offs in the Current Year. Other identifiable intangible assets are being amortized on a straight-line basis over the estimated useful life of the assets over periods ranging from 3-10 years.

 

F-11

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Goodwill and Other Intangibles 

In June 2001, the FASB issued Statement of Financial Accounting Standards No. 142 (SFAS No. 142), “Goodwill and Other Intangible Assets,” which changes the accounting for goodwill and other intangible assets without determinable lives from an amortization method to an impairment-only approach. The Candie's and Bongo trademarks had previously been amortized on a straight-line basis over their estimated useful lives of approximately 20 years. Effective July 1, 2005, the Company changed for accounting purposes, the estimated useful lives of the Candie's and Bongo trademarks to be an indefinite life. Accordingly the recorded value of these trademarks will no longer be amortized, but instead will be tested for impairment on an annual basis. In arriving at the conclusion to use an indefinite life management considered among other things, the Company's new licensing business model which has expanded the extent of potential use of these brand names in future years. This has been initially evidenced by the Candies licensing contract signed with Kohl's Department Stores (“Kohl's”) in late 2004, which has very rapidly expanded the Candies name to over 18 product categories in almost 700 Kohl's retail locations. Further the Candie's brand has been present in the US market since 1970s. Similarly, the Bongo brand has expanded from a predominantly jeanswear brand to a broad variety of product groups and multiple licenses in the U.S. and internationally. Brand recognition for both of these brands is very high, has been generally stable for an extended period of time, and the Company expects this consumer recognition and acceptance to remain stable or grow in the future based on anticipated broader distribution and product line expansion. As of December 31, 2006 the net book value of the Candie's and Bongo trademarks totaled $14.4 million.

Under SFAS No. 142, beginning on February 1, 2002, amortization of goodwill ceased and the Company annually tests goodwill for impairment.

The changes in the carrying amount of goodwill for the years ended December 31, 2006 and 2005, are as follows:

 

			Year Ended 12/31/2006			Year Ended 12/31/2005
Beginning Balance		$	32,835		$	25,241
Joe Boxer (Note 4)			-			1,932
Rampage (Note 5)			-			5,662
Mudd (Note 6)			9,785			-
Mossimo (Note 8)			49,015			-
Ocean Pacific (Note 9)			1,958			-
Ending Balance		$	93,593		$	32,835

Goodwill was initially tested in the first quarter of Fiscal 2003 for impairment upon adoption of SFAS No. 142. There have been no impairments to the carrying amount of goodwill in any period. In the Prior Year, because of the change in the business model, the Company operates as a single integrated business, and as such has one operating segment which is also used as the reporting unit for purposes of evaluating goodwill impairment. The fair value of the reporting unit is determined using discounted cash flow analysis and estimates of sales proceeds. The annual evaluation of goodwill is performed on October 1, the beginning of the Company's fourth fiscal quarter.

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.

Beginning January 2005, the Company changed its business practices with respect to Bright Star, which resulted in a change in revenue recognition for the Prior Year. Bright Star now acts as an agent, therefore only net commission revenue is recognized commencing January 1, 2005. Revenue is recognized upon shipment with related risk and title passing to the customers.

Allowances for chargebacks, returns, and other charges are recorded at the sales date based on customer specific projections as well as historical rates of such allowances.

Significant Contracts

In December 2004, the Company entered into a license agreement with Kohl's, which was subsequently amended in February 2005 (the “Kohl's License”). Pursuant to the Kohl's 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 become exclusive to Kohl's on January 1, 2007. The initial term of the Kohl's License expires on January 29, 2011, subject to Kohl's option to renew it for up to three additional terms of five years, each contingent on Kohl's meeting specified performance and minimum sale standards. The agreement also contains certain minimum royalties that Kohl's is obligated to pay the Company. Kohl's is also obligated to pay the Company an advertising royalty equal to of 1% of net sales under the Kohl's License each contract year.

