United
States
Securities
and Exchange Commission
Washington,
D.C. 20549
FORM
10-Q
x Quarterly Report
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
For the
Quarterly Period Ended
September 30, 2009
OR
o Transition Report
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
For the
Transition Period From
________ to
________.
Commission
file number 0-10593
ICONIX
BRAND GROUP, INC.
(Exact
name of registrant as specified in its charter)
Delaware
|
|
11-2481903
|
(State
or other jurisdiction of incorporation or
organization)
|
|
(I.R.S.
Employer Identification No.)
|
|
|
|
1450
Broadway, New York, NY
|
|
10018
|
(Address
of principal executive offices)
|
|
(Zip
Code)
|
(212)
730-0030
(Registrant's
telephone number, including area code)
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes x
No ¨
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files). Yes ¨
No ¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
|
Large accelerated filer x
|
Accelerated filer o
|
|
|
|
|
Non
- accelerated filer o(Do not check if a smaller reporting company)
|
Smaller reporting company o
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act)
Yes o No x
Indicate
the number of shares outstanding of each of the issuer's classes of Common
Stock, as of the latest practicable date.
Common
Stock, $.001 Par Value – 71,413,628 shares as of November 5,
2009.
INDEX
FORM
10-Q
Iconix
Brand Group, Inc. and Subsidiaries
|
|
|
Page No.
|
Part I.
|
Financial
Information
|
|
3
|
|
|
|
|
Item 1.
|
Financial
Statements
|
|
3
|
|
|
|
|
|
Condensed
Consolidated Balance Sheets – September 30, 2009 (unaudited) and
December 31, 2008
|
|
3
|
|
Unaudited
Condensed Consolidated Income Statements – Three and Nine Months Ended
September 30, 2009 and 2008
|
|
4
|
|
Unaudited
Condensed Consolidated Statement of Stockholders' Equity - Nine Months
Ended September 30, 2009
|
|
5
|
|
Unaudited
Condensed Consolidated Statements of Cash Flows - Nine Months Ended
September 30, 2009 and 2008
|
|
6
|
|
Notes
to Unaudited Condensed Consolidated Financial Statements
|
|
8
|
|
|
|
|
Item 2.
|
Management's
Discussion and Analysis of Financial Condition and Results of
Operations
|
|
23
|
|
|
|
|
Item 3.
|
Quantitative
and Qualitative Disclosures about Market Risk
|
|
29
|
|
|
|
|
Item 4.
|
Controls
and Procedures
|
|
30
|
|
|
|
|
Part II.
|
Other
Information
|
|
30
|
|
|
|
|
Item 1.
|
Legal
Proceedings
|
|
30
|
Item 1A.
|
Risk
Factors
|
|
30
|
Item 2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
|
34
|
Item
4. |
Submission
of Matters to a Vote of Security-Holders |
|
34
|
Item
5. |
Other
Information |
|
34
|
Item 6.
|
Exhibits
|
|
34
|
|
|
|
|
Signatures
|
|
|
35
|
Part I.
Financial Information
Item 1.
Financial Statements
Iconix
Brand Group, Inc. and Subsidiaries
Condensed
Consolidated Balance Sheets
(in
thousands, except par value)
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008(1)
|
|
|
|
(unaudited)
|
|
|
|
|
Assets
|
|
|
|
|
|
|
Current
Assets:
|
|
|
|
|
|
|
Cash
(including restricted cash of $7,377 in 2009 and $875 in
2008)
|
|
$ |
233,431 |
|
|
$ |
67,279 |
|
Accounts
receivable
|
|
|
54,181 |
|
|
|
47,054 |
|
Deferred
income tax assets
|
|
|
1,806 |
|
|
|
1,655 |
|
Prepaid
advertising and other
|
|
|
14,541 |
|
|
|
13,400 |
|
Total
Current Assets
|
|
|
303,959 |
|
|
|
129,388 |
|
Property
and equipment:
|
|
|
|
|
|
|
|
|
Furniture,
fixtures and equipment
|
|
|
10,976 |
|
|
|
9,187 |
|
Less:
Accumulated depreciation
|
|
|
(3,476 |
) |
|
|
(2,468 |
) |
|
|
|
7,500 |
|
|
|
6,719 |
|
Other
Assets:
|
|
|
|
|
|
|
|
|
Restricted
cash
|
|
|
15,866 |
|
|
|
15,866 |
|
Marketable
securities
|
|
|
6,801 |
|
|
|
7,522 |
|
Goodwill
|
|
|
164,586 |
|
|
|
144,725 |
|
Trademarks
and other intangibles, net
|
|
|
1,054,176 |
|
|
|
1,060,460 |
|
Deferred
financing costs, net
|
|
|
5,230 |
|
|
|
6,524 |
|
Non-current
deferred income tax assets
|
|
|
23,080 |
|
|
|
25,463 |
|
Investments
and joint ventures
|
|
|
22,797 |
|
|
|
4,097 |
|
Other
assets – non-current
|
|
|
26,376 |
|
|
|
19,495 |
|
|
|
|
1,318,912 |
|
|
|
1,284,152 |
|
Total
Assets
|
|
$ |
1,630,371 |
|
|
$ |
1,420,259 |
|
|
|
|
|
|
|
|
|
|
Liabilities
and Stockholders' Equity
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable and accrued expenses
|
|
$ |
16,041 |
|
|
$ |
22,392 |
|
Accounts
payable, subject to litigation
|
|
|
- |
|
|
|
1,878 |
|
Deferred
revenue
|
|
|
10,094 |
|
|
|
5,570 |
|
Current
portion of long-term debt
|
|
|
71,244 |
|
|
|
73,363 |
|
Total
current liabilities
|
|
|
97,379 |
|
|
|
103,203 |
|
|
|
|
|
|
|
|
|
|
Non-current
deferred income taxes
|
|
|
132,136 |
|
|
|
118,469 |
|
Long
term debt, less current maturities
|
|
|
503,056 |
|
|
|
545,226 |
|
Long
term deferred revenue
|
|
|
9,632 |
|
|
|
9,272 |
|
Other
long term liabilities
|
|
|
884 |
|
|
|
- |
|
Total
Liabilities
|
|
|
743,087 |
|
|
|
776,170 |
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders'
Equity
|
|
|
|
|
|
|
|
|
Common
stock, $.001 par value shares authorized 150,000; shares
issued 72,657 and 59,077 respectively
|
|
|
71 |
|
|
|
58 |
|
Additional
paid-in capital
|
|
|
721,905 |
|
|
|
533,235 |
|
Retained
earnings
|
|
|
175,752 |
|
|
|
120,358 |
|
Accumulated
other comprehensive loss
|
|
|
(4,232 |
) |
|
|
(3,880 |
) |
Less:
Treasury stock – 1,149 and 921 shares at cost,
respectively
|
|
|
(7,380 |
) |
|
|
(5,682 |
) |
Total
Iconix Stockholders’ Equity
|
|
|
886,116 |
|
|
|
644,089 |
|
Non-controlling
interest
|
|
|
1,168 |
|
|
|
- |
|
Total
Stockholders’ Equity
|
|
|
887,284 |
|
|
|
644,089 |
|
Total
Liabilities and Stockholders' Equity
|
|
$ |
1,630,371 |
|
|
$ |
1,420,259 |
|
(1) As
adjusted due to implementation of FSP APB 14-1 (ASC Topic 470). See
Notes 2 and 6.
See Notes
to Unaudited Condensed Consolidated Financial Statements.
Iconix
Brand Group, Inc. and Subsidiaries
Unaudited
Condensed Consolidated Income Statements
(in
thousands, except earnings per share data)
|
|
Three Months Ended September
30,
|
|
|
Nine Months Ended September
30,
|
|
|
|
2009
|
|
|
2008(1)
|
|
|
2009
|
|
|
2008(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Licensing
and other revenue
|
|
$ |
59,367 |
|
|
$ |
55,135 |
|
|
$ |
166,276 |
|
|
$ |
162,502 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative expenses
|
|
|
21,023 |
|
|
|
18,558 |
|
|
|
54,661 |
|
|
|
55,589 |
|
Expenses
related to specific litigation
|
|
|
- |
|
|
|
279 |
|
|
|
137 |
|
|
|
665 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
|
38,344 |
|
|
|
36,298 |
|
|
|
111,478 |
|
|
|
106,248 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
9,787 |
|
|
|
11,458 |
|
|
|
30,336 |
|
|
|
35,694 |
|
Interest
income
|
|
|
(766 |
) |
|
|
(948 |
) |
|
|
(1,941 |
) |
|
|
(3,363 |
) |
Equity
(earnings) loss on joint ventures
|
|
|
(2,559 |
) |
|
|
428 |
|
|
|
(3,366 |
) |
|
|
428 |
|
Other
expenses - net
|
|
|
6,462 |
|
|
|
10,938 |
|
|
|
25,029 |
|
|
|
32,759 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before income taxes
|
|
|
31,882 |
|
|
|
25,360 |
|
|
|
86,449 |
|
|
|
73,489 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision
for income taxes
|
|
|
11,428 |
|
|
|
8,939 |
|
|
|
31,055 |
|
|
|
25,914 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
20,454 |
|
|
$ |
16,421 |
|
|
$ |
55,394 |
|
|
$ |
47,575 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.29 |
|
|
$ |
0.28 |
|
|
$ |
0.87 |
|
|
$ |
0.83 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$ |
0.28 |
|
|
$ |
0.27 |
|
|
$ |
0.83 |
|
|
$ |
0.78 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
71,336 |
|
|
|
57,841 |
|
|
|
63,850 |
|
|
|
57,662 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
74,070 |
|
|
|
61,091 |
|
|
|
66,426 |
|
|
|
61,241 |
|
(1) As
adjusted due to implementation of FSP APB 14-1 (ASC Topic 470). See
Notes 2 and 6.
See Notes
to Unaudited Condensed Consolidated Financial Statements.
Iconix
Brand Group, Inc. and Subsidiaries
Unaudited
Condensed Consolidated Statement of Stockholders' Equity
Nine
Months Ended September 30, 2009
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Other
|
|
|
|
|
|
Non-
|
|
|
|
|
|
|
Common Stock
|
|
|
Paid-in
|
|
|
Retained
|
|
|
Comprehensive
|
|
|
Treasury
|
|
|
Controlling
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Earnings
|
|
|
Loss
|
|
|
Stock
|
|
|
Interest
|
|
|
Total
|
|
Balance at January 1, 2009 - as adjusted (1)
|
|
|
58,156
|
|
|
$
|
58
|
|
|
$
|
533,235
|
|
|
$
|
120,358
|
|
|
$
|
(3,880
|
)
|
|
$
|
(5,682
|
)
|
|
$
|
-
|
|
|
$
|
644,089
|
|
Shares
issued on exercise of stock options
|
|
|
828
|
|
|
|
1
|
|
|
|
3,229
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,230
|
|
Shares
issued on vesting of restricted stock
|
|
|
166
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Shares
repurchased on the open market
|
|
|
(200
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,455
|
)
|
|
|
-
|
|
|
|
(1,455
|
)
|
Shares
issued for earn-out on acquisition
|
|
|
1,297
|
|
|
|
1
|
|
|
|
15,675
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
15,676
|
|
Issuance
of new stock
|
|
|
10,700
|
|
|
|
11
|
|
|
|
152,787
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
152,798
|
|
Issuance
of common stock related to joint venture
|
|
|
589
|
|
|
|
-
|
|
|
|
7,999
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
7,999
|
|
Shares
repurchased on vesting of restricted stock and exercise of stock
options
|
|
|
(28
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(243
|
)
|
|
|
-
|
|
|
|
(243
|
)
|
Tax
benefit of stock option exercises
|
|
|
-
|
|
|
|
-
|
|
|
|
3,941
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,941
|
|
Amortization
expense in connection with restricted stock
|
|
|
-
|
|
|
|
-
|
|
|
|
4,983
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,983
|
|
Amortization
expense in connection with convertible notes
|
|
|
-
|
|
|
|
-
|
|
|
|
56
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
56
|
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
55,394
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
55,394
|
|
Realization
of cash flow hedge, net of tax
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
110
|
|
|
|
-
|
|
|
|
-
|
|
|
|
110
|
|
Change
in fair value of securities, net of tax
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(462
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(462
|
)
|
Total
comprehensive income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
55,042
|
|
Increase
in non-controlling interest
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,168
|
|
|
|
1,168
|
|
Balance
at September 30, 2009
|
|
|
71,508
|
|
|
$
|
71
|
|
|
$
|
721,905
|
|
|
$
|
175,752
|
|
|
$
|
(4,232
|
)
|
|
$
|
(7,380
|
)
|
|
$
|
1,168
|
|
|
$
|
887,284
|
|
(1) As
adjusted due to implementation of FSP APB 14-1 (ASC Topic 470). See
Notes 2 and 6.
See Notes
to Unaudited Condensed Consolidated Financial Statements.
Iconix
Brand Group, Inc. and Subsidiaries
Unaudited
Condensed Consolidated Statements of Cash Flows
(in
thousands)
|
|
Nine Months Ended September
30,
|
|
|
|
2009
|
|
|
2008(1)
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
Net
income
|
|
$
|
55,394
|
|
|
|
47,575
|
|
Depreciation
of property and equipment
|
|
|
1,008
|
|
|
|
511
|
|
Amortization
of trademarks and other intangibles
|
|
|
5,361
|
|
|
|
5,485
|
|
Amortization
of deferred financing costs
|
|
|
1,738
|
|
|
|
1,316
|
|
Amortization
of convertible note discount
|
|
|
10,431
|
|
|
|
9,447
|
|
Stock-based
compensation expense
|
|
|
4,993
|
|
|
|
6,234
|
|
Expiration
of cash flow hedge
|
|
|
148
|
|
|
|
-
|
|
Change
in non-controlling interest
|
|
|
(897
|
)
|
|
|
-
|
|
Change
in allowance for bad debts
|
|
|
3,396
|
|
|
|
1,351
|
|
Equity
investments in joint ventures
|
|
|
(2,468
|
)
|
|
|
428
|
|
Gain
on sale of trademark
|
|
|
(3,723
|
)
|
|
|
(2,625
|
)
|
Deferred
income taxes
|
|
|
15,899
|
|
|
|
18,297
|
|
Changes
in operating assets and liabilities, net of business
acquisitions:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(10,523
|
)
|
|
|
(14,315
|
)
|
Prepaid
advertising and other
|
|
|
1,136
|
|
|
|
(10,876
|
)
|
Other
assets
|
|
|
(3,983
|
)
|
|
|
1,025
|
|
Deferred
revenue
|
|
|
4,884
|
|
|
|
(3,517
|
)
|
Accounts
payable and accrued expenses
|
|
|
(3,116
|
)
|
|
|
2,795
|
|
Other
long term liabilities
|
|
|
884
|
|
|
|
-
|
|
Net
cash provided by operating activities
|
|
|
80,562
|
|
|
|
63,131
|
|
Cash
flows used in investing activities:
|
|
|
|
|
|
|
|
|
Purchases
of property and equipment
|
|
|
(1,789
|
)
|
|
|
(4,245
|
)
|
Additions
to trademarks
|
|
|
(114
|
)
|
|
|
(546
|
)
|
Collection
on promissory note
|
|
|
-
|
|
|
|
1,000
|
|
Investment
in joint venture
|
|
|
(9,000
|
)
|
|
|
(2,000
|
)
|
Distributions
to equity partners
|
|
|
991
|
|
|
|
-
|
|
Payment
of accrued expenses related to acquisitions
|
|
|
(223
|
)
|
|
|
(1,293
|
)
|
Earn-out
payment on acquisition
|
|
|
(9,400
|
)
|
|
|
(4,453
|
)
|
Net
cash used in investing activities
|
|
|
(19,535
|
)
|
|
|
(11,537
|
)
|
Cash
flows used in financing activities:
|
|
|
|
|
|
|
|
|
Proceeds
from issuance of new stock, net of cost
|
|
|
152,787
|
|
|
|
-
|
|
Proceeds
from exercise of stock options and warrants
|
|
|
3,229
|
|
|
|
2,257
|
|
Shares
repurchased on vesting of restricted stock and exercise of stock
options
|
|
|
(243
|
)
|
|
|
(700
|
)
|
Shares
repurchased on the open market
|
|
|
(1,455
|
)
|
|
|
-
|
|
Payment
of long-term debt
|
|
|
(55,200
|
)
|
|
|
(30,754
|
)
|
Non-controlling
interest contribution
|
|
|
2,066
|
|
|
|
-
|
|
Excess
tax benefit from share-based payment arrangements
|
|
|
3,941
|
|
|
|
8,958
|
|
Restricted
cash - current
|
|
|
(6,502
|
)
|
|
|
3,919
|
|
Restricted
cash - non-current
|
|
|
-
|
|
|
|
(695
|
)
|
Net
cash provided by (used in) financing activities
|
|
|
98,623
|
|
|
|
(17,015
|
)
|
Net
(decrease) increase in cash and cash equivalents
|
|
|
159,650
|
|
|
|
34,579
|
|
Cash,
beginning of period
|
|
|
66,404
|
|
|
|
48,067
|
|
Cash,
end of period
|
|
$
|
226,054
|
|
|
|
82,646
|
|
Balance
of restricted cash - current
|
|
|
7,377
|
|
|
|
1,286
|
|
Total
cash including current restricted cash, end of period
|
|
$
|
233,431
|
|
|
|
83,932
|
|
(1) As
adjusted due to implementation of FSP APB 14-1 (ASC Topic 470). See
Notes 2 and 6.
