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, 2005
OR
[ ] 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.
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(Exact name of registrant as specified in its charter)
Delaware 11-2481903
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1450 Broadway, New York, NY 10018
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(Address of principal executive offices) (Zip Code)
(212) 730-0030
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year, if changed since last
report)
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 periods 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 is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act) Yes ___ No. _X__
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act) Yes____ 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 - 35,474,116 shares as of November 3, 2005
INDEX
FORM 10-Q
Iconix Brand Group, Inc. and Subsidiaries
Page No.
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Part I. Financial Information
Item 1. Financial Statements - (Unaudited)
Condensed Consolidated Balance Sheets - September 30, 2005 and December 31, 2004............... 3
Condensed Consolidated Income Statements - Three and Nine Months Ended
September 30, 2005 and October 31, 2004.................................................. 4
Condensed Consolidated Statement of Stockholders' Equity - Nine Months Ended
September 30, 2005....................................................................... 5
Condensed Consolidated Statements of Cash Flows - Nine Months Ended
September 30, 2005 and October 31, 2004.................................................. 6
Notes to Condensed Consolidated Financial Statements........................................... 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................................... 18
Item 3. Quantitative and Qualitative Disclosures about Market Risk.................................... 24
Item 4. Controls and Procedures....................................................................... 24
Part II. Other Information..............................................................................
Item 1. Legal Proceedings............................................................................. 24
Item 4. Submission of Matters to a Vote of Security-Holders........................................... 24
Item 6. Exhibits...................................................................................... 25
Signatures ........................................................................................... 26
2
Part I. Financial Information
Item 1. FINANCIAL STATEMENTS-(Unaudited)
Iconix Brand Group, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
September 30, December 31,
2005 2004
---------- ----------
(Unaudited)
Assets (000's omitted, except par value)
Current Assets
Cash............................................................... $ 7,407 $ 798
Restricted-use cash................................................ 12,000 -
Accounts receivable, net........................................... 7,387 2,239
Due from factors, net.............................................. - 3,865
Due from affiliate................................................. 455 227
Inventories........................................................ - 279
Deferred income taxes.............................................. 4,440 1,549
Prepaid advertising and other...................................... 1,506 670
------- -------
Total Current Assets................................................... 33,195 9,627
Property and equipment, at cost:
Furniture, fixtures and equipment.................................. 1,612 1,638
Less: Accumulated depreciation and amortization.................... 1,398 1,292
------- -------
214 346
Other assets:
Restricted-use cash................................................ 4,610 2,900
Goodwill........................................................... 32,166 25,241
Intangibles, net.................................................... 139,515 16,591
Deferred financing costs, net...................................... 3,745 2,149
Deferred income taxes.............................................. 5,082 2,073
Other.............................................................. 1,107 1,233
------- -------
186,225 50,187
------- -------
Total Assets........................................................... $ 219,634 $ 60,160
======= =======
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable and accrued expenses.............................. $ 3,887 $ 4,284
Accounts payable, subject to litigation............................ 4,886 4,886
Due to related parties............................................. - 2,465
Current portion of deferred revenue............................. 1,354 1,413
Debt to be repaid with restricted-use cash...................... 12,000 -
Current portion of long-term debt............................... 16,002 2,563
------- -------
Total Current Liabilities.............................................. 38,129 15,611
------- -------
Deferred revenue....................................................... 91 366
Long-term liabilities.................................................. 89,164 19,925
Contingencies.......................................................... - -
Stockholders' Equity
Common stock, $.001 par value - shares authorized 75,000; shares issued
35,422 at September 30, 2005 and 28,293 issued
at December 31, 2004.......................................... 36 29
Additional paid-in capital......................................... 135,682 76,154
Accumulated deficit................................................ (42,801) (51,258)
Treasury stock - 198 shares at cost................................. (667) (667)
------- -------
Total Stockholders' Equity............................................. 92,250 24,258
------- -------
Total Liabilities and Stockholders' Equity............................. $219,634 $ 60,160
======= =======
See Notes to Condensed Consolidated Financial Statements.
3
Iconix Brand Group, Inc. and Subsidiaries
Condensed Consolidated Income Statements
(Unaudited)
Three Months Ended Nine Months Ended
September 30, October 31, September 30, October 31,
------------- ------------ ------------- --------------
2005 2004 2005 2004
(000's omitted, except per share data)
Net sales............................................. $ - $9,950 $ - $52,798
Licensing and commission revenue...................... 9,205 3,454 17,792 8,505
------------- ------------ ------------- --------------
Net revenues.......................................... 9,205 13,404 17,792 61,303
Cost of goods sold (net of recovery pursuant to
an agreement of $3,459 and $5,184 in the three
and nine months ended in 2004, respectively)........ - 7,320 - 44,383
------------- ------------ ------------- --------------
Gross profit.......................................... 9,205 6,084 17,792 16,920
Operating expenses:
Selling, general and administrative expenses (net of
recovery pursuant to an agreement of $0 and $296 in
the three and nine months ended in
2005, respectively)................................. 3,868 4,824 9,385 13,574
Special charges....................................... 289 - 996 99
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4,157 4,824 10,381 13,673
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Operating income...................................... 5,048 1,260 7,411 3,247
Interest expense - net................................ 1,289 657 2,134 2,093
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Income before income taxes............................ 3,759 603 5,277 1,154
Income tax benefits - net............................. (1,400) - (3,180) -
------------- ------------ ------------- --------------
Net income .......................................... $ 5,159 $ 603 $ 8,457 $ 1,154
============ ============= ============= ==============
Earnings per common share:
Basic....................................... $ 0.16 $ 0.02 $ 0.28 $ 0.04
============ ============= ============= ==============
Diluted..................................... $ 0.14 $ 0.02 $ 0.26 $ 0.04
============ ============= ============= ==============
Weighted average number of common shares outstanding:
Basic....................................... 32,501 27,264 29,859 26,633
============ ============= ============= ==============
Diluted..................................... 36,654 29,462 33,071 28,037
============ ============= ============= ==============
See Notes to Condensed Consolidated Financial Statements.
4
Iconix Brand Group, Inc. and Subsidiaries
Condensed Consolidated Statement of Stockholders' Equity
(Unaudited)
Nine Months Ended September 30, 2005
(000's omitted)
Additional
Common Stock Paid-In Accumulated Treasury
Shares Amount Capital Deficit Stock Total
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Balance at January 1, 2005 28,293 $ 29 $ 76,154 $ (51,258) $ (667) $ 24,258
Issuance of common stock to directors .... 17 -- 110 -- -- 110
Issuance of common stock related to
acquisition of Joe Boxer (R).......... 4,350 4 36,232 -- -- 36,236
Issuance of common stock related to
acquisition of Rampage (R)............ 2,171 2 20,148 -- -- 20,150
Exercise of stock options................. 591 1 1,289 -- -- 1,290
Warrants granted to non-employees related
to acquisitions....................... -- -- 1,576 -- -- 1,576
Options granted to non-employees - other.. -- -- 173 -- -- 173
Net income................................ -- -- -- 8,457 -- 8,457
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Balance at September 30, 2005 35,422 $ 36 $135,682 $ (42,801) $ (667) $ 92,250
=============================================================================
See Notes to Condensed Consolidated Financial Statements.
5
Iconix Brand Group, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ended
------------------------
September 30, October 31,
2005 2004
----------- -----------
(000's omitted)
OPERATING ACTIVITIES:
Net cash provided by operating activities.................................. $ 5,627 $ 4,831
----------- -----------
INVESTING ACTIVITIES:
Purchases of property and equipment................................... (26) (31)
Purchases of trademarks............................................... (247) -
Acquisition of Joe Boxer.............................................. (40,100) -
Acquisition of Rampage................................................ (25,850) -
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Net cash used in investing activities...................................... (66,223) (31)
----------- -----------
FINANCING ACTIVITIES:
Proceeds from long - term debt..................................... 85,489 3,600
Increase in debt to be repaid with restricted-use cash............. (12,000) -
Increase in restricted cash ....................................... (1,710) -
Repayment of long - term debt...................................... (1,430) (1,869)
Repayment of loans from related party.............................. (2,465) 1,711
Prepaid interest expense - long term............................... - (500)
Deferred financing costs........................................... (1,968) 24
Proceeds from common stock issuance................................ - 2,184
Proceeds from exercise of stock options............................ 1,289 723
Revolving notes payable - bank..................................... - (12,775)
----------- -----------
Net cash (used in) provided by financing activities........................ 67,205 (6,902)
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INCREASE (DECREASE) IN CASH................................................ 6,609 (2,102)
Cash at beginning of period................................................ 798 2,794
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Cash at end of period...................................................... $ 7,407 $ 692
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid for interest................................................ $1,219 $ 2,225
=========== ===========
Value of common stock issued as partial consideration in the
acquisition of Joe Boxer.............................................. $36,236 $ -
=========== ===========
Assumption of the K Mart loan related to the acquisition of
Joe Boxer.......................................................... $10,798 $ -
=========== ===========
Value of common stock issued as partial consideration in the
acquisition of Rampage................................................ $20,150 $ -
=========== ===========
See Notes to Condensed Consolidated Financial Statements.
6
Iconix Brand Group, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
September 30, 2005
NOTE A 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, all adjustments (consisting
primarily of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the three month ("Current
Quarter") and nine month period ("Current Nine Months") ended September 30, 2005
are not necessarily indicative of the results that may be expected for a full
fiscal year.
In December, 2004, the Company changed its fiscal year end from January 31 to
December 31, effective for the period ending December 31, 2004. As a result, the
end of the Current Quarter and the Current Nine Months do not coincide with the
three months ("Prior Year Quarter") and Nine Months ("Prior Year Nine Months")
ended October 31, 2004. The financial statements included herein are for the
Current Quarter and Current Nine Months, and they are compared with the Prior
Year Quarter and Prior Year Nine Months. The Company has not recast the Prior
Year Quarter and Prior Year Nine Months to coincide with the Current Quarter and
Current Nine Months as management believes that such recasting does not
materially affect the relative comparability of the data presented herein.
