-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GI2GebdSQ7891X5m+dcFYw7a7tHtJWAgulXdSf4IjO5ryECo4IqH32TDP45wOxZM cuwrhK0WbxXp+P1C4K8FXw== 0000857737-05-000081.txt : 20051114 0000857737-05-000081.hdr.sgml : 20051111 20051114172410 ACCESSION NUMBER: 0000857737-05-000081 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 20050930 FILED AS OF DATE: 20051114 DATE AS OF CHANGE: 20051114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ICONIX BRAND GROUP, INC. CENTRAL INDEX KEY: 0000857737 STANDARD INDUSTRIAL CLASSIFICATION: FOOTWEAR, (NO RUBBER) [3140] IRS NUMBER: 112481903 STATE OF INCORPORATION: DE FISCAL YEAR END: 0131 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-10593 FILM NUMBER: 051202989 BUSINESS ADDRESS: STREET 1: 1450 BROADWAY, 4TH FL CITY: NEW YORK STATE: NY ZIP: 10018 BUSINESS PHONE: 212-730-0030 MAIL ADDRESS: STREET 1: 1450 BROADWAY, 4TH FL CITY: NEW YORK STATE: NY ZIP: 10018 FORMER COMPANY: FORMER CONFORMED NAME: CANDIES INC DATE OF NAME CHANGE: 19930604 FORMER COMPANY: FORMER CONFORMED NAME: MILLFELD TRADING CO INC DATE OF NAME CHANGE: 19920703 10-Q 1 icon_10q093005.txt QUARTERLY REPORT FOR QUARTER ENDED 9/30/2005 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. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 11-2481903 - -------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 1450 Broadway, New York, NY 10018 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (212) 730-0030 - -------------------------------------------------------------------------------- (Registrant's telephone number, including area code) - -------------------------------------------------------------------------------- (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. ----------- 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 ------------- ------------ ------------- -------------- 4,157 4,824 10,381 13,673 ------------- ------------ ------------- -------------- Operating income...................................... 5,048 1,260 7,411 3,247 Interest expense - net................................ 1,289 657 2,134 2,093 ------------- ------------ ------------- -------------- 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 ----------------------------------------------------------------------------- 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 ----------------------------------------------------------------------------- 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) - ----------- ----------- 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) ----------- ----------- INCREASE (DECREASE) IN CASH................................................ 6,609 (2,102) Cash at beginning of period................................................ 798 2,794 ----------- ----------- 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 EX-10.1 2 ex101.txt EMPLOYMENT AGREEMENT WITH WILLIAM SWEEDLER Exhibit 10.1 EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT (the "Agreement"), entered into July 22, 2005, by and between Iconix Brand Group, Inc., a Delaware corporation (the "Company"), and William Sweedler (the "Executive"). W I T N E S S E T H: WHEREAS, on the date hereof, the Company acquired substantially all of the assets of Joe Boxer Company, LLC and certain of its affiliates ("Joe Boxer"); WHEREAS the Company desires to operate the business of Joe Boxer utilizing all of Joe Boxer's intellectual property as the Joe Boxer division (the "Joe Boxer Division") of the Company; and WHEREAS, the Executive possesses experience in the apparel industry and brand licensing and unique personal knowledge, experience and expertise concerning Joe Boxer and the business and operations to be conducted by the Joe Boxer Division; and WHEREAS, the Company desires to employ the Executive as an executive officer of the Company with the title of (i) Executive Vice President of the Company and (ii) President of the Joe Boxer Division, and the Executive desires to be so employed by the Company, in each case, upon the terms and subject to the conditions set forth in this Agreement. NOW, THEREFORE, in consideration of the covenants and agreements hereinafter set forth and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. EMPLOYMENT AND DUTIES 1.1. Term of Employment. The Executive's employment under this Agreement shall commence on July 22, 2005 (the "Start Date") and shall continue until the fourth anniversary of the Start Date (the "Term"), unless such employment is earlier terminated or canceled as provided in this Agreement. 1.2. General. 1.2.1. During the Term, the Executive shall have the title of (i) Executive Vice President of the Company and (ii) Chief Executive Officer and President of the Joe Boxer Division (provided that Executive acknowledges the Company may, so as to avoid any potential confusion with the Chief Executive Officer of the Company, omit the reference to Executive's Chief Executive Officer title in any press release issued by the Company) and shall have such duties as may be from time to time delegated to him by the Chief Executive Officer of the Company and as are consistent and commensurate with his title and position. The Executive shall faithfully and diligently discharge his duties hereunder and use his best efforts to implement the policies established by the Chief Executive Officer of the Company. During the Term, no other executive officer of the Company or other person or entity shall be appointed with direct authority over the Joe Boxer Division. 1.2.2. The Executive shall devote all of his business time, attention, knowledge and skills faithfully, diligently and to the best of his ability, in furtherance of the business and activities of the Joe Boxer Division and/or the Company as may be reasonably requested by the Chief Executive Officer of the Company; provided, however, that nothing in this Agreement shall preclude the Executive from devoting reasonable periods of time required for: (i) serving as a director or member of a committee of any organization or corporation involving no conflict of interest with the interests of the Company and with the written consent of the Company, which consent shall not be unreasonably withheld; (ii) delivering lectures, fulfilling speaking engagements, and any writing or publication relating to his area of expertise; (iii) engaging in professional organization and program activities; and (iv) managing his personal and family investments; provided that such activities do not materially interfere with the due performance of his duties and responsibilities under this Agreement as determined by the Chief Executive Officer of the Company. 1.3. Reimbursement of Expenses. The Company shall pay to the Executive the reasonable expenses incurred by him in the performance of his duties hereunder, including, without limitation, those incurred in connection with business related travel or entertainment, or, if such expenses are paid directly by the Executive, the Company shall promptly reimburse the Executive for such payments, provided that the Executive properly accounts for such expenses in accordance with the Company's policy. 2. COMPENSATION 2.1. Base Salary. During the Term, the Executive shall be entitled to receive a base salary ("Base Salary") at a rate of four hundred thousand dollars ($400,000.00) per annum during the first year of the Term, four hundred fifty thousand dollars ($450,000.00) per annum during the second year of the Term, five hundred thousand dollars ($500,000.00) per annum during the third year of the Term, and five hundred fifty thousand dollars ($550,000.00) per annum during the fourth year of the Term, which Base Salary shall be payable in arrears in equal installments not less frequently than on a bi-monthly basis in accordance with the payroll practices of the Company, with such increases as may be determined by the Chief Executive Officer of the Company from time to time. 2.2. Additional Salary. In addition to the Base Salary, the Company shall pay the Executive an additional salary during the first year of the Term of fifty thousand dollars ($50,000.00) (the "Additional Salary") payable in one lump sum payment on the first anniversary of the date of this Agreement, provided the Executive is employed by the Company on such first anniversary. 