 

F-12

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In connection with the Kohl's License, the Company amended the license agreement with Steve Madden LLC (the “Candie's/Madden Footwear License”), which had an original termination date of December 31, 2009, and its existing handbag license agreement with LaRue Distributors, Inc. (“LaRue”), which had an original termination date of December 31, 2007, to accelerate their termination dates to December 31, 2006 in order to provide Kohl's with the exclusive rights to footwear and handbags commencing as of January 1, 2007. In connection with these amendments, the Company has agreed to make certain payments to Steve Madden and LaRue in the event that Kohl's fails to use Steve Madden as a supplier of its Candie's shoes and purchases less than designated amounts of Candie's footwear goods from Steve Madden through January 2011 or fails to use LaRue as a supplier of its Candie's handbags and purchases less than designated amounts of Candie's handbag goods from LaRue through December 2010. Kohl's continues to use Steve Madden and LaRue as their partners and therefore there are no liabilities under this provision as of December 31, 2005. The only product category with respect to which Kohl's will not have exclusive rights to the Candie's brand as of January 1, 2007, is prescription eyewear, which has been licensed to Viva International Group, Inc since 1998.

 

As part of the Joe Boxer brand acquisition, the Company acquired its license agreement with respect to Kmart (the “Kmart License”). Pursuant to this license, which commenced in August 2001, Kmart (now Sears Holding Corp.) was granted the exclusive right to manufacture, market and sell through Kmart stores located in the United States, its territories and Puerto Rico 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. The initial term of the Kmart license expired on December 31, 2007. In September 2006, the Company entered into a new license with Kmart which replaced the existing license and extended the term through December 31, 2010, subject to Kmart’s option to renew it for up to four additional terms of five years, each contingent on its meeting specified performance and minimum sale standards. The new license also provides for guaranteed annual minimums (for the year ending December 31, 2006, the amount owed for such year under the prior license, and for years 2007-2010, slightly more than half of such amount) and also provides for Kmart’s expansion of Joe Boxer’s distribution beyond Kmart and into Sears stores by the end of 2007.  The Kmart license provides for guaranteed minimum royalty payments of $19.0 million for the calendar year 2006.

 

 As part of the Mossimo merger in October 2006, the Company acquired Mossimo’s amended and restated license and design services agreement with Target, referred to as the “ Target License ”, which originally commenced in 2000 and was subsequently amended and restated in March 2006. Pursuant to the Target 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 or any other retail store or other merchandising activity operated by Target or its affiliates, until January 31, 2010. If Target is current with payments of its obligations under the Target license, Target has the right to renew the Target license on the same terms and conditions for additional terms of two years each. Under the Target license, Target pays royalty fees based on certain percentages of its net sales of Mossimo-branded products, subject to its obligation to pay certain guaranteed minimum fees per each contract year (defined as each period from February 1 through January 31 during the term of the agreement). Under the Target License, the Company also provides the creative director services of Mossimo Giannulli (under a consulting agreement) with respect to Mossimo-branded products sold through Target stores.

 

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.

Stock-Based Compensation

Pursuant to a provision in SFAS No. 123(R), "Accounting for Stock-Based Compensation", the Company had elected to continue using the intrinsic-value method of accounting for stock options granted to employees in accordance with Accounting Principles Board Opinion 25, "Accounting for Stock Issued to Employees." Accordingly, the compensation cost for stock options had been measured as the excess, if any, of the quoted market price of the Company's stock at the date of the grant over the amount the employee must pay to acquire the stock. Under this approach, the Company only recognized compensation expense for stock-based awards to employees for options granted at below-market prices, with the expense recognized over the vesting period of the options.

In December 2005, the Company's Board of Directors approved the accelerated vesting of all employee stock options previously granted under the Company's various non-qualified stock option plans, which would have been unvested as of December 31, 2005. As a result, all options granted as of December 31, 2005, except those based on performance became exercisable immediately. The number of shares, exercise prices and other terms of the options subject to the acceleration remain unchanged. The acceleration of such option vesting resulted in an additional $446 of compensation expense being reflected in pro-forma net income for the Prior Year shown in the table below, an amount that would have otherwise been recorded as compensation expense in the years ending December 31, 2006 and 2007 had no impact on compensation recognition in 2005. The purpose of accelerating the vesting of these options was to enable to Company to avoid recognizing stock based compensation expense associated with these options in future periods after the Company adopted SAFS No 123 (R).