Beginning January 2005, the Company changed its business practices with respect
to Bright Star Footwear, Inc ("Bright Star"), a subsidiary of the Company, which
resulted in a change in revenue recognition for the Current Quarter and Current
Nine Months. Bright Star now acts as an agent, therefore only net commission
revenue is recognized commencing January 1, 2005. As a result there was $820,000
in commission revenue and no sales recorded in the Current Quarter for Bright
Star, as compared to $7.3 million in sales and $729,000 in gross profit in the
Prior Year Quarter. In the Current Nine Months there was $1.7 million in
commission revenue and no sales recorded for Bright Star, as compared to $19.1
million in sales and $1.8 million in gross profit in the Prior Year Nine Months.
Effective July 1, 2005 the Company had a change in estimate of the useful lives
of the Candie's(R) and Bongo(R) trademarks to indefinite life. When acquired in
1981, the Candie's trademark was estimated to have a useful life of 20 years.
Bongo, acquired in 1998 was also estimated at that time to have a useful life of
20 years. In arriving at the conclusion to use an indefinite life management
considered the following elements of the Company's evolving business and use of
the Candies and Bongo trademarks.
During the first half 2005, the Company fully completed the transition into a
licensing company. As a result of this new business model, the Company has
focused on expanding the use and value of the Candie's and Bongo names. The
Candie's brand has been licensed to Kohl's Department Stores ("Kohl's". Kohl's
is a trademark of Kohl's Illinois, Inc.), one of the largest retailers in the
United States to become their exclusive junior lifestyle brand. In July of 2005,
Candie's launched in all 670 Kohl's doors in over 18 product categories,
including shoes, junior apparel, handbags, innerwear, cold weather accessories,
legwear, fragrances, jewelry, sleepwear, knits, optical, activewear, special
sizes and children's. In 2006 Kohl's will add home accessories, fragrance,
swimwear and sunglasses. Similarly, the Bongo brand has been expanded from a
predominantly jeans wear brand, to broad variety of products, including tops,
footwear, knitwear, watches, handbags, optical, accessories, swim, intimate
apparel, outerwear, belts, jewelry, children's apparel and men's apparel.
Brand recognition for both of these brands is very high and the Company expects
it to grow in the future. Candie's is being aggressively marketed by Kohl's on
television, in consumer magazines, in their newspaper circulars, on the Internet
and via direct mail. The already high awareness of the Candie's brand is growing
driven by Kohl's vast media reach and it is quickly developing a loyal base of
consumers within Kohl's. Bongo's brand awareness has been on the rise driven by
its transformation into a lifestyle brand with the launch of new categories
including outerwear, watches, jewelry, eyewear and young men's apparel.
Based upon the history of both brands, the modification in use of these brands
from a manufacturing and distribution emphasis to one of only licensing, the
recent expansion of both brands into a broad range of lifestyle categories, and
the strong brand awareness, the Company believes it is reasonable to anticipate
7
the future use of these trademarks over an indefinite period. The impact of this
change in estimate for both the third quarter and nine months ended September
30, 2005, is a reduction in amortization expense relating to the Candie's and
Bongo trademarks totaling $232,500.
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, 2004.
NOTE B STOCK OPTIONS
Pursuant to a provision in SFAS No. 123(R), "Accounting for Stock-Based
Compensation", the Company has elected to continue using the intrinsic-value
method of accounting for stock options granted to employees in accordance with
Accounting Principles Board Opinion 25, "Accounting for Stock Issued to
Employees." Accordingly, the compensation cost for stock options has been
measured as the excess, if any, of the quoted market price of the Company's
stock at the date of the grant over the amount the employee must pay to acquire
the stock. Under this approach, the Company only recognizes compensation expense
for stock-based awards to employees for options granted at below-market prices,
with the expense recognized over the vesting period of the options. See Note M.
The stock-based employee compensation cost that would have been included in the
determination of net income if the fair value based method had been applied to
all awards, as well as the resulting pro forma net income and earnings per share
using the fair value approach, are presented in the following table. The pro
forma adjustments for compensation cost have not been offset by a related income
tax benefit, consistent with the manner in which the Company currently records
its provision for income taxes. These pro forma amounts may not be
representative of future disclosures since the estimated fair value of stock
options is amortized to expense over the vesting period, and additional options
may be granted in future years.
(000's omitted except per share data) Three Months Ended Nine Months Ended
------------------ ------------------
September 30, October 31, September 30, October 31,
2005 2004 2005 2004
-------------- ------------- ------------- --------------
Net income - as reported $ 5,159 $ 603 $ 8,457 $ 1,154
Deduct: Stock-based employee compensation
determined under the fair value based
method (1,209) (447) (3,649) (1,341)
-------------- ------------- ------------- --------------
Pro forma net income (loss) $ 3,950 $ 156 $ 4,808 $ (187)
============== ============= ============= ==============
Basic earnings (loss) per share:
As reported $ 0.16 $ 0.02 $ 0.28 $ 0.04
============== ============= ============= ==============
Pro forma $ 0.12 $ 0.01 $ 0.16 $ (0.01)
============== ============= ============= ==============
Diluted earnings (loss) per share:
As reported $ 0.14 $ 0.02 $ 0.26 $ 0.04
============== ============= ============= ==============
Pro forma $ 0.11 $ 0.01 $ 0.15 $ (0.01)
============== ============= ============= ==============
NOTE C FINANCING AGREEMENTS
In August 2002, IP Holdings, LLC ("IPH"), a subsidiary of the Company, issued in
a private placement $20 million of asset-backed notes secured by intellectual
property assets (trade names, trademarks, license agreements and payments and
proceeds with respect thereto) of IPH. The notes had a 7-year term with a fixed
interest rate of 7.93% with quarterly principal and interest payments of
approximately $859,000. After funding a liquidity reserve account in the amount
of $2.9 million, the net proceeds of the notes ($16.2 million) were used by the
Company to reduce amounts due by the Company under its then-existing revolving
credit facilities. In April 2004, IPH issued an additional $3.6 million in
subordinated asset-backed notes secured by its intellectual property assets. The
additional borrowing had a maturity date of August 2009, with a floating
interest rate of LIBOR + 4.45% and quarterly principal and interest payments and
$500,000 of interest prepaid at closing. The net proceeds of $2.9 million were
used by the Company for general working capital purposes. As of July 22, 2005,
the total principal on these notes was approximately $17.5 million, which were
refinanced in connection with an acquisition that was consummated in the Current
Quarter. See Note K.
In the Current Quarter, the Company acquired the JOE BOXER(R) brand ("Joe
Boxer") from Joe Boxer Company, LLC and its affiliates, and the RAMPAGE(R) brand
("Rampage") from Rampage Licensing, LLC. See Notes K and L. The financing for
the acquisitions was accomplished through two private placements by IPH of
asset-backed notes for a combined total of $103 million secured by the
8
intellectual property assets (including the Joe Boxer assets and the Rampage
assets) owned by IPH. The proceeds of the notes were used as follows:
approximately $17.5 million was used to refinance previously issued notes, $40.0
million was paid to the sellers of Joe Boxer, approximately $25.8 million was
paid to the sellers of Rampage, $1.7 million was placed in a reserve account as
required by the lender, approximately $1.8 million was used to pay costs
associated with the debt issuances, approximately $200,000 was paid to legal
professionals associated with the acquisitions, approximately $4.0 million was
available to the Company for working capital purposes, and $12 million was
deposited in an escrow account for the benefit of the holder of the note, to be
used by IPH solely for the purchase of certain intellectual property assets. If
the purchase does not occur prior to November 15, 2005, IPH will redeem up to
$12 million of the note with the funds in such escrow account with no penalty.
IPH intends to redeem $12 million of the note as it does not anticipate such
purchase will occur prior to November 15, 2005. Costs associated with the debt
issuances of approximately $1.8 million have been deferred and are being
amortized over the 7 year life of the notes.
Interest rates and terms on the notes are as follows: the $63 million principal
amount of the note bears interest at a fixed interest rate of 8.45% with a 7
year term, the $28 million principal amount of the note bears interest at a
fixed rate of 8.10% with a 7 year term, and the $12 million principal amount of
the note bears interest at a floating interest rate of LIBOR + 0.7% for so long
as there is $12 million on deposit in the escrow account. IPH intends to redeem
$12 million of the note in November 2005. Neither Iconix Brand Group, Inc.
("Iconix") nor any of its subsidiaries (other than IPH) is obligated to make any
payment with respect to IPH's asset-backed notes, and the assets of Iconix and
its subsidiaries (other than IPH) are not available to IPH's creditors. The
assets of IPH are not available to the creditors of Iconix or its subsidiaries
(other than IPH).
See Note G regarding the former financing agreement of Unzipped Apparel, LLC
("Unzipped"), the Company's wholly-owned subsidiary.
NOTE D EARNINGS PER SHARE
Basic earnings per share includes no dilution and is computed by dividing
earnings attributable to common shareholders by the weighted average number of
common shares outstanding for the period. Diluted earnings per share reflects,
in periods in which they have a dilutive effect, the effect of common shares
issuable upon exercise of stock options, warrants and convertible preferred
stock. At September 30, 2005, 7.2 million stock options were outstanding under
the Company's option plans.
The following is a reconciliation of the shares used in calculating basic and
diluted earnings per share:
Three Months Ended Nine Months Ended,
September 30, October 31, September 30, October 31,
2005 2004 2005 2004
--------------------------- --------------------------
(000's omitted)
Basic .......................................................... 32,501 27,264 29,859 26,633
Effect of assumed conversions of employee stock options......... 4,153 2,198 3,212 1,404
--------------------------- --------------------------
Diluted ........................................................ 36,654 29,462 33,071 28,037
=========================== ==========================
NOTE E INCOME TAXES
The Company accounts for income taxes in accordance with Statement of Financial
Accounting Standards No. 109, ("SFAS 109") "Accounting for Income Taxes." Under
SFAS No. 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
No. 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 the Company's business. Based upon management's assessment of all
available evidence, including the Company's completed transition into a
licensing business, net income for fiscal year ended December 31, 2004,
estimates of future profitability based on projected royalty revenues from its
licensees, and the overall prospects of the Company's business, management
concluded in the Current Quarter that it is more likely than not that a portion
of previously unrecognized deferred income tax benefits will be realized.
Accordingly, the Company reduced a portion of the related valuation allowance
which resulted in a $2.0 million tax benefit for the Current Quarter and $3.8
million for the Current Nine Months, respectively. Further, in connection with
the income anticipated from the acquisition of Joe Boxer, the Company reduced
the valuation allowance by an additional $2.7 million and allocated an
equivalent amount to a deferred tax asset in the purchase accounting related to
such acquisition. Based on the realization of a portion of that income in the
Current Quarter, a $600,000 deferred income tax charge was recorded. See Note K.