2 2.3. Incentive Bonuses. In addition to the Base Salary (and, in the first year of the Term, in addition to the Additional Salary), for the period from the date hereof through December 31, 2007, the Executive shall be entitled to receive an incentive bonus for each fiscal year ("Incentive Bonus") equal to ten percent (10%) of the revenues earned or received by the Company attributable to the Joe Boxer Division ("Royalty Revenues") during such fiscal year, which Royalty Revenues for any fiscal year shall include, without limitation, revenues earned or received by the Company during each such fiscal year and which are attributable to the Joe Boxer Division from international, media or internet sources and/or operations and which, for purposes of Incentive Bonus payments only, shall exclude revenues which are attributable to the Joe Boxer Division received by the Company during such period under the License Agreement between the Company and Kmart Corporation, dated August 13, 2001, the License Agreement between Joe Boxer Canada, L.P. and Caulfield Apparel Group, Ltd., dated May 1, 2001 and the License Agreement between Joe Boxer Canada, L.P. and Boys Will Be Boys Clothing, Inc., dated May 2001 (collectively, the "Licensing Agreements"). For all purposes under this Agreement, the determination of Royalty Revenues for any fiscal year shall be made by the Company and shall be subject to confirmation in the event of a dispute by its independent public accounting firm and shall be final and binding on the Executive; provided that in determining Royalty Revenues for any fiscal year, the Company shall only consider revenues actually earned or received in such fiscal year (whether or not paid in such fiscal year) as Royalty Revenue for such fiscal year. Royalty Revenues earned or received for fiscal years after December 31, 2007 shall be included in determining the Royalty Bonus and vesting of Unvested Options (as such terms are hereinafter defined) set forth in Section 2.6.2 hereof for each fiscal year during which they are actually earned or received. Incentive Bonuses, if applicable, shall be due and payable by the Company to the Executive annually, commencing with the fiscal year ended December 31, 2005, within thirty (30) days after the filing by the Company of its Annual Report on Form 10-K for the such fiscal year with the Securities and Exchange Commission ("SEC"). 2.4. Early Termination. Anything contained in this Section 2 to the contrary notwithstanding, in the event that the Executive's employment hereunder is terminated by the Company without Cause or by the Executive for Good Reason (as such terms are defined in Section 5.1 hereof) prior to the end of a fiscal year and the Executive would have been entitled to Incentive Bonus under Section 2.3 for such fiscal year but for such termination, the Executive shall be entitled to the Incentive Bonus that would have been payable but for such termination through the Date of Termination (as defined in Section 5.3 hereof). 2.5. Stock Options. In addition to the Base Salary, Additional Salary and the Incentive Bonus, if any, the Executive shall receive on the date of this Agreement, as incentive compensation, ten year options ("Options") to purchase up to 1,425,000 shares (the "Shares") of common stock of the Company, at an exercise price per share equal to the last sale price for the Company's common stock as quoted on the Nasdaq National Market on the date hereof (the "Exercise Price"), 225,000 of which shall vest immediately and 1,200,000 (the "Unvested Options") of which shall vest as set forth in Section 2.6, subject to such other conditions or limitations provided for in the option agreement between the Company and Executive attached hereto as Exhibit A. The Company shall use its best efforts to file a registration statement covering the Shares on Form S-8 or any successor form within twenty (20) days from the date hereof. 3 2.6. Vesting Schedule. The Unvested Options shall vest as follows: 2.6.1. With respect to each fiscal year of the Company commencing with the fiscal year ended December 31, 2005 through and including December 31, 2007, for every $1,000 of Royalty Revenues (as defined in Section 2.3) generated during such fiscal year, Unvested Options to purchase fifty (50) shares shall vest. The amount of Royalty Revenues generated during each such fiscal year for purposes of determining the number of Unvested Options which shall have vested in respect of such fiscal year shall be determined in the manner set forth in Section 2.3. 2.6.2. With respect to each of the fiscal years of the Company ending December 31, 2008, 2009 and 2010, Unvested Options shall vest and an additional bonus (the "Royalty Bonus") shall be paid to Executive upon the Company generating Royalty Revenues (including revenues under Licensing Agreements which have been renewed or extended), in each case, in the amounts set forth for such year in the table below (it being understood that with respect to each of the fiscal years ending 2008 and 2009, ten percent (10%) of the aggregate amount of Royalty Revenue generated in any such fiscal year which exceeds the maximum threshold set forth for such year below, shall carry-over to the following fiscal year). Subject to the provisions of Section 5.4.2, in the event that the Term of this Agreement shall expire without being renewed in 2009, Royalty Bonus and Unvested Options shall continue to be paid and vest hereunder for the fiscal years ending 2009 and 2010 based upon the Royalty Revenue actually earned or received in each of such fiscal years (it being understood that nothing contained herein shall imply an obligation by the Company to extend the Term).
2008 Royalty Revenues over $12 Million up to 13 million 100,000 Options and Royalty Bonus of $100,000 $13 Million up to 14 million 200,000 Options and Royalty Bonus of $200,000 $14 Million up to 15 million 300,000 Options and Royalty Bonus of $300,000 $15 Million or more 400,000 Options and Royalty Bonus of $400,000 2009 Royalty Revenues over $13 Million up to 14 million 100,000 Options and Royalty Bonus of $100,000 $14 Million up to 15 million 200,000 Options and Royalty Bonus of $200,000 $15 Million up to 16 million 300,000 Options and Royalty Bonus of $300,000 $16 Million or more 400,000 Options and Royalty Bonus of $400,000 2010 Royalty Revenues over $14 Million up to 15 million 100,000 Options and Royalty Bonus of $100,000 $15 Million up to 16 million 200,000 Options and Royalty Bonus of $200,000 $16 Million up to 17 million 300,000 Options and Royalty Bonus of $300,000 $17 Million or more 400,000 Options and Royalty Bonus of $400,000
2.7. Payment Direction. The Executive may, at any time and at his sole and exclusive option, direct the Company to pay any part of the Incentive Bonus and/or the Royalty Bonus and/or issue any vested Options, in each case to which the Executive is entitled under this Agreement, to one or more employees of the Company working in the Joe Boxer Division. 4 2.8. Additional Compensation. In addition to the Base Salary, Additional Salary, the Incentive Bonus and the Royalty Bonus, if any, and the Options, the Executive shall be entitled to receive such other cash bonuses and such other compensation in the form of stock, stock options or other property or rights as may from time to time be awarded him by the Board during or in respect of his employment hereunder. 3. PLACE OF PERFORMANCE. In connection with his employment by the Company, the Executive shall be based at the Company's principal executive offices in the greater New York metropolitan area (excluding New Jersey), subject to the mutual agreement of the Executive and the Company to relocate him to another office of the Company. Subject to the foregoing, in connection with any relocation or transfer of the Executive outside of the greater New York metropolitan area, the Company will promptly pay (or reimburse the Executive for) all reasonable moving and moving-related expenses (including any losses incurred as a result of the sale of the Executive's personal residence) incurred by the Executive as a consequence of a change of his principal residence in connection with any such relocation or transfer. 4. EMPLOYEE BENEFITS 4.1. Benefit Plans. The Executive shall, during the Term, be included to the extent eligible thereunder in all employee benefit plans, programs or arrangements of general application, including, without limitation, any plans, programs or arrangements providing for retirement benefits, options and other equity-based incentive compensation, profit sharing, bonuses, disability benefits, health and life insurance, or vacation and paid holidays) which shall be established by the Company or any affiliate of the Company, for, or made available to, their respective senior executives ("Benefits"). During the Term, the Benefits described in this paragraph 4 may only be reduced as a result of a general reduction for all senior executives. The Company shall pay for any expenses related to COBRA until such time as the Executive is fully covered under the Company's plans. 4.2. Car Allowance. During the Term, the Company shall pay Executive a car allowance of $1,500 per month. 4.3. Vacation. The Executive shall be entitled to not less than four (4) weeks vacation at full pay for each year during the Term. Such vacation may be taken in the Executive's discretion and at such time or times as are not inconsistent with the reasonable business needs of the Company. 