Supplemental
disclosure of cash flow information:
|
|
Nine Month Ended September
30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Cash
paid during the period:
|
|
|
|
|
|
|
Income
taxes
|
|
$ |
8,023 |
|
|
$ |
5,325 |
|
Interest
|
|
$ |
15,645 |
|
|
$ |
22,811 |
|
Supplemental disclosures of non-cash
investing and financing activities:
|
|
Nine Months Ended September
30,
|
|
|
|
2009
|
|
|
2008
|
|
Acquisitions:
|
|
|
|
|
|
|
Common
stock issued
|
|
$ |
23,675 |
|
|
$ |
1,877 |
|
See Notes
to Unaudited Condensed Consolidated Financial Statements.
Iconix
Brand Group, Inc. and Subsidiaries
Notes to
Unaudited Condensed Consolidated Financial Statements
September
30, 2009
1.
Basis of Presentation
The
accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management of Iconix Brand Group, Inc.
(the "Company", “we”, “us”, or “our”), all adjustments (consisting primarily of
normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three months (“Current Quarter”) and
nine months (“Current Nine Months”) ended September 30, 2009 are not necessarily
indicative of the results that may be expected for a full fiscal
year.
Certain
prior period amounts have been reclassified to conform to the current period’s
presentation.
For
further information, refer to the consolidated financial statements and
footnotes thereto included in the Company's Annual Report on Form 10-K for the
year ended December 31, 2008 (“fiscal 2008”). Subsequent events were
evaluated through November 6, 2009, the date these financial statements were
issued.
2. Changes
in Accounting
In the
first quarter of 2009, the Company adopted the provisions of Financial
Accounting Standards Board Staff Position APB 14-1 “Accounting for Convertible
Debt Instruments That May Be Settled in Cash Upon Conversion” (“FSP APB
14-1”) (ASC Topic 470), which changed the accounting for convertible debt
instruments with cash settlement features. FSP APB 14-1 applies to the Company’s
previously issued 1.875% convertible senior subordinated notes (“Convertible
Notes”). In accordance with FSP APB 14-1, the Company recognized the liability
component of its Convertible Notes at fair value. The liability component is
recognized as the fair value of a similar instrument that does not have a
conversion feature at issuance. The equity component, which is the value of the
conversion feature at issuance, is recognized as the difference between the
proceeds from the issuance of the Convertible Notes and the fair value of the
liability component, after adjusting for the deferred tax impact. The
Convertible Notes were issued at a coupon rate of 1.875%, which was below that
of a similar instrument that does not have a conversion feature. The
Company recognizes an effective interest rate of 7.85% on the carrying amount of
the Convertible Notes. The effective rate is based on the rate for a
similar instrument that does not have a conversion feature. As such, the
valuation of the debt component, using the income approach, resulted in a debt
discount of $73.4 million at inception. The debt discount is amortized over the
expected life of the debt, which is also the stated life of the debt. See Note 6
for further discussion.
As a
result of applying FSP APB 14-1 retrospectively to all periods presented, the
Company recognized the following incremental effects on individual line items on
the consolidated balance sheet as of December 31, 2008:
(000’s omitted)
|
|
Before FSP
APB 14-1(ASC
Topic 470)
|
|
|
Adjustment
|
|
|
After FSP
APB 14-1(ASC
Topic 470)
|
|
Non-current
deferred income tax liabilities
|
|
$ |
99,604 |
|
|
$ |
18,865 |
|
|
$ |
118,469 |
|
Long-term
debt, less current maturities
|
|
|
594,664 |
|
|
|
(49,438 |
) |
|
|
545,226 |
|
Additional
paid-in-capital
|
|
|
491,936 |
|
|
|
41,299 |
|
|
|
533,235 |
|
Retained
earnings
|
|
|
131,094 |
|
|
|
(10,736 |
) |
|
|
120,358 |
|
The
impact of implementing FSP APB 14-1 for the three months ended September 30,
2008 (“Prior Year Quarter”) and nine months ended September 30, 2008 (“Prior
Year Nine Months”) has increased interest expense by approximately $2.9 million
and $8.6 million, respectively, and decreased the provision for income taxes by
approximately $1.0 million and $3.1 million, respectively, the net result of
which decreased net income by approximately $1.9 million and $5.4 million,
respectively, and decreased diluted earnings per share by approximately $0.03
and $0.09, respectively.
The
impact of implementing FSP APB 14-1 for the Current Quarter and the Current Nine
Months has increased interest expense by approximately $3.3 million and $9.5
million, respectively, and decreased the provision for income taxes by
approximately $1.2 million and $3.4 million, respectively, the net result of
which decreased net income by approximately $2.1 million and $6.1 million,
respectively, and decreased diluted earnings per share by approximately $0.03
and $0.09, respectively.
3. Investments
and Joint Ventures
Scion
LLC
Scion LLC
(“Scion”) is a brand management and licensing company formed by the Company with
Shawn “Jay-Z” Carter in March 2007 to buy, create and develop brands across a
spectrum of consumer product categories. On November 7, 2007,
Scion, through its wholly-owned subsidiary Artful Holdings LLC (“Artful
Holdings”), purchased Artful Dodger, an exclusive, high end urban apparel brand
for a purchase price of $15.0 million. Concurrent with the acquisition of Artful
Dodger, Artful Holdings entered into a license agreement covering all major
apparel categories for the United States. This license was
transitioned to a new licensee during the Current Quarter.
The brand
has also been licensed to wholesale partners and distributors in Canada and
Europe.
At
inception, the Company determined that it would consolidate Scion since,
under Financial Accounting Standards Board (“FASB”) Interpretations No. 46
“Consolidation of Variable Interest Entities – revised” (“FIN 46R”) (ASC Topic
810), the Company effectively holds a 100% equity interest and is the primary
beneficiary in the variable interest entity.
On March
12, 2009, the Company, through its investment in Scion, effectively
acquired a 16.6% interest in one of its licensees for $1. The Company has
determined that this entity is a variable interest entity as defined by FIN
46R. However, the Company is not the primary beneficiary; therefore,
the investment in this entity is accounted for under the cost method of
accounting. As part of the transaction, the Company and its Scion
partner each contributed approximately $2.1 million to Scion, which was
deposited as cash collateral under the terms of the entity’s financing
agreements. The total contributed cash of approximately $4.1 million,
which is owned by Scion, is included as short-term restricted cash in the
Company’s balance sheet.
In
December 2007, the FASB issued SFAS No. 160, “Non-controlling Interests in
Consolidated Financial Statements — an amendment of ARB No. 51” (“SFAS 160”)
(ASC Topic 810). SFAS 160 requires the recognition of a non-controlling interest
(formerly known as a “minority interest”) as equity in the consolidated
financial statements and separate from the parent’s equity. For the
Current Quarter and Current Nine Months, the amount of net income attributable
to the non-controlling interest is approximately $0.6 million and $0.9 million
and has been included in equity earnings on joint venture in the unaudited
condensed consolidated income statement. As a result, for the Current
Quarter and Current Nine Months, the impact of consolidating the joint venture
into the Company’s unaudited condensed consolidated statement of income
decreased net income by $0.6 million and $0.9 million,
respectively. The impact of consolidating the joint venture in the
Prior Year Quarter and the Prior Year Nine Months increased net income by $0.5
million and $0.5 million, respectively.
At
September 30, 2009, the impact of consolidating the joint venture on the
Company’s unaudited condensed consolidated balance sheet has increased
current assets by $4.3 million, non-current assets by $14.5 million and current
liabilities by $1.2 million. At December 31, 2008, the impact of
consolidating the joint venture on the Company’s consolidated balance sheet had
increased current assets by $3.5 million, non-current assets by $15.3 million
and current liabilities by $2.3 million.
As of
September 30, 2009 and December 31, 2008, the Company’s equity at risk in Scion
was approximately $22.7 million and $16.0 million, respectively. At September
30, 2009 and December 31, 2008, the carrying value of the consolidated assets
that are collateral for the variable interest entity’s obligations total $13.9
million and $14.7 million, respectively, which is comprised of the Artful Dodger
trademark. The assets of the Company are not available to the variable
interest entity's creditors.
Iconix
China
On
September 5, 2008, the Company and Novel Fashions Holdings Limited (“Novel”)
formed a joint venture (“Iconix China”) to develop and market the Company's
brands in the People’s Republic of China, Hong Kong, Macau and Taiwan (the
“China Territory”). Pursuant to the terms of this transaction, the Company
contributed to Iconix China substantially all rights to its brands in the China
Territory and committed to contribute $5.0 million, and Novel committed to
contribute $20 million. Upon closing of the transaction, the Company
contributed $2.0 million and Novel contributed $8.0 million. The
balance of the parties’ respective contributions are due in September
2009 and September 2010. As of September 30, 2009, the balance of the
amount that was due in September 2009 has not been paid as the joint venture
parties have determined that the joint venture is currently adequately
funded. The balance of the contributions due will continue to be
evaluated jointly by the Company and Novel, and will be funded as
necessary.
At
inception, the Company determined, in accordance with FIN 46R, based on the
corporate structure, voting rights and contributions of the Company and Novel,
that Iconix China is a variable interest entity and not subject to
consolidation, as, under FIN46R, the Company is not the primary beneficiary of
Iconix China. The Company has recorded its investment under the
equity method of accounting.
At
September 30, 2009, the Company’s maximum exposure for this joint venture was
$6.3 million. At December 31, 2008, the Company’s maximum exposure was $7.1
million.
At
September 30, 2009, Iconix China’s balance sheet included approximately $6.0
million in current assets, $22.9 million in total assets, $0.2 million in
current liabilities, and $0.2 million in total liabilities. At
December 31, 2008, Iconix China’s balance sheet included approximately $8.3
million in current assets, $25.1 million in total assets, $1.2 million in
current liabilities, and $1.2 million in total liabilities.
For the
Current Quarter, Iconix China’s statement of operations reflects $0.2 million in
revenue and approximately $0.8 million in operating expenses. For the
Current Nine Months, Iconix China’s statement of operations reflects that it had
approximately $0.2 million in revenue and approximately $1.7 million in
operating expenses. As a result, for the Current Quarter and Current
Nine Months, the Company recorded an equity loss of approximately $0.3 million
and $0.8 million, respectively, on its equity investment in the Iconix China
joint venture. For the Prior Year Quarter and the Prior Year Nine
Months, the Company recorded an equity loss of approximately $0.4 million on its
equity investment in the Iconix China joint venture.
Iconix
Latin America
In
December 2008, the Company contributed substantially all rights to its
brands in Mexico, Central America, South America, and the Caribbean (the “Latin
America Territory”) to Iconix Latin America LLC (“Iconix Latin America”), a then
newly formed subsidiary of the Company. On December 29, 2008, New
Brands America LLC (“New Brands”), an affiliate of the Falic Group, purchased a
50% interest in Iconix Latin America. .In consideration for its 50% interest in
Iconix Latin America, New Brands agreed to pay $6.0 million to the
Company. New Brands paid $1.0 million upon closing of this
transaction and has committed to pay an additional $5.0 million over the
30-month period following closing, of which $2.0 million, representing the
required payments, was paid during the Current Nine Months. As of
September 30, 2009, the balance owed to the Company under this obligation is
$4.0 million. The current portion of $2.5 million is included in the
unaudited condensed consolidated balance sheet in prepaid advertising and other
and the long term portion of $1.5 million is included in other assets –
non-current.
Based on
the corporate structure, voting rights and contributions of the Company and New
Brands, Iconix Latin America is not subject to consolidation. This
conclusion was based on the Company’s determination that the entity met the
criteria to be considered a “business,” and therefore was not subject to
consolidation due to the “business scope exception” of FIN 46R. As such, the
Company has recorded its investment under the equity method of
accounting.
At September 30, 2009, Iconix Latin America’s balance sheet included approximately
$1.3 million in current
assets, $1.3 million in
total assets, $0.1 million in current liabilities, and
$0.1 million in total
liabilities. For
the Current Quarter, Iconix Latin America’s statement of operations reflects that
it had approximately $0.4 million in revenue and approximately $0.1 million in operating
expenses. For the Current Nine Months, Iconix Latin America’s statement of operations reflects that
it had approximately
$1.2 million in revenue and approximately
$0.1 million in operating
expenses. As a result, during the Current Quarter and Current Nine
Months, the Company recorded equity earnings of approximately $0.2 million and $0.6 million, respectively, on
its equity investment in
the Iconix Latin
America joint venture,
representing the Company’s 50% equity interest in Iconix Latin America.
Ed
Hardy
On May 4,
2009, the Company acquired a 50% interest in Hardy Way LLC (“Hardy Way”), the
owner of the Ed Hardy brands and trademarks, for $17.0 million, comprised of
$9.0 million in cash and 588,688 shares of the Company’s common stock valued at
$8.0 million. In addition, the sellers of the 50% interest may be
entitled to receive an additional $1.0 million in shares of the Company’s common
stock pursuant to an earn-out based on royalties received by Hardy Way for the
year ending December 31, 2009.
Based on
the corporate structure, voting rights and contributions of the Company and
Hardy Way, Hardy Way is not subject to consolidation. This
conclusion was based on the Company’s determination that the entity met the
criteria to be considered a “business,” and therefore was not subject to
consolidation due to the “business scope exception” of FIN 46R. As such, the
Company has recorded its investment under the equity method of
accounting.
At
September 30, 2009, Hardy Way’s balance sheet included approximately $2.1
million in current assets, $2.1 million in total assets, $0.4 million in current
liabilities, and $0.4 million in total liabilities. For the Current
Quarter, Hardy Way’s statement of operations reflects that it had approximately
$4.3 million in revenue and approximately $0.2 million in operating
expenses. For the Current Nine Months, Hardy Way’s statement of
operations reflects that it had approximately $5.6 million in revenue and
approximately $0.3 million in operating expenses. As a result, during
the Current Quarter and Current Nine Months, the Company recorded equity
earnings of approximately $2.1 million and $2.7 million, respectively, on its
equity investment in the Hardy Way joint venture, representing the Company’s 50%
equity interest in Hardy Way.
4. Fair
Value Measurements
SFAS No.
157 “Fair Value Measurements” (“SFAS 157”) (ASC Topic 820), which the
Company adopted on January 1, 2008, establishes a framework for measuring fair
value and requires expanded disclosures about fair value measurement. While SFAS
157 does not require any new fair value measurements in its application to other
accounting pronouncements, it does emphasize that a fair value measurement
should be determined based on the assumptions that market participants would use
in pricing the asset or liability. As a basis for considering market participant
assumptions in fair value measurements, SFAS 157 established the following fair
value hierarchy that distinguishes between (1) market participant assumptions
developed based on market data obtained from sources independent of the
reporting entity (observable inputs) and (2) the reporting entity's own
assumptions about market participant assumptions developed based on the best
information available in the circumstances (unobservable inputs):
Level 1:
Observable inputs such as quoted prices for identical assets or liabilities in
active markets
Level 2:
Other inputs that are observable directly or indirectly, such as quoted prices
for similar assets or liabilities or market-corroborated inputs
Level 3:
Unobservable inputs for which there is little or no market data and which
requires the owner of the assets or liabilities to develop its own assumptions
about how market participants would price these assets or
liabilities
The
valuation techniques that may be used to measure fair value are as
follows:
(A)
Market approach - Uses prices and other relevant information generated by market
transactions involving identical or comparable assets or
liabilities
(B)
Income approach - Uses valuation techniques to convert future amounts to a
single present amount based on current market expectations about those future
amounts, including present value techniques, option-pricing models and excess
earnings method
(C) Cost
approach - Based on the amount that would currently be required to replace the
service capacity of an asset (replacement cost)
To
determine the fair value of certain financial instruments, the Company relies on
Level 2 inputs generated by market transactions of similar instruments where
available, and Level 3 inputs using an income approach when Level 1 and Level 2
inputs are not available. The Company’s assessment of the significance of a
particular input to the fair value measurement requires judgment and may affect
the valuation of financial assets and financial liabilities and their placement
within the fair value hierarchy. The following table summarizes the instruments
measured at fair value at September 30, 2009:
Carrying Amount as of
|
|
|
|
|
|
|
|
|
|
|
September 30, 2009
|
|
|
|
|
|
|
|
|
|
Valuation
|
(000's omitted)
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Technique
|
Marketable
Securities
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
6,801 |
|
(B)
|
Cash
Flow Hedge
|
|
$ |
- |
|
|
$ |
1 |
|
|
$ |
- |
|
(A)
|
Under
SFAS No. 159, “The Fair Value Option for Financial Assets and Financial
Liabilities” (“SFAS 159”) (ASC Topic 825), entities are permitted to choose
to measure many financial instruments and certain other items at fair
value. The Company did not elect the fair value measurement option
under SFAS 159 for any of its financial assets or liabilities.
In
February 2008, the FASB issued FASB Staff Position No. FAS 157-2, "Effective
Date of FASB Statement No. 157," (ASC Topic 820) which deferred the
effective date of adoption of this Staff Position to January 1, 2009 for all
nonfinancial assets and liabilities, except those that are recognized or
disclosed at fair value on a recurring basis (that is, at least annually).
The Company adopted the deferred provisions of SFAS 157 on January 1, 2009. The
adoption of these provisions did not have a material effect on the
Company’s unaudited condensed consolidated financial
statements.
Marketable
Securities
Marketable
securities, which are accounted for as available-for-sale, are stated at fair
value in accordance with SFAS No. 115, “Accounting for Certain Investments in
Debt and Equity Securities,” (“SFAS 115”) (ASC Topic 320)and consist of auction
rate securities (“ARS”). Temporary changes in fair market value are recorded as
other comprehensive income or loss, whereas other than temporary markdowns will
be realized through the Company’s income statement.