9
NOTE F CONTINGENCIES
On August 5, 2004, the Company, along with its subsidiaries Unzipped Apparel,
LLC ("Unzipped"), Michael Caruso & Co., Inc. ("Caruso") and IP Holdings, LLC,
(collectively, "Plaintiffs") commenced a lawsuit in the Superior Court of
California, Los Angeles County, against Unzipped's former manager, former
supplier and former distributor, Sweet Sportswear LLC ("Sweet"), Azteca
Production International, Inc. ("Azteca") and Apparel Distribution Services, LLC
("ADS"), respectively; and a principal of these entities and former Company
Board member, Hubert Guez (collectively, "Defendants"). Plaintiffs amended their
Complaint on November 22, 2004. In their Amended Complaint, Plaintiffs allege
that Defendants fraudulently induced Plaintiffs to purchase Sweet's 50% interest
in Unzipped for an inflated price, that Sweet and Azteca committed material
breaches of the Management Agreement (defined below) and supply and distribution
agreements, and that Guez materially breached his fiduciary obligations to the
Company while a member of the Company's Board of Directors. Also, Plaintiffs
allege that Defendants have imported, distributed and sold goods bearing the
Company's BONGO(R) trademarks in violation of federal and California law.
Plaintiffs seek damages in excess of $50 million. Defendants filed a motion to
dismiss certain of the claims asserted in the Amended Complaint, and on February
7, 2005, the Court denied Defendants' motion in its entirety.
On March 10, 2005, Sweet, Azteca and ADS (collectively, "Cross-Complainants")
filed an Answer to Plaintiffs' Amended Complaint and a Cross-Complaint against
Plaintiffs and the Company's Chief Executive Officer, Neil Cole ("Mr. Cole")
(collectively, "Cross-Defendants") seeking compensatory, punitive and exemplary
damages and litigation costs, as well as the establishment of a constructive
trust for the benefit of the Cross-Complainants. The Cross-Complainants alleged
that some or all of the Cross-Defendants breached the Management Agreement and
supply and distribution agreements; that IPH and Mr. Cole interfered with
Sweet's performance under the Management Agreement; and that the Company, Caruso
and Mr. Cole interfered with Cross-Complainants' relationships with Unzipped and
caused Unzipped to breach its agreements with Azteca and ADS. Cross-Complainants
also alleged that some or all of the Company, Caruso and Mr. Cole fraudulently
induced Sweet to sell its 50% interest in Unzipped for a deflated price and
enter into an associated 8% Senior Subordinated Note with the principal amount
of $11 million (the "Sweet Note").
The Company had previously entered into a management agreement with Sweet (the
"Management Agreement") wherein Sweet guaranteed that the net income of
Unzipped, as defined, would be no less than $1.7 million for each year during
the term ("the Guarantee"). In the event that the Guarantee was not met, Sweet
was obligated to pay the difference between the actual net income, as defined,
and the Guarantee ("the Shortfall Payment"). The Cross-Complaint alleged that
the Company breached its obligations to Sweet arising under the Sweet Note by,
among other things, understating Unzipped's earnings for the fiscal year ended
January 31, 2004 and the first three quarters of the fiscal year ended January
31, 2005 for the purpose of causing Unzipped to fall short of the Guarantee for
these periods, and improperly offsetting the Shortfall Payment against the Sweet
Note. See Note G. Lastly, the Cross-Complaint alleged that the understatements
in Unzipped's earnings and offsets against the Sweet Note were incorporated into
the Company's public filings for the periods identified above, causing the
Company to overstate materially its earnings and understate its liabilities for
such period with the effect of improperly inflating the public trading price of
the Company's common stock.
Cross-Defendants filed a motion to dismiss certain of the claims asserted in the
Cross-Complaint, and on June 28, 2005, the Court granted Cross-Defendants'
motion in part. On July 22, 2005, Cross-Complainants amended their
Cross-Complaint (the "FAXC"), omitting their previously asserted claim that some
or all of the Company, Caruso and Mr. Cole fraudulently induced Sweet to sell
its 50% interest in Unzipped for a deflated price and enter into the Sweet Note.
Although the FAXC no longer seeks relief for this purported fraud, the substance
of the allegations remains largely unchanged.
Cross-Defendants filed a motion to dismiss certain of the claims asserted in the
FAXC, and on October 25, 2005, the Court granted Cross-Defendants' motion in
part, dismissing all claims asserted against Mr. Cole along with the
Cross-Complainants' sole remaining fraud claim. The remaining Cross-Defendants
deny Cross-Complainants' allegations and intend to vigorously defend against the
Amended Cross-Complaint.
On November 5, 2004, Unzipped Apparel, LLC. ("Unzipped") commenced a lawsuit in
the Supreme Court of New York, New York County, against Unzipped's former
President of Sales, Gary Bader ("Bader"), alleging that Bader breached certain
fiduciary duties owed to Unzipped as its President of Sales, unfairly competed
with Unzipped and tortiously interfered with Unzipped's contractual
relationships with its employees. On October 5, 2005, Unzipped amended its
Complaint to assert identical claims against Bader's company, Sportswear
Mercenaries, Ltd. ("SWM"). On October 14, 2005, Bader and SWM filed an Answer
containing Counterclaims to Unzipped's Amended Complaint, and a Third-Party
Complaint against the Company and Mr. Cole, seeking unspecified damages in
excess of $4 million. Unzipped, the Company and Mr. Cole deny the claims
asserted against them, and intend to vigorously defend against all such claims.
10
In January 2002, Redwood Shoe Corporation ("Redwood"), one of the Company's
former buying agents of footwear, filed a complaint in the United States
District Court for the Southern District of New York, alleging that the Company
breached various contractual obligations to Redwood and seeking to recover
damages in excess of $20 million and its litigation costs. The Company filed a
motion to dismiss certain counts of the complaint based upon Redwood's failure
to state a claim, in response to which Redwood has filed an amended complaint.
The Company also moved to dismiss certain parts of the amended complaint. The
magistrate assigned to the matter granted, in part, the Company's motion to
dismiss, and this ruling is currently pending before the District Court. The
Court has stayed discovery pending a ruling on this motion. The Company intends
to vigorously defend the lawsuit, and file counterclaims against Redwood after
the District Court rules on the pending motion to dismiss. At September 30, 2005
and October 31, 2004, the payable to Redwood totaled approximately $1.8 million
which is subject to any claims, offsets or other deductions the Company may
assert against Redwood, and was reflected in "Accounts payable, subject to
litigation".
From time to time, the Company is also made a party to certain 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. Except as set forth herein, the Company knows of
no material legal proceedings, pending or threatened, or judgments entered,
against any director or officer of the Company in his capacity as such.
NOTE G UNZIPPED APPAREL, LLC
Equity Investment:
On October 7, 1998, the Company formed Unzipped with joint venture partner
Sweet, the purpose of which was to market and distribute apparel under the BONGO
label. The Company and Sweet each had a 50% interest in Unzipped. Pursuant to
the terms of the joint venture, the Company licensed the BONGO trademark to
Unzipped for use in the design, manufacture and sale of certain designated
apparel products.
Acquisition:
On April 23, 2002, the Company acquired the remaining 50% interest in Unzipped
from Sweet for a purchase price of three million shares of the Company's common
stock and $11 million in debt evidenced by the Sweet Note. In connection with
the acquisition of Unzipped, the Company filed a registration statement with the
SEC for the three million shares of the Company's common stock issued to Sweet,
which was declared effective by the SEC on July 29, 2003.
Revolving Credit Agreement:
On February 25, 2003, Unzipped entered into a two-year $25 million credit
facility ("the Unzipped Credit Facility") with GE Capital Commercial Services,
Inc. ("GECCS" or "the Lender"). Borrowings were limited by advance rates against
eligible accounts receivable and inventory balances, as defined. Under the
Unzipped Credit Facility, Unzipped could also arrange for letters of credit in
an amount up to $5 million. The borrowings bore interest at a rate of 2.25% per
annum in excess of the 30 day Commercial Paper rate or 3%, whichever is greater.
Borrowings under the Unzipped Credit Facility were secured by substantially all
of the assets of Unzipped. In addition, Unzipped had agreed to subordinate its
accounts payable to Azteca, ADS and Sweet to GECCS. Unzipped was required to
meet a minimum tangible net worth covenant, as defined. At October 31, 2004, the
loan had been repaid in full and the borrowing arrangement with GECCS was
terminated.
Related Party Transactions:
Prior to August 5, 2004, Unzipped was managed by Sweet pursuant to the
Management Agreement, pursuant to which Sweet was obligated to manage the
operations of Unzipped in return for, commencing in fiscal year ended January
31, 2004 ("Fiscal 2004"), a management fee based upon certain specified
percentages of net income that Unzipped would achieve during the three-year
term. In addition, Sweet guaranteed that the net income, as defined, of Unzipped
commencing in Fiscal 2004 would be no less than $1.7 million for each year
during the term. In the event that the Guarantee was not met, under the
Management Agreement, Sweet was obligated to pay to the Company the difference
between the actual net income of Unzipped, as defined, and the Guarantee. The
Shortfall Payment could be offset against the amounts due under the Sweet Note
at the option of either Sweet or the Company.
11
For the Current Quarter, Unzipped had no operations, as compared to a net loss
(as defined and pro-rated for the period from the beginning of the Prior Year
Quarter to August 5, 2004 when the Company terminated the Management Agreement,
for the purpose of determining if the Guarantee had been met) of $3.1 million in
the Prior Year Quarter. Consequently for the Current Quarter there was no
Shortfall Payment, as compared to a Shortfall Payment of $3.5 million in the
Prior Year Quarter. The $3.5 million Shortfall Payment had been adjusted to $3.1
million, net of $400,000 reserve against the difference between the pro-rated
Shortfall Payment and the full quarterly Shortfall Payment of $425,000 which the
Company believes that it is entitled to. The adjusted Shortfall Payment had been
recorded in the consolidated income statements as a reduction of Unzipped's cost
of sales (since the majority of Unzipped's operations are with entities under
common ownership with Sweet, including all of the purchases of inventory) and on
the balance sheet as a reduction of the Sweet Note based upon the right to
offset in the Management Agreement.