4.4. Professional Dues. During the Term, the Company shall reimburse Executive for dues paid in connection with membership by Executive in one club or professional association or organization, including the YPO. 4.5. Equipment. Executive shall be provided with all reasonable and necessary facilities and equipment to carry out his duties, including but not limited to, a laptop computer, cellular telephone and home fax machine and laser printer. 5 4.6. Assistant. Executive shall be entitled to share a full time dedicated secretary or assistant with Andrew Tarshis or another executive of the Company. 5. TERMINATION OF EMPLOYMENT 5.1. General. The Executive's employment under this Agreement may be terminated without any breach of this Agreement only on the following circumstances: 5.1.1. Death. The Executive's employment under this Agreement shall terminate upon his death. 5.1.2. Disability. If, as a result of the Executive's Disability (as defined below), the Executive shall have been absent from his duties under this Agreement for sixty (60) consecutive days or any ninety (90) days in a one hundred eighty (180) day period, the Company may terminate the Executive's employment upon thirty (30) days prior written notice; provided that the Executive has not returned to full time performance of his duties during such thirty (30) day period. For purposes hereof, "Disability" shall mean that the Executive is unable to perform his normal and customary duties hereunder as a result of physical or mental illness. 5.1.3. Good Reason. The Executive may terminate his employment for Good Reason at any time. For purposes of this Agreement, "Good Reason" shall mean: (i) the failure by the Company to comply with its material obligations and agreements contained in this Agreement; (ii) a material diminution of the responsibilities or title of the Executive with the Company without the express written consent of the Executive; (iii) (y) a reduction by the Company in, (A) the Base Salary in any year of the Term, as described in paragraph 2.1 hereof, or as the same may be increased from time to time, (B) the Additional Salary, (C) the Incentive Bonuses or (D) the Royalty Bonus, or (z) a change that is adverse to the Executive in the vesting schedule or vesting provisions described in this Agreement with respect to the Unvested Options, in each case without the express written consent of the Executive; (iv) the re-location of the Executive to an office outside of the greater New York metropolitan area, unless mutually agreed to; (v) a breach by the Company of any of its post-closing obligations set forth in Section 9.1(b) of the Asset Purchase Agreement dated the date hereof between Executive and the other parties thereto (the "Asset Purchase Agreement"); (vi) the termination by the Company of Neil Cole; (vii) the bankruptcy, reorganization or liquidation of the Company; or 6 (viii) a failure of any successor corporation to the Company to assume the Company's obligations under this Agreement. provided, however, that the Executive shall have provided the Company with written notice that such actions are occurring and the Company has been afforded a reasonable opportunity (but in any event not more than thirty (30) days) to cure same. 5.1.4. Cause. The Company may terminate the Executive's employment under this Agreement for Cause. Termination for "Cause" shall mean termination of the Executive's employment because of the occurrence of any of the following as determined by the Board: (i) the willful and continued failure by the Executive to substantially perform his obligations under this Agreement (other than any such failure resulting from the Executive's incapacity due to physical or mental illness); provided, however, that the Company shall have provided the Executive with written notice that such actions are occurring and the Executive has been afforded a reasonable opportunity of at least thirty (30) days to cure same, or (ii) the breach by the Executive of any of the Executive's post-closing obligations set forth in Section 9.1(a) of the Asset Purchase Agreement; (iii) the indictment of the Executive for a felony or other crime involving moral turpitude or dishonesty; or (iv) the willful engaging by the Executive in misconduct (including theft, fraud, embezzlement, and securities law violations) which is injurious to the Company, monetarily, or otherwise. For purposes of Section 5.1.4(iv), no act or failure to act, on the part of the Executive, shall be considered "willful" unless done, or omitted to be done, by the Executive in bad faith and without reasonable belief that the Executive's action or omission was in the best interest of the Company. 5.2. Notice of Termination. Any termination of the Executive's employment by the Company or by the Executive (other than termination by reason of the Executive's death) shall be communicated by written Notice of Termination to the other party of this Agreement. For purposes of this Agreement, a "Notice of Termination" shall mean a notice which shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated. 5.3. Date of Termination. The "Date of Termination" shall mean (a) if the Executive's employment is terminated by his death, the date of his death, (b) if the Executive's employment is terminated pursuant to subsection 5.1.2 above, thirty (30) days after Notice of Termination is given (provided that the Executive shall not have returned to the performance of his duties on a full-time basis during such thirty (30) day period), (c) if the Executive's employment is terminated pursuant to subsections 5.1.3 or 5.1.4 above, the date specified in the Notice of Termination after the expiration of any applicable 7 cure periods, and (d) if the Executive's employment is terminated for any other reason, the date on which a Notice of Termination is given; provided that if within thirty (30) days after any Notice of Termination is given the party or parties receiving such Notice of Termination notifies the other party or parties that a dispute exists concerning such termination, the Date of Termination shall be the date on which the dispute is finally determined by a binding and final arbitration award or by a final judgment, order or decree of a court of competent jurisdiction (the time for appeal therefrom having expired and no appeal having been perfected). 5.4. Compensation Upon Termination. 5.4.1. Termination for Cause. If the Executive's employment shall be terminated for Cause, the Company shall pay the Executive his Base Salary through the Date of Termination, at the rate in effect at the time Notice of Termination is given, and all expenses and accrued Benefits arising prior to such termination which are payable to the Executive pursuant to this Agreement through the Date of Termination and the Company shall have no further obligation with respect to this Agreement. 5.4.2. Termination without Cause or For Good Reason. Subject to the provisions of subsection 5.4.3 hereof, if, prior to the expiration of the Term, the Executive's employment hereunder is terminated by the Executive for Good Reason or by the Company without Cause (other than a termination by reason of Disability), the Company shall pay to the Executive all expenses and accrued Benefits arising prior to such termination which are payable to the Executive pursuant to this Agreement through the Date of Termination and the Company shall continue to pay the Executive his Base Salary as then in effect, in accordance with the Company's normal payroll practice for the remainder of the Term (such period being referred to hereinafter as the "Severance Period"), payable in monthly installments. In addition, during the Severance Period, the Executive shall be entitled to continue to participate in all employee benefit plans that the Company provides (and continues to provide) generally to its senior executives. In addition, the Company will pay to the Executive an amount in cash equal to the higher of (A) the sum of (x) Royalty Bonus earned but not paid on or prior to the Date of Termination, plus (y) the total value of all vested and unexercised Options on or prior to the Date of Termination, and (B) the sum of (x) 50% of the Royalty Bonuses that would be earned after the Date of Termination, assuming the maximum threshold amount of Royalty Revenues for 2008, 2009 and 2010 set forth in 2.6.2 hereof are achieved, plus (y) 50% of the total value of all vested and unexercised Options and of all Unvested Options that would vest after the Date of Termination, assuming the maximum threshold amount of Royalty Revenues for 2008, 2009 and 2010 set forth in 2.6.2 hereof are achieved; provided, however, that if on or prior to the Date of Termination, the Company has entered into, or within thirty (30) days after the Date of Termination, enters into, one or more contracts or agreements such that pursuant to the terms of such contracts or agreements the Company would earn or receive Royalty Revenues equal to or in excess of the sum of the minimum threshold amounts of Royalty Revenues for 2008, 2009 and 2010 set forth in this 2.6.2 hereof, Executive shall be entitled to receive an amount in cash equal to the sum of (x) 100% of the Royalty Bonuses that would be earned after the Date of Termination based upon the minimum Royalty Revenues generated under such contracts or agreements for 2008, 2009 and 2010, plus (y) 100% of the total 8 value of all vested and unexercised Options and of all Unvested Options that would vest after the Date of Termination, based upon the minimum Royalty Revenues guaranteed under such contracts or agreements for 2008, 2009 and 2010. For purposes hereof, the value of an Option shall equal the product of the last sales price for the Company's common stock on the Date of Termination less the Exercise Price. 