As of
September 30, 2009, the Company held ARS with a face value of $13.0 million and
a fair value of approximately $6.8 million. In December 2008, the
insurer of the ARS exercised its put option to replace the underlying securities
of the ARS with its preferred securities. Although the ARS had paid cash
dividends according to their stated terms, during the second quarter of 2009,
the Company received notice from the insurer that payment of cash dividends
would cease as of July 31, 2009 and would only be resumed if the board of
directors of the insurer declared such cash dividends to be payable at a later
date. Prior to the cessation of cash dividend payments, the Company
estimated the fair value of its ARS with a discounted cash flow model where the
Company used the expected rate of cash dividends to be received. As
the cash dividend payments have ceased, the Company has changed its methodology
for estimating the fair value of the ARS. Beginning June 30, 2009,
the Company estimated the fair value of its ARS using the present value of the
weighted average of several scenarios of recovery based on management’s
assessment of the probability of each scenario. The Company considered a
variety of factors in its model including: credit rating of the issuer and
insurer, comparable market data (if available), current macroeconomic market
conditions, quality of the underlying securities, and the probabilities of
several levels of recovery and reinstatement of the cash dividend
payments. As a result of its evaluation, during the Current Nine
Months the Company has recorded an unrealized pre-tax loss of approximately $0.7
million in accumulated other comprehensive loss as a reduction to stockholders’
equity to reflect a temporary decline in the fair value of the ARS; the
Company’s evaluation as of September 30, 2009 resulted in no impact to the
Current Quarter. The Company believes the decrease in fair value is
temporary due to general macroeconomic market conditions. Further,
the Company has the ability and intent to hold the ARS until an anticipated full
redemption. These funds will not be available to the Company until a successful
auction occurs or a buyer is found outside the auction process. As the ARS have
failed to auction and may not auction successfully in the near future, the
Company has classified its ARS as non-current. The Company continues to monitor
the auction rate securities market and considers its impact, if any, on the fair
value of its ARS. The following table summarizes the activity for the
period:
|
|
For the Three Months Ended
|
|
|
For the Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
Auction Rate Securities (000's omitted)
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Balance
at beginning of period
|
|
$ |
6,801 |
|
|
$ |
10,660 |
|
|
$ |
7,522 |
|
|
$ |
10,920 |
|
Additions
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Gains
(losses) reported in earnings
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Losses
reported in accumulated other comprehensive loss
|
|
|
- |
|
|
|
- |
|
|
|
(721 |
) |
|
|
(260 |
) |
Balance
at end of period
|
|
$ |
6,801 |
|
|
$ |
10,660 |
|
|
$ |
6,801 |
|
|
$ |
10,660 |
|
Cash
Flow Hedge
On July
26, 2007, the Company purchased a hedge instrument from Lehman Brothers Special
Financing Inc. (“LBSF”) to mitigate the cash flow risk of rising interest rates
on the Term Loan Facility (see Note 6 for a description of this credit
agreement). This hedge instrument caps the Company’s exposure to rising interest
rates at 6.00% for LIBOR for 50% of the forecasted outstanding balance of the
Term Loan Facility (“Interest Rate Cap”). Based on management’s assessment, the
Interest Rate Cap qualifies for hedge accounting under SFAS 133 “Accounting for
Derivative Instruments and Hedging Transactions” (ASC Topic
815). On a quarterly basis, the value of the hedge is adjusted to
reflect its current fair value, with any adjustment flowing through other
comprehensive income. The fair value of this instrument is obtained by comparing
the characteristics of this cash flow hedge with similarly traded instruments,
and is therefore classified as Level 2 in the fair value hierarchy. At September
30, 2009, the fair value of the Interest Rate Cap was approximately $1,000. On
October 3, 2008, LBSF filed a petition for bankruptcy protection under Chapter
11 of the United States Bankruptcy Code. The Company currently believes that the
LBSF bankruptcy filing and its potential impact on LBSF will not have a material
adverse effect on the Company’s financial position, results of operations or
cash flows.
Financial
Instruments
At
September 30, 2009 and December 31, 2008, the fair values of cash and cash
equivalents, receivables and accounts payable approximated their carrying values
due to the short-term nature of these instruments. The fair value of the note
receivable from New Brands (see Note 3) approximates its $4.0 million carrying
value; the fair value of the note receivable due from the purchasers of the
Canadian trademark for Joe Boxer approximates its $5.2 million carrying
value. The estimated fair values of other financial instruments
subject to fair value disclosures, determined based on broker quotes or quoted
market prices or rates for the same or similar instruments, and the related
carrying amounts are as follows:
(000's omitted)
|
|
September 30, 2009
(unaudited)
|
|
|
December 31, 2008
|
|
|
|
Carrying Amount
|
|
|
Fair Value
|
|
|
Carrying Amount
|
|
|
Fair Value
|
|
Long-term
debt, including current portion
|
|
$ |
574,300 |
|
|
$ |
576,611 |
|
|
$ |
618,589 |
|
|
$ |
534,098 |
|
Financial
instruments expose the Company to counterparty credit risk for nonperformance
and to market risk for changes in interest. The Company manages exposure
to counterparty credit risk through specific minimum credit standards,
diversification of counterparties and procedures to monitor the amount of credit
exposure. The Company’s financial instrument counterparties are substantial
investment or commercial banks with significant experience with such
instruments.
Non-Financial
Assets and Liabilities
On
January 1, 2009, the Company adopted the provisions of SFAS 157 with respect to
its non-financial assets and liabilities requiring non-recurring adjustments to
fair value. The Company uses level 3 inputs and the income method to measure the
fair value of its non-financial assets and liabilities. The Company
had no adjustments in the Current Nine Months. The Company has goodwill,
which is tested for impairment at least annually, as required by SFAS 142 (ASC
Topic 350). Further, in accordance with SFAS 142, the Company’s
indefinite-lived trademarks are tested for impairment at least annually, on an
individual basis as separate single units of accounting. Similarly,
consistent with SFAS 144 “Accounting for the Impairment or Disposal of
Long-Lived Assets” (ASC Topic 360), the Company assesses whether or not
there is impairment of the Company’s definite-lived trademarks. See
Note 5.
5. Trademarks
and Other Intangibles, net
Trademarks
and other intangibles, net consist of the following:
|
|
|
|
September 30, 2009
(unaudited)
|
|
|
December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
|
|
Gross
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
Lives in
|
|
Carrying
|
|
|
Accumulated
|
|
|
Carrying
|
|
|
Accumulated
|
|
(000's omitted)
|
|
Years
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indefinite
life trademarks
|
|
indefinite
|
|
$ |
1,034,449 |
|
|
$ |
9,498 |
|
|
$ |
1,035,382 |
|
|
$ |
9,498 |
|
Definite
life trademarks
|
|
10-15
|
|
|
19,570 |
|
|
|
3,331 |
|
|
|
19,561 |
|
|
|
2,252 |
|
Non-compete
agreements
|
|
2-15
|
|
|
10,075 |
|
|
|
7,232 |
|
|
|
10,075 |
|
|
|
6,098 |
|
Licensing
agreements
|
|
1-9
|
|
|
22,193 |
|
|
|
12,198 |
|
|
|
22,193 |
|
|
|
9,136 |
|
Domain
names
|
|
5
|
|
|
570 |
|
|
|
422 |
|
|
|
570 |
|
|
|
337 |
|
|
|
|
|
$ |
1,086,857 |
|
|
$ |
32,681 |
|
|
$ |
1,087,781 |
|
|
$ |
27,321 |
|
On
September 30, 2009, the Company entered into a perpetual license and
purchase option agreement with a licensee for its Joe Boxer trademark covering
the Canadian territory in exchange for approximately $5.2 million. As
a result of this transaction, the balance of the Company’s indefinite life
trademarks was reduced by approximately $1.0 million, representing the cost
basis for the Joe Boxer trademark for the Canadian territory. In
addition, goodwill of approximately $0.4 million was written off in connection
with this transaction.
Amortization
expense for intangible assets was $1.8 million for both the Current Quarter and
the Prior Year Quarter, and $5.4 million and $5.5 million for the Current Nine
Months and the Prior Year Nine Months, respectively. The trademarks of Candies,
Bongo, Joe Boxer, Rampage, Mudd, London Fog, Mossimo, Ocean Pacific, Danskin,
Rocawear, Cannon, Royal Velvet, Fieldcrest, Charisma, Starter and Waverly have
been determined to have an indefinite useful life and accordingly, consistent
with SFAS 142, no amortization will be recorded in the Company's consolidated
income statements. Instead, each of these intangible assets will be tested for
impairment at least annually on an individual basis as separate single units of
accounting, with any related impairment charge recorded to the statement of
operations at the time of determining such impairment. Similarly,
consistent with SFAS 144 “Accounting for the Impairment or Disposal of
Long-Lived Assets”, there was no impairment of the definite-lived
trademarks.
6. Debt
Arrangements
The
Company's debt is comprised of the following:
|
|
September 30,
|
|
|
|
|
(000’s omitted)
|
|
2009
(unaudited)
|
|
|
2008
|
|
Convertible Senior
Subordinated Notes (Note 2)
|
|
$ |
244,026 |
|
|
$ |
233,999 |
|
Term
Loan Facility
|
|
|
217,484 |
|
|
|
255,307 |
|
Asset-Backed
Notes
|
|
|
100,604 |
|
|
|
117,097 |
|
Sweet
Note (Note 7)
|
|
|
12,186 |
|
|
|
12,186 |
|
Total
Debt
|
|
$ |
574,300 |
|
|
$ |
618,589 |
|
Convertible
Senior Subordinated Notes
On June
20, 2007, the Company completed the issuance of $287.5 million principal amount
of the Company's Convertible Notes in a private offering to certain
institutional investors. The net proceeds received by the Company from the
offering were approximately $281.1 million.
The
Convertible Notes bear interest at an annual rate of 1.875%, payable
semi-annually in arrears on June 30 and December 31 of each year, beginning
December 31, 2007. However, the Company recognizes an effective interest rate of
7.85% on the carrying amount of the Convertible Notes. The effective
rate is based on the rate for a similar instrument that does not have a
conversion feature. The Convertible Notes will be convertible into
cash and, if applicable, shares of the Company's common stock based on a
conversion rate of 36.2845 shares of the Company's common stock, subject to
customary adjustments, per $1,000 principal amount of the Convertible Notes
(which is equal to an initial conversion price of approximately $27.56 per
share) only under the following circumstances: (1) during any fiscal quarter
beginning after September 30, 2007 (and only during such fiscal quarter), if the
closing price of the Company's common stock for at least 20 trading days in the
30 consecutive trading days ending on the last trading day of the immediately
preceding fiscal quarter is more than 130% of the conversion price per share,
which is $1,000 divided by the then applicable conversion rate; (2) during the
five business day period immediately following any five consecutive trading day
period in which the trading price per $1,000 principal amount of the Convertible
Notes for each day of that period was less than 98% of the product of (a) the
closing price of the Company's common stock for each day in that period and (b)
the conversion rate per $1,000 principal amount of the Convertible Notes; (3) if
specified distributions to holders of the Company's common stock are made, as
set forth in the indenture governing the Convertible Notes (“Indenture”); (4) if
a “change of control” or other “fundamental change,” each as defined in the
Indenture, occurs; (5) if the Company chooses to redeem the Convertible Notes
upon the occurrence of a “specified accounting change,” as defined in the
Indenture; and (6) during the last month prior to maturity of the Convertible
Notes. If the holders of the Convertible Notes exercise the conversion
provisions under the circumstances set forth, the Company will need to remit the
lower of the principal balance of the Convertible Notes or their conversion
value to the holders in cash. As such, the Company would be required to classify
the entire amount outstanding of the Convertible Notes as a current liability in
the following quarter. The evaluation of the classification of amounts
outstanding associated with the Convertible Notes will occur every
quarter.
Upon
conversion, a holder will receive an amount in cash equal to the lesser of (a)
the principal amount of the Convertible Note or (b) the conversion value,
determined in the manner set forth in the Indenture. If the conversion value
exceeds the principal amount of the Convertible Note on the conversion date, the
Company will also deliver, at its election, cash or the Company's common stock
or a combination of cash and the Company's common stock for the conversion value
in excess of the principal amount. In the event of a change of control or other
fundamental change, the holders of the Convertible Notes may require the Company
to purchase all or a portion of their Convertible Notes at a purchase price
equal to 100% of the principal amount of the Convertible Notes, plus accrued and
unpaid interest, if any. If a specified accounting change occurs, the Company
may, at its option, redeem the Convertible Notes in whole for cash, at a price
equal to 102% of the principal amount of the Convertible Notes, plus accrued and
unpaid interest, if any. Holders of the Convertible Notes who convert their
Convertible Notes in connection with a fundamental change or in connection with
a redemption upon the occurrence of a specified accounting change may be
entitled to a make-whole premium in the form of an increase in the conversion
rate.
Pursuant
to Emerging Issues Task Force (“EITF”) 90-19, “Convertible Bonds with Issuer
Option to Settle for Cash upon Conversion” (“EITF 90-19”), EITF 00-19,
“Accounting for Derivative Financial Instruments Indexed to, and Potentially
Settled in, a Company's Own Stock” (“EITF 00-19”), and EITF 01-6, “The Meaning
of Indexed to a Company's Own Stock” (“EITF 01-6”) (ASC Topic 815), the
Convertible Notes are accounted for as convertible debt in the accompanying
unaudited condensed consolidated balance sheet and the embedded conversion
option in the Convertible Notes has not been accounted for as a separate
derivative. For a discussion of the effects of the Convertible Notes and the
Convertible Note Hedge and Sold Warrants discussed below on earnings per share,
see Note 8.
In June
2008, the FASB ratified EITF Issue No. 07-5, “Determining Whether an Instrument
(or an Embedded Feature) Is Indexed to an Entity’s Own Stock” (“EITF
07-5”) (ASC Topic 815). EITF 07-5 provides that an entity should use a two
step approach to evaluate whether an equity-linked financial instrument (or
embedded feature) is indexed to its own stock, including evaluating the
instrument’s contingent exercise and settlement provisions. It also clarifies on
the impact of foreign currency denominated strike prices and market-based
employee stock option valuation instruments on the evaluation. EITF 07-5 is
effective for fiscal years beginning after December 15, 2008. The
Company has evaluated the impact of EITF 07-5, and has determined it
has no impact on the Company’s results of operations and financial position in
the Current Nine Months, and will have no impact on the Company’s results of
operations and financial position in future fiscal periods.
At
September 30, 2009 and December 31, 2008, the amount of the Convertible Notes
accounted for as a liability under FSP APB 14-1 was $244.0 million and $234.0
million, and is reflected on the unaudited condensed consolidated balance sheets
as follows:
|
|
September 30,
|
|
|
December 31,
|
|
(000’s omitted)
|
|
2009
(unaudited)
|
|
|
2008
|
|
Equity
component carrying amount
|
|
$ |
41,309 |
|
|
$ |
41,309 |
|
Unamortized
discount
|
|
|
43,474 |
|
|
|
53,501 |
|
Net
debt carrying amount
|
|
|
244,026 |
|
|
|
233,999 |
|
For the
Current Quarter and the Prior Year Quarter, the Company recorded additional
non-cash interest expense of $3.3 million and $2.9 million, respectively,
representing the difference between the stated interest rate on the Convertible
Notes and the rate for a similar instrument that does not have a conversion
feature. For the Current Nine Months and the Prior Year Nine Months,
the Company recorded additional non-cash interest expense of approximately $9.5
million and approximately $8.6 million, respectively.
For both
the Current Quarter and the Prior Year Quarter, contractual interest expense
relating to the Convertible Notes was approximately $1.3 million. For
both the Current Nine Months and the Prior Year Nine Months, contractual
interest expense relating to the Convertible Notes was approximately $4.0
million.
The
Convertible Notes do not provide for any financial covenants.
In
connection with the sale of the Convertible Notes, the Company entered into
hedges for the Convertible Notes (“Convertible Note Hedges”) with respect to its
common stock with two entities, one of which was Lehman Brothers OTC Derivatives
Inc. (“Lehman OTC” and together with the other counterparty, the
“Counterparties”). Pursuant to the agreements governing these Convertible Note
Hedges, the Company purchased call options (the “Purchased Call Options”) from
the Counterparties covering up to approximately 10.4 million shares of the
Company's common stock of which 40% were purchased from Lehman OTC. These
Convertible Note Hedges are designed to offset the Company's exposure to
potential dilution upon conversion of the Convertible Notes in the event that
the market value per share of the Company's common stock at the time of exercise
is greater than the strike price of the Purchased Call Options (which strike
price corresponds to the initial conversion price of the Convertible Notes and
is simultaneously subject to certain customary adjustments). On June 20, 2007,
the Company paid an aggregate amount of approximately $76.3 million of the
proceeds from the sale of the Convertible Notes for the Purchased Call Options,
of which $26.7 million was included in the balance of deferred income tax assets
at June 30, 2007 and is being recognized over the term of the Convertible Notes.
As of September 30, 2009, the balance of deferred income tax assets related to
this transaction was $14.8 million.
The
Company also entered into separate warrant transactions with the Counterparties
whereby the Company, pursuant to the agreements governing these warrant
transactions, sold to the Counterparties warrants (the “Sold Warrants”) to
acquire up to 3.6 million shares of the Company's common stock of which 40% were
sold to Lehman OTC, at a strike price of $42.40 per share of the Company's
common stock. The Sold Warrants will become exercisable on September 28, 2012
and will expire by the end of 2012. The Company received aggregate proceeds of
approximately $37.5 million from the sale of the Sold Warrants on June 20,
2007.