For the Current Nine Months, Unzipped had a net loss (as defined, for the
purpose of determining if the Guarantee had been met) of $296,000, as compared
to net income (as defined, for the purpose of determining if the Guarantee had
been met) of $4.2 million in the Prior Year Nine Months. Consequently for the
Current Nine Months there was a Shortfall Payment of $438,000, as compared to an
adjusted Shortfall Payment of $4.8 million, net of $400,000 reserve, in the
Prior Year Nine Months. The adjusted Shortfall Payments had been recorded in the
consolidated income statements as a reduction of Unzipped's cost of sales (since
the majority of Unzipped's operations were with entities under common ownership
with Sweet, including all of the purchases of inventory) and on the balance
sheet as a reduction of the Sweet Note based upon the right to offset in the
Management Agreement.
As of September 30, 2005, as a net result of the offset of the Shortfall
Payment, the balance of the Sweet Note was reduced to $2.9 million and was
reflected in "Long-term debt". The Company believes that it is entitled to the
full Guarantee of $1.7 million for the fiscal year of Unzipped ended January 31,
2005. For the purpose of computing the Shortfall Payment for financial statement
presentation, however, the Company has pro-rated the Guarantee to exclude the
portion relating to the period subsequent to August 5, 2004 ($827,000, including
$142,000 for the month of January 2005). As a result, the net Shortfall Payment
reflected as a reduction of cost of sales in the Current Nine Months of
$296,000, and the Sweet Note balance of $2.9 million includes the above noted
$827,000, pending the outcome of the litigation with Sweet and its affiliates.
See Note F. After adjusting for the Shortfall Payment, Unzipped reported a net
loss of $37,500 for the Current Nine Months and net income of $535,600 in the
Prior Year Nine Months. Due to the immaterial nature of the related amounts, the
net loss of $37,500 from Unzipped has been included in the selling, general and
administrative expense in the Company's Condensed Consolidated Income Statements
for the Current Nine Months.
For each of the quarters ended July 31, October 31, and December 31, 2004, March
31, June 30, 2005 and the Current Quarter, the Company did not make an interest
payment on the Sweet Note to partially offset the Shortfall Payment due from
Sweet. Such interest payment is to be resumed after the Shortfall Payment is
satisfied.
Prior to August 5, 2004, there was a distribution agreement between Unzipped and
ADS pursuant to which Unzipped paid ADS a per unit fee for warehousing and
distribution functions and per unit fee for processing and invoicing orders. The
agreement also provided for reimbursement for certain operating costs incurred
by ADS and charges for special handling fees at hourly rates approved by Sweet
as manager. Prior to August 5, 2004, there was also a supply agreement in effect
between Unzipped and Azteca pursuant to which Unzipped paid Azteca cost plus 6%
for goods, and was entitled to up to 30 days in which to pay Azteca. Prior to
August 5, 2004, Azteca allocated expenses to Unzipped for Unzipped's use of a
portion of Azteca's office space, design and production team and support
personnel. Unzipped also occupied office space in a building rented by ADS and
Commerce Clothing Company, LLC, a related party to Azteca.
On August 5, 2004, Unzipped terminated the Management Agreement with Sweet, the
supply agreement with Azteca and the distribution agreement with ADS and
commenced a lawsuit against Sweet, Azteca, ADS and Hubert Guez. See Note F.
At September 30, 2005, the Company included in "accounts payable, subject to
litigation" amounts due to Azteca and ADS of $847,000 and $2.3 million
respectively. See Note F. At October 31, 2004, included in the "Due to related
parties" were amounts due to Azteca and ADS $2.3 million and $847,000
respectively.
In a separate transaction concerning Unzipped with Bongo Apparel, Inc. ("BAI"),
BAI is the licensee of the BONGO jeans wear business formerly managed by Sweet.
Prior to August 26, 2005, BAI managed the operations of Unzipped following the
termination of Sweet as the manager on August 5, 2004. As of December 31, 2004,
there was $2.5 million due to BAI and $0 as of September 30, 2005.
12
NOTE H SEGMENT INFORMATION
The Company identifies operating segments based on, among other things, the way
the Company's management organizes the components of its business for purposes
of allocating resources and assessing performance. The Company's operations are
comprised of two reportable segments: licensing/commission/footwear and apparel.
Segment revenues are generated from the royalty income from licensees and the
sale of footwear, apparel and accessories through wholesale channels and the
Company's retail locations. The activities associated with the apparel product
sales segment were discontinued effective with the termination of the Company's
relationship with Sweet described in Notes F and G. The Company defines segment
income as operating income before interest expense and income taxes. Summarized
below are the Company's segment revenues, income (loss) and total assets by
reportable segments for the three months and Nine Months ended September 30,
2005 and October 31, 2004.
Licensing/
(000's omitted) Commission/Footwear Apparel Consolidated
For three months ended September 30, 2005
Total revenues $ 9,205 $ - $ 9,205
Segment operating income (loss) 5,048 - 5,048
Net interest expense 1,289
Income before provision for income taxes $ 3,759
Capital additions $ - $ - $ -
Depreciation and amortization expenses $ 363 $ - $ 363
For nine months ended September 30, 2005
Total revenues $ 17,792 $ - $ 17,792
Segment operating income (loss) 7,449 (38) 7,411
Net interest expense 2,134
Income before provision for income taxes $ 5,277
Capital additions $ 26 $ - $ 26
Depreciation and amortization expenses $ 1,353 $ 38 $ 1,391
Total assets as of September 30, 2005 $188,370 $ 31,264 $219,634
For the three months ended October 31, 2004
Total revenues $ 10,039 $ 3,365 $ 13,404
Segment operating income 1,256 4 1,260
Net interest expense 657
Income before provision for income taxes $ 603
Capital additions $ 27 $ - $ 27
Depreciation and amortization expenses $ 466 $ 127 $ 593
For the nine months ended October 31, 2004
Total revenues $ 25,809 $ 35,494 $ 61,303
Segment operating income 2,312 935 3,247
Net interest expense 2,093
Income before provision for income taxes $ 1,154
Total assets as of October 31, 2004 $ 27,581 $ 33,108 $ 60,689
Capital additions $ 27 $ 4 $ 31
Depreciation and amortization expenses $ 1,279 $ 381 $ 1,660
13
NOTE I BADGLEY MISCHKA LICENSING LLC
On October 29, 2004 (the "Closing Date"), the Company acquired the principal
assets (the "Purchased Assets") of B.E.M. Enterprise, Ltd. ("BEM"), the holding
company for the Badgley Mischka designer business from parent company Escada
U.S.A. The purchased assets include the BADGLEY MISCHKA(R) trademark, two
existing licenses and the rights to operate the existing Badgley Mischka retail
store located on Rodeo Drive in Beverly Hills, California. The purchase price
for the transaction was $950,000, (excluding $372,000 of fees and expenses
related to the acquisition) which was paid by the Company's issuance of 214,981
shares of the Company's common stock. The purchase price of the Purchased Assets
was subject to an upward adjustment in the event that the closing sale price of
the Company's common stock on the date which was 180 days after the Closing Date
was less than the closing sale price on the Closing Date. No such adjustment to
the purchase price was necessary as the closing sales price at April 27, 2005
was $4.95, greater than the closing price of $4.44 on the Closing Date. The
Company filed a registration statement with the SEC for the resale of the
214,981 shares of the Company's common stock issued to BEM, which was declared
effective by the SEC on December 1, 2004.
Included in cash on the Company's condensed consolidated financial statements is
a term deposit in the principal amount of $100,000 which has been pledged as
collateral to the landlord of the Badgley Mischka retail store until December
31, 2005, in connection with the leased premises. Unrestricted access to this
fund will revert to the Company on January 1, 2006.
The Company was advised in acquisition of the Purchased Assets by UCC Funding
Corporation ("UCC"), of which Robert D'Loren, a then director of the Company, is
President. In connection with the services provided in the acquisition, Mr.
D'Loren, the sole shareholder of UCC, received 50,000 stock options. In
addition, UCC will receive a fee of 5% of the gross revenues that the Company
derives from the BADGLEY MISCHKA trademark and all derivative trademarks, which
right was assigned to Content Holding, which is owned by Mr. D'Loren. In
addition, should the Company sell all or substantially all of the acquired
assets, UCC will receive a cash payment calculated under a formula based on the
sales price
NOTE J - SPECIAL CHARGES
During the quarter ended September 30, 2005, the Company recorded $289,000 of
special charges in connection with its litigation related to Unzipped. See Note
F. In the Prior Year Quarter, the Company did not record any special charges. In
the Current Nine Months, the Company recorded $996,000 of special charges in
connection with the Unzipped litigation, compared to $99,000 of special charges
consisting primarily of legal and professional fees related to transitioning
Unzipped's wholesale business into a licensing business in the Prior Year Nine
Months.
NOTE K ACQUISITION OF JOE BOXER
On July 22, 2005, the Company acquired the JOE BOXER (R) brand from Joe Boxer
Company, LLC and its affiliates. Joe Boxer is a leading lifestyle brand of
apparel, apparel accessories and home goods for men, women, teens and children.
The Joe Boxer brand is currently licensed exclusively to Kmart in the United
States and internationally to manufacturers in Canada and Mexico.
The aggregate purchase price paid was $40.0 million in cash, 4.35 million
restricted shares of the Company's common stock (valued at $36.2 million) and an
assumption of a debt payable to a licensee in the amount of approximately $10.8
million. Based on the Company's assessment of the fair value of the assets
acquired, approximately $79.8 million has been assigned to the Joe Boxer
trademark. Under the purchase method of accounting, tangible and identifiable
intangible assets acquired and liabilities assumed are recorded at their
estimated fair values. The estimated fair values, useful lives and amortization
of certain assets acquired are based on a third party valuation and are subject
to final valuation adjustments. The Joe Boxer trademark has been determined to
have an indefinite useful life and accordingly, consistent with FAS 142, no
amortization will be recorded in the Company's consolidated statements of
operations. Instead, the related intangible asset will be tested for impairment
at least annually, with any related impairment charge recorded to the statement
of operations at the time of determining such impairment.
Total purchase price was determined as follows:
(000's omitted)
Cash paid at closing $ 40,000
Fair value of 4,350,000 shares of
common stock at $8.33 per share 36,236
Assumption of K-mart loan, including
$3,509 due within 12 months 10,798
Accrued interest, K-mart loan 309
Value of warrants issued as a
cost of the acquisition 788
Other estimated costs of acquisition 755
----------------
Total cost of acquisition $ 88,886
================
14
The purchase price was allocated to the fair value of the assets acquired and
liabilities assumed as follows:
(000's omitted)
Accounts receivable $ 3,121
Deferred tax asset 2,700
Licensing contracts 1,333
Joe Boxer trademark 79,800
Goodwill 1,932
----------------
Total allocated purchase price $ 88,886
================
The $1.3 million of licensing contracts is being amortized on a straight-line
basis over the remaining contractual period of approximately 29 months. The
goodwill of $1.9 million is subject to a test for impairment on an annual basis.
Any adjustments resulting from the finalization of the purchase price
allocations will affect the amounts assigned to goodwill.
As part of this acquisition, the Company entered into an employment agreement
with William Sweedler as Executive Vice President of the Company and President
of the Joe Boxer division. As part of his compensation, on July 22, 2005, he was
granted 1,425,000 stock options of which 225,000 vested immediately, and
1,200,000 will vest upon achievement by the Joe Boxer division of certain
revenues levels.
The Company obtained $40 million in cash to pay a portion of the purchase price
for the Joe Boxer assets through the debt issuance by IPH of a $63 million
asset-backed note. Approximately $17.5 million of the proceeds of the note was
used to refinance previously existing notes with the same lender, $40.0 million
was paid to the sellers, approximately $1.0 million was used to pay costs
associated with the debt issuance, $310,000 was deposited in a reserve account
as required by the lender, and approximately $4.0 million of which was available
to the Company for working capital purposes. Costs associated with the debt
issuance of approximately $1.0 million have been deferred and are being
amortized over the 7-year life of the refinanced debt.
UCC acted as a financial advisor to IPH in connection with the Joe Boxer
acquisition and the Rampage brand acquisition. See Note L. On June 7, 2005, the
Company entered an agreement with UCC to issue UCC a ten-year warrant
("Warrant") to purchase an aggregate of 1,000,000 shares of the Company's common
stock ("Warrant Shares") at a price of $5.98 per share, subject to anti-dilution
adjustments under certain conditions. Pursuant to the agreement, UCC will act,
for a 36-month term, as the Company's exclusive advisor in connection with
providing various advisory services relating to the Company's acquisitions. One
third of the Warrant Shares vest upon consummation of each acquisition, for a
total of three acquisitions. On July 22, 2005, 333,334 of the Warrants Shares
vested, with a fair value of $788,000, upon consummation of the acquisition of
Joe Boxer
On September 19, 2005, the Company filed with the SEC a registration statement
covering the resale of certain of the shares of common stock issued in
connection with the acquisition of Joe Boxer and the resale of the Warrant
Shares. The registration statement was declared effective by the SEC on October
12, 2005
The following unaudited pro-forma information presents a summary of the
Company's consolidated results of operations as if the Joe Boxer acquisition and
the Rampage acquisition (See Note L) and their related financing had occurred on
January 1, 2005. These pro forma results have been prepared for comparative
purposes only and do not purport to be indicative of the results of operations
which actually would have resulted had the acquisition occurred on January 1,
2005, or which may result in the future.
Three Nine
Months Ended Months Ended
September 30, 2005 September 30, 2005
-------------------------------------------
(000's omitted, except per share)
Total net revenues $11,729 $31,767
Operating income $ 7,172 $17,754
Net Income $6,128 $17,185
Basic earnings per common share $0.19 $0.57
Diluted earnings per common share $0.17 $0.52
15
NOTE L ACQUISITION OF RAMPAGE
On September 16, 2005, the Company acquired the Rampage brand from Rampage
Licensing, LLC, a California limited liability company (the "Seller").
The purchase price for the acquisition was paid by the following consideration:
$25.75 million in cash and the issuance to the designees of the Seller of
2,171,336 restricted shares of the Company's common stock, which was valued at
approximately $20.15 million.
Based on the Company's preliminary assessment of the fair value of the assets
acquired, approximately $41.1 million has been assigned to the Rampage
trademark. Under the purchase method of accounting, tangible and identifiable
intangible assets acquired and liabilities assumed are recorded at their
estimated fair values. The estimated fair values, useful lives and amortization
of certain assets acquired are based on a preliminary valuation and are subject
to final valuation adjustments. The Rampage trademark has been determined to
have an indefinite useful life, and accordingly, in accordance with FAS 142, no
amortization will be recorded in the Company's consolidated statements of
operations. Instead, the related intangible asset will be tested for impairment
at least annually, with any related impairment charge recorded to the statement
of operations at the time of determining such impairment.
Total purchase price was determined as follows:
(000's omitted)
Cash paid at closing $ 25,750
Fair value of 2,171,336 shares of
common stock at $9.28 per share 20,150
Value of warrants issued as a
cost of the acquisition 788
Other estimated costs of acquisition 755
----------------
Total cost of acquisition $ 47,443
================
The purchase price was allocated to the fair value of the assets acquired and
liabilities assumed as follows:
(000's omitted)
Rampage licensing contract $ 550
Rampage domain name 230
Rampage non-compete agreement 600
Rampage trademark 41,070
Goodwill 4,993
----------------
Total allocated purchase price $ 47,443
================
The licensing contracts are to be amortized on a straight-line basis over the
remaining contractual period of approximately 3 years, the Rampage domain name
is to be amortized on a straight-line basis over 5 years, and the value of the
non-compete agreement is to be amortized on a straight-line basis over 2 years.
The goodwill of approximately $5 million is subject to a test for impairment on
an annual basis. Any adjustments resulting from the finalization of the purchase
price allocations will affect the amounts assigned to goodwill.
The Company obtained $25.75 million in cash to pay a portion of the purchase
price of the Rampage assets through the debt issuance by IPH of a $103 million
asset-backed note. Approximately $63 million of the proceeds of the note was
used to refinance the note described in Note K, $25.75 million was paid to the
sellers, approximately $773,500 was used to pay costs associated with the debt
issuance, $1.4 million was deposited in a reserve account as required by the
lender, and $12 million was deposited in an escrow account for the benefit of
the holders of the note, to be used by IPH only for the purchase of additional
intellectual property assets from the Company. To the extent such purchase does
not occur prior to November 15, 2005, IPH must redeem a portion of the note
worth $12 million on deposit in such escrow account with no penalty. IPH intends
to redeem $12 million of the note as IPH does not anticipate such purchase will
occur prior to November 15, 2005. Costs associated with the debt issuance have
been deferred and are being amortized over the 7-year life of the notes.
In accordance with the agreement with UCC (See Note K), an additional 333,333 of
the Warrants Shares vested on September 16, 2005 with a fair value of $788,000
upon consummation of the Rampage acquisition, for which UCC acted as a financial
advisor to IPH
16
On October 17, 2005, the Company filed with the SEC a registration statement
covering the resale of the shares of common stock issued in connection with the
acquisition of Rampage. The registration statement was declared effective by the
SEC on October 27, 2005
For unaudited pro-forma information presenting a summary of the Company's
consolidated results of operations as if the acquisition and related financing
had occurred on January 1, 2005, see Note K.
NOTE M RECENT ACCOUNTING STANDARDS
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Monetary Assets,"
which addresses the measurement of exchanges of nonmonetary assets and
eliminates the exception from fair value measurement for nonmonetary exchanges
of similar productive assets and replaces it with an exception for exchanges
that do not have commercial substance. SFAS No. 153 is effective for nonmonetary
asset exchanges occurring in fiscal periods beginning after June 15, 2005, with
earlier application permitted. The adoption of SFAS No. 153 will have no impact
on the Company's results of operations or its future financial position or
results of operations.
In December 2004, the FASB issued FAS No. 123(R), "Share-Based Payment," an
amendment of FASB Statements 123 and 95. FAS No, 123(R) replaced FAS No. 123,
"Accounting for Stock-Based Compensation," and supersedes APB Opinion No. 25,
"Accounting for Stock Issued to Employees." This statement required companies to
recognize the fair value of stock options and other stock-based compensation to
employees beginning with fiscal periods beginning after June 15, 2005. In April
2005, the Securities and Exchange Commission approved a new rule for public
companies which delays the adoption of this standard for an additional nine
months. This means that the Company will be required to implement FAS No, 123(R)
no later than the quarter beginning January 1, 2006. The Company currently
measures stock-based compensation in accordance with APB Opinion No. 25, as
discussed above. The impact on the Company's financial condition or results of
operations will depend on the number and terms of stock options outstanding on
the date of change, as well as future options that may be granted.
17
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 Form 10-Q
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 the control of the Company, which may cause
the actual results, performance or achievements of the Company to be materially
different from any future results, performance or achievements expressed or
implied by such forward looking statements.
Such factors include, but are not limited to, uncertainty regarding the
Company's continued acquisition of new licensees, market acceptance of current
products and the ability to successfully develop and market new products
particularly in light of rapidly changing fashion trends, the impact of supply
and manufacturing constraints or difficulties relating to the Company's
licensees' dependence on foreign manufacturers and suppliers, uncertainties
relating to customer plans and commitments, the ability of licensees to
successfully market and sell branded products, competition, uncertainties
relating to economic conditions in the markets in which the Company's licensees
operate, the ability to hire and retain key personnel, the ability to obtain
capital if required, the risks of litigation and regulatory proceedings, the
risks of uncertainty of trademark protection, the uncertainty of marketing and
licensing acquired trademarks and other risks detailed in this report and in the
Company's other SEC filings, and uncertainty associated with the impact on the
Company in relation to recent events discussed above in this report.
The words "believe", "expect", "anticipate", "seek" 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.
General Introduction. The Company is in the business of licensing and marketing
intellectual property. The Company currently owns five brands, CANDIE'S(R),
BONGO(R), BADGLEY MISCHKA(R), JOE BOXER(R) and RAMPAGE(R), which it licenses to
third parties for use in connection with a variety of apparel, and fashion
products. The Company also arranges through its wholly-owned subsidiary Bright
Star Footwear, Inc. ("Bright Star") for the manufacture of footwear products for
mass market and discount retailers under the private label brand of the
retailer.
The Company's business strategy, as a licensing and marketing company, is to
maximize the value of its intellectual property by entering into strategic
licenses with partners who have been selected based upon the Company's belief
that they will be able to produce and sell quality products in the categories of
their specific expertise. This licensing strategy is designed to permit the
Company to operate its licensing business with minimal working capital, no
inventory, production or distribution costs or risks, and utilizing only a small
group of core employees.
In December, 2004, the Company changed its fiscal year end from January 31 to
December 31, effective for the period ending December 31, 2004. As a result, the
end of the Current Quarter and the Current Nine Months do not coincide with the
three months ("Prior Year Quarter") and Nine Months ("Prior Year Nine Months")
ended October 31, 2004. The financial statements included herein are for the
Current Quarter and Current Nine Months, and they are compared with the Prior
Year Quarter and Prior Year Months. The Company has not recast the Prior Year
Quarter and Prior Year Nine Months to coincide with the Current Quarter and
Current Nine Months as management believes that such recasting is not cost
justified and does not materially affect the relative comparability of the data
presented herein.
Beginning January 2005, the Company changed its business practices with respect
to Bright Star, which resulted in a change in revenue recognition. Bright Star
is now acting solely as an agent, accordingly, only net commission revenue is
recognized.
As a result of the Company's transition to a licensing business, and to a lesser
extent, its change in fiscal year end and the change in its Bright Star revenue
reporting, the Company's operating results for the current years and quarters
are not comparable to prior years and quarters, as applicable. Further, since it
is anticipated that there will be no revenue other than licensing and commission
revenue going forward, the results for the remaining quarters for the year
ending December 31, 2005 are also expected to be non-comparable to the
corresponding prior year's quarters.
On July 1, 2005, the Company changed its corporate name to Iconix Brand Group,
Inc. and its NASDAQ symbol to ICON.
Seasonal and Quarterly Fluctuations. The Company's results may fluctuate quarter
to quarter as a result of its licensees' businesses as well as a result of
holidays, weather, the timing of product shipments, market acceptance of the
Company products, the mix, pricing and presentation of the products offered and
sold, the hiring and training of personnel, the timing of inventory write downs,
fluctuations in the cost of materials, the mix between wholesale and licensing
businesses, and the incurrence of operating costs beyond the Company's control
as may be caused by general economic conditions, and other unpredictable factors
such as the action of competitors. Accordingly, the results of operations in any
quarter will not necessarily be indicative of the results that may be achieved
for a full fiscal year or any future quarter.
18
The Company continues to seek to expand and diversify the types of licensed
products being produced under its 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 the Company, however, will still largely remain dependent on its
ability to contract with and retain key licensees, its licensee's ability to
predict accurately upcoming fashion trends among its customer base, to build and
maintain brand awareness and to fulfill the product requirements of the retail
channel within a global marketplace. Unanticipated changes in consumer fashion
preferences, slowdowns in the United States economy, changes in the prices of
supplies, gasoline, consolidation of retail establishments, among other factors
noted herein and the Company's other filing with the SEC, could adversely affect
the Company's licensees' from meeting and/or exceeding their contractual
commitments to the Company and thereby adversely impact the Company's future
operating results.
Effects of Inflation. The Company does not believe that the relatively moderate
rates of inflation experienced over the past few years in the United States,
where it primarily competes, have had a significant effect on revenues or
profitability.
Changes in estimate. Effective July 1, 2005 the Company had a change in estimate
of the useful lives of the Candie's and Bongo trademarks to indefinite life.
When acquired in 1981, the Candie's trademark was estimated to have a useful
life of 20 years. Bongo, acquired in 1998 was also estimated at that time to
have a useful life of 20 years. In arriving at the conclusion to use an
indefinite life management considered the following elements of the Company's
evolving business and use of the Candies and Bongo trademarks.
During the first half 2005, the Company fully completed the transition into a
licensing company. As a result of this new business model, the Company has
focused on expanding the use and value of the Candie's and Bongo names. The
Candie's brand has been licensed to Kohl's Department Stores ("Kohl's", Kohl's
is a trademark of Kohl's Illinois, Inc.), one of the largest retailers in the
United States to become their exclusive junior lifestyle brand. In July of 2005,
Candie's launched in all 670 Kohl's doors in over 18 product categories,
including shoes, junior apparel, handbags, innerwear, cold weather accessories,
legwear, fragrances, jewelry, sleepwear, knits, optical, activewear , special
sizes and children's. In 2006 Kohl's will add home accessories, fragrance,
swimwear and sunglasses. Similarly, the Bongo brand has been expanded from a
predominantly jeans wear brand, to broad variety of products, including tops,
footwear, knitwear, watches, handbags, optical, accessories, swim, intimate
apparel, outerwear, belts, jewelry, children's apparel and men's apparel.
Brand recognition for both of these brands is very high and the Company expects
it to grow in the future. Candie's is being aggressively marketed by Kohl's on
television, in consumer magazines, in their newspaper circulars, on the Internet
and via direct mail. The already high awareness of the Candie's brand is growing
driven by Kohl's vast media reach and it is quickly developing a loyal base of
consumers within Kohl's. Bongo's brand awareness has been on the rise driven by
its transformation into a lifestyle brand with the launch of new categories
including outerwear, watches, jewelry, eyewear and young men's apparel.
Based upon the rich heritage of both brands, the modification in use of these
brands from a manufacturing and distribution emphasis to one of only licensing,
the recent expansion of both into a broad range of lifestyle categories, and the
strong brand awareness, the Company believes it is reasonable to anticipate the
future us of these trademarks over an indefinite period. The impact of this
change in estimate for both the third quarter and nine months ended September
30, 2005, is a reduction in amortization expense relating to the Candie's and
Bongo trademarks totaling $232,500.
Summary of Operating Results:
The Company had net income of $5.2 million and $8.5 million, respectively, for
the Current Quarter and Current Nine Months, compared to net income of $603,000
and $1.2 million, respectively, for the Prior Year Quarter and Prior Year Nine
Months.
The Company's operating income was $5.0 million and $7.4 million for the Current
Quarter and the Current Nine Months, respectively, compared to operating income
of $1.3 million and $3.2 million in the comparable prior year periods,
respectively.
19
Results of Operations
For the three months ended September 30, 2005 and October 31, 2004
Revenues. During the Current Quarter, consolidated net revenues decreased by
$4.2 million to $9.2 million from $13.4 million in the Prior Year Quarter. As a
result of the Company licensing its jeans wear business in August 2004, there
were no reportable jeans wear sales in the Current Quarter as compared to $3.7
million in the Prior Year Quarter and there will be no jeans wear sales for the
remainder of the fiscal year ending December 31, 2005 and thereafter. Further,
due to a change in revenue recognition resulting from its change of business
practice beginning January 2005, Bright Star recorded only the net commission
earned on such transactions in the Current Quarter and will continue to do so in
the future. As a result there was $820,000 in commission revenue and no sales
recorded in the Current Quarter for Bright Star, as compared to $7.3 million in
sales and $729,000 in gross profit in the Prior Year Quarter.
Licensing and commission revenue increased $5.7 million, or 167% to $9.2 million
in the Current Quarter from $3.5 million in the Prior Year Quarter. The increase
was due primarily to $3.9 million revenue generated from the acquisition of the
Joe Boxer brand which was completed in July 2005, and $1.0 million by the launch
of the Company's Candie's brand at Kohl's Department Stores.
Gross Profit. Consolidated gross profit increased by $3.1 million to $9.2
million in the Current Quarter from $6.1 million in the Prior Year Quarter.
There was no reportable gross profit from Unzipped's wholesale jeans wear sales
in the Current Quarter, as compared to $2.6 million in the Prior Year Quarter.
Unzipped's gross profit in the Prior Year Quarter included a $3.1 million
adjustment from the Shortfall Payment. See Note F to Notes to Condensed
Consolidated Financial Statements. As previously discussed above, Bright Star's
gross profit increased from $729,000 in the Prior Year Quarter to $820,000 in
the Current Quarter.
Operating Expenses. During the Current Quarter, consolidated selling, general
and administrative expenses decreased by $956,000 to $3.9 million from $4.8
million in the Prior Year Quarter. No net income or loss was included in the
consolidated selling, general and administrative expenses from Unzipped's
operations in the Current Quarter, as compared to $2.6 million expense in the
Prior Year Quarter as the Company completed its transition of the jeans wear
business into a licensing business. See Liquidity and Capital Resources -
Matters Pertaining to Unzipped and Note F of Notes to Condensed Consolidated
Financial Statements. Operating expense in the Company's licensing division
increased by $1.1 million to $3.1 million in the Current Quarter, from $2.0
million in the Prior Year Quarter, partially offset by a $232,500 reduction in
trademark amortization expenses related to CANDIES(R) and BONGO(R) brands as the
Company changed its estimate of the useful lives of these brands to indefinite
life. Operating expense in Bright Star was essentially flat compared to the
Prior Year Quarter. Offsetting the decline in selling, general and
administrative expenses in the Current Quarter was $543,000 of expenses related
to the activities of the Company's Badgely Mischka subsidiary, which was
acquired in October 2004, and $581,000 of expense related to the Company's Joe
Boxer division, which was acquired in July 2005.
In the Current Quarter, the Company's special charges included $289,000 of legal
fees incurred by the Company relating to litigation involving Unzipped. No
special charges were recorded in the Prior Year Quarter. See Note F of Notes to
Condensed Consolidated Financial Statements.
Interest Expense - Net. Interest expense increased by $632,000 in the Current
Quarter to $1.3 million (net of interest income of $54,000), compared to
$657,000 in the Prior Year Quarter. Included in interest expense in the Current
Quarter was $38,000 from the Sweet Note as compared to $165,000 in the Prior
Year Quarter. The increase is primarily due to the new financing arrangements in
connection with the acquisition of Joe Boxer and Rampage (See Note C of Notes to
Consolidated Condensed Financial Statements) offset by a lower average
outstanding balance on the Sweet Note, which has been reduced with the
application of Shortfall Payments (See Note F of Notes to the Consolidated
Condensed Financial Statements). Interest expense in the Current Quarter
associated with the asset backed notes issued by IPH was $1.3 million, as
compared to $393,000 in the Prior Year Quarter. Also included in interest
expense in the Prior Year Quarter was $94,000 from Unzipped's activities, with
no comparable amount in the Current Quarter.
Income Tax Provision (Benefit). A non-cash tax benefit of $2.0 million was
recognized by reducing the valuation allowance in the Current Quarter based on
the Company's projection of future taxable income, which provides sufficient
evidence to support realization of the unreserved portion of a tax benefit
related to the Company's NOLs. This was offset by a $600,000 non-cash deferred
income tax provision on the income generated from the Joe Boxer division. There
was no tax expense on income reported for the Prior Year Quarter, due to a
reduction in the deferred tax valuation reserve, which offsets the income tax
provision. See Note E of Notes to Condensed Consolidated Financial Statements.
Net Income. The Company recorded net income of $5.2 million in the Current
Quarter, compared to $603,000 in the Prior Year Quarter, resulting from the
factors noted above
20
For the Nine Months ended September 30, 2005 and October 31, 2004
Revenues. During the Current Nine Months, consolidated net revenues decreased by
$43.5 million to $17.8 million from $61.3 million in the Prior Year Nine Months.
As a result of the Company licensing its jeans wear business in August 2004,
there were no reportable jeans wear sales in the Current Nine Months as compared
to $35.5 million in the Prior Year Nine Months, and there will be no jeans wear
sales for the remainder of the fiscal year ending December 31, 2005 and
thereafter. Further, due to a change in revenue recognition resulting from its
change of business practice beginning January 2005, Bright Star recorded only
the net commission earned on such transactions in the Current Nine Months and
will continue to do so in the future. As a result there was $1.7 million in
commission revenue and no sales recorded in the Current Nine Months for Bright
Star, as compared to $19.1 million in sales and $1.8 million in gross profit in
the Prior Year Nine Months.
Licensing and commission revenue increased $9.3 million, or 109% to $17.8
million in the Current Nine Months from $8.5 million in the Prior Year Nine
Months. The increase was due primarily to $3.0 million revenue generated by the
launch of the Company's Candie's brand at Kohl's Department Stores, $3.9 million
from the acquisition of the Joe Boxer brand which was completed in July 2005,
and $1.2 million from the Company's Bongo brand apparel licensed to BAI.
Gross Profit. Consolidated gross profit increased by $872,000 to $17.8 million
in the Current Nine Months from $16.9 million in the Prior Year Nine Months.
There was no reportable gross profit from Unzipped's wholesale jeans wear sales
in the Current Nine Months as compared to $8.4 million expense in the Prior Year
Nine Months. Unzipped's gross profit in the Prior Year Nine Months included $5.2
million adjustment from the Shortfall Payment. See Note F to Notes to Condensed
Consolidated Financial Statements. As previously discussed above, Bright Star's
gross profit decreased from $1.8 million in the Prior Year Nine Months to $1.7
million in the Current Nine Months.
Operating Expenses. During the Current Nine Months, consolidated selling,
general and administrative expenses decreased by $4.2 million to $9.4 million
from $13.6 million in the Prior Year Nine Months. Included in the consolidated
selling, general and administrative expenses were $37,500 of Unzipped's net
loss, as compared to $7.4 million of expenses in the Prior Year Nine Months as
the Company completed its transition of the jeans wear business into a licensing
business. See Matters Pertaining to Unzipped and Note F of Notes to Condensed
Consolidated Financial Statements. Operating expense in the Company's licensing
division increased by $1.8 million to $7.2 million in the Current Nine Months,
from $5.4 million in the Prior Year Quarter, partially offset by a $232,500
reduction in trademark amortization expenses related to CANDIES(R) and BONGO(R)
brands as the Company changed its estimate of the useful lives of these brands
to indefinite in the Current Quarter. Operating expense in Bright Star was
essentially flat compared to the Prior Year Nine Month. Offsetting the decline
in selling, general and administrative expenses in the Current Nine Months was
$1.4 million of expenses related to the activities of the Company's Badgely
Mischka subsidiary which was acquired in October 2004, and $581,000 of expense
related to the Company's Joe Boxer division, which was acquired in July 2005.
In the Current Nine Months, the Company's special charges included $996,000 of
legal fees incurred by the Company relating to litigation involving Unzipped,
compared to $99,000 of legal professional fees related to transitioning
Unzipped's wholesale business into a licensing business in the Prior Year Nine
Months. See Note F of Notes to Condensed Consolidated Financial Statements.
Interest Expense - Net. Interest expense decreased by $41,000 in the Current
Nine Months to $2.1 million (net of interest income of $89,000), compared to
$2.1 million in the Prior Year Nine Months. Included in interest expense in the
Current Nine Months was $113,000 from the Sweet Note as compared to $534,000 in
the Prior Year Nine Months. The decrease is due to a lower average outstanding
balance on the Sweet Note, which has been reduced with the application of
Shortfall Payments. See Note F of Notes to the Consolidated Condensed Financial
Statements. Interest expense in the Current Nine Months associated with the
asset backed notes issued by IPH was $2.0 million as compared to $1.1 million in
the Prior Year Quarter. This increase was due primarily to the new financing
arrangements in connection to the acquisition of Joe Boxer and Rampage. See Note
C of Consolidated Condensed Financial Statements. Also included in interest
expense in the Prior Year Nine Months was $399,000 from Unzipped's activities,
with no comparable amount in the Current Nine Months.
Income Tax Provision (Benefits). A provision for $20,000 for minimum taxes was
recorded in the Current Nine Months. A non-cash tax benefit of $3.8 million was
recognized by reducing the valuation allowance in the Current Nine Months based
on the Company's projection of future taxable income, which provides sufficient
evidence to support realization of the unreserved portion of a tax benefit
related to the Company's NOLs. This was offset by a $600,000 non-cash deferred
income tax provision on the income generated from the Joe Boxer division. There
was no tax expense on income reported for Prior Year Nine Months, due to a
reduction in the deferred tax valuation reserve, which offsets the income tax
provision. See Note E of Notes to Condensed Consolidated Financial Statements.
21
Net Income. The Company recorded net income of $8.5 million in the Current Nine
Months, compared to $1.2 million in the Prior Year Nine Months, as a result of
the factors noted above.
Liquidity and Capital Resources
Working Capital.
At September 30, 2005, the current ratio of assets to liabilities was 0.87 to 1
as compared to 0.62 to 1 at December 31, 2004 and 0.73 to 1 at October 31, 2004.
Included in current liabilities at September 30, 2005 were $4.9 million of
accounts payables that are subject to litigation.
The Company continues to rely upon cash generated from operations, especially
licensing and commission activity to finance its operations. Net cash provided
from operating activities totaled $5.6 million in the Current Nine Months, as
compared to $4.8 million of net cash used in the Prior Year Nine Months. The
Company believes that such cash from operations will be sufficient to satisfy
its anticipated working capital requirements for the foreseeable future.
Capital Expenditures.
There were $26,000 of capital expenditures in the Current Nine Months, as
compared to $31,000 for the Prior Year Nine Months.
Matters Pertaining to Unzipped.
On April 23, 2002, the Company acquired the remaining 50% interest in Unzipped
from Sweet for three million shares of the Company's common stock and $11
million in debt evidenced by the Sweet Note. See Note G of Notes to Condensed
Consolidated Financial Statements. Pursuant to the Management Agreement which
was terminated on August 5, 2005, Sweet was obligated to pay any Shortfall under
the Guarantee and the Shortfall Payment was offset against the Sweet Note.
Prior to August 5, 2004, Unzipped was managed by Sweet pursuant to the
Management Agreement, pursuant to which Sweet was obligated to manage the
operations of Unzipped in return for, commencing in Fiscal 2004, a management
fee based upon certain specified percentages of net income that Unzipped would
achieve during the three-year term. In addition, Sweet guaranteed that the net
income, as defined, of Unzipped commencing in Fiscal 2004 would be no less than
$1.7 million for each year during the term. In the event that the Guarantee was
not met, under the Management Agreement, Sweet was obligated to pay to the
Company the difference between the actual net income of Unzipped, as defined,
and the Guarantee. The Shortfall Payment could be offset against the amounts due
under the Sweet Note at the option of either Sweet or the Company.
For the Current Quarter, Unzipped had no operations, as compared to a net loss
(as defined and pro-rated for the period from the beginning of the Prior Year
Quarter to August 5, 2004 when the Company terminated the Management Agreement,
for the purpose of determining if the Guarantee had been met) of $3.1 million in
the Prior Year Quarter. Consequently for the Current Quarter there was no
Shortfall Payment, as compared to a Shortfall Payment of $3.5 million in the
Prior Year Quarter. The $3.5 million Shortfall Payment had been adjusted to $3.1
million, net of $400,000 reserve against the difference between the pro-rated
Shortfall Payment and the full quarterly Shortfall Payment of $425,000 which the
Company believes that it is entitled to. The adjusted Shortfall Payment had been
recorded in the consolidated income statements as a reduction of Unzipped's cost
of sales (since the majority of Unzipped's operations are with entities under
common ownership with Sweet, including all of the purchases of inventory) and on
the balance sheet as a reduction of the Sweet Note based upon the right to
offset in the Management Agreement.
For the Current Nine Months, Unzipped had a net loss (as defined, for the
purpose of determining if the Guarantee had been met) of $296,000, as compared
to net income (as defined, for the purpose of determining if the Guarantee had
been met) of $4.2 million in the Prior Year Nine Months. Consequently for the
Current Nine Months there was a Shortfall Payment of $438,000, as compared to an
adjusted Shortfall Payment of $4.8 million, net of $400,000 reserve, in the
Prior Year Nine Months. The adjusted Shortfall Payments had been recorded in the
consolidated income statements as a reduction of Unzipped's cost of sales (since
the majority of Unzipped's operations were with entities under common ownership
with Sweet, including all of the purchases of inventory) and on the balance
sheet as a reduction of the Sweet Note based upon the right to offset in the
Management Agreement.
22
As of September 30, 2005, as a net result of the offset of the Shortfall
Payment, the balance of the Sweet Note was reduced to $2.9 million and was
reflected in "Long-term debt". The Company believes that it is entitled to the
full Guarantee of $1.7 million for the fiscal year of Unzipped ended January 31,
2005. For the purpose of computing the Shortfall Payment for financial statement
presentation, however, the Company has pro-rated the Guarantee to exclude the
portion relating to the period subsequent to August 5, 2004 ($827,000, including
$142,000 for the month of January 2005). As a result, the net Shortfall Payment
reflected as a reduction of cost of sales in the Current Nine Months of
$296,000, and the Sweet Note balance of $2.9 million includes the above noted
$827,000, pending the outcome of the litigation with Sweet and its affiliates.
See Note F. After adjusting for the Shortfall Payment, Unzipped reported a net
loss of $37,500 for the Current Nine Months and net income of $535,600 in the
Prior Year Nine Months. Due to the immaterial nature of the related amounts, the
net loss of $37,500 from Unzipped has been included in the selling, general and
administrative expense in the Company's Condensed Consolidated Income Statements
for the Current Nine Months.
For each of the quarters ended July 31, October 31, and December 31, 2004, March
31, June 30, 2005 and the Current Quarter, the Company did not make an interest
payment on the Sweet Note to partially offset the Shortfall Payment due from
Sweet. Such interest payment is to be resumed after the Shortfall Payment is
satisfied.
Revolving Credit Facilities
On February 25, 2003 Unzipped entered into the Unzipped Credit Facility with
GECCS. Borrowings under the Unzipped Credit Facility were limited by advance
rates against eligible accounts receivable and inventory balances, as defined.
Under the Unzipped Credit Facility, Unzipped could also arrange for letters of
credit in an amount up to $5 million. The borrowings bore interest at a rate of
2.25% per annum in excess of the 30 day Commercial Paper rate or 3%, whichever
is greater. The Unzipped Credit Facility was terminated on October 31, 2004.
Bond Financing
In August 2002, IP Holdings, LLC ("IPH"), a subsidiary of the Company, issued in
a private placement $20 million of asset-backed notes secured by intellectual
property assets (trade names, trademarks, license agreements and payments and
proceeds with respect thereto) of IPH. The notes had a 7-year term with a fixed
interest rate of 7.93% with quarterly principal and interest payments of
approximately $859,000. After funding a liquidity reserve account in the amount
of $2.9 million, the net proceeds of the notes ($16.2 million) were used by the
Company to reduce amounts due by the Company under its then-existing revolving
credit facilities. In April 2004, IPH issued an additional $3.6 million in
subordinated asset-backed notes secured by its intellectual property assets. The
additional borrowing had a maturity date of August 2009, with a floating
interest rate of LIBOR + 4.45% and quarterly principal and interest payments and
$500,000 of interest prepaid at closing. The net proceeds of $2.9 million were
used by the Company for general working capital purposes. As of July 22, 2005,
the total principal on these notes was approximately $17.5 million, which were
refinanced in connection with an acquisition that was consummated in the Current
Quarter. See Notes K and L of Notes to Condensed Consolidated Financial
Statements.
In the Current Quarter, the Company acquired the JOE BOXER brand ("Joe Boxer")
from Joe Boxer Company, LLC and its affiliates, and the RAMPAGE brand
("Rampage") from Rampage Licensing, LLC. See Notes K and L of Notes to Condensed
Consolidated Financial Statements. The financing for the acquisitions was
accomplished through two private placements by IPH of asset-backed notes for a
combined total of $103 million secured by the intellectual property assets
(including the Joe Boxer assets and the Rampage assets) owned by IPH. The
proceeds of the notes were used as follows: approximately $17.5 million was used
to refinance previously issued notes, $40.0 million was paid to the sellers of
Joe Boxer, approximately $25.8 million was paid to the sellers of Rampage, $1.7
million was placed in a reserve account as required by the lender, approximately
$1.8 million was used to pay costs associated with the debt issuance,
approximately $200,000 was paid to legal professionals associated with the
acquisitions, approximately $4.0 million was available to the Company for
working capital purposes, and $12 million was deposited in an escrow account for
the benefit of the holder of the note, to be used by IPH solely for the purchase
of certain intellectual property assets. If the purchase does not occur prior to
November 15, 2005, IPH will redeem up to $12 million of the note with the funds
in such escrow account with no penalty. IPH intends to redeem $12 million of the
note as it does not anticipate such purchase will occur prior to November 15,
2005. Costs associated with the debt issuances of approximately $1.8 million
have been deferred and are being amortized over the 7 year life of the notes.
Interest rates and terms on the notes are as follows: the $63 million principal
amount of the note bears interest at a fixed interest rate of 8.45% with a 7
year term, the $28 million principal amount of the note bears interest at a
fixed rate of 8.10% with a 7 year term, and the $12 million principal amount of
the note bears interest at a floating interest rate of LIBOR + 0.7% for so long
as there is $12 million on deposit in the escrow account. IPH intends to redeem
$12 million of the note in November, 2005. Neither Iconix Brand Group, Inc.
("Iconix") nor any of its subsidiaries (other than IPH) is obligated to make any
payment with respect to IPH's asset-backed notes, and the assets of Iconix and
its subsidiaries (other than IPH) are not available to IPH's creditors. The
assets of IPH are not available to the creditors of Iconix or its subsidiaries
(other than IPH).
23
Other
The Company's cash requirements fluctuate from time to time due to, among other
factors, seasonal variations in the timing of licensee shipments and the related
royalty payments. The Company believes that it will be able to satisfy its
ongoing cash requirements for the foreseeable future, primarily with cash flow
from operations. However, if the Company's plans change or its assumptions prove
to be incorrect, it could be required to obtain additional capital that may not
be available to it on acceptable terms, or at all.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
As a result of the Company's credit facilities, the Company was exposed to the
risk of rising interest rates. The following table provides information on the
Company's fixed maturity debt as of September 30, 2005 that was sensitive to
changes in interest rates.
The IPH's assets-backed notes on an escrow account had an
average interest rate of 5.3% for the three month period
ended September 30, 2005 $12.0 million
IPH intends to redeem the $12 million deposited in the escrow account for the
purchase of additional intellectual property assets as it does not anticipate
such purchase will occur prior to November 15, 2005. See Note C of Notes to
Condensed Consolidated Financial Statements.
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 of the end of the period covered by this report.
Based on this evaluation, the principal executive officer and principal
financial officer concluded that the Company's disclosure controls and
procedures are effective in reaching a reasonable level of assurance that
information required to be disclosed by the Company in the reports that it files
or submits under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time period specified in the Securities and
Exchange Commission's rules and forms.
The principal executive officer and principal financial officer also conducted
an evaluation of internal control over financial reporting ("Internal Control")
to determine whether any changes in Internal Control occurred during the quarter
ended September 30, 2005 that have materially affected or which are reasonably
likely to materially affect Internal Control. Based on that evaluation, there
has been no such change during the quarter ended September 30, 2005.
PART II. Other Information
Item 1. Legal Proceedings
See Note F of Notes to Condensed Consolidated Financial Statements.
Item 4. Submission of Matters to a Vote of Security-Holders.
At the Company's Annual Meeting of Stockholders held on August 25, 2005, the
stockholders voted to elect the seven individuals named below to serve as
Directors of the Company and to ratify the appointment of BDO Seidman, LLP as
the Company's independent auditors for the fiscal year ending December 31, 2005.
The votes cast by stockholders with respect to the election of Directors were as
follows:
24
Votes Cast Votes
Director "For" Withheld
- -------- ---------- --------
Neil Cole 26,386,643 344,744
William Sweedler 26,711,191 20,196
Barry Emanuel 26,394,333 337,054
Steven Mendelow 26,501,041 230,346
Michael Caruso 26,496,718 234,669
Michael Groveman 26,500,170 231,217
Drew Cohen 26,499,722 231,665
The votes cast by stockholders with respect to the ratification of the
appointment of BDO Seidman, LLP were as follows:
Votes Cast "For" Votes Cast "Against" Votes "Abstaining"
- ---------------- -------------------- ------------------
26,694,057 15,210 22,120
Item 6. Exhibits
2.1* Asset Purchase Agreement dated July 22, 2005 by and among Registrant,
Joe Boxer Company, LLC, Joe Boxer Licensing, LLC, JBC Canada Holdings,
LLC, Joe Boxer Canada, LP, and William Sweedler, David Sweedler, Alan
Rummelsburg, Joseph Sweedler and Arnold Suresky. (1)
2.2* Asset Purchase Agreement dated September 16, 2005 by and among the
Registrant, Rampage Licensing LLC, Rampage.com, LLC, Rampage Clothing
Company, Larry Hansel, Bridgette Hansel Andrews, Michelle Hansel, Paul
Buxbaum and David Ellis. (2)
4.1 Second Amended and Restated Indenture dated as of July 1, 2005 by and
among IP Holdings LLC, as issuer, and Wilmington Trust Company, as
Trustee. (1)
4.2 Third Amended and Restated Indenture dated as of September 1, 2005 by
and among IP Holdings LLC, as issuer, and Wilmington Trust Company, as
Trustee. (2)
10.1 Employment Agreement dated as of July 22, 2005 between the Registrant
and William Sweedler.
10.2 Option Agreement dated as of July 22, 2005 between the Registrant and
William Sweedler.
10.3 Employment Agreement dated as of July 22, 2005 between the Registrant
and Andrew Tarshis.
31.1 Certification of Chief Executive Officer Pursuant To Rule 13a-14 Or
15d-14 Of The Securities Exchange Act Of 1934, As Adopted Pursuant To
Section 302 Of The Sarbanes-Oxley Act Of 2002.
31.2 Certification of Chief Financial Officer Pursuant To Rule 13a-14 Or
15d-14 Of The Securities Exchange Act Of 1934, As Adopted Pursuant To
Section 302 Of The Sarbanes-Oxley Act Of 2002.
32.1 Certification of Chief Executive Officer Pursuant To 18 U.S.C. Section
1350, As Adopted Pursuant To Section 906 Of The Sarbanes-Oxley Act Of
2002.
32.2 Certification of Chief Financial Officer Pursuant To 18 U.S.C. Section
1350, As Adopted Pursuant To Section 906 Of The Sarbanes-Oxley Act Of
2002.
- -----------------------------------------------------------
* The Registrant has omitted certain schedules and exhibits in
accordance with Item 601(b)(2) of Regulation S-K and shall furnish the
omitted schedules and exhibits to the Commission upon request.
(1) Incorporated by reference to the applicable exhibit contained in the
Registrant's Current Report on Form 8-K filed with SEC on July 28,
2005.
(2) Incorporated by reference to the applicable exhibit contained in the
Registrant's Current Report on Form 8-K filed with SEC on September
22, 2005.
25
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Iconix Brand Group, Inc.
--------------------------------
(Registrant)
Date November 14, 2005 /s/ Neil Cole
---------------------------------- --------------------------------
Neil Cole
Chairman of the Board, President
And Chief Executive Officer
(on Behalf of the Registrant)
Date November 14, 2005 /s/ Warren Clamen
---------------------------------- --------------------------------
Warren Clamen
Chief Financial Officer
26