5.4.3. Death During Severance Period. In the event of the Executive's death during the Severance Period, payments of Base Salary under this Section 5.4 and payments under the Company's employee benefit plan(s) shall continue to be made in accordance with their terms during the remainder of the Severance Period to the beneficiary designated in writing for such purpose by the Executive or, if no such beneficiary is specifically designated, to the Executive's estate. 5.4.4. Termination Following a Change in Control. Anything contained herein to the contrary notwithstanding, in the event the Executive's employment hereunder is terminated within twelve (12) months following a Change in Control (as defined below) by the Company without Cause, or any joint venturer or partner of the Company existing as of the date hereof, or by the Executive with Good Reason (other than pursuant to 5.1.3(vi)), then the Company shall pay to the Executive in complete satisfaction of its obligations under this Agreement, as severance pay and as liquidated damages (because actual damages are difficult to ascertain), in a lump sum, in cash, within fifteen (15) days after the Date of Termination, an amount equal to $100 less than three times the Executive's "annualized includable compensation for the base period" (as defined in Section 280G of the Internal Revenue Code of 1986); provided, however, that if such lump sum severance payment, either alone or together with other payments or benefits, either cash or non-cash, that the Executive has the right to receive from the Company, including, but not limited to, accelerated vesting or payment of any deferred compensation, options, stock appreciation rights or any benefits payable to the Executive under any plan for the benefit of employees, which would constitute an "excess parachute payment" (as defined in Section 280G of the Internal Revenue Code of 1986), then such lump sum severance payment or other benefit shall be reduced to the largest amount that will not result in receipt by the Executive of a parachute payment. The determination of the amount of the payment described in this subsection shall be made by the Company's independent auditors at the sole expense of the Company. For purposes of clarification the value of any options described above will be determined by the Company's independent auditors using a Black-Scholes valuation methodology. For purposes of this Agreement, a "Change in Control" shall be deemed to occur (i) when any "person" as defined in Section 3(a)(9) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and as used in Section 13(d) and 14(d) thereof, including a "group" as defined in Section 13(d) of the Exchange Act, but excluding the Executive and Neil Cole, the Company or any subsidiary or any affiliate of the Company or any employee benefit plan sponsored or maintained by the Company or any subsidiary of the Company (including any trustee of such plan acting as trustee), becomes the "beneficial owner" (as defined in Rule 13(d)(3) under the Exchange Act) of securities of the Company representing 20% or more of the combined voting power of the Company's then outstanding securities; or (ii) when, during any period of twenty-four (24) consecutive months, the individuals who, at the beginning of such period, constitute the Board of Directors (the "Incumbent Directors") cease for any 9 reason other than death to constitute at least a majority thereof; provided, however, that a director who was not a director at the beginning of such twenty-four (24) month period shall be deemed to have satisfied such twenty-four (24) month requirement (and be an Incumbent Director) if such director was elected by, or on the recommendation of or with the approval of, at least two-thirds (2/3) of the directors who then qualified as Incumbent Directors either actually (because they were directors at the beginning of such twenty-four (24) month period) or through the operation of this proviso; or (iii) the occurrence of a transaction requiring stockholder approval for the acquisition of the Company by an entity other than the Company or a subsidiary or an affiliated company of the Company through purchase of assets, or by merger, or otherwise. 5.4.5. Termination upon Death or Retirement. In the event of the termination of the Executive's employment by reason of death or retirement, the Company shall pay the Executive his Base Salary through the Date of Termination, at the rate then in effect, and all expenses or accrued Benefits arising prior to such termination which are payable to the Executive pursuant to this Agreement through the Date of Termination. In addition, the Executive and/or his beneficiaries shall be entitled to such other benefits as shall be determined in accordance with the benefit plans maintained by the Company. 5.4.6. Termination upon Disability. In the event of the termination of the Executive's employment by reason of Disability in accordance with the provisions of Section 5.1.2 hereof, the Company shall pay to the Executive an amount equal to the present value of the Base Salary that would have been payable to the Executive during the remainder of the Term had the Agreement not been so terminated, 50% of which amount shall be paid as a lump sum cash payment, and 50% which shall be paid monthly over the remainder of the Term; together with all expenses and accrued Benefits arising prior to such termination which are payable to the Executive pursuant to this Agreement through the Date of Termination. In addition, the Executive and/or his beneficiaries shall be entitled to such other benefits as shall be determined in accordance with the benefit plans maintained by the Company. 5.4.7. The Executive shall not be required to mitigate the amount of any payment provided for in this Section 5.4 by seeking other employment or otherwise, nor shall the amount of any payment provided for in this Section 5.4 be reduced by any compensation earned by the Executive as the result of employment by another employer or business or by profits earned by the Executive from any other source at any time before and after the Date of Termination. 6. INSURABILITY; RIGHT TO INSURE During the continuance of the Executive's employment hereunder, the Company shall have the right to maintain key man life insurance in its own name covering the Executive's life in such amount as shall be determined by the Company, for a term ending on the termination or expiration of this Agreement. The Executive shall aid in the procuring of such insurance by submitting to the required medical examinations, if any, and by filling out, executing and delivering such applications and other instrument in writing as may be reasonably required by an insurance company or companies to which application or applications for insurance may be made by or for the Company. 10 7. CONFIDENTIALITY; NONCOMPETITION; NONSOLICITATION; NONDISPARAGEMENT 7.1. The Company and the Executive acknowledge that the services to be performed by the Executive under this Agreement are unique and extraordinary and, as a result of such employment, the Executive shall be in possession of confidential information relating to the business practices of the Company. The term "confidential information" shall mean any and all information (oral and written) relating to the Company or any of its affiliates, or any of their respective activities, other than such information which (i) can be shown by the Executive to be in the public domain (such information not being deemed to be in the public domain merely because it is embraced by more general information which is in the public domain) other than as the result of breach of the provisions of this paragraph 7 or (ii) the Executive is required to disclose under any applicable laws, regulations or directives of any government agency, tribunal or authority having jurisdiction in the matter or under subpoena or other process of law. The Executive shall not, during or after the Term, except as may be required during Executive's employment in the course of the performance of his duties hereunder, directly or indirectly, use, communicate, disclose or disseminate to any person, firm or corporation any confidential information regarding the clients, customers, trade secrets or business practices of the Company acquired by the Executive, without the prior written consent of the Company. 