Pursuant
to Emerging Issues Task Force (EITF) Issue No. 00-19 “Accounting for Derivative
Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own
Stock,” (EITF 00-19), and EITF Issue No. 01-06, “The Meaning of Indexed to a
Company’s Own Stock” (EITF 01-06), the Convertible Note Hedge and the proceeds
received from the issuance of the Sold Warrants were recorded as a charge and an
increase, respectively, in additional paid-in capital in stockholders’ equity as
separate equity transactions. As a result of these transactions, the Company
recorded a net reduction to additional paid-in-capital of $12.1 million in June
2007.
The
Company has evaluated the impact of adopting EITF 07-5 as it relates to the
Sold Warrants, and has determined it has no impact on the Company’s results
of operations and financial position in the Current Nine Months, and will have
no impact on the Company’s results of operations and financial position in
future fiscal periods.
As the
Convertible Note Hedge transactions and the warrant transactions were separate
transactions entered into by the Company with the Counterparties, they are not
part of the terms of the Convertible Notes and will not affect the holders'
rights under the Convertible Notes. In addition, holders of the Convertible
Notes will not have any rights with respect to the Purchased Call Options or the
Sold Warrants.
If the
market value per share of the Company's common stock at the time of conversion
of the Convertible Notes is above the strike price of the Purchased Call
Options, the Purchased Call Options entitle the Company to receive from the
Counterparties net shares of the Company's common stock, cash or a combination
of shares of the Company's common stock and cash, depending on the consideration
paid on the underlying Convertible Notes, based on the excess of the then
current market price of the Company's common stock over the strike price of the
Purchased Call Options. Additionally, if the market price of the Company's
common stock at the time of exercise of the Sold Warrants exceeds the strike
price of the Sold Warrants, the Company will owe the Counterparties net shares
of the Company's common stock or cash, not offset by the Purchased Call Options,
in an amount based on the excess of the then current market price of the
Company's common stock over the strike price of the Sold Warrants.
These
transactions will generally have the effect of increasing the conversion price
of the Convertible Notes to $42.40 per share of the Company's common stock,
representing a 100% percent premium based on the last reported sale price of the
Company’s common stock of $21.20 per share on June 14, 2007.
On
September 15, 2008 and October 3, 2008, respectively, Lehman Brothers Holdings
Inc. (“Lehman Holdings”) and its subsidiary, Lehman OTC, filed for protection
under Chapter 11 of the United States Bankruptcy Code in the United States
Bankruptcy Court in the Southern District of New York (“Bankruptcy Court”). On
September 17, 2009, the Company filed proofs of claim with the Bankruptcy Court
relating to the Lehman OTC Convertible Note Hedges. The Company will
continue to monitor the bankruptcy filings of Lehman Holdings and Lehman OTC
with respect to such claims. The Company currently believes that the
bankruptcy filings and their potential impact on these entities will not have a
material adverse effect on the Company’s financial position, results of
operations or cash flows. The terms of the Convertible Notes and the rights of
the holders of the Convertible Notes are not affected in any way by the
bankruptcy filings of Lehman Holdings or Lehman OTC.
Term
Loan Facility
In
connection with the acquisition of the Rocawear brand, in March 2007, the
Company entered into a $212.5 million credit agreement with Lehman Brothers
Inc., as lead arranger and bookrunner, and Lehman Commercial Paper Inc.
(“LCPI”), as syndication agent and administrative agent (the “Credit Agreement”
or “Term Loan Facility”). At the time, the Company pledged to LCPI, for the
benefit of the lenders under the Term Loan Facility (the “Lenders”), 100% of the
capital stock owned by the Company in its subsidiaries, OP Holdings and
Management Corporation, a Delaware corporation (“OPHM”), and Studio Holdings and
Management Corporation, a Delaware corporation (“SHM”). The Company's
obligations under the Credit Agreement are guaranteed by each of OPHM and SHM,
as well as by two of its other subsidiaries, OP Holdings LLC, a Delaware limited
liability company (“OP Holdings”), and Studio IP Holdings LLC, a Delaware
limited liability company ("Studio IP Holdings").
On
October 3, 2007, in connection with the acquisition of Official-Pillowtex LLC, a
Delaware limited liability company (“Official-Pillowtex”), with the proceeds of
the Convertible Notes, the Company pledged to LCPI, for the benefit of the
Lenders, 100% of the capital stock owned by the Company in Mossimo, Inc., a
Delaware corporation (“MI”), and Pillowtex Holdings and Management Corporation,
a Delaware corporation (“PHM”), each of which guaranteed the Company’s
obligations under the Credit Agreement. Simultaneously with the acquisition of
Official-Pillowtex, each of Mossimo Holdings LLC, a Delaware limited
liability company (“Mossimo Holdings”), and Official-Pillowtex guaranteed the
Company’s obligations under the Credit Agreement. On September 10,
2008, PHM was converted into a Delaware limited liability company, Pillowtex
Holdings and Management LLC (“PHMLLC”), and the Company’s membership interest in
PHMLLC was pledged to LCPI in place of the capital stock of PHM.
On
December 17, 2007, in connection with the acquisition of the Starter brand, the
Company borrowed an additional $63.2 million pursuant to the Term Loan Facility
(the “Additional Borrowing”). The net proceeds received by the Company from the
Additional Borrowing were $60 million.
As of
September 30, 2009, the Company may borrow an additional $36.8 million under the
terms of the Term Loan Facility.
The
guarantees under the Term Loan Facility are secured by a pledge to LCPI, for the
benefit of the Lenders, of, among other things, the Ocean Pacific/OP, Danskin,
Rocawear, Mossimo, Cannon, Royal Velvet, Fieldcrest, Charisma, Starter and
Waverly trademarks and related intellectual property assets, license agreements
and proceeds therefrom. Amounts outstanding under the Term Loan Facility bear
interest, at the Company’s option, at the Eurodollar rate or the prime rate,
plus an applicable margin of 2.25% or 1.25%, as the case may be, per annum. The
Credit Agreement provides that the Company is required to repay the outstanding
term loan in equal quarterly installments in annual aggregate amounts equal to
1.00% of the aggregate principal amount of the loans outstanding, subject to
adjustment for prepayments, in addition to an annual payment equal to 50% of the
excess cash flow from the subsidiaries subject to the Term Loan Facility, as
described in the Credit Agreement, with any remaining unpaid principal balance
to be due on April 30, 2013 (the “Loan Maturity Date”). Upon completion of the
Convertible Notes offering, the Loan Maturity Date was accelerated to January 2,
2012. The Term Loan Facility can be prepaid, without penalty, at any time. On
March 11, 2008, the Company paid to LCPI, for the benefit of the Lenders, $15.6
million, representing 50% of the excess cash flow from the subsidiaries subject
to the Term Loan Facility for the year ended December 31, 2007. As a result of
such payment, the Company is no longer required to pay the quarterly
installments described above. The Term Loan Facility requires the Company to
repay the principal amount of the term loan outstanding in an amount equal to
50% of the excess cash flow of the subsidiaries subject to the Term Loan
Facility for the most recently completed fiscal year. On March 13, 2009, the
Company paid to LCPI, for the benefit of the Lenders, $38.7 million,
representing 50% of the excess cash flow from the subsidiaries subject to the
Term Loan Facility for the year ended December 31, 2008. As of
September 30, 2009, $35.4 million has been classified as current portion of
long-term debt, which represents 50% of the excess cash flow for the Current
Nine Months of the subsidiaries subject to the Term Loan
Facility. The aggregate amount of 50% of the excess cash flow for all
four quarters in 2009 will be paid during the first quarter of
2010. For the Current Quarter and the Current Nine Months, the
effective interest rate of the Term Loan Facility was 2.60% and 3.45%,
respectively. At September 30, 2009, the balance of the Term Loan
Facility was $217.5 million. As of September 30, 2009, the Company was in
compliance with all material covenants set forth in the Credit Agreement. The
$272.5 million in proceeds from the Term Loan Facility were used by the Company
as follows: $204.0 million was used to pay the cash portion of the initial
consideration for the acquisition of the Rocawear brand; $2.1 million was used
to pay the costs associated with the Rocawear acquisition; $60 million was used
to pay the consideration for the acquisition of the Starter brand; and $3.9
million was used to pay costs associated with the Term Loan Facility. The costs
of $3.9 million relating to the Term Loan Facility have been deferred and are
being amortized over the life of the loan, using the effective interest method.
As of September 30, 2009, the subsidiaries subject to the Term Loan Facility
were Studio IP Holdings, SHM, OP Holdings, OPHM, Mossimo Holdings,
MI, Official-Pillowtex and PHMLLC (collectively, the “Term Loan
Facility Subsidiaries”). As of September 30, 2009, the Term Loan Facility
Subsidiaries, directly or indirectly, owned the following trademarks, excluding
certain territories covered by the Iconix China and Iconix Latin America joint
ventures (see Note 3): Danskin, Rocawear, Starter, Ocean Pacific/OP, Mossimo,
Cannon, Royal Velvet, Fieldcrest, Charisma and Waverly.
On July
26, 2007, the Company purchased a hedge instrument to mitigate the cash flow
risk of rising interest rates on the Term Loan Facility. See Note 4 for
further information.
Asset-Backed
Notes
The
financing for certain of the Company's acquisitions has been accomplished
through private placements by its subsidiary, IP Holdings LLC ("IP
Holdings") of asset-backed notes ("Asset-Backed Notes") secured
by intellectual property assets (trade names, trademarks, license agreements and
payments and proceeds with respect thereto relating to the Candie’s, Bongo, Joe
Boxer, Rampage, Mudd and London Fog brands) of IP Holdings. At September 30,
2009, the balance of the Asset-Backed Notes was $100.6 million, $23.7 million of
which is included in the current portion of long-term debt on the unaudited
condensed consolidated balance sheet.
Cash on
hand in the bank account of IP Holdings is restricted at any point in time up to
the amount of the next debt principal and interest payment required under the
Asset-Backed Notes. Accordingly, $7.4 million and $0.9 million as of September
30, 2009 and December 31, 2008, respectively, are included as restricted cash
within the Company's current assets. Further, in connection with IP Holdings'
issuance of Asset-Backed Notes, a reserve account has been established and the
funds on deposit in such account will be applied to the final principal payment
with respect to the Asset-Backed Notes. Accordingly, as of September 30, 2009
and December 31, 2008, $15.9 million has been classified as non-current and
disclosed as restricted cash within other assets on the Company's balance
sheets.
Interest
rates and terms on the outstanding principal amount of the Asset-Backed Notes as
of September 30, 2009 are as follows: $34.5 million principal amount bears
interest at a fixed interest rate of 8.45% with a six year term, $15.3 million
principal amount bears interest at a fixed rate of 8.12% with a six year term,
and $50.8 million principal amount bears interest at a fixed rate of 8.99% with
a six and a half year term. The Asset-Backed Notes have no financial covenants
by which the Company or its subsidiaries need comply. The aggregate principal
amount of the Asset-Backed Notes will be fully paid by February 22,
2013.
Neither
the Company nor any of its subsidiaries (other than IP Holdings) is obligated to
make any payment with respect to the Asset-Backed Notes, and the assets of the
Company and its subsidiaries (other than IP Holdings) are not available to IP
Holdings' creditors. The assets of IP Holdings are not available to the
creditors of the Company or its subsidiaries (other than IP
Holdings).
Sweet
Note
On April
23, 2002, the Company acquired the remaining 50% interest in Unzipped (see Note
9) from Sweet Sportswear, LLC (“Sweet”) for a purchase price comprised of
3,000,000 shares of its common stock and $11.0 million in debt, which was
evidenced by the Company’s issuance of the 8% Senior Subordinated Note due in
2012 (“Sweet Note”). Prior to August 5, 2004, Unzipped was managed by Sweet
pursuant to the Management Agreement (as defined in Note 9), which obligated
Sweet to manage the operations of Unzipped in return for, commencing in the
fiscal year ended January 31, 2003 (“fiscal 2003”), an annual management fee
based upon certain specified percentages of net income achieved by Unzipped
during the three- year term of the agreement. In addition, Sweet guaranteed that
the net income, as defined in the agreement, of Unzipped would be no less than
$1.7 million for each year during the term, commencing with fiscal 2003. In the
event that the guarantee was not met for a particular year, Sweet was obligated
under the Management Agreement to pay the Company the difference between the
actual net income of Unzipped, as defined, for such year and the guaranteed $1.7
million. That payment, referred to as the shortfall payment, could be offset
against the amounts due under the Sweet Note at the option of either the Company
or Sweet. As a result of such offsets, the balance of the Sweet Note was reduced
by the Company to $3.1 million as of December 31, 2006 and $3.0 million as of
December 31, 2005 and was reflected in Long- term debt. This note bears
interest at the rate of 8% per year and matures in April 2012.
In
November 2007, the Company received a signed judgment related to the Sweet
Sportswear/Unzipped litigation. See Note 11.
The
judgment stated that the Sweet Note (originally $11.0 million when issued by the
Company upon the acquisition of Unzipped from Sweet in 2002) should total
approximately $12.2 million as of December 31, 2007. The recorded balance of the
Sweet Note, prior to any adjustments related to the judgment was approximately
$3.2 million. The Company increased the Sweet Note by approximately $6.2 million
and recorded the expense as an expense related to specific litigation. The
Company further increased the Sweet Note by approximately $2.8 million to record
the related interest and included the charge in interest expense. As of
September 30, 2009, the Sweet Note is approximately $12.2 million and included
in the current portion of long-term debt.
In
addition, in November 2007 the Company was awarded a judgment of approximately
$12.2 million for claims made by it against Hubert Guez and Apparel Distribution
Services, Inc. As a result, the Company recorded a receivable of approximately
$12.2 million and recorded the benefit in special charges during the year ended
December 31, 2007. This receivable is included in other assets - non-current and
bears interest, which was accrued for during the Current Quarter and the Prior
Year Quarter, at the rate of 8% per year.
Debt
Maturities
As of
September 30, 2009, the Company’s debt maturities on a calendar year basis are
as follows:
(000’s omitted)
|
|
Total
|
|
|
October 1
through
December 31,
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
Convertible
Notes1
|
|
$
|
244,026
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
244,026
|
|
|
$
|
-
|
|
Term
Loan Facility
|
|
|
217,484
|
|
|
|
-
|
|
|
|
35,354
|
|
|
|
-
|
|
|
|
182,130
|
|
|
|
-
|
|
Asset-Backed
Notes
|
|
|
100,604
|
|
|
|
5,738
|
|
|
|
24,216
|
|
|
|
26,380
|
|
|
|
33,468
|
|
|
|
10,802
|
|
Sweet
Note
|
|
|
12,186
|
|
|
|
12,186
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total
Debt
|
|
$
|
574,300
|
|
|
$
|
17,924
|
|
|
|
59,570
|
|
|
|
26,380
|
|
|
|
459,624
|
|
|
|
10,802
|
|
1 reflects
the net debt carrying amount of the Convertible Notes on the unaudited condensed
consolidated balance sheet as of September 30, 2009, in accordance with FSP APB
14-1. The principal amount owed to the holders of the Convertible
Notes is $287.5 million.
7.
Stockholders’ Equity
Public
Offering
On June
9, 2009, the Company completed a public offering of common stock pursuant to a
registration statement that had been declared effective by the Securities and
Exchange Commission. All 10,700,000 shares of common stock offered by
the Company in the final prospectus were sold at $15.00 per
share. Net proceeds to the Company from the offering amounted to
approximately $152.8 million.
2009
Equity Incentive Plan
On August
13, 2009, the Company's stockholders approved the Company's 2009 Equity
Incentive Plan ("2009 Plan”). The 2009 Plan authorizes the granting of common
stock options or other stock-based awards covering up to 3,000,000 shares of the
Company’s common stock. All employees, directors, consultants and
advisors of the Company, including those of the Company's subsidiaries, are
eligible to be granted Non Qualified Stock Options and other stock-based awards
under the 2009 Plan, and employees are also eligible to be granted Incentive
Stock Options under the 2009 Plan. No new awards may be granted under the Plan
after August 13, 2019.
Stock
Options
The
Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
The fair
value for these options and warrants was estimated at the date of grant using a
Black-Scholes option-pricing model with the following weighted-average
assumptions:
Expected
Volatility
|
|
|
30
- 50 |
% |
Expected
Dividend Yield
|
|
|
0 |
% |
Expected
Life (Term)
|
|
3 -
7 years
|
|
Risk-Free
Interest Rate
|
|
|
3.00 - 4.75 |
% |
The
Company has estimated its forfeiture rate at 0%. The options
that the Company granted under its plans expire at various times,
either five, seven or ten years from the date of grant, depending on the
particular grant.