 

F-13

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The stock-based employee compensation cost that would have been included in the determination of net income if the fair value based method had been applied to all awards, as well as the resulting pro forma net income and earnings per share using the fair value approach, are presented in the following table. The pro forma adjustments for compensation cost have not been offset by a related income tax benefit, consistent with the manner in which the Company currently records its provision for income taxes. These pro forma amounts may not be representative of future disclosures since the estimated fair value of stock options is amortized to expense over the vesting period, and additional options may be granted in future years. The fair value for these options was estimated at the date of grant using a Black-Scholes option-pricing model with the weighted-average assumptions presented in Note 13 of Notes to Consolidated Financial Statements.

 

F-14

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			Year ended December 31, 2005			11-Months ended December 31, 2004
Net income - as reported		$	15,943		$	241
Add: Stock-based employee Compensation included in reported net income			-			-
Deduct: Stock-based employee compensation determined under the fair value based method			(9,601	)		(1,458	)
Pro forma net income (loss)		$	6,342		$	(1,217	)
Basic earnings (loss) per share:
As reported		$	0.51		$	0.01
Pro forma		$	0.20		$	(0.05	)
Diluted earnings (loss) per share:
As reported		$	0.46		$	0.01
Pro forma		$	0.18		$	(0.05	)

Fair Value of Financial Instruments

The carrying amounts reported in the consolidated balance sheets for cash and cash equivalents, marketable securities, accounts receivable and accounts payable approximate fair value because of the immediate or short-term maturity of these financial instruments. The carrying amount reported for long-term debt approximates fair value because, in general, the interest on the underlying instruments fluctuates with market rates. In instances where long-term debt carries fixed interest rates, the obligation is recorded at the present value of the future payments, which approximates fair value.

Earnings Per Share

Basic earnings per share includes no dilution and is computed by dividing net income available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflect, in periods in which they have a dilutive effect, the effect of common shares issuable upon exercise of stock options, warrants and restricted stock. The difference between reported basic and diluted weighted-average common shares results from the assumption that all dilutive stock options, warrants, and restricted stock outstanding were exercised into common stock. Diluted loss per share reflects, in periods in which they have a dilutive effect, the effect of common shares issuable upon exercise of stock options.

Advertising Campaign Costs

The Company records national advertising campaign costs as an expense concurrent with the first showing of the related advertising and other advertising costs when incurred. Advertising expenses for Current Year, the Prior Year, and the 11-Month Prior Year amounted to $7,849, $2,937, and $1,782, respectively.

New Accounting Standards

 

In February 2006, the FASB issued SFAS No. 155, "Accounting for Certain Hybrid Financial Instruments -an amendment of FASB Statements No. 133 and 140," which simplifies accounting for certain hybrid financial instruments by permitting fair value remeasurement for any hybrid instrument that contains an embedded derivative that otherwise would require bifurcation and eliminates a restriction on the passive derivative instruments that a qualifying special-purpose entity may hold. SFAS No. 155 is effective for all financial instruments acquired, issued or subject to a remeasurement (new basis) event occurring after the beginning of an entity's first fiscal year that begins after September 15, 2006. The adoption of SFAS No. 155 is not expected to have an impact on the Company's results of operations or its financial position.

In March 2006, the FASB issued SFAS No. 156, "Accounting for Servicing of Financial Assets - an amendment of FASB Statement No. 140," which establishes, among other things, the accounting for all separately recognized servicing assets and servicing liabilities by requiring that all separately recognized servicing assets and servicing liabilities be initially measured at fair value, if practicable. SFAS No. 156 is effective as of the beginning of an entity's first fiscal year that begins after September 15, 2006. The adoption of SFAS No. 156 is not expected to have a material impact on the Company's results of operations or its financial position.

 

F-15

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In June 2006, the FASB issued FASB Interpretation No. 48 ("FIN 48"), "Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109," which establishes that the financial statement effects of a tax position taken or expected to be taken in a tax return are to be recognized in the financial statements when it is more likely than not, based on the technical merits, that the position will be sustained upon examination. FIN 48 is effective for fiscal years beginning after December 15, 2006.While the Company continues to evaluate its historical tax positions, the adoption of FIN 48 is not expected to have a material impact on the Company's results of operations or its financial position.

In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements," which establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. SFAS No. 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The adoption of SFAS No. 157 is not expected to have a material impact on our results of operations or our financial position.

 

In February 2007, the FASB issued SFAS 159, “The Fair Value Option for Financial Asset and Financial Liability: Including an amendment to FASB Statement No. 115” (“SFAS 159”). The standard permits all entities to elect to measure certain financial instruments and other items at fair value with changes in fair value reported in earnings. SFAS 159 is effective as of the beginning of the first fiscal year that begins after November 15, 2007. We are evaluating the impact adopting SFAS 159 will have on our consoidated financial statements.

       

Presentation of Prior Year Data

Certain reclassifications have been made to conform prior year data to the current presentation.

 

2. Unzipped Apparel, LLC (“Unzipped”)

Equity Investment:

On October 7, 1998, the Company formed Unzipped with joint venture partner Sweet Sportswear, LLC (“Sweet”), the purpose of which was to market and distribute apparel under the BONGO label. The Company and Sweet each had a 50% interest in Unzipped. Pursuant to the terms of the joint venture, the Company licensed the BONGO trademark to Unzipped for use in the design, manufacture and sale of certain designated apparel products.

Acquisition:

On April 23, 2002, the Company acquired the remaining 50% interest in Unzipped from Sweet for a purchase price of three million shares of the Company's common stock and $11 million in debt evidenced by the 8% Senior Subordinated Note due in 2012 (“Sweet Note”). In connection with the acquisition of Unzipped, the Company filed a registration statement with the 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.

Revolving Credit Agreement:

On February 25, 2003, Unzipped entered into a two-year $25 million credit facility (“the Unzipped Credit Facility”) with GE Capital Commercial Services ( “ GECCS ” ), Inc. Borrowings were limited by advance rates against eligible accounts receivable and inventory balances, as defined. Under the Unzipped Credit Facility, Unzipped could also arrange for letters of credit in an amount up to $5 million. The borrowings bore interest at a rate of 2.25% per annum in excess of the 30 day Commercial Paper rate or 3%, whichever is greater. Borrowings under the Unzipped Credit Facility were secured by substantially all of the assets of Unzipped. In addition, Unzipped had agreed to subordinate its accounts payable to Azteca Production International, Inc (“Azteca”), and Apparel Distribution Services, LLC (“ADS”), all of which were related to Sweet, to GECCS. Unzipped was required to meet a minimum tangible net worth covenant, as defined. At October 31, 2004, the loan had been repaid in full and the borrowing arrangement with GECCS was terminated.

Related Party Transactions:

Prior to August 5, 2004, Unzipped was managed by Sweet pursuant to a management agreement (the “Management Agreement”). Unzipped also had a supply agreement with Azteca and a distribution agreement with ADS. All of these entities are owned or controlled by Hubert Guez.

Pursuant to the Management Agreement, Sweet was obligated to manage the operations of Unzipped in return for, commencing in Fiscal 2004, a management fee based upon certain specified percentages of net income that Unzipped would achieved during the three-year term. In addition, Sweet guaranteed that the net income, as defined, of Unzipped commencing in Fiscal 2004 would be no less than $1.7 million for each year during the term (the “Guarantee”). In the event that the Guarantee is not met, under the Management Agreement, Sweet is obligated to pay to the Company the difference between the actual net income of Unzipped, as defined, and the Guarantee (the “Shortfall Payment”). The Shortfall Payment can be offset against the Sweet Note in the original amount of $ 11 million at the option of either Sweet or the Company.

 

F-16

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In the Prior Year, Unzipped had a net loss (as defined, for the purpose of determining if the Guarantee had been met) of $296 and a net income (as defined, for the purpose of determining if the Guarantee had been met) of $6.4 million in the 11-Month Prior Year. Consequently for the Prior Year there was an adjusted Shortfall Payment of $438, and $7.6 million, net of $685 reserve in the 11-Month Prior Year. The adjusted Shortfall Payments have been recorded in the consolidated income statements as a reduction of Unzipped's selling, general and administrative expenses and on the balance sheet as a reduction of the Sweet Note based upon the right to offset in the Management Agreement. After adjusting for the Shortfall Payment, Unzipped reported a net loss of $38 in the Prior Year and a net loss of $461 in the 11-Month Prior Year.

Prior to August 5, 2004, there was a distribution agreement between Unzipped and ADS pursuant to which Unzipped paid ADS a per unit fee for warehousing and distribution functions and per unit fee for processing and invoicing orders. The agreement also provided for reimbursement for certain operating costs incurred by ADS and charges for special handling fees at hourly rates approved by management. Prior to August 5, 2004, there was also a supply agreement in effect between Unzipped and Azteca pursuant to which Unzipped paid Azteca cost plus 6% for goods, and was entitled to up to 30 days in which to pay Azteca.

Prior to August 5, 2004, Azteca allocated expenses to Unzipped for Unzipped's use of a portion of Azteca's office space, design and production team and support personnel. Unzipped also occupied office space in a building rented by ADS and Commerce Clothing Company, LLC, a related party to Azteca.

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 15.

The related party transactions, most of which are being disputed in the litigation as further described in Note 15, are summarized as follows (there were no transactions with these related parties in the Current Year):

 

 

			Year ended 12/31/2005			11-Months ended 12/31/2004
Products purchased from Azteca		$	-		$	22,886
Allocated office space, design and production team and support personnel expense from Azteca			-			118
Management fee			-			-
Shortfall Payment per Management Agreement			438			7,566
Interest expense paid on Azteca subordinated debt			-			-
Expenses of distribution services per distribution agreement with ADS			-			2,405

 

At December 31, 2006, the Company included in accounts payable subject to litigation amounts due to Azteca and ADS $847 and $2,261 , respectively. These amounts, however, are in dispute in the litigation. See Note 15.

In a separate transaction concerning Unzipped, Bongo Apparel, Inc (“BAI”), licensee for jeanswear, and managed the transition of the operations of Unzipped to a licensing business beginning on August 5, 2004. In connection with Jeanswear License and this transition, the designees of TKO Apparel (an affiliate of BAI) purchased one million shares of the common stock of the Company at a price of $2.20 per share. In a separate transaction, TKO agreed to lend Unzipped up to $2.5 million. As of December 31, 2004, the loan balance was $2.5 million, which the Company repaid in 2005.

 

3.  Badgley Mischka Licensing LLC 

On October 29, 2004 (the "Closing Date"), the Company acquired the principal assets (the "Purchased Assets") of B.E.M. Enterprise, Ltd. (“BEM”), the holding company for the Badgley Mischka designer business from parent company Escada U.S.A. The Purchased Assets included the Badgley Mischka® trademark, two existing licenses and the rights to operate the existing Badgley Mischka retail store located on Rodeo Drive in Beverly Hills, California. The purchase price for the transaction was $950, (excluding $372 of fees and expenses related to the acquisition) which was paid by the Company's issuance of 214,981 shares of the Company's common stock. The purchase price of the Purchased Assets was subject to an upward adjustment in the event that the closing sale price of the Company's common stock on the date which was 180 days after the Closing Date was less than the closing sale price on the Closing Date. No such adjustment to the purchase price was necessary as the closing sales price at April 27, 2005 was $4.95, greater than the closing price of $4.44 on the Closing Date.

 

F-17

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The Company was advised in acquisition of the Purchased Assets by UCC Funding Corporation (“UCC”), of which Robert D'Loren, a then director of the Company, is President. In connection with the services provided in the acquisition, Mr. D'Loren, the sole shareholder of UCC, received 50,000 stock options, which were valued at $133 and included in the cost of the acquisition. In addition, UCC receives a fee of 5% of the gross revenues that the Company derives from the BADGLEY MISCHKA trademark and all derivative trademarks, which right was assigned to Content Holding, which is owned by Mr. D'Loren. In addition, should the Company sell all or substantially all of the acquired assets, UCC will receive a cash payment calculated under a formula based on the sales price.