7.2. Upon the termination of the Executive's employment for any reason whatsoever, all documents, records, notebooks, equipment, price lists, specifications, programs, customer and prospective customer lists and other materials which refer or relate to any aspect of the business of the Company which are in the possession of the Executive, including all copies thereof, shall be promptly returned to the Company. 7.3. In consideration for the Company's entering into this Agreement and the Asset Purchase Agreement, the Executive hereby agrees that he shall not, during the Term, and, in the event that the Executive's employment hereunder is terminated by the Company for Cause or by the Executive without Good Reason, for a period of two years after the date of such termination, directly or indirectly, within any county (or adjacent county) in any State within the United States within a fifty (50) mile radius of the location of any of the Company's offices, engage, have an interest in or render any services to any business (whether as owner, manager, operator, licensor, licensee, lender, partner, stockholder, joint venturer, employee, consultant or otherwise) competitive with the business activities conducted by the Company, its subsidiaries, or affiliates during the Term. Notwithstanding the foregoing, nothing herein shall prevent the Executive from (i) owning stock or other equity interests in (A) a publicly traded corporation whose activities compete with the Company, provided that such stock holdings do not at any time constitute more than five percent (5%) of the outstanding voting equity securities of such corporation or (B) Windsong Allegiance Group, LLC or any of its affiliates or related entities (collectively "WAG") or (ii) during the two year period after a termination of Executive by the Company for Cause or by the Executive without Good Reason, from engaging, having an interest in, or rendering any services to WAG, provided that WAG does not then engage in opportunities involving the licensing or marketing of brands which are directly competitive with the business of the Company and which are not being engaged in by WAG on the date of this Agreement. 11 7.4. In consideration for the Company's entering into this Agreement and the Asset Purchase Agreement, the Executive shall not, during the Term, and, in the event that the Executive's employment hereunder is terminated by the Company for Cause or by the Executive without Good Reason, for a period of two years thereafter, directly or indirectly, take any action which constitutes, an interference with or a disruption of any of the Company's business activities including, without limitation, the solicitations of the Company's customers or persons listed on the personnel lists of the Company. 7.5. For purposes of clarification, but not of limitation, the Executive hereby acknowledges and agrees that the provisions of Sections 7.3 and 7.4 above shall serve as a prohibition against him from, during the period referred to therein, directly or indirectly, hiring, offering to hire, enticing, soliciting or in any other manner persuading or attempting to persuade any officer, employee, agent, lessor, lessee, licensor, licensee or customer of the Company (but only such persons existing during the time of the Executive's employment by the Company, or at the termination of his employment), to discontinue or alter his, her or its relationship with the Company. 7.6. At no time during or after the Term shall either party hereto, directly or indirectly, disparage the commercial, business, professional or financial, as the case may be, reputation of the other party. 7.7. Without intending to limit the remedies available to the Company, the Executive acknowledges that a breach of any of the covenants contained in this paragraph 7 may result in material and irreparable injury to the Company, or its affiliates or subsidiaries, for which there is no adequate remedy at law, that it will not be possible to measure damages for such injuries precisely and that, in the event of such a breach or threat the Company shall be entitled to seek a temporary restraining order and/or a preliminary or permanent injunction restraining the Executive from engaging in activities prohibited by this paragraph 7 or such other relief as may be required specifically to enforce any of the covenants in this paragraph 7. If for any reason it is held that the restrictions under this paragraph 7 are not reasonable or that consideration therefor is inadequate, such restrictions shall be interpreted or modified to include as much of the duration and scope identified in this paragraph as will render such restrictions valid and enforceable. 7.8. Notwithstanding anything to the contrary set forth above, in the event that the Executive terminates this Agreement within six (6) months of the date hereof, the provisions of Section 7.3 shall not apply to Executive. 8. RIGHTS OF INDEMNIFICATION 8.1. The Company shall indemnify the Executive to the fullest extent permitted by the General Corporation Law of the State of Delaware, as amended from time to time, for all amounts (including without limitation, judgments, fines, settlement payments, expenses and attorney's fees) incurred or paid by the Executive in connection with any action, suit, investigation or proceeding arising out of or relating to the performance by the Executive of services for, or the acting by the Executive as a director, officer or employee of the Company, or any other person or enterprise at the Company's request. 12 8.2. The Company shall use its best efforts to obtain and maintain in full force and effect during the Term, directors' and officers' liability insurance policies providing full and adequate protection to the Executive for his capacities, provided that the Board shall have no obligation to purchase such insurance if, in its opinion, coverage is available only on unreasonable terms. 9. MISCELLANEOUS 9.1. Notices. All notices or communications hereunder shall be in writing, addressed as follows: To the Company: Inconix Brand Group, Inc. 215 West 40th Street 6th Floor New York, NY 10018 Attn: Deborah Sorell Stehr Senior Vice President and General Counsel With a copy to: Blank Rome LLP 405 Lexington Avenue New York, NY 10174 Attn: Robert J. Mittman, Esq. To the Executive: William Sweedler c/o Windsong, Inc. 1599 Post Road East Westport, CT 06880 With a copy to: Mayer, Brown, Rowe & Maw, LLP 1675 Broadway New York, NY 10019 Attn: Nazim Zilkha, Esq. All such notices shall be conclusively deemed to be received and shall be effective (i) if sent by hand delivery, upon receipt, (ii) if sent by telecopy or facsimile transmission, upon confirmation of receipt by the sender of such transmission, (iii) if sent by overnight courier, one business day after being sent by overnight courier, or (iv) if sent by registered or certified mail, postage prepaid, return receipt requested, on the fifth day after the day on which such notice is mailed. 9.2. Severability. Each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement is held to be prohibited by or invalid under applicable law, such provision will be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Agreement. 13 9.3. Binding Effect; Benefits. Executive may not delegate his duties or assign his rights hereunder. This Agreement shall inure to the benefit of, and be binding upon, the parties hereto and their respective heirs, legal representatives, successors and permitted assigns. 9.4. Entire Agreement. This Agreement represents the entire agreement of the parties and shall supersede any and all previous contracts, arrangements or understandings between the Company and the Executive. This Agreement may be amended at any time by mutual written agreement of the parties hereto. In the case of any conflict between any express term of this Agreement and any statement contained in any employment manual, memo or rule of general applicability of the Company, this Agreement shall control. 9.5. Withholding. The payment of any amount pursuant to this Agreement shall be subject to applicable withholding and payroll taxes, and such other deductions as may be required under the Company's employee benefit plans, if any. 9.6. Governing Law. This Agreement and the performance of the parties hereunder shall be governed by the internal laws (and not the law of conflicts) of the State of New York. Any claim or controversy arising out of or in connection with this Agreement, or the breach thereof, shall be adjudicated exclusively by the Supreme Court, New York County, State of New York, or by a federal court sitting in Manhattan in New York City, State of New York. The parties hereto agree to the personal jurisdiction of such courts and agree to accept process by regular mail in connection with any such dispute. 9.7. Legal Fees and Court Costs. In the event that any action, suit or other proceeding in law or in equity is brought to enforce the provisions of this Agreement, and such action results in the award of a judgment for money damages or in the granting of any injunction in favor of the Company, all expenses (including reasonable attorneys' fees) of the Company in such action, suit or other proceeding shall be paid by the Executive. In the event that any action, suit or other proceeding in law or in equity is brought to enforce the provisions of this Agreement, and such action results in the award of a judgment for money damages or in the granting of any injunction in favor of the Executive, all expenses (including reasonable attorneys' fees and travel expenses) of the Executive in such action, suit or other proceeding shall be paid by the Company. -SIGNATURE PAGE FOLLOWS- 14 IN WITNESS WHEREOF, the Company has caused this Agreement to be duly executed and the Executive has hereunto set his hand, as of the day and year first above written, THE COMPANY: ICONIX BRAND GROUP, INC. By: /s/ Neil Cole ----------------------------------- EXECUTIVE /s/William Sweedler ----------------------------------- William Sweedler EX-10.2 3 ex102.txt OPTION AGREEMENT WITH WILLIAM SWEEDLER EXHIBIT 10.2 ICONIX BRAND GROUP, INC. NON-QUALIFIED NON-PLAN STOCK OPTION AGREEMENT ICONIX BRAND GROUP, INC., a Delaware corporation (the "Company"), hereby grants to William Sweedler, an employee of the Company (the "Optionee"), as of July 22, 2005 (the "Grant Date"), a non-qualified non-plan stock option to purchase a total of 1,425,000 shares of the Company's common stock, par value $.001 per share ("Common Stock"), at $8.81 per share. This option (the "Option"), which is being granted pursuant to the Employment Agreement (as hereinafter defined), is intended to be a non-qualified stock option, i.e., this Option is not intended to be, nor is it, an incentive stock option as defined in Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"). 1. Duration. (a) This Option was granted as of the Grant Date. (b) This Option shall expire at the close of business on July 22, 2015, (the "Termination Date"), but shall be subject to earlier termination as provided herein. (c) If the Optionee ceases to be employed by the Company as a result of a termination by the Company for Cause (as defined in the Employment Agreement dated July 22, 2005 between the Company and the Optionee (the "Employment Agreement")), or voluntary termination by Optionee without Good Reason (as defined in the Employment Agreement), the Optionee's right to exercise any unexercised portion of this Option shall case forthwith, and this Option shall thereupon terminate. In the event the Optionee's employment is terminated by the Company without Cause, or by voluntary termination by the Optionee for Good Reason, the Optionee's right to exercise any unexercised portion of this Option shall cease forthwith, and this Option shall thereupon terminate, however, Optionee shall be entitled to such payments as set forth in Section 5.4.2 of the Employment Agreement. In the event the Optionee's employment with the Company is terminated due to his Disability (as defined in the Employment Agreement), the Option shall be exercisable within the earlier of: (i) one (1) year after the date of such Disability or, (ii) July 22, 2015. In such event, the Option shall be exercisable to the extent that the right to purchase the shares of Common Stock hereunder has accrued on the date the Optionee becomes disabled. In the event of the death of the Optionee while an employee of the Company, the Option shall be exercisable to the extent exercisable but not exercised as of the date of death and in such event, the Option must be exercised, if at all, within the earlier of (i) one (1) year after the date of death of the Optionee or (ii) July 22, 2015. In the event the Optionee's employment with the Company is terminated due to expiration of the Employment Agreement's Term (as defined in the Employment Agreement), the Option shall remain exercisable until and including the date which is one (1) year after the Company has determined the Royalty Revenues for the year ended 2010, in accordance with the Employment Agreement. 2. Price. The purchase price for each share of Common Stock upon exercise of this Option (the "Purchase Price") shall be $8.81, subject to adjustment as provide in Section 5 hereof. 3. Non-Qualified Stock Option. This Option is a non-qualified stock option, the exercise of which is subject to Section 83 of the Code. 4. Written Notice of Exercise. This Option, to the extent it is exercisable as provided in Section 10 herein, may be exercised only by delivering to the Company, at its principal office within the time specified in Section 1 hereof or such shorter time as is otherwise provided for herein, a written notice of exercise substantially in the form described in Section 10. 5. Anti-Dilution Provisions. (a) If there is any stock dividend or recapitalization resulting in a stock split, or combination or exchange of shares of Common Stock of the Company, the number of shares of Common Stock then subject to this Option and the Purchase Price may be proportionately and appropriately adjusted by the Board of Directors of the Company (the "Board"); provided, however, that any fractional shares resulting from any such adjustment shall be eliminated. (b) If there is any other change in the Common Stock of the Company, including recapitalization, reorganization, sale or exchange of assets, exchange of shares, offering of subscription rights, or a merger or consolidation in which the Company is the surviving corporation, an adjustment, if any, shall be made in the shares then subject to this Option as the Board in its sole discretion may deem appropriate. Failure of the Board to provide for an adjustment pursuant to this subparagraph prior to the effective date of any Company action referred to herein shall be conclusive evidence that no adjustment has been approved by the Board in consequence of such action and that no such adjustment will be made in consequence of such action. 6. Investment Representation. The Optionee agrees that until such time as a registration statement under the Securities Act of 1933, as amended (the "Act"), becomes effective with respect to this Option and/or the shares of Common Stock underlying this Option, the Optionee is taking this Option and shall take the shares of Common Stock underlying this Option, for the Optionees own account, for investment, and not for resale or distribution. 7. Transferability. Except as may be otherwise provided by the Board or an appropriate committee of the Board, as the case may be, at or after the Grant Date, the Option shall not be transferable otherwise than by will or the laws of descent and distribution, and the Option may be exercised during the lifetime of the Optionee only by the Optionee. No transfer of the Option by the Optionee by 2 will or by the laws of descent and distribution shall be effective to bind the Company unless the Company shall have been furnished with written notice thereof and a copy of the will and such other evidence as the Company may deem necessary to establish the validity of the transfer and the acceptance by the transferor or transferees of the terms and conditions of such Option. 8. Certain Rights Not Conferred by Option. The Optionee shall not, by virtue of holding this Option, be entitled to any rights of a stockholder in the Company. 9. Transfer Taxes. The Company shall pay all original issue and transfer taxes with respect to the issuance and transfer of shares of Common Stock of the Company pursuant hereto provided that the shares are issued in the name of the Optionee. 10. Vesting Options. (a) The amount of shares of Common Stock to this Option shall become exercisable as follows: 225,000 shall vest on the Grant Date and 1,200,000 shall vest in accordance with section 2.6 of the Employment Agreement, a copy of which is attached hereto as Exhibit A. (b) This Option shall be exercisable by written notice of such exercise, in the form prescribed by the Board to the Company, at its principal executive office. The notice shall specify the number of shares for which the Option is being exercised, be signed by the Optionee and shall be accompanied by payment in cash or by check of the amount of the full purchase price of such shares or in such manner as the Board shall deem acceptable. (c) No shares shall be delivered upon exercise of this Option until all laws, rules and regulations which the Board may deem applicable have been complied with. If a registration statement under the Act is not then in effect with respect to the shares issuable upon such exercise, the Company may require as a condition precedent, among other things (i) that the person exercising the Option give to the Company a written representation and undertaking, satisfactory in form and substance to the Company, that such person is acquiring the shares for his own account for investment and not with a view to the distribution thereof and/or (ii) an opinion of counsel satisfactory to the Company with respect to the existence of an exemption from the registration requirements of the Act, in which event the person(s) acquiring the Common Stock shall be bound by the provisions of the following legend which shall be endorsed upon the certificate(s) evidencing his option shares issued pursuant to such exercise: "The shares represented by this certificate have not been registered under the Securities Act of 1933, as amended (the "Act"). Such shares may not be sold, transferred or otherwise disposed of unless they have first been registered under the Act or, unless, in the opinion of counsel satisfactory to the Company's counsel, such registration is not required." 3 (d) Without limiting the generality of the foregoing, the Company may delay issuance of the shares of Common Stock underlying this Option until completion of any action or obtaining of any consent, which the Company deems necessary under any applicable law (including without limitation state securities or "blue sky" laws). (e) The person exercising this Option shall not be considered a record holder of the stock so purchased for any purpose until the date on which such person is actually recorded as the holder of such stock in the records of the Company. 11. No Continued Employment. Nothing herein shall be deemed to create any employment agreement or guaranty of continued service as the employee or limit in any way the Company's right to terminate Optionee's status as the employee at any time. 12. Notices. Any notice required or permitted by the terms of this Agreement shall be given by registered or certified mail, return receipt requested, addressed as follows: To the Company: Iconix Brand Group, Inc. 215 W. 40th Street, 6th floor New York, N.Y. 10018 Attention: President To the Optionee: William Sweedler c/o Windsong Inc. 1599 Post Road East Wesport, CT 06880 or to such other address or addresses of which notice in the same manner has previously been given when mailed in accordance with the foregoing provisions. Either party hereto may change the address to which such notices shall be given by providing the other party hereto with written notice of such change. 13. Tax Withholding. Not later than the date as of which an amount first becomes includable in the gross income of the Optionee or other holder for federal income tax purposes with respect to this Option, the Optionee or other holder shall pay to the Company, or make arrangements satisfactory to the Company regarding the payment of, any federal, state and local taxes of any kind required by law to be withheld or paid with respect to such amount. The obligations of the Company under this Agreement shall be conditional upon such payment or arrangements and the Company shall, to the extent permitted by law, have the right to deduct any such taxes from any payment of any kind otherwise due to the holder of the option from the Company or any of its subsidiaries. 4 14. Benefit of Agreement. This Agreement shall be for the benefit of and shall be binding upon the heirs, executors, administrators and successors of the parties hereto. 15. Governing Law. This Agreement shall be construed and enforced in accordance with the law of the State of New York, except to the extent that the laws of the State of Delaware may be applicable. ICONIX BRAND GROUP, INC. By: /s/Neil Cole ---------------------------------------- Name:Neil Cole Title: President and CEO Accepted as of the date first set above. /s/William Sweedler - --------------------------------------------- Signature required with return of document to the Company to formalize issuance of agreement. 5 EX-10.3 4 ex103.txt EMPLOYMENT AGREEMENT ANDREW TARSHIS Exhibit 10.3 EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT, dated as of July 22, 2005, by and between Iconix Brand Group, Inc., a Delaware corporation (the "Company"), and Andrew Tarshis (the "Executive"). W I T N E S S E T H WHEREAS, on the date hereof, the Company acquired substantially all of the assets of Joe Boxer Company, LLC and certain of its affiliates and desires to operate such business as the Joe Boxer division (the "Division") of the Company; and WHEREAS, the Executive possesses unique personal knowledge, experience and expertise concerning the business and operations to be conducted by the Company in the Division; and WHEREAS, the Company desires to employ the Executive as (i) Senior Vice President, Business Affairs and General Counsel of the Division and (ii) Senior Vice President, Business Affairs and Associate Counsel of the Company, and the Executive desires to be so employed by the Company, upon the terms and subject to the conditions set forth in this Agreement NOW, THEREFORE, in consideration of the mutual covenants and agreements hereinafter set forth, and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the Company and Executive hereby agree as follows: 1. Engagement of Executive; Duties. During the Term (as hereinafter defined), the Executive shall have the titles of (i) the Senior Vice President, Business Affairs and General Counsel of the Division and (ii) the Senior Vice President, Business Affairs and Associate Counsel of the Company, and shall have such duties as may be from time to time delegated to him by the Chief Executive Officer of the Division or the Company. The Executive shall faithfully and diligently discharge his duties hereunder and use his best efforts to implement the policies established by the Company. 2. Time. The Executive shall devote substantially all of his professional time to the business affairs of the Division and the Company. 3. Term. The Executive's engagement shall commence effective July 22, 2005 and shall continue for two (2) years (the "Term") unless otherwise terminated as provided herein. The Company may terminate the Agreement for cause in the event that Executive is convicted of a crime of moral turpitude or dishonesty which conviction may reasonably be expected to have an adverse impact on the Company, or for the willful and continued refusal of Executive to follow the directives of the Chief Executive Officer of the Company (provided that the Company shall have provided Executive with written notice of such willful and continued refusal and Executive has been afforded a reasonable opportunity of at least thirty days to cure the same). Executive may terminate this Agreement in the event his title, reporting relationship or job responsibilities are materially or adversely affected or in the event that Executive is re-located to an office outside the greater New York metropolitan area (which metropolitan area shall not be deemed to include New Jersey). In the event the Company elects to terminate this Agreement for any reason other than for cause as specified herein or Executive terminates for the reasons specified herein, Executive shall be entitled to receive the greater of (i) his current salary through the remainder of the Term, or (ii) 25% of his then base salary. In the event that the Company shall fail to renew this Agreement at the end of the Term upon terms no less favorable to Executive as of the end of the Term, Executive shall be entitled to receive, at the expiration of the Term, a payment in an amount equal to 25% of his then base salary. 4. Compensation. (a) Base Salary. Executive's base salary for the first year of the Term will be at a rate of not less than $225,000 per annum and Executive's base salary for the second year of the Term will be at a rate of not less than $240,000 per annum, in each case, paid in accordance with the Company's payroll practices and policies then in effect. (b) Bonus. Executive shall be entitled to participate in the Company's executive bonus program then in effect. Executive shall be eligible for an annual bonus of up to 100% of Executive's salary, to be superceded by the maximum amount available under the Company's executive bonus program and any other bonus program generally applicable to senior executives of the Company. (c) Options. Executive shall be granted options on the date hereof to purchase 110,000 shares of the Company's common stock with an exercise price equal to the closing sales price of the Company's common stock on the date of grant (the "Options"). 50% of the Options shall vest on the date of grant and 50% shall vest on December 31, 2005, provided that the Executive is still employed by the Company on such date. (d) Fringe Benefits. Executive shall receive the fringe benefits given to other executive officers of the Company including, but not limited to, major medical, dental, life insurance, pension including any 401 (K) or other profit sharing plan. Executive shall also be added as an insured under the Company's officers and directors insurance and all other polices which pertain to officers of the Company. The Company shall pay for all expenses related to COBRA until such time as Executive is fully covered under Company's plans. The Company shall pay Executive a car allowance of $1,500 per month during the Term of this Agreement. (e) Reimbursement of Expenses. The Company shall pay to Executive the reasonable expenses incurred by him in the performance of his duties hereunder, including, without limitation, expenses related to cell phones, blackberrys and laptop computers and such other expenses incurred in connection with business related travel or entertainment in accordance with the Company's policy, or, if such expenses are paid directly by the Executive, the Company shall promptly reimburse the Executive for such payments, provided that the Executive (i) properly accounts for such expenses in accordance with the Company's policy and (ii) has received prior approval by the Chief Executive Officer of the Company for major expenses. 2 (f) Vacation. Executive shall be entitled to four weeks of paid vacation per year. The Executive shall use his vacation in the calendar year in which it is accrued. 5. Confidentiality. Executive shall not divulge to anyone, either during or at any time after the Term, any information constituting a trade secret or other confidential information acquired by it concerning the Company, any subsidiary or other affiliate of the Company, except in the performance of his duties hereunder, including but not limited to its licensees, revenues, business systems and processes ("Confidential Information"). Executive acknowledges that any Confidential Information is of great value to the Company, and upon the termination of its engagement Executive shall redeliver to the Company all Confidential Information and other related data in his possession. 6. Change of Control. In the event that there comes a time during the Term hereof that (x) Neil Cole is not either (i) employed as an executive officer of the Company, or (ii) a member of the Company's Board of Directors, or (y) a sale or merger of the Division or the Company with a non-affiliate shall occur and within 12 months of such event, Executive's employment with the Company is terminated by the Company without cause or Executive terminates this Agreement for the reasons specified in paragraph 3 hereof, Executive shall be entitled to receive, in addition to any other amounts otherwise payable hereunder, an amount equal to his current compensation through the remainder of the Term, but no less than one times Executive's annualized compensation at the time of termination. 7. Miscellaneous. (a) This Agreement shall be deemed to be a contract made under the laws of the State of New York and for all purposes shall be construed in accordance with those laws. The Company and Executive unconditionally consent to submit to the exclusive jurisdiction of the New York State Supreme Court, County of New York or the United States District Court for Southern District of New York for any actions, suits or proceedings arising out of or relating to this Agreement and the transactions contemplated hereby (and agree not to commence any action, suit or proceeding relating thereto except in such courts), and further agree that service of any process, summons, notice or document by registered mail to the address set forth below shall be effective service of process for any action, suit or proceeding brought against the Company or the Executive, as the case may be, in any such court. 3 (b) If not terminated in accordance with its terms, this Agreement shall be binding upon, and inure to the benefit of, the Parties, their heirs, legal representatives, successors and permitted assigns. (c) The invalidity or unenforceability of any provision hereof shall not in any way affect the validity or enforceability of any other provision. This Agreement reflects the entire understanding between the Parties. (d) This Agreement supersedes any and all other agreements, either oral or in writing, between the parties hereto with respect to the employment of the Executive by the Company and contains all of the covenants and agreements between the parties with respect to such employment in any manner whatsoever. Any modification or termination of this Agreement will be effective only if it is in writing signed by the party to be charged. (e) This Agreement may be executed by the parties in one or more counterparts, each of which shall be deemed to be an original but all of which taken together shall constitute one and the same agreement, and shall become effective when one or more counterparts has been signed by each of the parties hereto and delivered to each of the other parties hereto. 8. Notices. All notices relating to this Agreement shall be in writing and shall be either personally delivered, sent by telecopy (receipt confirmed) or mailed by certified mail, return receipt requested, to be delivered at such address as is indicated below, or at such other address or to the attention of such other person as the recipient has specified by prior written notice to the sending party. Notice shall be effective when so personally delivered, one business day after being sent by telecopy or five days after being mailed. To the Company: Iconix Brand Group, Inc. 215 West 40th Street, 6th Floor New York, New York 10008 Attention: Neil Cole, Chief Executive Officer With a copy in the same manner to: Blank Rome LLP 405 Lexington Avenue New York, New York 10174 Attention: Robert J. Mittman, Esq. To the Executive: Andrew Tarshis 185 Pinewood Road Stamford, Connecticut 06903 With a copy in the same manner to: Mayer, Brown, Rowe & Maw, LLP 1675 Broadway New York, NY 10019 Attn: Nazim Zilkha, Esq. -SIGNATURE PAGE FOLLOWS- IN WITNESS WHEREOF, the parties hereto have executed this agreement as of the 22nd day of July, 2005. Iconix Brand Group, Inc. Executive By: /s/Neil Cole /s/Andrew Tarshis ---------------------------- ---------------------- Neil Cole Andrew Tarshis Chief Executive Officer EX-31.1 5 ex311.txt CEO 302 CERTIFICATION Exhibit 31.1 ICONIX BRAND GROUP, INC. CERTIFICATION 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 I, Neil Cole, President and Chief Executive Officer of Iconix Brand Group, Inc, certify that: 1. I have reviewed this Quarterly Report on Form 10-Q for the period ended September 30, 2005 of Iconix Brand Group, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and; c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and; 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 14, 2005 /s/ Neil Cole ------------------------------------- Neil Cole President and Chief Executive Officer EX-31.2 6 ex312.txt CFO 302 CERTIFICATION Exhibit 31.2 ICONIX BRAND GROUP, INC. CERTIFICATION 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 I, Warren Clamen, Chief Financial Officer of Iconix Brand Group, Inc, certify that: 1. I have reviewed this Quarterly Report on Form 10-Q for the period ended September 30, 2005 of Iconix Brand Group, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and; c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and; 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 14, 2005 /s/ Warren Clamen ----------------------------------- Warren Clamen Chief Financial Officer EX-32.1 7 ex321.txt CEO 906 CERTIFICATION Exhibit 32.1 ICONIX BRAND GROUP, INC. CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Iconix Brand Group, Inc. (the "Company") on Form 10-Q for the period ending September 30, 2005 (the "Report"), I, Neil Cole, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge: (1) The Report fully complies with the requirements of section 13(a) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/ Neil Cole - ------------------------------------- Neil Cole President and Chief Executive Officer November 14, 2005 EX-32.2 8 ex322.txt CFO 906 CERTIFICATION Exhibit 32.2 ICONIX BRAND GROUP, INC. CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Iconix Brand Group, Inc. (the "Company") on Form 10-Q for the period ending September 30, 2005 (the "Report"), I, Warren Clamen, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge: (1) The Report fully complies with the requirements of section 13(a) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/ Warren Clamen - ------------------------------------- Warren Clamen Chief Financial Officer November 14, 2005 -----END PRIVACY-ENHANCED MESSAGE-----