Summaries
of the Company's stock options, warrants and performance related options
activity, and related information for the Current Nine Months are as
follows:
Options
|
|
|
|
|
Weighted-Average
|
|
|
|
Options
|
|
|
Exercise Price
|
|
|
|
|
|
|
|
|
Outstanding
January 1, 2009
|
|
|
3,895,138 |
|
|
$ |
4.29 |
|
Granted
|
|
|
20,000 |
|
|
|
15.35 |
|
Canceled
|
|
|
(8,000 |
) |
|
|
16.96 |
|
Exercised
|
|
|
(828,059 |
) |
|
|
3.84 |
|
Expired/Forfeited
|
|
|
- |
|
|
|
- |
|
Outstanding
September 30, 2009
|
|
|
3,079,079 |
|
|
$ |
5.00 |
|
Exercisable
at September 30, 2009
|
|
|
3,074,079 |
|
|
$ |
4.99 |
|
Warrants
|
|
|
|
|
Weighted-Average
|
|
|
|
Warrants
|
|
|
Exercise Price
|
|
|
|
|
|
|
|
|
Outstanding
January 1, 2009
|
|
|
286,900 |
|
|
$ |
16.99 |
|
Granted
|
|
|
- |
|
|
|
- |
|
Canceled/Forfeited
|
|
|
- |
|
|
|
- |
|
Exercised
|
|
|
- |
|
|
|
- |
|
Expired/Forfeited
|
|
|
- |
|
|
|
- |
|
Outstanding
September 30, 2009
|
|
|
286,900 |
|
|
$ |
16.99 |
|
Exercisable
at September 30, 2009
|
|
|
286,900 |
|
|
|
16.99 |
|
All
warrants issued in connection with acquisitions are recorded at fair market
value using the Black Scholes model and are recorded as part of purchase
accounting. Certain warrants are exercised using the cashless
method.
The
Company values other warrants issued to non-employees at the commitment date at
the fair market value of the instruments issued, a measure which is more readily
available than the fair market value of services rendered, using the Black
Scholes model. The fair market value of the instruments issued is expensed over
the vesting period.
Restricted
stock
Compensation
cost for restricted stock is measured as the excess, if any, of the quoted
market price of the Company’s stock at the date the common stock is issued over
the amount the employee must pay to acquire the stock (which is generally zero).
The compensation cost, net of projected forfeitures, estimated at 0%, is
recognized over the period between the issue date and the date any restrictions
lapse, with compensation cost for grants with a graded vesting schedule
recognized on a straight-line basis over the requisite service period for each
separately vesting portion of the award as if the award was, in substance,
multiple awards. The restrictions do not affect voting and dividend
rights.
The
following tables summarize information about unvested restricted stock
transactions:
|
|
|
|
|
Weighted-Average
|
|
|
|
Shares
|
|
|
Grant Date Fair Value
|
|
|
|
|
|
|
|
|
Non-vested,
January 1, 2009
|
|
|
1,513,983 |
|
|
$ |
18.96 |
|
Granted
|
|
|
659,771 |
|
|
|
16.05 |
|
Vested
|
|
|
(79,486 |
) |
|
|
13.01 |
|
Canceled
|
|
|
(44,369 |
) |
|
|
18.66 |
|
Non-vested,
September 30, 2009
|
|
|
2,049,899 |
|
|
$ |
18.26 |
|
Stock
based compensation expense related to restricted stock grants for the Current
Quarter and Prior Year Quarter was $1.7 million and $1.9 million, respectively,
and for the Current Nine Months and the Prior Year Nine Months was
approximately $5.0 million and $6.1 million, respectively. An additional amount
of $20.4 million is expected to be expensed evenly over a period of
approximately 1-4 years. During the Current Nine Months and Prior
Year Nine Months, the Company withheld shares of its common stock valued at $0.2
million and $0.7 million, respectively, in connection with net share settlement
of restricted stock grants and option exercises.
Stockholder Rights
Plan
In
January 2000, the Company's Board of Directors adopted a stockholder rights
plan. Under the plan, each stockholder of common stock received a dividend
of one right for each share of the Company's outstanding common stock, entitling
the holder to purchase one thousandth of a share of Series A Junior
Participating Preferred Stock, par value, $0.01 per share of the Company, at an
initial exercise price of $6.00. The rights become exercisable and will trade
separately from the common stock ten business days after any person or group
acquires 15% or more of the common stock, or ten business days after any person
or group announces a tender offer for 15% or more of the outstanding common
stock.
Stock
Repurchase Program
On
November 3, 2008, the Company announced that its Board of Directors had
authorized the repurchase of up to $75 million of the Company's common stock
over a period of approximately three years. This authorization replaces any
prior plan or authorization. The current plan does not obligate the Company to
repurchase any specific number of shares and may be suspended at any time at
management's discretion. During the Current Nine Months, the Company
repurchased 200,000 shares for approximately $1.5 million. No shares
were repurchased by the Company during the Prior Year Nine Months.
Securities
Available for Issuance
As of
September 30, 2009, 68,940 common shares were available for issuance of
additional awards under the Company’s 2006 Equity Incentive Plan, and 2,371,243
common shares were available for issuance of additional awards under the
Company’s 2009 Equity Incentive Plan.
8. Earnings
Per Share
Basic
earnings per share includes no dilution and is computed by dividing net income
available to common stockholders by the weighted average number of common shares
outstanding for the period. Diluted earnings per share reflect, in periods in
which they have a dilutive effect, the effect of restricted stock-based awards
and common shares issuable upon exercise of stock options and warrants. The
difference between basic and diluted weighted-average common shares results from
the assumption that all dilutive stock options outstanding were exercised and
all Convertible Notes have been converted into common stock.
For the
Current Quarter, of the total potentially dilutive shares related to
restricted stock-based awards, stock options and warrants, 2.1 million were
anti-dilutive, compared to 2.1 million for the Prior Year
Quarter. For the Current Nine Months, of the total potentially
dilutive shares related to restricted stock-based awards, stock options and
warrants, 2.7 million were anti-dilutive, compared to 1.9 million for the Prior
Year Nine Months.
For the
Current Quarter, of the performance related restricted stock-based
awards issued in connection with the Company’s employment agreement
with its chairman, chief executive officer and president, 1.5 million of such
awards (which is included in the total 2.1 million anti-dilutive stock-based
awards described above) were anti-dilutive and therefore not included in this
calculation.
For the Current Nine Months, of the performance related restricted
stock-based awards issued in connection with the Company’s employment agreement
with its chairman, chief executive officer and president, 2.0 million of such
awards (which is included in the total 2.7 million anti-dilutive stock-based
awards described above) were anti-dilutive and therefore not included in this
calculation.
Warrants
issued in connection with the Company’s Convertible Notes financing were
anti-dilutive and therefore not included in this calculation. Portions of the
Convertible Notes that would be subject to conversion to common stock were
anti-dilutive as of September 30, 2009 and therefore not included in this
calculation.
A
reconciliation of shares used in calculating basic and diluted earnings per
share follows:
|
|
For the Three Months Ended
|
|
|
For the Nine Months Ended
|
|
(000's omitted)
|
|
September 30,
(unaudited)
|
|
|
September 30,
(unaudited)
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Basic
|
|
|
71,336
|
|
|
|
57,841
|
|
|
|
63,850
|
|
|
|
57,662
|
|
Effect
of exercise of stock options
|
|
|
2,436
|
|
|
|
3,106
|
|
|
|
2,246
|
|
|
|
3,426
|
|
Effect
of contingent common stock issuance
|
|
|
-
|
|
|
|
144
|
|
|
|
48
|
|
|
|
144
|
|
Effect
of assumed vesting of restricted stock
|
|
|
298
|
|
|
|
-
|
|
|
|
282
|
|
|
|
9
|
|
Diluted
|
|
|
74,070
|
|
|
|
61,091
|
|
|
|
66,426
|
|
|
|
61,241
|
|
9.
Unzipped Apparel, LLC (“Unzipped”)
On
October 7, 1998, the Company formed Unzipped with its then joint venture
partner, Sweet (as previously defined in Note 6), the purpose of which was to
market and distribute apparel under the Bongo label. The Company and Sweet each
had a 50% interest in Unzipped. Pursuant to the terms of the joint venture, the
Company licensed the Bongo trademark to Unzipped for use in the design,
manufacture and sale of certain designated apparel products.
On April 23, 2002, the
Company acquired the remaining 50% interest in Unzipped from Sweet for a
purchase price of three million shares of the Company's common stock and $11
million in debt evidenced by the Sweet Note. See Note 6. In connection with the
acquisition of Unzipped, the Company filed a registration statement with the
Securities and Exchange Commission ("SEC") for the three million shares of the
Company's common stock issued to Sweet, which was declared effective by the SEC
on July 29, 2003.
Prior to
August 5, 2004, Unzipped was managed by Sweet pursuant to a management agreement
(the “Management Agreement”). Unzipped also had a supply agreement with Azteca
Productions International, Inc. ("Azteca") and a distribution agreement with
Apparel Distribution Services, LLC ("ADS"). All of these entities are owned or
controlled by Hubert Guez.
On August
5, 2004, Unzipped terminated the Management Agreement with Sweet, the supply
agreement with Azteca and the distribution agreement with ADS and commenced a
lawsuit against Sweet, Azteca, ADS and Hubert Guez. See Note 10.
There
were no transactions with these related parties during the Current Quarter or
the Prior Year Quarter.
In
November 2007, a judgment was entered in the Unzipped litigation, pursuant to
which the $3.1 million in accounts payable to ADS/Azteca (previously shown as
“accounts payable - subject to litigation”) was eliminated and recorded in the
income statement as a benefit to the “expenses related to specific
litigation”.
As a
result of the judgment, in the year ended December 31, 2007 (“fiscal 2007”) the
balance of the $11.0 million principal amount Sweet Note, originally issued by
the Company upon the acquisition of Unzipped from Sweet in 2002, including
interest, was increased from approximately $3.2 million to approximately $12.2
million as of December 31, 2007. Of this increase, approximately $6.2 million
was attributed to the principal of the Sweet Note and the expense was recorded
as an expense related to specific litigation. The remaining $2.8 million of the
increase was attributed to related interest on the Sweet Note and recorded as
interest expense. As of September 30, 2009, the full $12.2 million current
balance of the Sweet Note and $1.7 million of accrued interest are included in
the current portion of long term debt and accounts payable and accrued expenses,
respectively.
In
addition, in November 2007 the Company was awarded a judgment of approximately
$12.2 million for claims made by it against Hubert Guez and ADS. As a result,
the Company recorded a receivable of approximately $12.2 million and recorded
the benefit in special charges for fiscal 2007. As of September 30, 2009, this
receivable and the associated accrued interest of $1.7 million are included in
other assets - non-current.
10. Expenses
Related to Specific Litigation
Expenses
related to specific litigation consist of legal expenses and costs related to
the Unzipped litigation. For the Prior Year Quarter, the Company recorded
expenses related to specific litigation of $0.3 million; there were no such
expenses during the Current Quarter. For the Current Nine Months and
Prior Year Nine Months, the Company recorded expenses related to specific
litigation of $0.1 million and $0.7 million, respectively. See Note 9 and
Note 11for information relating to Unzipped.
11. Commitments
and Contingencies
Sweet
Sportswear/Unzipped litigation
In August
2004, the Company commenced a lawsuit in the Superior Court of California, Los
Angeles County, against Unzipped’s former manager, supplier and distributor
Sweet, Azteca and ADS and Hubert Guez, a principal of these entities and former
member of the Company’s board of directors (collectively referred to as the Guez
defendants) alleging numerous causes of action, including fraud, breach of
contract, breach of fiduciary duty and trademark infringement. Sweet, Azteca and
ADS filed counterclaims against the Company claiming damages resulting from,
among other things, a variety of alleged contractual breaches.
In April
2007, a jury returned a verdict of approximately $45 million in the Company’s
favor on every claim that the Company pursued, and against the Guez defendants
on every counterclaim they asserted. Additionally, the jury found that all of
the Guez defendants acted with “malice, fraud or oppression” with regard to each
of the tort claims asserted by the Company and, in addition, awarded the Company
$5 million in punitive damages against Guez personally.
In November 2007, the
Court, among other things, reduced the total damages awarded against the Guez
defendants by approximately 50% and reduced the amount of punitive damages
assessed against Guez to $4 million. The Court also entered judgments against
Guez in the amount of approximately $11 million and ADS in the amount of
approximately $1.3 million. It also entered judgment against all of the Guez
defendants on every counterclaim that they pursued in the litigation, including
ADS’s and Azteca’s unsuccessful efforts to recover against Unzipped any account
balances claimed to be owed, totaling approximately $3.5 million and Sweet’s
efforts to accelerate the principal balance of a note and other fees totaling
approximately $15 million (these orders are collectively referred to as the
“judgments”). The Court also issued an order confirming an additional aggregate
of approximately $6.8 million of the jury’s verdicts against Sweet and Azteca
(referred to as the “confirmed verdicts”) but declined to enter judgment against
these entities since it had ordered a new trial with regard to certain of the
jury’s other damage awards against these entities.
In May
2008, the Court awarded the Company statutory litigation costs (jointly and
severally against the Guez defendants) of approximately $650,000. In October
2008, the Court granted the Company’s petition for attorneys’ fees with respect
to approximately $7.7 million of fees (mostly against Sweet and Azteca), but did
not award any non-statutory (contractual) costs. In December 2008, the earlier
judgments were amended to add the cost award against all the Guez defendants, as
well as $100,000 of attorneys’ fees awarded against ADS.
In sum,
the trial court entered judgment in the Company’s favor of over $12 million and
has confirmed, but not reduced to judgment, additional amounts owed of
approximately $15 million, which consists of the confirmed verdicts plus the fee
and cost awards against Sweet and Azteca. All of these amounts accrue interest
at an annual rate of 10%. All parties have filed notices of appeal. The
Company’s notice of appeal related to, among other things, those parts of the
jury’s verdicts vacated by the Court. In December 2008, the Company also filed a
notice of appeal from the Court’s orders relating to attorneys’ fees awarded
against ADS, statutory costs and non-statutory costs. The Guez defendants have
posted an aggregate of approximately $51.7 million in undertakings with the
Court to secure the judgments. The Company is unable to pursue collection
of the monetary portions of the judgments during the pendency of the
appeals.
The
Company intends to vigorously pursue its appeals, and vigorously defend against
the Guez defendants’ appeal.
Normal
Course litigation
From time
to time, the Company is also made a party to litigation incurred in the normal
course of business. While any litigation has an element of uncertainty, the
Company believes that the final outcome of any of these routine matters will not
have a material effect on the Company’s financial position or future
liquidity.
12. Related
Party Transactions
Kenneth
Cole Productions, Inc.
On May 1,
2003, the Company granted Kenneth Cole Productions, Inc. the exclusive worldwide
license to design, manufacture, sell, distribute and market footwear under its
Bongo brand. The chairman of Kenneth Cole Productions is Kenneth Cole, who is
the brother of Neil Cole, the Company's Chief Executive Officer and President.
During the Current Nine Months and Prior Year Nine Months, the Company earned
$0.3 million and $0.9 million, respectively, in royalties from Kenneth Cole
Productions. This license will terminate effective December 31,
2009.
Candie’s
Foundation
The
Candie's Foundation, a charitable foundation founded by Neil Cole for the
purpose of raising national awareness about the consequences of teenage
pregnancy, owed the Company $0.7 million and $0.5 million at September 30, 2009
and December 31, 2008, respectively. The Candies Foundation has a commitment
from a licensee of the Company to receive a contribution of approximately $0.7
million in February 2010. The Candie's Foundation intends to pay-off
the entire borrowing from the Company during 2009, although additional advances
will be made as and when necessary.
Travel
The
Company recorded expenses of approximately $253,000 and $303,000 for
Current Nine Months and Prior Year Nine Months, respectively, for the hire and
use of aircraft solely for business purposes owned by a company in which
the Company’s chairman, chief executive officer and president is the sole owner.
Management believes that all transactions were made on terms and conditions no
less favorable than those available in the marketplace from unrelated
parties.
Consulting
Services
During
the Current Quarter, the Company engaged a consulting and advisory firm, a
principal of which is a director of the Company. During the Current
Quarter, the Company recorded an expense of $10,000 for these
services.
13. Segment
and Geographic Data
The
Company has one reportable segment, licensing and commission revenue generated
from its brands. The geographic regions consist of the United States and Other
(which principally represents Canada, Japan and Europe). Long lived assets are
substantially all located in the United States. Revenues attributed to each
region are based on the location in which licensees are located.
The net
revenues by type of license and information by geographic region are as
follows:
|
|
For
the three months ended
|
|
|
For
the nine months ended
|
|
(000's
omitted)
|
|
September
30,
(unaudited)
|
|
|
September
30,
(unaudited)
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Revenues
by product line:
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct-to-retail
license
|
|
$
|
29,908
|
|
|
$
|
11,455
|
|
|
$
|
83,934
|
|
|
$
|
41,229
|
|
Wholesale
license
|
|
|
24,850
|
|
|
|
40,247
|
|
|
|
76,888
|
|
|
|
116,658
|
|
Other
|
|
|
4,609
|
|
|
|
3,433
|
|
|
|
5,454
|
|
|
|
4,615
|
|
|
|
$
|
59,367
|
|
|
$
|
55,135
|
|
|
$
|
166,276
|
|
|
$
|
162,502
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
by geographic region:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United
States
|
|
$
|
53,199
|
|
|
$
|
48,930
|
|
|
$
|
154,914
|
|
|
$
|
149,722
|
|
Other
|
|
|
6,168
|
|
|
|
6,205
|
|
|
|
11,362
|
|
|
|
12,780
|
|
|
|
$
|
59,367
|
|
|
$
|
55,135
|
|
|
$
|
166,276
|
|
|
$
|
162,502
|
|
14. Subsequent
Events
On
October 30, 2009, the Company consummated, through a newly formed subsidiary
(the “Unlimited joint venture”), a transaction with the sellers of the Ecko
portfolio of brands, including Ecko Unlimited, Marc Ecko, the Rhino logo, and
Zoo York (the “Ecko Assets”), pursuant to which the sellers sold and/or
contributed the Ecko Assets to the Unlimited joint venture in exchange for a 49%
membership interest in the Unlimited joint venture and $63.5 million in cash
which had been contributed to the Unlimited joint venture by the
Company. As a result of this transaction, the Company owns 51% of the
membership interest in the Unlimited joint venture. In addition, the
October joint venture borrowed $90.0 million from a third party to repay certain
indebtedness of the sellers. There is no recourse to the Company under the
promissory note evidencing the $90.0 million loan.
Item 2. Management’s Discussion and Analysis
of Financial Condition and Results of Operations
Safe Harbor Statement under the
Private Securities Litigation Reform Act of 1995. The statements that are
not historical facts contained in this report are forward looking statements
that involve a number of known and unknown risks, uncertainties and other
factors, all of which are difficult or impossible to predict and many of which
are beyond our control, which may cause our actual results, performance or
achievements to be materially different from any future results, performance or
achievements expressed or implied by such forward looking statements. These
risks are detailed our Form 10-K for the fiscal year ended December 31, 2008 and
other SEC filings. The words “believe”, “anticipate,” “expect”, “confident”,
“project”, provide “guidance” and similar expressions identify forward-looking
statements. Readers are cautioned not to place undue reliance on these forward
looking statements, which speak only as of the date the statement was
made.
Executive Summary. We are a
brand management company engaged in licensing, marketing and providing trend
direction for a diversified and growing consumer brand portfolio. Our brands are
sold across every major segment of retail distribution, from luxury to mass. As
of September 30, 2009, we owned 17 iconic consumer brands: Candie’s, Bongo,
Badgley Mischka, Joe Boxer, Rampage, Mudd, London Fog, Mossimo, Ocean
Pacific/OP, Danskin, Rocawear, Cannon, Royal Velvet, Fieldcrest, Charisma,
Starter, and Waverly. In addition, Scion LLC, a joint venture in which we
have a 50% investment, owns the Artful Dodger brand. On May 4, 2009 we acquired
a 50% interest in Hardy Way LLC (“Hardy Way”), the owner of the Ed Hardy brands
and trademark. On October 30, 2009, we consummated, through the
Unlimited joint venture, a transaction with the sellers of the Ecko Assets,
pursuant to which the sellers sold and/or contributed the Ecko Assets to the
Unlimited joint venture in exchange for a 49% membership interest in the
Unlimited joint venture and $63.5 million in cash which had been contributed to
the Unlimited joint venture by us. As a result of this
transaction, we own 51% of the membership interest in the Unlimited joint
venture. In addition, the Unlimited joint venture borrowed $90.0
million from a third party to repay certain indebtedness of the sellers. There
is no recourse to us under the promissory note evidencing the $90.0 million
loan. We license our brands worldwide through over 200
direct-to-retail and wholesale licenses for use across a wide range of product
categories, including footwear, fashion accessories, sportswear, home products
and décor, and beauty and fragrance. Our business model allows us to focus on
our core competencies of marketing and managing brands without many of the risks
and investment requirements associated with a more traditional operating
company. Our licensing agreements with leading retail and wholesale partners
throughout the world provide us with a predictable stream of guaranteed minimum
royalties.
Our
growth strategy is focused on increasing licensing revenue from our existing
portfolio of brands through adding new product categories, expanding the retail
penetration of our existing brands and optimizing the sales of our licensees. We
will also seek to continue the international expansion of its brands by
partnering with leading licensees and/or joint venture partners throughout the
world. Finally, we believe we will continue to acquire iconic consumer brands
with applicability to a wide range of merchandise categories and an ability to
further diversify our brand portfolio.
We have
focused and continue to focus on cost-saving measures. These measures
have included a reduction of the total number of total full-time employees in
the Current Nine Months, as well as a continued review of all operating
expenses.
Results
of Operations
The
three months ended September 30, 2009 compared to the three months ended
September 30, 2008
Licensing and Other Revenue. Licensing and
other revenue for the Current Quarter increased to $59.4 million from $55.1
million for the Prior Year Quarter. During the Current Quarter, we
recorded a gain of approximately $3.7 million on our transaction regarding our
Joe Boxer trademark for the territory of Canada. In the Prior Year
Quarter, we recorded a gain of approximately $2.6 million related to our Iconix
China joint venture transaction. Excluding these two transactions,
the primary drivers of the $3.2 million net increase in revenue from the Prior
Year Quarter to the Current Quarter are as follows: an aggregate increase of
approximately $11.4 million from our three direct-to-retail brands with Walmart
Stores, Inc., herein referred to as Walmart, as well as a slight increase in
revenue attributable to our Waverly brand (which was acquired in December 2008)
for which there was no comparable revenue in the Prior Year
Quarter. These increases were partially offset by an aggregate
decrease of approximately $8.2 million, the primary drivers of which are as
follows: the transition of our women’s category for our Rocawear brand to a new
licensee; the transition of our Mudd brand to a direct-to-retail license with
Kohl’s Department Stores, Inc., herein referred to as Kohl’s, which was only
first launched in August 2009; and, a decrease in revenue for our Charisma brand
related to its transition to a license with the Costco Wholesale
Corporation, herein referred to as Costco.
Operating Expenses.
Consolidated selling, general and administrative, herein referred to as
SG&A, expenses totaled $21.0 million in the Current Quarter compared to
$18.6 million in the Prior Year Quarter. The increase of $2.4 million was driven
by the following factors: (i) bad debt expense for the for the Current Quarter
included approximately $3.0 million related to collectability issues with
the former women’s category license for the Rocawear brand, as compared to Prior
Year Quarter, representing an increase of approximately $1.8 million in bad debt
expense from the Prior Year Quarter; and (ii) an increase of approximately $1.2
million in advertising and marketing related expenses. These
increases were offset by a variety of cost saving initiatives, including: (i) a
decrease of approximately $0.8 million in payroll costs related to a reduction
in employee headcount; and (ii) a decrease of approximately $0.6 million in
professional fees.
For the
Prior Year Quarter, our expenses related to specific litigation included an
expense for professional fees $0.3 million, relating to litigation involving
Unzipped. There were no such expenses incurred in the Current
Quarter. See Notes 9 and 10 of Notes to Consolidated Financial
Statements for further information on our litigation involving
Unzipped.
Operating Income. Operating
income for the Current Quarter increased to $38.3 million, or approximately 65%
of total revenue, compared to $36.3 million or approximately 66% of total
revenue in the Prior Year Quarter. The slight decrease in our operating margin
percentage is primarily the result of the increase SG&A, offset by the
increase in revenue, for the reasons detailed above.
Other Expenses - Net – Other
expenses - net decreased by approximately $4.5 million in the Current Quarter to
$6.5 million, compared to other expenses - net of $10.9 million for the Prior
Year Quarter. This decrease was primarily due to an aggregate
increase of approximately $3.0 million in our equity earnings on joint ventures
due to earnings from our Iconix Latin America joint venture (created in December
2008) and our Hardy Way joint venture (created in May 2009), for which there was
no comparable earnings in the Prior Year Quarter. Further, interest
expense related to our variable rate debt decreased from approximately $3.3
million in the Prior Year Quarter to $1.4 million in the Current Quarter as a
result of both a lower debt balance as well as a decrease in our effective
interest rate to 2.60% in the Current Quarter from 5.06% in the Prior Year
Quarter. This was offset by a slight decrease of approximately $0.2
million in interest income related to a decrease in interest rates on money
invested by us during the Current Quarter.
Provision for Income Taxes.
The effective income tax rate for the Current Quarter is approximately 35.8%
resulting in the $11.4 million income tax expense, as compared to an effective
income tax rate of 35.2% in the Prior Year Quarter which resulted in the $8.9
million income tax expense.
Net Income. Our net income
was $20.5 million in the Current Quarter, compared to net income of $16.4
million in the Prior Year Quarter, as a result of the factors discussed
above.
The
nine months ended September 30, 2009 compared to the nine months ended September
30, 2008
Licensing and Other Revenue. Licensing and
other revenue for the Current Nine Months increased to $166.3 million from
$162.5 million for the Prior Year Nine Months. During the Current
Nine Months, we recorded a gain of approximately $3.7 million on our transaction
regarding our Joe Boxer trademark in Canada. In the Prior Year Nine
Months, we recorded a gain of approximately $2.6 million related to our Iconix
China joint venture transaction. Excluding these two transactions,
the primary drivers of the $2.7 million net increase in revenue from the Prior
Year Nine Months to the Current Nine Months are as follows: an aggregate
increase of approximately $20.8 million from our three direct-to-retail brands
with Walmart, as well as an increase in revenue attributable to our Waverly
brand (which was acquired in December 2008) for which there was no comparable
revenue in the Prior Year Nine Months. These increases were partially offset by
an aggregate decrease of approximately $18.2 million, the primary driver of which was the transition of our Mudd brand to a
direct-to-retail license with Kohl’s, which was only first launched in
August 2009. The remaining portion of the decrease was mainly attributable to four other
brands: the transition of our women’s category for our Rocawear brand to a
new licensee, a decrease in revenue from our Charisma
brand related to its transition to a license with Costco, a decrease in revenue from our Cannon
brand which is currently transitioning to a direct-to-retail license with Kmart Corporation, and a slight
decrease in revenue from our Rampage brand.
Operating Expenses.
Consolidated SG&A expenses totaled $54.7 million in the Current Nine Months
compared to $55.6 million in the Prior Year Nine Months. The decrease of $0.9
million was driven by a variety of cost saving initiatives, including: (i) a
decrease of approximately $2.6 million in payroll costs related to a reduction
in employee headcount, which was partially offset by the cost of severance for
terminated employees; (ii) a decrease of approximately $1.9 million in
professional fees; and (iii) a decrease of approximately $0.6 million in
employee travel related expenses. These decreases were partially
offset by an increase of approximately $2.2 million in bad debt expense
primarily due to the transition of the women’s category license for our Rocawear
brand, as well as an increase of $1.8 million in advertising and marketing
related expenses.
For the
Current Nine Months and the Prior Year Nine Months, our expenses related to
specific litigation included an expense for professional fees of approximately
$0.1 million and $0.7 million, respectively, relating to litigation involving
Unzipped. See Notes 9 and 10 of Notes to Unaudited Condensed Consolidated
Financial Statements.
Operating Income. Operating
income for the Current Nine Months increased to $111.5 million, or approximately
67% of total revenue, compared to approximately $106.2 million or approximately
65% of total revenue in the Prior Year Nine Months. The increase in our
operating margin percentage is primarily the result of the increase in revenue,
as well as the decrease in SG&A, for the reasons detailed
above.
Other Expenses - Net – Other
expenses - net decreased by approximately $7.7 million in the Current Nine
Months to $25.0 million, compared to other expenses - net of $32.8 million for
the Prior Year Nine Months. This decrease was primarily due to an
aggregate increase of approximately $3.8 million in our equity earnings on joint
ventures due to earnings from our Iconix Latin America joint venture (created in
December 2008) and our Hardy Way joint venture (created in May 2009), for which
there was no comparable earnings in the Prior Year Nine
Months. Further, interest expense related to our variable rate debt
decreased from approximately $11.5 million in the Prior Year Quarter to
approximately $5.7 million in the Current Quarter as a result of both a lower
average debt balance as well as a decrease in our effective interest rate to
3.45% in the Current Nine Months from 5.84% in the Prior Year Nine
Months. This was offset by a decrease of approximately $1.4 million
in interest income related to a decrease in interest rates on money invested by
us during the Current Nine Months.
Provision for Income Taxes.
The effective income tax rate for the Current Nine Months is approximately 35.9%
resulting in the $31.1 million income tax expense, as compared to an effective
income tax rate of 35.3% in the Prior Year Nine Months which resulted in the
$25.9 million income tax expense.
Net Income. Our
net income was $55.4 million in the Current Nine Months, compared to net income
of $47.6 million in the Prior Year Nine Months, as a result of the factors
discussed above.
Liquidity
and Capital Resources
Liquidity
Our
principal capital requirements have been to fund acquisitions, working capital
needs, and to a lesser extent, capital expenditures. We have historically relied
on internally generated funds to finance our operations and our primary source
of capital needs for acquisition has been the issuance of debt and equity
securities. At September 30, 2009 and December 31, 2008, our cash totaled $233.4
million and $67.3 million, respectively, including short-term restricted cash of
$7.4 million and $0.9 million, respectively. Of the $7.4 million of
short-term restricted cash at September 30, 2009, $4.1 million is in a cash
collateral account in our name (see Note 3 of Notes to Unaudited Condensed
Consolidated Financial Statements).
The Term
Loan Facility requires us to repay the principal amount of the term loan
outstanding in an amount equal to 50% of the excess cash flow of the
subsidiaries subject to the term loan facility for the most recently completed
fiscal year. During the Current Nine Months, we paid $38.7
million of the principal balance of the Term Loan Facility, which represents 50%
of the excess cash flow of the subsidiaries subject to the Term Loan Facility
for the year ended December 31, 2008.
On May 4,
2009, we acquired a 50% interest in Hardy Way, the owner of the Ed Hardy brand
and trademarks, for $17.0 million, including $9.0 million in cash, which was
funded entirely from cash on hand.
On
October 30, 2009, we consummated, through the Unlimited joint venture, a
transaction with the sellers of the Ecko Assets, pursuant to which the sellers
sold and/or contributed the Ecko Assets to the Unlimited joint venture in
exchange for a 49% membership interest in the Unlimited joint venture and $63.5
million in cash which had been contributed to the Unlimited joint venture by
us. As a result of this transaction, we own 51% of the
membership interest in the Unlimited joint venture. In addition, the
Unlimited joint venture borrowed $90.0 million from a third party to repay
certain indebtedness of the sellers. There is no recourse to us under the
promissory note evidencing the $90.0 million loan.
We
believe that cash from future operations as well as currently available cash
will be sufficient to satisfy our anticipated working capital requirements for
the foreseeable future. We intend to continue financing future brand
acquisitions through a combination of cash from operations, bank financing and
the issuance of additional equity and/or debt securities. See Note 6 of Notes to
Unaudited Condensed Consolidated Financial Statements for a description of
certain prior financings consummated by us.
As of
September 30, 2009, our marketable securities consist of auction rate
securities, herein referred to as ARS. Beginning in the third quarter of 2007,
$13.0 million of our ARS had failed auctions due to sell orders exceeding buy
orders. In December 2008, the insurer of the ARS exercised its put option to
replace the underlying securities of the auction rate securities with its
preferred securities. Further, although these ARS had paid dividends according
to their stated terms, the Company had received notice from the insurer that the
payment of cash dividends will cease after July 31, 2009 and will only be
resumed if the board of directors of the insurer declares such cash dividends to
be payable at a later date. These funds will not be available to us
until a successful auction occurs or a buyer is found outside the auction
process. Prior to the cessation of cash dividend payments, we estimated the
fair value of our ARS with a discounted cash flow model where we used the
expected rate of cash dividends to be received. As the cash dividend
payments have ceased, we changed our methodology for estimating the fair value
of the ARS. Beginning June 30, 2009, we estimated the fair value of
our ARS using the present value of the weighted average of several scenarios of
recovery based on our assessment of the probability of each scenario. We
considered a variety of factors in our analysis including: credit rating of the
issuer and insurer, comparable market data (if available), current macroeconomic
market conditions, quality of the underlying securities, and the probabilities
of several levels of recovery and reinstatement of cash dividend
payments. As the aggregate result of our quarterly evaluations, $13.0
million of our ARS have been written down to $6.8 million as a cumulative
unrealized pre-tax loss of $6.2 million to reflect a temporary decrease in fair
value. As the write-down of $6.2 million has been identified as a temporary
decrease in fair value, the write-down has not impacted our earnings and is
reflected as an other comprehensive loss in the stockholders’ equity section of
our unaudited condensed consolidated balance sheet. We believe
this decrease in fair value is temporary due to general macroeconomic market
conditions,. Further, we have the ability and intent to hold the ARS
until an anticipated full redemption. We believe our cash flow from future
operations and our existing cash on hand will be sufficient to satisfy our
anticipated working capital requirements for the foreseeable future, regardless
of the timeliness of the auction process.
Changes
in Working Capital
At
September 30, 2009 and December 31, 2008 the working capital ratio (current
assets to current liabilities) was 3.12 to 1 and 1.25 to 1, respectively. This
increase in our working capital ratio was driven by the factors set forth
below:
Operating
Activities
Net cash
provided by operating activities increased approximately $17.4 million to
approximately $80.6 million in the Current Nine Months from approximately $63.1
million of net cash provided by operating activities in the Prior Year Nine
Months. This increase is primarily due to an increase of $7.8 million
in net income from approximately $47.6 million in the Prior Year Nine Months to
approximately $55.4 million in the Current Nine Months for the reasons detailed
above, as well as an aggregate decrease in net cash used in changes in operating
assets and liabilities (net of business acquisitions) of approximately $14.2
million from approximately $24.9 million in the Prior Year Nine Months to
approximately $10.7 million in the Current Nine Months. These
reductions in cash used in operating activities were offset partially by
non-cash adjustments to net income for our equity investments in joint ventures
of $2.5 million of equity earnings in the Current Nine Months compared to $0.4
million in equity losses in the Prior Year Nine Months, resulting in a net
change of $2.1 million, and an increase in the change in our allowance for bad
debts of approximately $2.0 million, from approximately $1.4 million in the
Prior Year Nine Months to approximately $3.4 million in the Current Nine Months,
which was primarily due to the transition of the women’s category license
for our Rocawear brand.
Investing
Activities
Net cash
used in investing activities increased approximately $8.0 million to
approximately $19.5 million in the Current Nine Months from approximately $11.5
million of net cash used in investing activities in the Prior Year Nine
Months. This increase is primarily due to $9.0 million of cash paid
for the acquisition of a 50% interest in Ed Hardy, compared to $2.0 million of a
cash paid for our 50% investment in the Iconix China joint venture during the
Prior Year Nine Months, as well as cash earn-out payments totaling approximately
$9.4 million made during the Current Nine Months relating to the
Official-Pillowtex acquisition and Rocawear acquisition, as compared to an
earn-out payment of approximately $4.5 million related to the Official-Pillowtex
and Rocawear acquisitions in the Prior Year Nine Months. This
increase was offset by a decrease in purchases of property and equipment of $2.4
million as a result of purchases in the Prior Year Nine Months
of approximately $4.2 million related to the purchase of fixturing for
certain brands, as compared to the Current Nine Months in which purchases of
property and equipment totaled approximately $1.8
million. Further, we received a distribution of
approximately $1.0 million during the Current Nine Months related to our Hardy
Way joint venture, which did not exist in the Prior Year Nine
Months.
Financing
Activities
Net cash
provided by financing activities increased approximately $115.6 million to
approximately $98.6 million in the Current Nine Months from approximately $17.0
million of net cash used in financing activities in the Prior Year Nine
Months. This increase is primarily due to the net proceeds of our
common stock offering of approximately $152.8 million, which was offset
primarily by the payment of long term debt of $55.2
million. Specifically, our payment of long-term debt in the Prior
Year Nine Months of 50% of our excess cash flow from the subsidiaries subject to
the Term Loan Facility for fiscal 2007 was $15.6 million, as compared to our
payment in the Current Nine Months of $38.7 million, which represented 50% of
our excess cash flow from the subsidiaries subject to the term loan facility for
fiscal 2008. Additionally, current restricted cash increased $6.5
million primarily as a result of an investment through our joint venture Scion
(see Note 3 of Notes to Unaudited Condensed Consolidated Financial Statements),
which was offset by a non-controlling interest contribution of $2.1
million. Further, in the Current Nine Months the excess tax benefit
from share-based payment arrangements was approximately $3.9 million, as
compared to a approximately $9.0 million tax benefit in the Prior Year Nine
Months, due to fewer exercises of stock options at a lower average exercise
price during the Current Nine Months, which accounted for an increase of
approximately $5.0 million in net cash provided by financing
activities. Lastly, during the Current Nine Months, we repurchased
shares of our common stock for $1.5 million related to a stock repurchase plan
authorized by our Board of Directors in November 2008. There were no
such repurchases in the Prior Year Nine Months.
Other
Matters
New
Accounting Standards
In April
2009, the FASB issued FSP No. FAS 107-1 and APB 28-1, “Interim Disclosures about
Fair Value of Financial Instruments” (“FSP 107-1 and APB 28-1”) (ASC Topic 825).
FSP 107-1 and APB 28-1 require that disclosures about the fair value of a
company’s financial instruments be made whenever summarized financial
information for interim reporting periods is made. The provisions of FSP 107-1
are effective for interim reporting periods ending after June 15, 2009, and its
requirements are reflected herein.
In April
2009, the FASB issued FSP No. FAS 157-4, “Determining Fair Value When the Volume
and Level of Activity for the Asset or Liability Have Significantly Decreased
and Identifying Transactions That Are Not Orderly” (“FSP 157-4”) (ASC Topic
820). FSP 157-4 does not change the definition of fair value as detailed in FAS
157, but provides additional guidance for estimating fair value in accordance
with FAS 157 when the volume and level of activity for the asset or liability
have significantly decreased. The provisions of FSP 157-4 are effective for
interim and annual reporting periods ending after June 15, 2009, and its
requirements are reflected herein.
In April
2009, the FASB issued FSP No. FAS 115-2 and FAS 124-2, “Recognition and
Presentation of Other-Than-Temporary Impairments” (“FSP 115-2 and FAS
124-2”) (ASC Topic 320). FSP 115-2 and FAS 124-2 amends the
other-than-temporary impairment guidance in U.S. GAAP for debt securities and
provides additional disclosure requirements for other-than-temporary impairments
for debt and equity securities. FSP 115-2 and FAS 124-2 address the
determination as to when an investment is considered impaired, whether that
impairment is other than temporary, and the measurement of an impairment loss.
The provisions of FSP 115-2 and FAS 124-2 are effective for interim and annual
reporting periods ending after June 15, 2009, and its requirements are reflected
herein.
In May
2009, the FASB issued FAS No. 165, "Subsequent Events" (“SFAS 165”) (ASC
Topic 855). SFAS No. 165 establishes principles and requirements for
subsequent events, which are events or transactions that occur after the balance
sheet date but before financial statements are issued or are available to be
issued. In particular, SFAS No. 165 sets forth (a) the period after the balance
sheet date during which management of a reporting entity shall evaluate events
or transactions that may occur for potential recognition or disclosure in the
financial statements, (b) the circumstances under which an entity shall
recognize events or transactions occurring after the balance sheet date in its
financial statements, and (c) the disclosures that an entity shall make about
events or transactions that occurred after the balance sheet date. SFAS No. 165
is effective for interim or annual financial periods ending after June 15, 2009
and is to be applied prospectively. The adoption of SFAS No. 165 did not have a
material impact on our results of operations or our financial
position.
In June
2009, the FASB issued Statement No. 167, Amendments to FASB Interpretation
No. 46(R) (“FAS 167”) (ASC Topic 810). FAS 167 amends the
consolidation guidance for variable interest entities (“VIE”) by requiring an
on-going qualitative assessment of which entity has the power to direct matters
that most significantly impact the activities of a VIE and has the obligation to
absorb losses or benefits that could be potentially significant to the VIE. FAS
167 is effective for the Company beginning in 2010. The Company is currently
assessing the impact of the standard on its financial statements.
In
June 2009, the FASB issued SFAS No. 168, The “FASB Accounting Standards
Codification” and the Hierarchy of Generally Accepted Accounting
Principles (“SFAS 168”) (ASC Topic 105). This standard
replaces SFAS No. 162, The Hierarchy of
Generally Accepted Accounting Principles , and establishes only two
levels of U.S. generally accepted accounting principles (“GAAP”), authoritative
and non-authoritative. The FASB Accounting Standards Codification (the
“Codification”) will become the source of authoritative, nongovernmental GAAP,
except for rules and interpretive releases of the Securities and Exchange
Commission (“SEC”), which are sources of authoritative GAAP for SEC registrants.
All other non-grandfathered, non-SEC accounting literature not included in the
Codification will become non-authoritative. This standard is effective for
financial statements for interim or annual reporting periods ending after
September 15, 2009. The Company will begin to use the new guidelines and
numbering system prescribed by the Codification when referring to GAAP in the
third quarter of 2009. As the Codification was not intended to change or alter
existing GAAP, it will not have any impact on the Company’s consolidated
financial statements.
Summary
of Critical Accounting Policies.
Several
of our accounting policies involve management judgments and estimates that could
be significant. The policies with the greatest potential effect on our
consolidated results of operations and financial position include the estimate
of reserves to provide for collectability of accounts receivable. We estimate
the collectability considering historical, current and anticipated trends of our
licensees related to deductions taken by customers and markdowns provided to
retail customers to effectively flow goods through the retail channels, and the
possibility of non-collection due to the financial position of its licensees'
and their retail customers. Due to our licensing model, we do not have any
inventory risk and have reduced our operating risks, and can reasonably forecast
revenues and plan expenditures based upon guaranteed royalty minimums and sales
projections provided by our retail licensees.
The
preparation of the consolidated financial statements in conformity with
accounting principles generally accepted in the U.S. requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. We review all significant estimates affecting the
financial statements on a recurring basis and records the effect of any
adjustments when necessary.
In
connection with our licensing model, we have entered into various trademark
license agreements that provide revenues based on minimum royalties and
additional revenues based on a percentage of defined sales. Minimum royalty
revenue is recognized on a straight-line basis over each period, as defined, in
each license agreement. Royalties exceeding the defined minimum amounts are
recognized as income during the period corresponding to the licensee's
sales.
In June
2001, the FASB issued Statement of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets," (ASC Topic 350), herein referred to
as SFAS 142, which changed the accounting for goodwill from an amortization
method to an impairment-only approach. Upon our adoption of SFAS 142 on February
1, 2002, we ceased amortizing goodwill. As prescribed under SFAS 142, we had
goodwill tested for impairment during the years ended December 31, 2008, 2007
and 2006, and no write-downs from impairments were necessary. Our tests for
impairment utilize discounted cash flow models to estimate the fair values of
the individual assets. Assumptions critical to our fair value estimates are as
follow: (i) discount rates used to derive the present value factors used in
determining the fair value of the reporting units and trademarks; (ii) royalty
rates used in our trade mark valuations; (iii) projected average revenue growth
rates used in the reporting unit and trademark models; and (iv) projected
long-term growth rates used in the derivation of terminal year
values. These tests factor in economic conditions and expectations of
management and may change in the future based on period-specific facts and
circumstances.
Impairment
losses are recognized for long-lived assets, including certain intangibles, used
in operations when indicators of impairment are present and the undiscounted
cash flows estimated to be generated by those assets are not sufficient to
recover the assets carrying amount. Impairment losses are measured by comparing
the fair value of the assets to their carrying amount. For the years
ended December 31, 2008, 2007, and 2006 there was no impairment present for
these long-lived assets.
Effective
January 1, 2006, we adopted Statement of Financial Accounting Standards
No. 123(R), “Accounting for Share-Based Payment” (ASC Topic 718),
herein referred to as SFAS 123(R), which requires companies to measure and
recognize compensation expense for all stock-based payments at fair value. Under
SFAS 123(R), using the modified prospective method, compensation expense is
recognized for all share-based payments granted prior to, but not yet vested as
of, January 1, 2006. Prior to the adoption of SFAS
123(R), we accounted for our stock-based compensation plans under
the recognition and measurement principles of accounting principles board, or
APB, Opinion No. 25, “Accounting for stock issued to employees,” and
related interpretations. Accordingly, the compensation cost for stock options
had been measured as the excess, if any, of the quoted market price of our
common stock at the date of the grant over the amount the employee must pay to
acquire the stock.
We
account for income taxes in accordance with Statement of Financial Accounting
Standards No. 109 “Accounting for Income Taxes”, herein referred to as SFAS 109
(ASC Topic 740). Under SFAS 109, deferred tax assets and liabilities are
determined based on differences between the financial reporting and tax basis of
assets and liabilities and are measured using the enacted tax rates and laws
that will be in effect when the differences are expected to reverse. A valuation
allowance is established when necessary to reduce deferred tax assets to the
amount expected to be realized. In determining the need for a valuation
allowance, management reviews both positive and negative evidence pursuant to
the requirements of SFAS 109, including current and historical results of
operations, the annual limitation on utilization of net operating loss carry
forwards pursuant to Internal Revenue Code section 382, future income
projections and the overall prospects of our business. Based upon management's
assessment of all available evidence, including our completed transition into a
licensing business, estimates of future profitability based on projected royalty
revenues from our licensees, and the overall prospects of our business,
management concluded that it is more likely than not that the net deferred
income tax asset will be realized.
We
adopted FASB Interpretation 48, herein referred to as FIN 48(ASC Topic 740),
beginning January 1, 2007. The implementation of FIN 48 did not have a
significant impact on our financial position or results of operations. The total
unrecognized tax benefit was $1.1 million at the date of adoption. At December
31, 2008, the total unrecognized tax benefit was $1.1 million. However, the
liability is not recognized for accounting purposes because the related deferred
tax asset has been fully reserved in prior years. We are continuing our practice
of recognizing interest and penalties related to income tax matters in income
tax expense. There was no accrual for interest and penalties related to
uncertain tax positions for the year ended December 31, 2008. We file federal
and state tax returns and we are generally no longer subject to tax examinations
for fiscal years prior to 2004.
Marketable
securities, which are accounted for as available-for-sale, are stated at fair
value in accordance with Statement of Financial Accounting Standards No. 115,
“Accounting for Certain Investments in Debt and Equity Securities” (“SFAS 115”)
(ASC Topic 320), and consist of auction rate securities. Temporary changes in
fair market value are recorded as other comprehensive income or loss, whereas
other than temporary markdowns will be realized through our statement of
operations. On January 1, 2008, we adopted SFAS 157, which establishes a
framework for measuring fair value and requires expanded disclosures about fair
value measurement. While SFAS 157 does not require any new fair value
measurements in its application to other accounting pronouncements, it does
emphasize that a fair value measurement should be determined based on the
assumptions that market participants would use in pricing the asset or
liability. Our assessment of the significance of a particular input to the fair
value measurement requires judgment and may affect the valuation.
Seasonal and Quarterly
Fluctuations.
The
majority of the products manufactured and sold under our brands and licenses are
for apparel, accessories, footwear and home products and decor, for which sales
may vary as a result of holidays, weather, and the timing of product shipments.
Accordingly, a portion of our revenue from its licensees, particularly from
those licensees whose actual sales royalties exceed minimum royalties, may be
subject to seasonal fluctuations. The results of operations in any quarter
therefore will not necessarily be indicative of the results that may be achieved
for a full fiscal year or any future quarter.
Other
Factors
We
continue to seek to expand and diversify the types of licensed products being
produced under our various brands, as well as diversify the distribution
channels within which licensed products are sold, in an effort to reduce
dependence on any particular retailer, consumer or market sector. The success of
our company, however, will still remain largely dependent on our ability to
build and maintain brand awareness and contract with and retain key licensees
and on our licensees’ ability to accurately predict upcoming fashion trends
within their respective customer bases and fulfill the product requirements of
their particular retail channels within the global marketplace. Unanticipated
changes in consumer fashion preferences, slowdowns in the U.S. economy, changes
in the prices of supplies, consolidation of retail establishments, and other
factors noted in “Part II - Item 1A-Risk Factors,” could adversely affect our
licensees’ ability to meet and/or exceed their contractual commitments to us and
thereby adversely affect our future operating results
Effects of Inflation. We
do not believe that the relatively moderate rates of inflation experienced over
the past few years in the United States, where we primarily compete, have had a
significant effect on revenues or profitability.
Item 3. Quantitative and Qualitative
Disclosures about Market Risk
We limit
exposure to foreign currency fluctuations by requiring substantially all of our
licenses to be denominated in U.S. dollars. Our note receivable due
from the purchasers of the Canadian trademark for Joe Boxer is denominated in
Canadian dollars. If there were an adverse change of 10% in the
exchange rate from Canadian dollars to U.S. dollars, the expected effect on net
income would be immaterial.
We are
exposed to potential loss due to changes in interest rates. Investments with
interest rate risk include marketable securities. Debt with interest rate risk
includes the fixed and variable rate debt. As of September 30, 2009, we had
approximately $217.5 million in variable interest debt under our Term Loan
Facility. To mitigate interest rate risks, we are utilizing derivative financial
instruments such as interest rate hedges to convert certain portions of our
variable rate debt to fixed interest rates. If there were an adverse change
of 10% in interest rates, the expected effect on net income would be
immaterial.
We
invested in certain auction rate securities, herein referred to as ARS. During
the Current Nine Months, our balance of ARS failed to auction due to sell orders
exceeding buy orders, and the insurer of the ARS exercised its put option to
replace the underlying securities of the ARS with its preferred securities.
Further, although the ARS have paid cash dividends according to their stated
terms, the payment of dividends ceased after July 31, 2009 and will only be
resumed if the board of directors of the insurer declares such cash dividends to
be payable at a later date. These funds will not be available to us
until a successful auction occurs or a buyer is found outside the auction
process. We estimated the fair value of our ARS to be $6.8 million, using
the present value of the weighted average of several scenarios of recovery based
on our assessment of the probability of each scenario. We believe this
decrease in fair value is temporary due to general macroeconomic market
conditions. Further, we have the ability and intent to hold the ARS until
an anticipated full redemption. The cumulative effect of the failure to
auction since the third quarter of fiscal 2007 has resulted in an accumulated
other comprehensive loss of $6.2 million which is reflected in the stockholders’
equity section of the condensed unaudited consolidated balance
sheet.
As
described elsewhere in Note 6 of the Notes to Unaudited Condensed Consolidated
Financial Statements, in connection with the initial sale of our Convertible
Notes, we entered into Convertible Note Hedges with affiliates of Merrill Lynch,
Pierce, Fenner & Smith Incorporated and Lehman Brothers Inc. At such
time, the hedging transactions were expected, but were not guaranteed, to
eliminate the potential dilution upon conversion of the Convertible Notes.
Concurrently, we entered into warrant transactions with the hedge
counterparties.
On
September 15, 2008 and October 3, 2008, respectively, Lehman Holdings
and Lehman OTC filed for protection under Chapter 11 of the United States
Bankruptcy Code in the United States Bankruptcy Court in the Southern District
of New York (“Bankruptcy Court”). We had purchased 40% of the Convertible Note
Hedges from Lehman OTC and we had sold 40% of the warrants to Lehman OTC. If
Lehman OTC does not perform such obligations and the price of our common stock
exceeds the $27.56 conversion price (as adjusted) of the Convertible Notes, the
effective conversion price of the Convertible Notes (which is higher than the
actual $27.56 conversion price due to these hedges) would be reduced and our
existing stockholders may experience dilution at the time or times the
Convertible Notes are converted. On September 17, 2009, the Company filed proofs
of claim with the Bankruptcy Court relating to the Lehman OTC Convertible Note
Hedges. The Company will continue to monitor the bankruptcy filings of Lehman
Holdings and Lehman OTC with respect to such claims. The Company currently
believes that the bankruptcy filings and their potential impact on these
entities will not have a material adverse effect on the Company’s financial
position, results of operations or cash flows.
The
effect, if any, of any of these transactions and activities on the trading price
of our common stock will depend in part on market conditions and cannot be
ascertained at this time, but any of these activities could adversely affect the
value of our common stock.
Item 4. Controls and
Procedures
The
Company, under the supervision and with the participation of its management,
including its principal executive officer and principal financial officer,
evaluated the effectiveness of the design and operation of its disclosure
controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) of the
Securities Exchange Act of 1934, herein referred to as the Exchange Act), as of
the end of the period covered by this report. The purpose of disclosure controls
is to ensure that information required to be disclosed in our reports filed with
or submitted to the SEC under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the SEC’s rules and
forms. Disclosure controls are also designed to ensure that such information is
accumulated and communicated to our management, including our principal
executive officer and principal financial officer, to allow timely decisions
regarding required disclosure.
Based on
this evaluation, the principal executive officer and principal financial officer
concluded that the Company’s disclosure controls and procedures are effective in
timely alerting them to material information required to be included in our
periodic SEC filings and ensuring that information required to be disclosed by
the Company in the reports that it files or submits under the Exchange Act is
recorded, processed, summarized and reported within the time period specified in
the SEC’s rules and forms.
The
principal executive officer and principal financial officer also conducted an
evaluation of internal control over financial reporting, herein referred to as
internal control, to determine whether any changes in internal control occurred
during the quarter ended June 30, 2009 that may have materially affected or
which are reasonably likely to materially affect internal control. Based on that
evaluation, there has been no change in the Company’s internal control during
the quarter ended September 30, 2009 that has materially affected, or is
reasonably likely to affect, the Company’s internal control.
PART
II. Other Information
Item 1. Legal Proceedings
See Note
11 of Notes to Unaudited Condensed Consolidated Financial
Statements.
Item 1A. Risk Factors.
In
addition to the risk factors disclosed in Part 1, Item 1A, “Risk Factors” of our
Annual Report on Form 10-K for the year ended December 31, 2008, set forth below
are certain factors that have affected, and in the future could affect, our
operations or financial condition. We operate in a changing environment that
involves numerous known and unknown risks and uncertainties that could impact
our operations. The risks described below and in our Annual Report on Form 10-K
for the year ended December 31, 2008 are not the only risks we face. Additional
risks and uncertainties not currently known to us or that we currently deem to
be immaterial also may materially adversely affect our financial condition
and/or operating results.
Our
existing and future debt obligations could impair our liquidity and financial
condition, and in the event we are unable to meet our debt obligations we could
lose title to our trademarks.
As of
September 30, 2009, our balance sheet reflects consolidated debt of
approximately $574.3 million, including secured debt of $318.1 million ($217.5
million under our term loan facility and $100.6 million under asset-backed notes
issued by our subsidiary, IP Holdings), primarily all of which was incurred in
connection with our acquisition activities. In accordance with FSP APB 14-1, our
Convertible Notes are included in our $574.3 million of consolidated debt at a
net debt carrying value of $244.0 million; however, the principal amount owed to
the holders of our Convertible Notes is $287.5 million. We may also assume or
incur additional debt, including secured debt, in the future in connection with,
or to fund, future acquisitions. Our debt obligations:
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could
impair our liquidity;
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could
make it more difficult for us to satisfy our other
obligations;
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require
us to dedicate a substantial portion of our cash flow to payments on our
debt obligations, which reduces the availability of our cash flow to fund
working capital, capital expenditures and other corporate
requirements;
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could
impede us from obtaining additional financing in the future for working
capital, capital expenditures, acquisitions and general corporate
purposes;
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impose
restrictions on us with respect to the use of our available cash,
including in connection with future
acquisitions;
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make
us more vulnerable in the event of a downturn in our business prospects
and could limit our flexibility to plan for, or react to, changes in our
licensing markets; and
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place
us at a competitive disadvantage when compared to our competitors who have
less debt.
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While we believe that by
virtue of the guaranteed minimum royalty payments due to us under our licenses
we will generate sufficient revenues from our licensing operations to satisfy
our obligations for the foreseeable future, in the event that we were to fail in
the future to make any required payment under agreements governing our
indebtedness or fail to comply with the financial and operating covenants
contained in those agreements, we would be in default regarding that
indebtedness. A debt default could significantly diminish the market value and
marketability of our common stock and could result in the acceleration of the
payment obligations under all or a portion of our consolidated indebtedness. In
the case of our term loan facility, it would enable the lenders to foreclose on
the assets securing such debt, including the Ocean Pacific/OP, Danskin,
Rocawear, Starter, Mossimo and Waverly trademarks, as well as the trademarks
acquired by us in connection with the Official-Pillowtex acquisition, and, in
the case of the asset-backed notes, it would enable the holders of such notes to
foreclose on the assets securing such notes, including the Candie’s, Bongo, Joe
Boxer, Rampage, Mudd and London Fog trademarks.
If
we are unable to identify and successfully acquire additional trademarks, our
growth may be limited, and, even if additional trademarks are acquired, we may
not realize anticipated benefits due to integration or licensing
difficulties.
A key
component of our growth strategy is the acquisition of additional trademarks.
Historically, we have been involved in numerous acquisitions of varying sizes.
We continue to explore new acquisitions. However, as our competitors continue to
pursue our brand management model, acquisitions may become more expensive and
suitable acquisition candidates could become more difficult to find. In
addition, even if we successfully acquire additional trademarks, we may not be
able to achieve or maintain profitability levels that justify our investment in,
or realize planned benefits with respect to, those additional brands. Although
we seek to temper our acquisition risks by following acquisition guidelines
relating to the existing strength of the brand, its diversification benefits to
us, its potential licensing scale and the projected rate of return on our
investment, acquisitions, whether they be of additional intellectual property
assets or of the companies that own them, entail numerous risks, any of which
could detrimentally affect our results of operations and/or the value of our
equity. These risks include, among others:
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negative
effects on reported results of operations from acquisition related charges
and amortization of acquired
intangibles;
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diversion
of management’s attention from other business
concerns;
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the
challenges of maintaining focus on, and continuing to execute, core
strategies and business plans as our brand and license portfolio grows and
becomes more diversified;
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adverse
effects on existing licensing
relationships;
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potential
difficulties associated with the retention of key employees, and the
assimilation of any other employees, who may be retained by us in
connection with or as a result of our acquisitions;
and
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risks
of entering new domestic and international markets (whether it be with
respect to new licensed product categories or new licensed product
distribution channels) or markets in which we have limited prior
experience.
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Acquiring
additional trademarks could also have a significant effect on our financial
position and could cause substantial fluctuations in our quarterly and yearly
operating results. Acquisitions could result in the recording of significant
goodwill and intangible assets on our financial statements, the amortization or
impairment of which would reduce our reported earnings in subsequent years. No
assurance can be given with respect to the timing, likelihood or financial or
business effect of any possible transaction. Moreover, as discussed below, our
ability to grow through the acquisition of additional trademarks will also
depend on the availability of capital to complete the necessary acquisition
arrangements. In the event that we are unable to obtain debt financing on
acceptable terms for a particular acquisition, we may elect to pursue the
acquisition through the issuance by us of shares of our common stock (and, in
certain cases, convertible securities) as equity consideration, which could
dilute our common stock because it could reduce our earnings per share, and any
such dilution could reduce the market price of our common stock unless and until
we were able to achieve revenue growth or cost savings and other business
economies sufficient to offset the effect of such an issuance. As a result,
there is no guarantee that our stockholders will achieve greater returns as a
result of any future acquisitions we complete.
A
substantial portion of our licensing revenue is concentrated with a limited
number of licensees such that the loss of any of such licensees could decrease
our revenue and impair our cash flows.
Our
licensees Walmart, Target Corporation, or Target, Kohl’s, and Kmart Corporation,
or Kmart, were our four largest direct-to-retail licensees during the Current
Nine Months, representing approximately 24%, 12%, 8% and 5%, respectively, of
our total revenue for such period, while Li & Fung USA was our largest
wholesale licensee, representing approximately 10% of our total revenue for such
period. Our license agreement with Target for the Mossimo trademark grants it
the exclusive U.S. license for substantially all Mossimo-branded products for a
current term expiring in January 2012; our second license agreement with Target
for the Fieldcrest mark grants it the exclusive U.S. license for substantially
all Fieldcrest-branded products for an initial term expiring in July 2010; and
our third license agreement with Target grants it the exclusive U.S. license for
Waverly Home for a broad range of Waverly Home-branded products for a term
expiring in January 2011. Our license agreement with Walmart for the Ocean
Pacific and OP trademarks grants it the exclusive license in the U.S., Canada,
Mexico, China, India and Brazil for substantially all Ocean Pacific/OP-branded
products for an term expiring June 30, 2011; our second license agreement
with Walmart for the Danskin Now trademark grants it the exclusive license in
the U.S., Canada, Argentina, and Central America for substantially all Danskin
Now-branded products for an initial term expiring December 2010; and our third
license agreement with Walmart for the Starter trademark grants it the exclusive
license in the U.S., Canada and Mexico for substantially all Starter-branded
products for an initial term expiring December 2013. Our license agreement with
Kohl’s for the Candie’s trademark grants it the exclusive U.S. license for a
wide variety of Candie’s-branded product categories for a term expiring in
January 2011, and our license agreement with Kohl’s for the Mudd trademark
grants it the exclusive U.S. license for a wide variety of Mudd-branded product
categories for an initial term expiring in January 2015. Our license
agreement with Kmart grants it the exclusive U.S. license with respect to the
Joe Boxer trademark for a wide variety of product categories for a term expiring
in December 2010 and our license agreement with Kmart for the Cannon trademark
granted the exclusive license in the U.S. and Canada for a wide variety of
product categories for an initial term expiring February 1, 2014. Our
license agreements with Li & Fung USA grant it the exclusive worldwide
license with respect to our Royal Velvet trademarks for a variety of products
sold exclusively at Bed Bath & Beyond in the U.S., and the
exclusive license (in many countries outside of the U.S. and Canada) for the
Cannon trademark for a variety of products. The term for each of these licenses
with Li & Fung USA expires on December 31, 2013. Because we are
dependent on these licensees for a significant portion of our licensing revenue,
if any of them were to have financial difficulties affecting its ability to make
guaranteed payments, or if any of these licensees decides not to renew or extend
its existing agreement with us, our revenue and cash flows could be reduced
substantially.
We
are dependent upon our chief executive officer and other key executives. If we
lose the services of these individuals we may not be able to fully implement our
business plan and future growth strategy, which would harm our business and
prospects.
Our
success as a marketer and licensor of intellectual property is largely due to
the efforts of Neil Cole, our president, chief executive officer and chairman.
Our continued success is largely dependent upon his continued efforts and those
of the other key executives he has assembled. Although we have entered into an
employment agreement with Mr. Cole, expiring on December 31, 2012, as
well as employment agreements with other of our key executives, there is no
guarantee that we will not lose their services. To the extent that any of their
services become unavailable to us, we will be required to hire other qualified
executives, and we may not be successful in finding or hiring adequate
replacements. This could impede our ability to fully implement our business plan
and future growth strategy, which would harm our business and
prospects.
We
have a material amount of goodwill and other intangible assets, including our
trademarks, recorded on our balance sheet. As a result of changes in market
conditions and declines in the estimated fair value of these assets, we may, in
the future, be required to write down a portion of this goodwill and other
intangible assets and such write-down would, as applicable, either decrease our
net income or increase our net loss.
As of
September 30, 2009, goodwill represented approximately $164.6 million, or
approximately 10% of our total assets, and trademarks and other intangible
assets represented approximately $1,054.2 million, or approximately 65% of our
total assets. Under Statement of Financial Accounting Standards, or SFAS,
No. 142, goodwill and indefinite life intangible assets, including some of
our trademarks, are no longer amortized, but instead are subject to impairment
evaluation based on related estimated fair values, with such testing to be done
at least annually. While, to date, no impairment write-downs have been
necessary, any write-down of goodwill or intangible assets resulting from future
periodic evaluations would, as applicable, either decrease our net income or
increase our net loss and those decreases or increases could be
material.
Convertible
note hedge and warrant transactions that we have entered into may affect the
value of our common stock.
In
connection with the initial sale of our Convertible Notes, we entered into
Convertible Note Hedges with affiliates of Merrill Lynch, Pierce,
Fenner & Smith Incorporated and Lehman Brothers Inc. At such time, the
hedging transactions were expected, but were not guaranteed, to eliminate the
potential dilution upon conversion of the Convertible Notes. Concurrently, we
entered into warrant transactions with the hedge
counterparties.
On
September 15, 2008 and October 3, 2008, respectively, Lehman Brothers
Holdings Inc., or Lehman Holdings, and its subsidiary, Lehman Brothers OTC
Derivatives Inc., or Lehman OTC, filed for protection under Chapter 11 of
the United States Bankruptcy Code in the United States Bankruptcy Court in the
Southern District of New York (“Bankruptcy
Court”). On September 17, 2009, the Company filed proofs of claim with
the Bankruptcy Court relating to the Lehman OTC Convertible Note Hedges. We
had purchased 40% of the Convertible Note Hedges from Lehman OTC, or the Lehman
note hedges, and we had sold 40% of the warrants to Lehman OTC. Lehman OTC’s
obligations under the Lehman note hedges are guaranteed by Lehman Holdings. If
the Lehman note hedges are rejected or terminated in connection with the Lehman
OTC bankruptcy, we would have a claim against Lehman OTC and Lehman Holdings, as
guarantor, for the damages and/or close-out values resulting from any such
rejection or termination. While we intend to pursue any claim for damages and/or
close-out values resulting from the rejection or termination of the Lehman note
hedges, at this point in the Lehman bankruptcy cases it is not possible to
determine with accuracy the ultimate recovery, if any, that we may realize on
potential claims against Lehman OTC or Lehman Holdings, as guarantor, resulting
from any rejection or termination of the Lehman note hedges. We also do not know
whether Lehman OTC will assume or reject the Lehman note hedges, and therefore
cannot predict whether Lehman OTC intends to perform its obligations under the
Lehman note hedges. As a result, if Lehman OTC does not perform such obligations
and the price of our common stock exceeds the $27.56 conversion price (as
adjusted) of the Convertible Notes, the effective conversion price of the
Convertible Notes (which is higher than the actual $27.56 conversion price due
to these hedges) would be reduced and our existing stockholders may experience
dilution at the time or times the convertible notes are converted. The extent of
any such dilution would depend, among other things, on the then prevailing
market price of our common stock and the number of shares of common stock then
outstanding, but we believe the impact will not be material and will not affect
our income statement presentation. We are not otherwise exposed to counterparty
risk related to the Lehman bankruptcies. We currently believe, although there
can be no assurance, that the bankruptcy filings and their potential impact on
these entities will not have a material adverse effect on our financial
position, results of operations or cash flows. We will continue to monitor the
bankruptcy filings of Lehman Holdings and Lehman OTC.
Moreover,
in connection with the warrant transactions with the counterparties, to the
extent that the price of our common stock exceeds the strike price of the
warrants, the warrant transactions could have a dilutive effect on our earnings
per share.
Our
public offering which was consummated in June 2009 may continue to be
dilutive to our per share earnings.
If we do
not make acquisitions which are sufficiently accretive to our earnings, the
issuance of our common stock in our June 2009 public offering may continue to
have a dilutive effect on our expected earnings per share for the year ending
December 31, 2009. The actual amount of such dilution cannot be determined
at this time and will be based on numerous factors, some of which are outside of
our control. Moreover, our ability to meet our previously announced
earnings per share guidance, which relates to our existing portfolio of brands
only and assumes neither the issuance of shares in such offering nor any
acquisitions, may be adversely affected by the completion of the
offering.
Due
to the recent downturn in the market, certain of the marketable securities we
own may take longer to auction than initially anticipated, if at
all.
Marketable
securities consist of auction rate securities, herein referred to as ARS. From
the third quarter of 2007 to the present, our balance of ARS failed to auction
due to sell orders exceeding buy orders, and the insurer of the ARS exercised
its put option to replace the underlying securities of the auction rate
securities with its preferred securities. Further, although the ARS had paid
cash dividends according to their stated terms, the payment of cash
dividends ceased after July 31, 2009 and will only be resumed if the board of
directors of the insurer declares such cash dividends to be payable at a later
date. These funds will not be available to us until a successful
auction occurs or a buyer is found outside the auction process. As a result,
$13.0 million of our ARS have been written down to approximately $6.8 million,
based on our evaluation, as an unrealized pre-tax loss to reflect a temporary
decrease in fair value, reflected as an accumulated other comprehensive loss of
$6.2 million in the stockholders’ equity section of our unaudited condensed
consolidated balance sheet. We estimated the fair value of our ARS using the
present value of the weighted average of several scenarios of recovery based on
our assessment of the probability of each scenario. We believe this decrease in
fair value is temporary due to general macroeconomic market
conditions. Further, we have the ability and intent to hold the securities
until an anticipated full redemption. However, there are no assurances that
a successful auction will occur, or that we can find a buyer outside the auction
process.
A
decline in general economic conditions resulting in a decrease in
consumer-spending levels and an inability to access capital may adversely affect
our business.
Many
economic factors beyond our control may impact our forecasts and actual
performance. These factors include consumer confidence, consumer spending
levels, employment levels, availability of consumer credit, recession,
deflation, inflation, a general slowdown of the U.S. economy or an uncertain
economic outlook. Furthermore, changes in the credit and capital markets,
including market disruptions, limited liquidity and interest rate fluctuations,
may increase the cost of financing or restrict our access to potential sources
of capital for future acquisitions.
Item
2. Unregistered Sales of Equity Securities and Use of Proceeds
The
following table represents information with respect to purchases of common stock
made by the Company during the Current Quarter: