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 EndedJune 30,
2009
 
 OR
 
 o Transition Report
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
 
 For the
Transition Period From________ to________.
 
 Commission
file number 0-10593
 
 ICONIX
BRAND GROUP, INC.
 (Exact
name of registrant as specified in its charter)
  Delaware
                
                11-2481903(State
      or other jurisdiction of  incorporation or
    organization)
                
                (I.R.S.
      Employer Identification No.)1450 Broadway, New York, NY
                
                10018(Address
      of principal executive offices)
                
                (Zip
      Code)
 
 (212)
730-0030
 (Registrant's
telephone number, including area code)
 
 Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.  Yes   x  No    ̈
 
 Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files).  Yes   ̈  No    ̈
 
 Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
  Large accelerated filer x
                Accelerated fileroNon
      - accelerated filer o(Do not check if a smaller reporting company)
                Smaller reporting companyo
 
 Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act)
 Yes  o No  x
 
 Indicate
the number of shares outstanding of each of the issuer's classes of Common
Stock, as of the latest practicable date.
 
 Common
Stock, $.001 Par Value – 71,299,210 shares as of August 4,
2009.
  
  INDEX
 
 FORM
10-Q
 
 Iconix
Brand Group, Inc. and Subsidiaries
  Page No.Part I.
                  
                  Financial
      Information
                  
                  3Item 1.
                  
                  Financial
      Statements
                  
                  3Condensed
      Consolidated Balance Sheets – June 30, 2009 (unaudited) and December
      31, 2008
                  
                  3Unaudited
      Condensed Consolidated Income Statements – Three and Six Months Ended June
      30, 2009 and 2008
                  
                  4Unaudited
      Condensed Consolidated Statement of Stockholders' Equity - Six Months
      Ended June 30, 2009
                  
                  5Unaudited
      Condensed Consolidated Statements of Cash Flows - Six Months Ended June
      30, 2009 and 2008
                  
                  6Notes
      to Unaudited Condensed Consolidated Financial Statements
                  
                  8Item 2.
                  
                  Management's
      Discussion and Analysis of Financial Condition and Results of
      Operations
                  
                  23Item 3.
                  
                  Quantitative
      and Qualitative Disclosures about Market Risk
                  
                  28Item 4.
                  
                  Controls
      and Procedures
                  
                  29Part II.
                  
                  Other
      Information
                  
                  29Item 1.
                  
                  Legal
      Proceedings
                  
                  29Item 1A.
                  
                  Risk
      Factors
                  
                  29Item 2.
                  
                  Unregistered
      Sales of Equity Securities and Use of Proceeds
                  
                  33Item 6.
                  
                  Exhibits
                  
                  33Signatures
                  
                  
                  34
  2
  Part I.
 Financial Information
 Item 1.
Financial Statements
 
 Iconix
Brand Group, Inc. and Subsidiaries
 Condensed
Consolidated Balance Sheets
 (in
thousands, except par value)
 
 June 30,
                  
                  
                  December 31,2009
                  
                  
                  2008(1)(unaudited)AssetsCurrent
      Assets:Cash
      (including restricted cash of $5,247 in 2009 and $875 in
    2008)
                  
                  $
                  200,191
                  
                  
                  $
                  67,279Accounts
      receivable
                  
                  
                  57,909
                  
                  
                  
                  47,054Deferred
      income tax assets
                  
                  
                  1,556
                  
                  
                  
                  1,655Prepaid
      advertising and other
                  
                  
                  13,406
                  
                  
                  
                  14,375Total
      Current Assets
                  
                  
                  273,062
                  
                  
                  
                  130,363Property
      and equipment:Furniture,
      fixtures and equipment
                  
                  
                  9,207
                  
                  
                  
                  9,187Less:
      Accumulated depreciation
                  
                  
                  (3,140
                  )
                  
                  
                  (2,468
                  )6,067
                  
                  
                  
                  6,719Other
      Assets:Restricted
      cash
                  
                  
                  15,866
                  
                  
                  
                  15,866Marketable
      securities
                  
                  
                  6,801
                  
                  
                  
                  7,522Goodwill
                  
                  
                  165,001
                  
                  
                  
                  144,725Trademarks
      and other intangibles, net
                  
                  
                  1,056,966
                  
                  
                  
                  1,060,460Deferred
      financing costs, net
                  
                  
                  5,659
                  
                  
                  
                  6,524Non-current
      deferred income tax assets
                  
                  
                  23,236
                  
                  
                  
                  25,463Investments
      and joint ventures
                  
                  
                  21,633
                  
                  
                  
                  4,097Other
      assets – non-current
                  
                  
                  17,960
                  
                  
                  
                  18,5201,313,122
                  
                  
                  
                  1,283,177Total
      Assets
                  
                  $
                  1,592,251
                  
                  
                  $
                  1,420,259Liabilities
      and Stockholders' EquityCurrent
      liabilities:Accounts
      payable and accrued expenses
                  
                  $
                  10,559
                  
                  
                  $
                  22,392Accounts
      payable, subject to litigation
                  
                  
                  -
                  
                  
                  
                  1,878Deferred
      revenue
                  
                  
                  4,094
                  
                  
                  
                  5,570Current
      portion of long-term debt
                  
                  
                  59,398
                  
                  
                  
                  73,363Total
      current liabilities
                  
                  
                  74,051
                  
                  
                  
                  103,203Non-current
      deferred income taxes
                  
                  
                  127,402
                  
                  
                  
                  118,469Long-term
      debt, less current maturities
                  
                  
                  516,700
                  
                  
                  
                  545,226Long
      term deferred revenue
                  
                  
                  9,559
                  
                  
                  
                  9,272Total
      Liabilities
                  
                  
                  727,712
                  
                  
                  
                  776,170Commitments
      and contingenciesStockholders'
      EquityCommon
      stock, $.001 par value shares authorized 150,000; shares
      issued  71,389 and 58,077 respectively
                  
                  
                  71
                  
                  
                  
                  58Additional
      paid-in capital
                  
                  
                  719,019
                  
                  
                  
                  533,235Retained
      earnings
                  
                  
                  155,298
                  
                  
                  
                  120,358Accumulated
      other comprehensive loss
                  
                  
                  (4,274
                  )
                  
                  
                  (3,880
                  )Less:
      Treasury stock – 1,143 and 921 shares at cost,
respectively
                  
                  
                  (7,369
                  )
                  
                  
                  (5,682
                  )Total
      Iconix Stockholders’ Equity
                  
                  
                  862,745
                  
                  
                  
                  644,089Non-controlling
      interest
                  
                  
                  1,794
                  
                  
                  
                  -Total
      Stockholders’ Equity
                  
                  
                  864,539
                  
                  
                  
                  644,089Total
      Liabilities and Stockholders' Equity
                  
                  $
                  1,592,251
                  
                  
                  $
                  1,420,259
 
 (1) As
adjusted due to implementation of FSP APB 14-1.  See Notes 2 and
6.
 
 See Notes
to Unaudited Condensed Consolidated Financial Statements.
  3
  Iconix
Brand Group, Inc. and Subsidiaries
 
 Unaudited
Condensed Consolidated Income Statements
 (in
thousands, except earnings per share data)
 
 Three Months Ended June 30,
                      
                      Six Months Ended June 30,2009
                      
                      2008(1)
                      
                      2009
                      
                      2008(1)Licensing
      revenue
                      
                      $
                      56,408
                      
                      51,700
                      
                      106,909
                      
                      107,367Selling,
      general and administrative expenses
                      
                      
                      17,368
                      
                      18,320
                      
                      33,638
                      
                      37,031Expenses
      related to specific litigation
                      
                      
                      83
                      
                      195
                      
                      137
                      
                      386Operating
      income
                      
                      
                      38,957
                      
                      33,185
                      
                      73,134
                      
                      69,950Other
      expenses:Interest
      expense
                      
                      
                      10,111
                      
                      11,290
                      
                      20,549
                      
                      24,236Interest
      income
                      
                      
                      (572
                      )
                      (849
                      )
                      (1,175
                      )
                      (2,415
                      )Equity
      earnings on joint ventures
                      
                      
                      (770
                      )
                      —
                      
                      (807
                      )
                      —Other
      expenses - net
                      
                      
                      8,769
                      
                      10,441
                      
                      18,567
                      
                      21,821Income
      before income taxes
                      
                      
                      30,188
                      
                      22,744
                      
                      54,567
                      
                      48,129Provision
      for income taxes
                      
                      
                      10,897
                      
                      8,111
                      
                      19,627
                      
                      16,975Net
      income
                      
                      $
                      19,291
                      
                      14,633
                      
                      34,940
                      
                      31,154Earnings
      per share:Basic
                      
                      $
                      0.31
                      
                      0.25
                      
                      0.58
                      
                      0.54Diluted
                      
                      $
                      0.30
                      
                      0.24
                      
                      0.56
                      
                      0.51Weighted
      average number of common shares outstanding:Basic
                      
                      
                      62,467
                      
                      57,719
                      
                      60,044
                      
                      57,572Diluted
                      
                      
                      65,060
                      
                      61,279
                      
                      62,765
                      
                      61,315
 
 (1) As
adjusted due to implementation of FSP APB 14-1.  See Notes 2 and
6.
 
 See Notes
to Unaudited Condensed Consolidated Financial Statements.
  4
  Iconix
Brand Group, Inc. and Subsidiaries
 
 Unaudited
Condensed Consolidated Statement of Stockholders' Equity
 
 Six
Months Ended June 30, 2009
 (in
thousands)
  AccumulatedAdditional
                    
                    
                    
                    
                    
                    Other
                    
                    
                    
                    
                    
                    Non-Common Stock
                    
                    
                    Paid-in
                    
                    
                    Retained
                    
                    
                    Comprehensive
                    
                    
                    Treasury
                    
                    
                    ControllingShares
                    
                    
                    Amount
                    
                    
                    Capital
                    
                    
                    Earnings
                    
                    
                    Loss
                    
                    
                    Stock
                    
                    
                    Interest
                    
                    
                    TotalBalance
      at January 1,2009
      - as adjusted (1)
                    
                    
                    58,156
                    
                    
                    $
                    58
                    
                    
                    $
                    533,235
                    
                    
                    $
                    120,358
                    
                    
                    $
                    (3,880
                    )
                    
                    $
                    (5,682
                    )
                    
                    $
                    -
                    
                    
                    $
                    644,089Shares
      issued on exercise of stock options
                    
                    
                    742
                    
                    
                    
                    1
                    
                    
                    
                    2,638
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    2,639Shares
      issued on vesting of restricted stock
                    
                    
                    127
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Shares
      repurchased on the open market
                    
                    
                    (200
                    )
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (1,455
                    )
                    
                    
                    -
                    
                    
                    
                    (1,455
                    )Shares
      issued for earn-out on acquisition
                    
                    
                    1,297
                    
                    
                    
                    1
                    
                    
                    
                    15,675
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    15,676Issuance
      of new stock
                    
                    
                    10,700
                    
                    
                    
                    11
                    
                    
                    
                    152,787
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    152,798Issuance
      of common stock related to joint venture
                    
                    
                    589
                    
                    
                    
                    -
                    
                    
                    
                    7,999
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    7,999Shares
      repurchased on vesting of restricted stock and exercise of stock
      options
                    
                    
                    (22
                    )
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (232
                    )
                    
                    
                    -
                    
                    
                    
                    (232
                    )Tax
      benefit of stock option exercises
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    3,302
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    3,302Amortization
      expense in connection with restricted stock
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    3,327
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    3,327Amortization
      expense in connection with convertible notes
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    56
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    56Comprehensive
      income:Net
      income
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    34,940
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    34,940Change
      in fair value of cash flow hedge, net of tax
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Realization
      of cash flow hedge, net of tax
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    -
                    
                    
                    
                    68
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    68Change
      in fair value of securities, net of tax
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (462
                    )
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (462
                    )Total
      comprehensive income
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    
                    -
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    34,546Increase
      in non-controlling interest
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    1,794
                    
                    
                    
                    1,794Balance
      at June 30, 2009
                    
                    
                    71,389
                    
                    
                    $
                    71
                    
                    
                    $
                    719,019
                    
                    
                    $
                    155,298
                    
                    
                    $
                    (4,274
                    )
                    
                    $
                    (7,369
                    )
                    
                    $
                    1,794
                    
                    
                    $
                    864,539
 
 (1) As
adjusted due to implementation of FSP APB 14-1.  See Notes 2 and
6.
 
 See Notes
to Unaudited Condensed Consolidated Financial Statements.
  5
  Iconix
Brand Group, Inc. and Subsidiaries
 
 Unaudited
Condensed Consolidated Statements of Cash Flows
 (in
thousands)
 
 Six Months Ended June 30,2009
                            
                            
                            2008(1)Cash
      flows from operating activities:Net
      income
                            
                            $
                            34,940
                            
                            
                            
                            31,154Depreciation
      of property and equipment
                            
                            
                            672
                            
                            
                            
                            290Amortization
      of trademarks and other intangibles
                            
                            
                            3,563
                            
                            
                            
                            3,701Amortization
      of deferred financing costs
                            
                            
                            1,161
                            
                            
                            
                            879Amortization
      of convertible note discount
                            
                            
                            6,761
                            
                            
                            
                            6,298Stock-based
      compensation expense
                            
                            
                            3,327
                            
                            
                            
                            4,355Expiration
      of cash flow hedge
                            
                            
                            106
                            
                            
                            
                            -Change
      in non-controlling interest
                            
                            
                            (271
                            )
                            
                            
                            -Change
      in allowance for bad debts
                            
                            
                            542
                            
                            
                            
                            216Equity
      investment in joint venture
                            
                            
                            (536
                            )
                            
                            
                            -Deferred
      income taxes
                            
                            
                            11,259
                            
                            
                            
                            9,239Changes
      in operating assets and liabilities, net of business
      acquisitions:Accounts
      receivable
                            
                            
                            (11,397
                            )
                            
                            
                            (6,917
                            )Prepaid
      advertising and other
                            
                            
                            969
                            
                            
                            
                            (8,657
                            )Other
      assets
                            
                            
                            560
                            
                            
                            
                            638Deferred
      revenue
                            
                            
                            (1,189
                            )
                            
                            
                            (4,039
                            )Accrued
      interest on long-term debt
                            
                            
                            237
                            
                            
                            
                            1,150Accounts
      payable and accrued expenses
                            
                            
                            (8,826
                            )
                            
                            
                            (689
                            )Net
      cash provided by operating activities
                            
                            
                            41,878
                            
                            
                            
                            37,618Cash
      flows used in investing activities:Purchases
      of property and equipment
                            
                            
                            (20
                            )
                            
                            
                            (4,125
                            )Additions
      to trademarks
                            
                            
                            (68
                            )
                            
                            
                            (356
                            )Collection
      on promissory note
                            
                            
                            -
                            
                            
                            
                            1,000Acquisition
      of 50% interest in Ed Hardy
                            
                            
                            (9,000
                            )
                            
                            
                            -Earn-out
      payment on acquisition
                            
                            
                            (9,400
                            )
                            
                            
                            (1,663
                            )Net
      cash used in investing activities
                            
                            
                            (18,488
                            )
                            
                            
                            (5,144
                            )Cash
      flows used in financing activities:Proceeds
      from issuance of new stock, net of cost
                            
                            
                            152,787
                            
                            
                            
                            -Proceeds
      from exercise of stock options and warrants
                            
                            
                            2,638
                            
                            
                            
                            1,715Shares
      repurchased on vesting of restricted stock and exercise of stock
      options
                            
                            
                            (232
                            )
                            
                            
                            (662
                            )Shares
      repurchased on the open market
                            
                            
                            (1,455
                            )
                            
                            
                            -Payment
      of long-term debt
                            
                            
                            (49,584
                            )
                            
                            
                            (25,592
                            )Non-controlling
      interest contribution
                            
                            
                            2,066
                            
                            
                            
                            -Excess
      tax benefit from share-based payment arrangements
                            
                            
                            3,302
                            
                            
                            
                            6,806Restricted
      cash - current
                            
                            
                            (4,372
                            )
                            
                            
                            3,864Restricted
      cash - non-current
                            
                            
                            -
                            
                            
                            
                            (700
                            )Net
      cash provided by (used in) financing activities
                            
                            
                            105,150
                            
                            
                            
                            (14,569
                            )Net
      (decrease) increase in cash and cash equivalents
                            
                            
                            128,540
                            
                            
                            
                            17,905Cash,
      beginning of period
                            
                            
                            66,404
                            
                            
                            
                            48,067Cash,
      end of period
                            
                            $
                            194,944
                            
                            
                            
                            65,972Balance
      of restricted cash - current
                            
                            
                            5,247
                            
                            
                            
                            1,341Total
      cash including current restricted cash, end of period
                            
                            $
                            200,191
                            
                            
                            
                            67,313
 
 (1) As
adjusted due to implementation of FSP APB 14-1.  See Notes 2 and
6.
  6
  Supplemental
disclosure of cash flow information:
  Six Months Ended June 30,2009
                  
                  
                  2008Cash
      paid during the period:Income
      taxes
                  
                  $
                  5,332
                  
                  
                  $
                  5,209Interest
                  
                  $
                  11,917
                  
                  
                  $
                  17,215
 
 Supplemental disclosures of non-cash
investing and financing activities:
 
 Six Months Ended June 30,2009
                  
                  
                  2008Acquisitions:Common
      stock issued
                  
                  $
                  8,000
                  
                  
                  $
                  -
 
 See Notes
to Unaudited Condensed Consolidated Financial Statements.
  7
  Iconix
Brand Group, Inc. and Subsidiaries
 
 Notes to
Unaudited Condensed Consolidated Financial Statements
 June 30,
2009
 
 1. 
Basis of Presentation
 
 The
accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management of Iconix Brand Group, Inc.
(the "Company", “we”, “us”, or “our”), all adjustments (consisting primarily of
normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three months (“Current Quarter”) and
six months (“Current Six Months”) ended June 30, 2009 are not necessarily
indicative of the results that may be expected for a full fiscal
year.
 
 Certain
prior period amounts have been reclassified to conform to the current period’s
presentation.
 
 For
further information, refer to the consolidated financial statements and
footnotes thereto included in the Company's Annual Report on Form 10-K for the
year ended December 31, 2008 (“fiscal 2008”).  Subsequent events were
evaluated through August 6, 2009, the date these financial statements were
issued.
 
 2.  Changes
in Accounting
 
 In the
first quarter of 2009, the Company adopted the provisions of Financial
Accounting Standards Board Staff Position APB 14-1 “Accounting for Convertible
Debt Instruments That May Be Settled in Cash Upon Conversion” (“FSP APB 14-1”),
which changed the accounting for convertible debt instruments with cash
settlement features. FSP APB 14-1 applies to the Company’s previously issued
1.875% convertible senior subordinated notes (“Convertible Notes”). In
accordance with FSP APB 14-1, the Company recognized the liability component of
its Convertible Notes at fair value. The liability component is recognized as
the fair value of a similar instrument that does not have a conversion feature
at issuance. The equity component, which is the value of the conversion feature
at issuance, is recognized as the difference between the proceeds from the
issuance of the Convertible Notes and the fair value of the liability component,
after adjusting for the deferred tax impact. The Convertible Notes were issued
at a coupon rate of 1.875%, which was below that of a similar instrument that
does not have a conversion feature.  The Company recognizes an effective
interest rate of 7.85% on the carrying amount of the Convertible
Notes.  The effective rate is based on the rate for a similar
instrument that does not have a conversion feature. As such, the valuation of
the debt component, using the income approach, resulted in a debt discount of
$73.4 million at inception. The debt discount is amortized over the expected
life of the debt, which is also the stated life of the debt. See Note 6 for
further discussion.
 
 As a
result of applying FSP APB 14-1 retrospectively to all periods presented, the
Company recognized the following incremental effects on individual line items on
the consolidated balance sheet as of December 31, 2008:
  (000’s omitted)
                  
                  Before FSP
                    APB 14-1
                  
                  
                  Adjustment
                  
                  
                  After FSP
                    APB 14-1Non-current
      deferred income tax liabilities
                  
                  $
                  99,604
                  
                  
                  $
                  18,865
                  
                  
                  $
                  118,469Long-term
      debt, less current maturities
                  
                  
                  594,664
                  
                  
                  
                  (49,438
                  )
                  
                  
                  545,226Additional
      paid-in-capital
                  
                  
                  491,936
                  
                  
                  
                  41,299
                  
                  
                  
                  533,235Retained
      earnings
                  
                  
                  131,094
                  
                  
                  
                  (10,736
                  )
                  
                  
                  120,358
 
 The
impact of implementing FSP APB 14-1 for the six months ended June 30, 2008
(“Prior Year Six Months”) has increased interest expense by approximately $5.7
million and decreased the provision for income taxes by $2.2 million, the net
result of which decreased net income by approximately $3.4 million and decreased
diluted earnings per share by $0.06.
 
 The
impact of implementing FSP APB 14-1 for the Current Six Months has increased
interest expense by $6.1 million and decreased the provision for income taxes by
$2.2 million, the net result of which decreased net income by $3.9 million and
decreased diluted earnings per share by $0.06.
 
 3.  Investments
and Joint Ventures
 
 Scion
LLC
 
 Scion LLC
(“Scion”) is a brand management and licensing company formed by the Company with
Shawn “Jay-Z” Carter in March 2007 to buy, create and develop brands across a
spectrum of consumer product categories. On November 7, 2007,
Scion, through its wholly-owned subsidiary Artful Holdings LLC (“Artful
Holdings”), purchased Artful Dodger, an exclusive, high end urban apparel brand
for a purchase price of $15.0 million. Concurrent with the acquisition of Artful
Dodger, Artful Holdings entered into a license agreement covering all major
apparel categories for the United States.
  8
  The brand
has also been licensed to wholesale partners and distributors in Canada and
Europe.
 
 At
inception, the Company determined that it would consolidate Scion since,
under Financial Accounting Standards Board (“FASB”) Interpretations No. 46
“Consolidation of Variable Interest Entities – revised” (“FIN 46R”), the Company
effectively holds a 100% equity interest and is the primary beneficiary in the
variable interest entity. For the Current Quarter and Current Six Months, the
impact of consolidating the joint venture into the Company’s unaudited condensed
consolidated statement of income decreased net income by $0.2 million and $0.4
million, respectively.  The impact of consolidating the joint venture
in the three months ended June 30, 2008 (“Prior Year Quarter”) decreased net
income by $0.2 million; the impact of consolidating the joint venture in the six
months ended June 30, 2008 (“Prior Year Six Months”) was immaterial to the
Company.
 
 At June
30, 2009, the impact of consolidating the joint venture on the Company’s
unaudited condensed consolidated balance sheet has increased current assets
by $0.9 million, non-current assets by $14.8 million and current liabilities by
$1.1 million.  At December 31, 2008, the impact of consolidating the
joint venture on the Company’s consolidated balance sheet had increased current
assets by $3.5 million, non-current assets by $15.3 million and current
liabilities by $2.3 million.
 
 As of
June 30, 2009 and December 31, 2008, the Company’s equity at risk in Scion was
approximately $21.4 million and $16.0 million, respectively. At June 30, 2009
and December 31, 2008, the carrying value of the consolidated assets that are
collateral for the variable interest entity’s obligations total $14.2 million
and $14.7 million, respectively, which is comprised of the Artful Dodger
trademark. The assets of the Company are not available to the variable
interest entity's creditors.
 
 On March
12, 2009, the Company, through its investment in Scion, effectively
acquired a 16.5% interest in one of its licensees for $1. The Company has
determined that this entity is a variable interest entity as defined by FIN
46R.  However, the Company is not the primary beneficiary; therefore,
the investment in this entity is accounted for under the cost method of
accounting.  As part of the transaction, the Company and its Scion
partner each contributed approximately $2.1 million to Scion, which was
deposited as cash collateral under the terms of the entity’s financing
agreements.  The contributed cash, owned by Scion, is included as
short-term restricted cash in the Company’s balance sheet.
 
 In
December 2007, the FASB issued SFAS No. 160, “Non-controlling Interests in
Consolidated Financial Statements — an amendment of ARB No. 51” (“SFAS 160”).
SFAS 160 requires the recognition of a non-controlling interest (formerly known
as a “minority interest”) as equity in the consolidated financial statements and
separate from the parent’s equity. For the Current Quarter and Current Six
Months, the amount of net income attributable to the non-controlling interest is
approximately $0.1 million and $0.3 million and has been included in equity
earnings on joint venture in the unaudited condensed consolidated income
statement.
 
 Iconix
China
 
 On
September 5, 2008, the Company and Novel Fashions Holdings Limited (“Novel”)
formed a joint venture (“Iconix China”) to develop, exploit and market the
Company's brands in the People’s Republic of China, Hong Kong, Macau and Taiwan
(the “China Territory”). Pursuant to the terms of this transaction, the Company
contributed to Iconix China substantially all rights to its brands in the China
Territory and committed to contribute $5.0 million, and Novel committed to
contribute $20 million.  Upon closing of the transaction, the Company
contributed $2.0 million and Novel contributed $8.0 million.  The
balance of the parties’ respective contributions are due in September
2009 and September 2010.
 
 At
inception, the Company determined, in accordance with FIN 46R, based on the
corporate structure, voting rights and contributions of the Company and Novel,
that Iconix China is a variable interest entity and not subject to
consolidation, as, under FIN46R, the Company is not the primary beneficiary of
Iconix China.  The Company has recorded its investment under the
equity method of accounting.
 
 At June
30, 2009, the Company’s maximum exposure for this joint venture was $6.6
million. At December 31, 2008, the Company’s maximum exposure was $7.1
million.
 
 At June
30, 2009, Iconix China’s balance sheet included approximately $6.3 million in
current assets, $23.3 million in total assets, $0.2 million in current
liabilities, and $0.2 million in total liabilities.  For the Current
Quarter, Iconix China’s statement of operations reflects approximately $0.1
million in revenue and approximately $0.4 million in operating
expenses.  For the Current Six Months, Iconix China’s statement of
operations reflects that it had approximately $0.1 million in revenue and
approximately $1.1 million in operating expenses.  As a result, for
the Current Quarter and Current Six Months, the Company recorded an equity loss
of approximately $0.2 million and $0.5 million, respectively, on its equity
investment in the Iconix China joint venture.
 
 At
December 31, 2008, Iconix China’s balance sheet included approximately $8.3
million in current assets, $25.1 million in total assets, $1.2 million in
current liabilities, and $1.2 million in total liabilities.
  9
  Iconix
Latin America
 
 In
December 2008, the Company contributed substantially all rights to its
brands in Mexico, Central America, South America, and the Caribbean (the “Latin
America Territory”) to Iconix Latin America LLC (“Iconix Latin America”), a then
newly formed subsidiary of the Company.  On December 29, 2008, New
Brands America LLC (“New Brands”), an affiliate of the Falic Group, purchased a
50% interest in Iconix Latin America. Pursuant to the terms of this transaction,
the Company has contributed substantially all rights to its brands in the Latin
America Territory.  In consideration for its 50% interest in Iconix
Latin America, New Brands agreed to pay $6.0 million to the
Company.  New Brands paid $1.0 million upon closing of this
transaction and has committed to pay an additional $5.0 million over the
30-month period following closing, of which $0.5 million was paid during the
Current Six Months.  As of June 30, 2009, the balance owed to the
Company under this obligation is $4.5 million.  The current portion of $2.5
million is included in the unaudited condensed consolidated balance sheet in
prepaid advertising and other and the long term portion of $2.0 million is
included in other assets – non-current.
 
 Based on
the corporate structure, voting rights and contributions of the Company and New
Brands, Iconix Latin America is not subject to consolidation.   This
conclusion was based on the Company’s determination that the entity met the
criteria to be considered a “business,” and therefore was not subject to
consolidation due to the “business scope exception” of FIN 46R. As such, the
Company has recorded its investment under the equity method of
accounting.
 
 During
the Current Quarter and Current Six Months, the Company recorded equity earnings
of $0.2 million and $0.4 million, respectively, on its equity investment in the
Iconix Latin America joint venture.
 
 Ed
Hardy
 
 On May 4,
2009, the Company acquired a 50% interest in Hardy Way LLC (“Hardy Way”), the
owner of the Ed Hardy brands and trademarks, for $17.0 million, comprised of
$9.0 million in cash and 588,688 shares of the Company’s common stock valued at
$8.0 million.  In addition, the seller of the 50% interest or his
affiliate may be entitled to receive an additional $1.0 million in shares of the
Company’s common stock pursuant to an earn-out based on royalties received by
Hardy Way for the year ending December 31, 2009.
 
 Based on
the corporate structure, voting rights and contributions of the Company and
Hardy Way, Hardy Way is not subject to consolidation.   This
conclusion was based on the Company’s determination that the entity met the
criteria to be considered a “business,” and therefore was not subject to
consolidation due to the “business scope exception” of FIN 46R. As such, the
Company has recorded its investment under the equity method of
accounting.
 
 At June
30, 2009, Hardy Way’s balance sheet included approximately $1.3 million in
current assets, $1.3 million in total assets, $0.2 million in current
liabilities, and $0.2 million in total liabilities.  For the Current
Quarter, Hardy Way’s statement of operations reflects that it had approximately
$1.3 million in revenue and approximately $0.2 million in operating
expenses.  As a result, during the Current Quarter, the Company
recorded equity earnings of approximately $0.6 million on its equity investment
in the Hardy Way joint venture, representing the Company’s 50% equity interest
in Hardy Way.
 
 4.  Fair
Value Measurements
 
 SFAS No.
157 “Fair Value Measurements” (“SFAS 157”), which the Company adopted on January
1, 2008, establishes a framework for measuring fair value and requires expanded
disclosures about fair value measurement. While SFAS 157 does not require any
new fair value measurements in its application to other accounting
pronouncements, it does emphasize that a fair value measurement should be
determined based on the assumptions that market participants would use in
pricing the asset or liability. As a basis for considering market participant
assumptions in fair value measurements, SFAS 157 established the following fair
value hierarchy that distinguishes between (1) market participant assumptions
developed based on market data obtained from sources independent of the
reporting entity (observable inputs) and (2) the reporting entity's own
assumptions about market participant assumptions developed based on the best
information available in the circumstances (unobservable inputs):
 
 Level 1:
Observable inputs such as quoted prices for identical assets or liabilities in
active markets
 
 Level 2:
Other inputs that are observable directly or indirectly, such as quoted prices
for similar assets or liabilities or market-corroborated inputs
 
 Level 3:
Unobservable inputs for which there is little or no market data and which
requires the owner of the assets or liabilities to develop its own assumptions
about how market participants would price these assets or
liabilities
 
 The
valuation techniques that may be used to measure fair value are as
follows:
 
 (A)
Market approach - Uses prices and other relevant information generated by market
transactions involving identical or comparable assets or
liabilities
 
 (B)
Income approach - Uses valuation techniques to convert future amounts to a
single present amount based on current market expectations about those future
amounts, including present value techniques, option-pricing models and excess
earnings method
  10
  (C) Cost
approach - Based on the amount that would currently be required to replace the
service capacity of an asset (replacement cost)
 
 To
determine the fair value of certain financial instruments, the Company relies on
Level 2 inputs generated by market transactions of similar instruments where
available, and Level 3 inputs using an income approach when Level 1 and Level 2
inputs are not available. The Company’s assessment of the significance of a
particular input to the fair value measurement requires judgment and may affect
the valuation of financial assets and financial liabilities and their placement
within the fair value hierarchy. The following table summarizes the instruments
measured at fair value at June 30, 2009:
 
 Carrying Amount as ofJune 30, 2009
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    Valuation(000's omitted)
                    
                    Level 1
                    
                    
                    Level 2
                    
                    
                    Level 3
                    
                    TechniqueMarketable
      Securities
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    6,800
                    
                    (B)Cash
      Flow Hedge
                    
                    $
                    -
                    
                    
                    $
                    1
                    
                    
                    $
                    -
                    
                    (A)
 
 Under
SFAS No. 159, “The Fair Value Option for Financial Assets and Financial
Liabilities” (“SFAS 159”), entities are permitted to choose to measure many
financial instruments and certain other items at fair value.  The
Company did not elect the fair value measurement option under SFAS 159 for any
of its financial assets or liabilities.
 
 In
February 2008, the FASB issued FASB Staff Position No. FAS 157-2, "Effective
Date of FASB Statement No. 157," which deferred the effective date of adoption
of this Staff Position to January 1, 2009 for all nonfinancial assets and
liabilities, except those that are recognized or disclosed at fair value on
a recurring basis (that is, at least annually). The Company adopted the
deferred provisions of SFAS 157 on January 1, 2009. The adoption of
these provisions did not have a material effect on the
Company’s unaudited condensed consolidated financial
statements.
 
 Marketable
Securities
 
 Marketable
securities, which are accounted for as available-for-sale, are stated at fair
value in accordance with SFAS No. 115, “Accounting for Certain Investments in
Debt and Equity Securities,” (“SFAS 115”) and consist of auction rate securities
(“ARS”). Temporary changes in fair market value are recorded as other
comprehensive income or loss, whereas other than temporary markdowns will be
realized through the Company’s income statement.
 
 As of
June 30, 2009, the Company held ARS with a face value of $13.0 million and a
fair value of $6.8 million.  In December 2008, the insurer of the ARS
exercised its put option to replace the underlying securities of the ARS with
its preferred securities. Although the ARS have paid cash dividends according to
their stated terms, the Company has received notice from the insurer that the
payment of cash dividends will cease after July 31, 2009 and will only be
resumed if the board of directors of the insurer declares such cash dividends to
be payable at a later date.  Prior to
the cessation of cash dividend payments, the Company estimated the fair value of
its ARS with a discounted cash flow model where the Company used the expected
rate of cash dividends to be received.  As the cash dividend payments
will cease after July 31, 2009, the Company changed its methodology for
estimating the fair value of the ARS as of June 30, 2009.  As of June
30, 2009, the Company estimated the fair value of its ARS using the present
value of the weighted average of several scenarios of recovery based on
management’s assessment of the probability of each scenario. The
Company considered a variety of factors in its model including: credit rating of
the issuer and insurer, comparable market data (if available), current
macroeconomic market conditions, quality of the underlying securities, and the
probabilities of several levels of recovery and reinstatement of cash dividend
payments.  As a result of its evaluation, during the Current Quarter
and the Current Six Months the Company has recorded an unrealized pre-tax loss
of approximately $0.7 million and $0.7 million, respectively, in accumulated
other comprehensive loss as a reduction to stockholders’ equity to reflect a
temporary decline in the fair value of the ARS.  The Company believes
the decrease in fair value is temporary due to general macroeconomic market
conditions.  Further, the Company has the ability and intent to hold
the ARS until an anticipated full redemption. These funds will not be available
to the Company until a successful auction occurs or a buyer is found outside the
auction process. As the ARS have failed to auction and may not auction
successfully in the near future, the Company has classified its ARS as
non-current. The Company continues to monitor the auction rate securities market
and considers its impact, if any, on the fair value of its ARS.  The
following table summarizes the activity for the period:
  For the Three Months Ended
                                                        
                                                        
                                                        For the Six Months EndedAuction Rate Securities (000's omitted)
                                                        
                                                        June 30,
                                                        
                                                        
                                                        June 30,2009
                                                        
                                                        
                                                        2008
                                                        
                                                        
                                                        2009
                                                        
                                                        
                                                        2008Balance
      at beginning of period
                                                        
                                                        $
                                                        7,456
                                                        
                                                        
                                                        $
                                                        10,660
                                                        
                                                        
                                                        $
                                                        7,522
                                                        
                                                        
                                                        $
                                                        10,920Additions
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -Gains
      (losses) reported in earnings
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -Losses
      reported in accumulated other comprehensive loss
                                                        
                                                        
                                                        (655
                                                        )
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        (721
                                                        )
                                                        
                                                        
                                                        (260
                                                        )Balance
      at end of period
                                                        
                                                        $
                                                        6,801
                                                        
                                                        
                                                        $
                                                        10,660
                                                        
                                                        
                                                        $
                                                        6,801
                                                        
                                                        
                                                        $
                                                        10,660
  11
  Cash
Flow Hedge
 
 On July
26, 2007, the Company purchased a hedge instrument from Lehman Brothers Special
Financing Inc. (“LBSF”) to mitigate the cash flow risk of rising interest rates
on the Term Loan Facility (see Note 6 for a description of this credit
agreement). This hedge instrument caps the Company’s exposure to rising interest
rates at 6.00% for LIBOR for 50% of the forecasted outstanding balance of the
Term Loan Facility (“Interest Rate Cap”). Based on management’s assessment, the
Interest Rate Cap qualifies for hedge accounting under SFAS 133 “Accounting for
Derivative Instruments and Hedging Transactions”. On a quarterly basis, the
value of the hedge is adjusted to reflect its current fair value, with any
adjustment flowing through other comprehensive income. The fair value of this
instrument is obtained by comparing the characteristics of this cash flow hedge
with similarly traded instruments, and is therefore classified as Level 2 in the
fair value hierarchy. At June 30, 2009, the fair value of the Interest Rate Cap
was approximately $1,000. On October 3, 2008, LBSF filed a petition for
bankruptcy protection under Chapter 11 of the United States Bankruptcy Code. The
Company currently believes that the LBSF bankruptcy filing and its potential
impact on LBSF will not have a material adverse effect on the Company’s
financial position, results of operations or cash flows.
 
 Financial
Instruments
 
 At June
30, 2009 and December 31, 2008, the fair values of cash and cash
equivalents, receivables and accounts payable approximated their carrying values
due to the short-term nature of these instruments. The fair value of the note
receivable from New Brands approximates its $4.5 million carrying
value.  The estimated fair values of other financial instruments
subject to fair value disclosures, determined based on broker quotes or quoted
market prices or rates for the same or similar instruments, and the related
carrying amounts are as follows:
 
 (000's omitted)
                    
                    June 30, 2009
                    
                    
                    December 31, 2008Carrying Amount
                    
                    
                    Fair Value
                    
                    
                    Carrying Amount
                    
                    
                    Fair ValueLong-term
      debt, including current portion
                    
                    $
                    576,098
                    
                    
                    $
                    567,693
                    
                    
                    $
                    618,589
                    
                    
                    $
                    534,098
 
 Financial
instruments expose the Company to counterparty credit risk for nonperformance
and to market risk for changes in interest.  The Company manages exposure
to counterparty credit risk through specific minimum credit standards,
diversification of counterparties and procedures to monitor the amount of credit
exposure. The Company’s financial instrument counterparties are substantial
investment or commercial banks with significant experience with such
instruments.
 
 Non-Financial
Assets and Liabilities
 
 On
January 1, 2009, the Company adopted the provisions of SFAS 157 with respect to
its non-financial assets and liabilities requiring non-recurring adjustments to
fair value. The Company uses level 3 inputs and the income method to measure the
fair value of its non-financial assets and liabilities.  The Company
had no adjustments in the Current Six Months.  The Company has goodwill,
which is tested for impairment at least annually, as required by SFAS
142.  Further, in accordance with SFAS 142, the Company’s
indefinite-lived trademarks are tested for impairment at least annually, on an
individual basis as separate single units of accounting.  Similarly,
consistent with SFAS 144 “Accounting for the Impairment or Disposal of
Long-Lived Assets”, the Company assesses whether or not there is impairment of
the Company’s definite-lived trademarks.  See Note 5.
 
 5.  Trademarks
and Other Intangibles, net
 
 Trademarks
and other intangibles, net consist of the following:
  June 30, 2009
                          
                          
                          December 31, 2008Estimated
                          
                          
                          Gross
                          
                          
                          
                          
                          
                          GrossLives in
                          
                          
                          Carrying
                          
                          
                          Accumulated
                          
                          
                          Carrying
                          
                          
                          Accumulated(000's omitted)
                          
                          Years
                          
                          
                          Amount
                          
                          
                          Amortization
                          
                          
                          Amount
                          
                          
                          AmortizationIndefinite
      life trademarks
                          
                          indefinite
                          
                          
                          $
                          1,035,444
                          
                          
                          $
                          9,498
                          
                          
                          $
                          1,035,382
                          
                          
                          $
                          9,498Definite
      life trademarks
                          
                          10-15
                          
                          
                          
                          19,567
                          
                          
                          
                          2,961
                          
                          
                          
                          19,561
                          
                          
                          
                          2,252Non-compete
      agreements
                          
                          2-15
                          
                          
                          
                          10,075
                          
                          
                          
                          6,854
                          
                          
                          
                          10,075
                          
                          
                          
                          6,098Licensing
      agreements
                          
                          1-9
                          
                          
                          
                          22,193
                          
                          
                          
                          11,177
                          
                          
                          
                          22,193
                          
                          
                          
                          9,136Domain
      names
                          
                          5
                          
                          
                          
                          570
                          
                          
                          
                          393
                          
                          
                          
                          570
                          
                          
                          
                          337$
                          1,087,849
                          
                          
                          $
                          30,883
                          
                          
                          $
                          1,087,781
                          
                          
                          $
                          27,321
 
 Amortization
expense for intangible assets was $1.8 million for both the Current Quarter and
the Prior Year Quarter, and $3.6 million and $3.7 million for the Current Six
Months and the Prior Year Six Months, respectively. The trademarks of Candies,
Bongo, Joe Boxer, Rampage, Mudd, London Fog, Mossimo, Ocean Pacific, Danskin,
Rocawear, Cannon, Royal Velvet, Fieldcrest, Charisma, Starter and Waverly have
been determined to have an indefinite useful life and accordingly, consistent
with SFAS 142, no amortization will be recorded in the Company's consolidated
income statements. Instead, each of these intangible assets will be tested for
impairment at least annually on an individual basis as separate single units of
accounting, with any related impairment charge recorded to the statement of
operations at the time of determining such impairment.  Similarly,
consistent with SFAS 144 “Accounting for the Impairment or Disposal of
Long-Lived Assets”, there was no impairment of the definite-lived
trademarks.
  12
  6.  Debt
Arrangements
 
 The
Company's debt is comprised of the following:
 
 June 30,
                    
                    
                    December 31,(000’s omitted)
                    
                    2009
                    
                    
                    2008Convertible Senior
      Subordinated Notes (Note 2)
                    
                    $
                    240,357
                    
                    
                    $
                    233,999Term
      Loan Facility
                    
                    
                    217,336
                    
                    
                    
                    255,307Asset-Backed
      Notes
                    
                    
                    106,219
                    
                    
                    
                    117,097Sweet
      Note (Note 7)
                    
                    
                    12,186
                    
                    
                    
                    12,186Total
      Debt
                    
                    $
                    576,098
                    
                    
                    $
                    618,589
 
 Convertible
Senior Subordinated Notes
 
 On June
20, 2007, the Company completed the issuance of $287.5 million principal amount
of the Company's Convertible Notes in a private offering to certain
institutional investors. The net proceeds received by the Company from the
offering were approximately $281.1 million.
 
 The
Convertible Notes bear interest at an annual rate of 1.875%, payable
semi-annually in arrears on June 30 and December 31 of each year, beginning
December 31, 2007. However, the Company recognizes an effective interest rate of
7.85% on the carrying amount of the Convertible Notes.  The effective
rate is based on the rate for a similar instrument that does not have a
conversion feature.  The Convertible Notes will be convertible into
cash and, if applicable, shares of the Company's common stock based on a
conversion rate of 36.2845 shares of the Company's common stock, subject to
customary adjustments, per $1,000 principal amount of the Convertible Notes
(which is equal to an initial conversion price of approximately $27.56 per
share) only under the following circumstances: (1) during any fiscal quarter
beginning after September 30, 2007 (and only during such fiscal quarter), if the
closing price of the Company's common stock for at least 20 trading days in the
30 consecutive trading days ending on the last trading day of the immediately
preceding fiscal quarter is more than 130% of the conversion price per share,
which is $1,000 divided by the then applicable conversion rate; (2) during the
five business day period immediately following any five consecutive trading day
period in which the trading price per $1,000 principal amount of the Convertible
Notes for each day of that period was less than 98% of the product of (a) the
closing price of the Company's common stock for each day in that period and (b)
the conversion rate per $1,000 principal amount of the Convertible Notes; (3) if
specified distributions to holders of the Company's common stock are made, as
set forth in the indenture governing the Convertible Notes (“Indenture”); (4) if
a “change of control” or other “fundamental change,” each as defined in the
Indenture, occurs; (5) if the Company chooses to redeem the Convertible Notes
upon the occurrence of a “specified accounting change,” as defined in the
Indenture; and (6) during the last month prior to maturity of the Convertible
Notes. If the holders of the Convertible Notes exercise the conversion
provisions under the circumstances set forth, the Company will need to remit the
lower of the principal balance of the Convertible Notes or their conversion
value to the holders in cash. As such, the Company would be required to classify
the entire amount outstanding of the Convertible Notes as a current liability in
the following quarter. The evaluation of the classification of amounts
outstanding associated with the Convertible Notes will occur every
quarter.
 
 Upon
conversion, a holder will receive an amount in cash equal to the lesser of (a)
the principal amount of the Convertible Note or (b) the conversion value,
determined in the manner set forth in the Indenture. If the conversion value
exceeds the principal amount of the Convertible Note on the conversion date, the
Company will also deliver, at its election, cash or the Company's common stock
or a combination of cash and the Company's common stock for the conversion value
in excess of the principal amount. In the event of a change of control or other
fundamental change, the holders of the Convertible Notes may require the Company
to purchase all or a portion of their Convertible Notes at a purchase price
equal to 100% of the principal amount of the Convertible Notes, plus accrued and
unpaid interest, if any. If a specified accounting change occurs, the Company
may, at its option, redeem the Convertible Notes in whole for cash, at a price
equal to 102% of the principal amount of the Convertible Notes, plus accrued and
unpaid interest, if any. Holders of the Convertible Notes who convert their
Convertible Notes in connection with a fundamental change or in connection with
a redemption upon the occurrence of a specified accounting change may be
entitled to a make-whole premium in the form of an increase in the conversion
rate.
 
 Pursuant
to Emerging Issues Task Force (“EITF”) 90-19, “Convertible Bonds with Issuer
Option to Settle for Cash upon Conversion” (“EITF 90-19”), EITF 00-19,
“Accounting for Derivative Financial Instruments Indexed to, and Potentially
Settled in, a Company's Own Stock” (“EITF 00-19”), and EITF 01-6, “The Meaning
of Indexed to a Company's Own Stock” (“EITF 01-6”), the Convertible Notes are
accounted for as convertible debt in the accompanying unaudited condensed
consolidated balance sheet and the embedded conversion option in the Convertible
Notes has not been accounted for as a separate derivative. For a discussion of
the effects of the Convertible Notes and the Convertible Note Hedge and Sold
Warrants discussed below on earnings per share, see Note 8.
  13
  In June
2008, the FASB ratified EITF Issue No. 07-5, “Determining Whether an Instrument
(or an Embedded Feature) Is Indexed to an Entity’s Own Stock” (“EITF 07-5”).
EITF 07-5 provides that an entity should use a two step approach to evaluate
whether an equity-linked financial instrument (or embedded feature) is indexed
to its own stock, including evaluating the instrument’s contingent exercise and
settlement provisions. It also clarifies on the impact of foreign currency
denominated strike prices and market-based employee stock option valuation
instruments on the evaluation. EITF 07-5 is effective for fiscal years beginning
after December 15, 2008.  The Company has evaluated the impact of
EITF 07-5, and has determined it has no impact on the Company’s results of
operations and financial position in the Current Six Months, and will have no
impact on the Company’s results of operations and financial position in future
fiscal periods.
 
 At June
30, 2009 and December 31, 2008, the amount of the Convertible Notes accounted
for as a liability under FSP APB 14-1 was $240.4 million and $234.0 million, and
is reflected on the unaudited condensed consolidated balance sheets as
follows:
 
 June 30,
                    
                    December 31,(000’somitted)
                    2009
                    
                    2008Equity
      component carrying amount
                    
                    $
                    41,309
                    
                    
                    $
                    41,309Unamortized
      discount
                    
                    
                    47,143
                    
                    
                    
                    53,501Net
      debt carrying amount
                    
                    
                    240,357
                    
                    
                    
                    233,999
 
 For the
Current Quarter and the Prior Year Quarter, the Company recorded additional
non-cash interest expense of $3.2 million and $2.9 million, respectively,
representing the difference between the stated interest rate on the Convertible
Notes and the rate for a similar instrument that does not have a conversion
feature.  For the Current Six Months and the Prior Year Six Months,
the Company recorded additional non-cash interest expense of approximately $6.3
million and approximately $5.7 million, respectively.
 
 For both
the Current Quarter and the Prior Year Quarter, contractual interest expense
relating to the Convertible Notes was approximately $1.3 million.  For
both the Current Six Months and the Prior Year Six Months, contractual interest
expense relating to the Convertible Notes was approximately $2.7
million.
 
 The
Convertible Notes do not provide for any financial covenants.
 
 In
connection with the sale of the Convertible Notes, the Company entered into
hedges for the Convertible Notes (“Convertible Note Hedges”) with respect to its
common stock with two entities, one of which was Lehman Brothers OTC Derivatives
Inc. (“Lehman OTC” and together with the other counterparty, the
“Counterparties”). Pursuant to the agreements governing these Convertible Note
Hedges, the Company purchased call options (the “Purchased Call Options”) from
the Counterparties covering up to approximately 10.4 million shares of the
Company's common stock of which 40% were purchased from Lehman OTC. These
Convertible Note Hedges are designed to offset the Company's exposure to
potential dilution upon conversion of the Convertible Notes in the event that
the market value per share of the Company's common stock at the time of exercise
is greater than the strike price of the Purchased Call Options (which strike
price corresponds to the initial conversion price of the Convertible Notes and
is simultaneously subject to certain customary adjustments). On June 20, 2007,
the Company paid an aggregate amount of approximately $76.3 million of the
proceeds from the sale of the Convertible Notes for the Purchased Call Options,
of which $26.7 million was included in the balance of deferred income tax assets
at June 30, 2007 and is being recognized over the term of the Convertible Notes.
As of June 30, 2009, the balance of deferred income tax assets related to this
transaction was $16.1 million.
 
 The
Company also entered into separate warrant transactions with the Counterparties
whereby the Company, pursuant to the agreements governing these warrant
transactions, sold to the Counterparties warrants (the “Sold Warrants”) to
acquire up to 3.6 million shares of the Company's common stock of which 40% were
sold to Lehman OTC, at a strike price of $42.40 per share of the Company's
common stock. The Sold Warrants will become exercisable on September 28, 2012
and will expire by the end of 2012. The Company received aggregate proceeds of
approximately $37.5 million from the sale of the Sold Warrants on June 20,
2007.
 
 Pursuant
to Emerging Issues Task Force (EITF) Issue No. 00-19 “Accounting for Derivative
Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own
Stock,” (EITF 00-19), and EITF Issue No. 01-06, “The Meaning of Indexed to a
Company’s Own Stock” (EITF 01-06), the Convertible Note Hedge and the proceeds
received from the issuance of the Sold Warrants were recorded as a charge and an
increase, respectively, in additional paid-in capital in stockholders’ equity as
separate equity transactions. As a result of these transactions, the Company
recorded a net reduction to additional paid-in-capital of $12.1 million in June
2007.
 
 The
Company has evaluated the impact of adopting EITF 07-5 as it relates to the
Sold Warrants, and has determined it has no impact on the Company’s results
of operations and financial position in the Current Six Months, and will have no
impact on the Company’s results of operations and financial position in future
fiscal periods.
 
 As the
Convertible Note Hedge transactions and the warrant transactions were separate
transactions entered into by the Company with the Counterparties, they are not
part of the terms of the Convertible Notes and will not affect the holders'
rights under the Convertible Notes. In addition, holders of the Convertible
Notes will not have any rights with respect to the Purchased Call Options or the
Sold Warrants.
  14
  If the
market value per share of the Company's common stock at the time of conversion
of the Convertible Notes is above the strike price of the Purchased Call
Options, the Purchased Call Options entitle the Company to receive from the
Counterparties net shares of the Company's common stock, cash or a combination
of shares of the Company's common stock and cash, depending on the consideration
paid on the underlying Convertible Notes, based on the excess of the then
current market price of the Company's common stock over the strike price of the
Purchased Call Options. Additionally, if the market price of the Company's
common stock at the time of exercise of the Sold Warrants exceeds the strike
price of the Sold Warrants, the Company will owe the Counterparties net shares
of the Company's common stock or cash, not offset by the Purchased Call Options,
in an amount based on the excess of the then current market price of the
Company's common stock over the strike price of the Sold Warrants.
 
 These
transactions will generally have the effect of increasing the conversion price
of the Convertible Notes to $42.40 per share of the Company's common stock,
representing a 100% percent premium based on the last reported sale price of the
Company’s common stock of $21.20 per share on June 14, 2007.
 
 On
September 15, 2008 and October 3, 2008, respectively, Lehman Brothers Holdings
Inc. (“Lehman Holdings”) and its subsidiary, Lehman OTC, filed for protection
under Chapter 11 of the United States Bankruptcy Code in the United States
Bankruptcy Court in the Southern District of New York. The Company currently
believes that the bankruptcy filings and their potential impact on these
entities will not have a material adverse effect on the Company’s financial
position, results of operations or cash flows. The Company will continue to
monitor the bankruptcy filings of Lehman Holdings and Lehman OTC. The terms of
the Convertible Notes and the rights of the holders of the Convertible Notes are
not affected in any way by the bankruptcy filings of Lehman Holdings or Lehman
OTC.
 
 Term
Loan Facility
 
 In
connection with the acquisition of the Rocawear brand, in March 2007, the
Company entered into a $212.5 million credit agreement with Lehman Brothers
Inc., as lead arranger and bookrunner, and Lehman Commercial Paper Inc.
(“LCPI”), as syndication agent and administrative agent (the “Credit Agreement”
or “Term Loan Facility”). At the time, the Company pledged to LCPI, for the
benefit of the lenders under the Term Loan Facility (the “Lenders”), 100% of the
capital stock owned by the Company in its subsidiaries, OP Holdings and
Management Corporation, a Delaware corporation (“OPHM”), and Studio Holdings and
Management Corporation, a Delaware corporation (“SHM”). The Company's
obligations under the Credit Agreement are guaranteed by each of OPHM and SHM,
as well as by two of its other subsidiaries, OP Holdings LLC, a Delaware limited
liability company (“OP Holdings”), and Studio IP Holdings LLC, a Delaware
limited liability company ("Studio IP Holdings").
 
 On
October 3, 2007, in connection with the acquisition of Official-Pillowtex LLC, a
Delaware limited liability company (“Official-Pillowtex”), with the proceeds of
the Convertible Notes, the Company pledged to LCPI, for the benefit of the
Lenders, 100% of the capital stock owned by the Company in Mossimo, Inc., a
Delaware corporation (“MI”), and Pillowtex Holdings and Management Corporation,
a Delaware corporation (“PHM”), each of which guaranteed the Company’s
obligations under the Credit Agreement. Simultaneously with the acquisition of
Official-Pillowtex, each of Mossimo Holdings LLC, a Delaware limited
liability company (“Mossimo Holdings”), and Official-Pillowtex guaranteed the
Company’s obligations under the Credit Agreement.  On September 10,
2008, PHM was converted into a Delaware limited liability company, Pillowtex
Holdings and Management LLC (“PHMLLC”), and the Company’s membership interest in
PHMLLC was pledged to LCPI in place of the capital stock of PHM.
 
 On
December 17, 2007, in connection with the acquisition of the Starter brand, the
Company borrowed an additional $63.2 million pursuant to the Term Loan Facility
(the “Additional Borrowing”). The net proceeds received by the Company from the
Additional Borrowing were $60 million.
 
 As of
June 30, 2009, the Company may borrow an additional $36.8 million under the
terms of the Term Loan Facility.
 
 The
guarantees under the Term Loan Facility are secured by a pledge to LCPI, for the
benefit of the Lenders, of, among other things, the Ocean Pacific/OP, Danskin,
Rocawear, Mossimo, Cannon, Royal Velvet, Fieldcrest, Charisma, Starter and
Waverly trademarks and related intellectual property assets, license agreements
and proceeds therefrom. Amounts outstanding under the Term Loan Facility bear
interest, at the Company’s option, at the Eurodollar rate or the prime rate,
plus an applicable margin of 2.25% or 1.25%, as the case may be, per annum. The
Credit Agreement provides that the Company is required to repay the outstanding
term loan in equal quarterly installments in annual aggregate amounts equal to
1.00% of the aggregate principal amount of the loans outstanding, subject to
adjustment for prepayments, in addition to an annual payment equal to 50% of the
excess cash flow from the subsidiaries subject to the Term Loan Facility, as
described in the Credit Agreement, with any remaining unpaid principal balance
to be due on April 30, 2013 (the “Loan Maturity Date”). Upon completion of the
Convertible Notes offering, the Loan Maturity Date was accelerated to January 2,
2012. The Term Loan Facility can be prepaid, without penalty, at any time. On
March 11, 2008, the Company paid to LCPI, for the benefit of the Lenders, $15.6
million, representing 50% of the excess cash flow from the subsidiaries subject
to the Term Loan Facility for the year ended December 31, 2007. As a result of
such payment, the Company is no longer required to pay the quarterly
installments described above. The Term Loan Facility requires the Company to
repay the principal amount of the term loan outstanding in an amount equal to
50% of the excess cash flow of the subsidiaries subject to the Term Loan
Facility for the most recently completed fiscal year. During the Current Six
Months, the Company paid to LCPI, for the benefit of the Lenders, $38.7 million,
representing 50% of the excess cash flow from the subsidiaries subject to the
Term Loan Facility for the year ended December 31, 2008.  As of June
30, 2009, $24.0 million has been classified as current portion of long-term
debt, which represents 50% of the excess cash flow for the Current Six Months of
the subsidiaries subject to the Term Loan Facility.  The aggregate
amount of 50% of the excess cash flow for all four quarters in 2009 will be paid
during the first quarter of 2010.    For the Current Six Months,
the effective interest rate of the Term Loan Facility was 3.47%.  At
June 30, 2009, the balance of the Term Loan Facility was $217.3 million. 
As of June 30, 2009, the Company was in compliance with all material covenants
set forth in the Credit Agreement. The $272.5 million in proceeds from the Term
Loan Facility were used by the Company as follows: $204.0 million was used to
pay the cash portion of the initial consideration for the acquisition of the
Rocawear brand; $2.1 million was used to pay the costs associated with the
Rocawear acquisition; $60 million was used to pay the consideration for the
acquisition of the Starter brand; and $3.9 million was used to pay costs
associated with the Term Loan Facility. The costs of $3.9 million relating to
the Term Loan Facility have been deferred and are being amortized over the life
of the loan, using the effective interest method. As of June 30, 2009, the
subsidiaries subject to the Term Loan Facility were Studio IP Holdings, SHM, OP
Holdings, OPHM, Mossimo Holdings, MI,  Official-Pillowtex and PHMLLC
(collectively, the “Term Loan Facility Subsidiaries”). As of June 30, 2009, the
Term Loan Facility Subsidiaries, directly or indirectly, owned the following
trademarks: Danskin, Rocawear, Starter, Ocean Pacific/OP, Mossimo, Cannon, Royal
Velvet, Fieldcrest, Charisma and Waverly.
  15
  On July
26, 2007, the Company purchased a hedge instrument to mitigate the cash flow
risk of rising interest rates on the Term Loan Facility. See Note 4 for
further information.
 
 Asset-Backed
Notes
 
 The
financing for certain of the Company's acquisitions has been accomplished
through private placements by its subsidiary, IP Holdings LLC ("IP
Holdings") of asset-backed notes ("Asset-Backed Notes") secured
by intellectual property assets (trade names, trademarks, license agreements and
payments and proceeds with respect thereto relating to the Candie’s, Bongo, Joe
Boxer, Rampage, Mudd and London Fog brands) of IP Holdings. At June 30, 2009,
the balance of the Asset-Backed Notes was $106.2 million.
 
 Cash on
hand in the bank account of IP Holdings is restricted at any point in time up to
the amount of the next debt principal and interest payment required under the
Asset-Backed Notes. Accordingly, $1.1 million and $0.9 million as of June 30,
2009 and December 31, 2008, respectively, are included as restricted cash within
the Company's current assets. Further, in connection with IP Holdings' issuance
of Asset-Backed Notes, a reserve account has been established and the funds on
deposit in such account will be applied to the final principal payment with
respect to the Asset-Backed Notes. Accordingly, as of June 30, 2009 and December
31, 2008, $15.9 million has been disclosed as restricted cash within other
assets on the Company's balance sheets.
 
 Interest
rates and terms on the outstanding principal amount of the Asset-Backed Notes as
of June 30, 2009 are as follows: $36.6 million principal amount bears interest
at a fixed interest rate of 8.45% with a six year term, $16.2 million principal
amount bears interest at a fixed rate of 8.12% with a six year term, and $53.4
million principal amount bears interest at a fixed rate of 8.99% with a six and
a half year term. The Asset-Backed Notes have no financial covenants by which
the Company or its subsidiaries need comply. The aggregate principal amount of
the Asset-Backed Notes will be fully paid by February 22, 2013.
 
 Neither
the Company nor any of its subsidiaries (other than IP Holdings) is obligated to
make any payment with respect to the Asset-Backed Notes, and the assets of the
Company and its subsidiaries (other than IP Holdings) are not available to IP
Holdings' creditors. The assets of IP Holdings are not available to the
creditors of the Company or its subsidiaries (other than IP
Holdings).
 
 Sweet
Note
 
 On April
23, 2002, the Company acquired the remaining 50% interest in Unzipped (see Note
9) from Sweet Sportswear, LLC (“Sweet”) for a purchase price comprised of
3,000,000 shares of its common stock and $11.0 million in debt, which was
evidenced by the Company’s issuance of the 8% Senior Subordinated Note due in
2012 (“Sweet Note”). Prior to August 5, 2004, Unzipped was managed by Sweet
pursuant to the Management Agreement (as defined in Note 9), which obligated
Sweet to manage the operations of Unzipped in return for, commencing in the
fiscal year ended January 31, 2003 (“fiscal 2003”), an annual management fee
based upon certain specified percentages of net income achieved by Unzipped
during the three- year term of the agreement. In addition, Sweet guaranteed that
the net income, as defined in the agreement, of Unzipped would be no less than
$1.7 million for each year during the term, commencing with fiscal 2003. In the
event that the guarantee was not met for a particular year, Sweet was obligated
under the Management Agreement to pay the Company the difference between the
actual net income of Unzipped, as defined, for such year and the guaranteed $1.7
million. That payment, referred to as the shortfall payment, could be offset
against the amounts due under the Sweet Note at the option of either the Company
or Sweet. As a result of such offsets, the balance of the Sweet Note was reduced
by the Company to $3.1 million as of December 31, 2006 and $3.0 million as of
December 31, 2005 and was reflected in Long- term debt. This note bears
interest at the rate of 8% per year and matures in April 2012.
 
 In
November 2007, the Company received a signed judgment related to the Sweet
Sportswear/Unzipped litigation. See Note 11.
 
 The
judgment stated that the Sweet Note (originally $11.0 million when issued by the
Company upon the acquisition of Unzipped from Sweet in 2002) should total
approximately $12.2 million as of December 31, 2007. The recorded balance of the
Sweet Note, prior to any adjustments related to the judgment was approximately
$3.2 million. The Company increased the Sweet Note by approximately $6.2 million
and recorded the expense as an expense related to specific litigation. The
Company further increased the Sweet Note by approximately $2.8 million to record
the related interest and included the charge in interest expense. As of June 30,
2009, the Sweet Note is approximately $12.2 million and included in the current
portion of long-term debt.
  16
  In
addition, in November 2007 the Company was awarded a judgment of approximately
$12.2 million for claims made by it against Hubert Guez and Apparel Distribution
Services, Inc. As a result, the Company recorded a receivable of approximately
$12.2 million and recorded the benefit in special charges during the year ended
December 31, 2007. This receivable is included in other assets - non-current and
bears interest, which was accrued for during the Current Quarter and the Prior
Year Quarter, at the rate of 8% per year.
 
 Debt
Maturities
 
 As of
June 30, 2009, the Company’s debt maturities on a calendar year basis are as
follows:
  (000’s
      omitted)
                  
                  Total
                  
                  
                  July
      1
                    through
                    December
      31,
                    2009
                  
                  
                  2010
                  
                  
                  2011
                  
                  
                  2012
                  
                  
                  2013Convertible
      Notes1
                  
                  $
                  240,357
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  240,357
                  
                  
                  $
                  -Term
      Loan Facility
                  
                  
                  217,336
                  
                  
                  
                  -
                  
                  
                  
                  24,009
                  
                  
                  
                  -
                  
                  
                  
                  193,327
                  
                  
                  
                  -Asset-Backed
      Notes
                  
                  
                  106,219
                  
                  
                  
                  11,353
                  
                  
                  
                  24,216
                  
                  
                  
                  26,380
                  
                  
                  
                  33,468
                  
                  
                  
                  10,802Sweet
      Note
                  
                  
                  12,186
                  
                  
                  
                  12,186
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Total
      Debt
                  
                  $
                  576,098
                  
                  
                  $
                  23,539
                  
                  
                  
                  48,225
                  
                  
                  
                  26,380
                  
                  
                  
                  467,152
                  
                  
                  
                  10,802
 
 1reflects
the net debt carrying amount of the Convertible Notes on the unaudited condensed
consolidated balance sheet as of June 30, 2009, in accordance with FSP APB
14-1.  The principal amount owed to the holders of the Convertible
Notes is $287.5 million.
 
 7. 
Stockholders’ Equity
 
 Public
Offering
 
 On June
9, 2009, the Company completed a public offering of common stock pursuant to a
registration statement that had been declared effective by the Securities and
Exchange Commission.  All 10,700,000 shares of common stock offered by
the Company in the final prospectus were sold at $15.00 per
share.  Net proceeds to the Company from the offering amounted to
approximately $152.8 million.
 
 Stock
Options
 
 The
Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
 
 The fair
value for these options and warrants was estimated at the date of grant using a
Black-Scholes option-pricing model with the following weighted-average
assumptions:
 
 Expected
      Volatility
                    
                    
                    30
      - 50
                    %Expected
      Dividend Yield
                    
                    
                    0
                    %Expected
      Life (Term)
                    
                    3 -
      7 yearsRisk-Free
      Interest Rate
                    
                    
                    3.00 - 4.75
                    %
 
 The
Company has estimated its forfeiture rate at 0%.  The options
that the Company granted under its plans expire at various times,
either five, seven or ten years from the date of grant, depending on the
particular grant.
  17
  Summaries
of the Company's stock options, warrants and performance related options
activity, and related information for the Current Quarter are as
follows:
 
 Options
                      
                      
                      
                      
                      Weighted-AverageOptions
                      
                      
                      Exercise PriceOutstanding
      January 1, 2009
                      
                      
                      3,895,138
                      
                      
                      $
                      4.29Granted
                      
                      
                      5,000
                      
                      
                      
                      9.92Canceled
                      
                      
                      (8,000
                      )
                      
                      
                      16.96Exercised
                      
                      
                      (741,759
                      )
                      
                      
                      3.49Expired
                      
                      
                      -
                      
                      
                      
                      -Outstanding
      June 30, 2009
                      
                      
                      3,150,379
                      
                      
                      $
                      4.99Exercisable
      at June 30, 2009
                      
                      
                      3,145,379
                      
                      
                      $
                      4.98
 
 Warrants
  Weighted-AverageWarrants
                      
                      
                      Exercise PriceOutstanding
      January 1, 2009
                      
                      
                      286,900
                      
                      
                      $
                      16.99Granted
                      
                      
                      -
                      
                      
                      
                      -Canceled/Forfeited
                      
                      
                      -
                      
                      
                      
                      -Exercised
                      
                      
                      -
                      
                      
                      
                      -Expired
                      
                      
                      -
                      
                      
                      
                      -Outstanding
      June 30, 2009
                      
                      
                      286,900
                      
                      
                      $
                      16.99Exercisable
      at June 30, 2009
                      
                      
                      286,900
                      
                      
                      
                      286,900
 
 All
warrants issued in connection with acquisitions are recorded at fair market
value using the Black Scholes model and are recorded as part of purchase
accounting. Certain warrants are exercised using the cashless
method.
 
 The
Company values other warrants issued to non-employees at the commitment date at
the fair market value of the instruments issued, a measure which is more readily
available than the fair market value of services rendered, using the Black
Scholes model. The fair market value of the instruments issued is expensed over
the vesting period.
 
 Restricted
stock
 
 Compensation
cost for restricted stock is measured as the excess, if any, of the quoted
market price of the Company’s stock at the date the common stock is issued over
the amount the employee must pay to acquire the stock (which is generally zero).
The compensation cost, net of projected forfeitures, is recognized over the
period between the issue date and the date any restrictions lapse, with
compensation cost for grants with a graded vesting schedule recognized on a
straight-line basis over the requisite service period for each separately
vesting portion of the award as if the award was, in substance, multiple awards.
The restrictions do not affect voting and dividend rights.
 
 The
following tables summarize information about unvested restricted stock
transactions:
  Weighted-AverageShares
                      
                      
                      Grant Date Fair ValueNon-vested,
      January 1, 2009
                      
                      
                      1,513,983
                      
                      
                      $
                      18.96Granted
                      
                      
                      26,532
                      
                      
                      
                      9.40Vested
                      
                      
                      (62,477
                      )
                      
                      
                      14.77Canceled
                      
                      
                      (35,989
                      )
                      
                      
                      19.11Non-vested,
      June 30, 2009
                      
                      
                      1,442,049
                      
                      
                      $
                      18.96
 
 Stock
based compensation expense related to restricted stock grants for the Current
Quarter and Prior Year Quarter was $1.7 million and $2.1 million, respectively,
and for the Current Six Months and the Prior Year Six Months was
approximately $3.3 million and $4.2 million, respectively. An additional amount
of $19.4 million is expected to be expensed evenly over a period of
approximately 1-4 years.  During the Current Six Months and Prior Year
Six Months, the Company withheld shares of its common stock valued at $0.2
million and $0.2 million, respectively, in connection with net share settlement
of restricted stock grants and option exercises.
  18
  Stockholder
Rights Plan
 
 In
January 2000, the Company's Board of Directors adopted a stockholder rights
plan. Under the plan, each stockholder of common stock received a dividend
of one right for each share of the Company's outstanding common stock, entitling
the holder to purchase one thousandth of a share of Series A Junior
Participating Preferred Stock, par value, $0.01 per share of the Company, at an
initial exercise price of $6.00. The rights become exercisable and will trade
separately from the common stock ten business days after any person or group
acquires 15% or more of the common stock, or ten business days after any person
or group announces a tender offer for 15% or more of the outstanding common
stock.
 
 Stock
Repurchase Program
 
 On
November 3, 2008, the Company announced that its Board of Directors had
authorized the repurchase of up to $75 million of the Company's common stock
over a period of approximately three years. This authorization replaces any
prior plan or authorization. The current plan does not obligate the Company to
repurchase any specific number of shares and may be suspended at any time at
management's discretion.  During the Current Six Months, the Company
repurchased 200,000 shares for approximately $1.5 million.  No shares
were repurchased by the Company during the Prior Year Six Months.
 
 Securities
Available for Issuance
 
 As of
June 30, 2009, 88,422 common shares were available for issuance of additional
awards under the Company’s 2006 Equity Incentive Plan.
 
 8.  Earnings
Per Share
 
 Basic
earnings per share includes no dilution and is computed by dividing net income
available to common stockholders by the weighted average number of common shares
outstanding for the period. Diluted earnings per share reflect, in periods in
which they have a dilutive effect, the effect of restricted stock-based awards
and common shares issuable upon exercise of stock options and warrants. The
difference between basic and diluted weighted-average common shares results from
the assumption that all dilutive stock options outstanding were exercised and
all Convertible Notes have been converted into common stock.
 
 For the
Current Quarter, of the total potentially dilutive shares related to
restricted stock-based awards, stock options and warrants, 1.5 million were
anti-dilutive, compared to 1.9 million for the Prior Year
Quarter.  For the Current Six Months, of the total potentially
dilutive shares related to restricted stock-based awards, stock options and
warrants, 1.6 million were anti-dilutive, compared to 1.9 million for the Prior
Year Six Months.
 
 As of
June 30, 2009, of the performance related restricted stock-based
awards issued in connection with the Company’s new employment agreement
with its chairman, chief executive officer and president, 1.2 million of such
awards (which is included in the total 1.6 million anti-dilutive stock-based
awards described above) were anti-dilutive and therefore not included in this
calculation.
 
 Warrants
issued in connection with the Company’s Convertible Notes financing were
anti-dilutive and therefore not included in this calculation. Portions of the
Convertible Notes that would be subject to conversion to common stock were
anti-dilutive as of June 30, 2009 and therefore not included in this
calculation.
 
 A
reconciliation of shares used in calculating basic and diluted earnings per
share follows:
  For the Three Months Ended
                    
                    
                    For the Six Months Ended(000's omitted)
                    
                    June 30,
                    
                    
                    June 30,2009
                    
                    
                    2008
                    
                    
                    2009
                    
                    
                    2008Basic
                    
                    
                    62,467
                    
                    
                    
                    57,719
                    
                    
                    
                    60,044
                    
                    
                    
                    57,572Effect
      of exercise of stock options
                    
                    
                    2280
                    
                    
                    
                    3,416
                    
                    
                    
                    2,151
                    
                    
                    
                    3,585Effect
      of contingent common stock issuance
                    
                    
                    -
                    
                    
                    
                    144
                    
                    
                    
                    295
                    
                    
                    
                    144Effect
      of assumed vesting of restricted stock
                    
                    
                    313
                    
                    
                    
                    -
                    
                    
                    
                    275
                    
                    
                    
                    1465,060
                    
                    
                    
                    61,279
                    
                    
                    
                    62,765
                    
                    
                    
                    61,315
 
 9. 
Unzipped Apparel, LLC (“Unzipped”)
 
 On
October 7, 1998, the Company formed Unzipped with its then joint venture partner
Sweet Sportswear, LLC (“Sweet”), the purpose of which was to market and
distribute apparel under the Bongo label. The Company and Sweet each had a 50%
interest in Unzipped. Pursuant to the terms of the joint venture, the Company
licensed the Bongo trademark to Unzipped for use in the design, manufacture and
sale of certain designated apparel products.
  19




On April
23, 2002, the Company acquired the remaining 50% interest in Unzipped from Sweet
for a purchase price of three million shares of the Company's common stock and
$11 million in debt evidenced by the Sweet Note. See Note 6. In connection with
the acquisition of Unzipped, the Company filed a registration statement with the
Securities and Exchange Commission ("SEC") for the three million shares of the
Company's common stock issued to Sweet, which was declared effective by the SEC
on July 29, 2003.





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





On August
5, 2004, Unzipped terminated the Management Agreement with Sweet, the supply
agreement with Azteca and the distribution agreement with ADS and commenced a
lawsuit against Sweet, Azteca, ADS and Hubert Guez. See Note 10.





There
were no transactions with these related parties during the Current Quarter or
the Prior Year Quarter.





In
November 2007, a judgment was entered in the Unzipped litigation, pursuant to
which the $3.1 million in accounts payable to ADS/Azteca (previously shown as
“accounts payable - subject to litigation”) was eliminated and recorded in the
income statement as a benefit to the “expenses related to specific
litigation”.





As a
result of the judgment, in the year ended December 31, 2007 (“fiscal 2007”) the
balance of the $11.0 million principal amount Sweet Note, originally issued by
the Company upon the acquisition of Unzipped from Sweet in 2002, including
interest, was increased from approximately $3.2 million to approximately $12.2
million as of December 31, 2007. Of this increase, approximately $6.2 million
was attributed to the principal of the Sweet Note and the expense was recorded
as an expense related to specific litigation. The remaining $2.8 million of the
increase was attributed to related interest on the Sweet Note and recorded as
interest expense. As of June 30, 2009, the full $12.2 million current balance of
the Sweet Note and $1.5 million of accrued interest are included in the current
portion of long term debt and accounts payable and accrued expenses,
respectively.





In
addition, in November 2007 the Company was awarded a judgment of approximately
$12.2 million for claims made by it against Hubert Guez and ADS. As a result,
the Company recorded a receivable of approximately $12.2 million and recorded
the benefit in special charges for fiscal 2007. As of June 30, 2009, this
receivable and the associated accrued interest of $1.5 million are included in
other assets - non-current.





10.  Expenses
Related to Specific Litigation





Expenses
related to specific litigation consist of legal expenses and costs related to
the Unzipped litigation. For the Current Quarter and Prior Year Quarter, the
Company recorded expenses related to specific litigation of $0.1 million and
$0.2 million, respectively.  For the Current Six Months and Prior Year
Six Months, the Company recorded expenses related to specific litigation of $0.1
million and $0.4 million, respectively. See Note 9 and Note 11for
information relating to Unzipped.





11.  Commitments
and Contingencies




Sweet
Sportswear/Unzipped litigation





In August
2004, the Company commenced a lawsuit in the Superior Court of California, Los
Angeles County, against Unzipped’s former manager, supplier and distributor
Sweet, Azteca and ADS and Hubert Guez, a principal of these entities and former
member of the Company’s board of directors (collectively referred to as the Guez
defendants) alleging numerous causes of action, including fraud, breach of
contract, breach of fiduciary duty and trademark infringement. Sweet, Azteca and
ADS filed counterclaims against the Company claiming damages resulting from,
among other things, a variety of alleged contractual breaches.
 
 In April
2007, a jury returned a verdict of approximately $45 million in the Company’s
favor on every claim that the Company pursued, and against the Guez defendants
on every counterclaim they asserted. Additionally, the jury found that all of
the Guez defendants acted with “malice, fraud or oppression” with regard to each
of the tort claims asserted by the Company and, in addition, awarded the Company
$5 million in punitive damages against Guez personally.


20




In
November 2007, the Court, among other things, reduced the total damages awarded
against the Guez defendants by approximately 50% and reduced the amount of
punitive damages assessed against Guez to $4 million. The Court also entered
judgments against Guez in the amount of approximately $11 million and ADS in the
amount of approximately $1.3 million. It also entered judgment against all of
the Guez defendants on every counterclaim that they pursued in the litigation,
including ADS’s and Azteca’s unsuccessful efforts to recover against Unzipped
any account balances claimed to be owed, totaling approximately $3.5 million and
Sweet’s efforts to accelerate the principal balance of a note and other fees
totaling approximately $15 million (these orders are collectively referred to as
the “judgments”). The Court also issued an order confirming an additional
aggregate of approximately $6.8 million of the jury’s verdicts against Sweet and
Azteca (referred to as the “confirmed verdicts”) but declined to enter judgment
against these entities since it had ordered a new trial with regard to certain
of the jury’s other damage awards against these entities.
 
 In May
2008, the Court awarded the Company statutory litigation costs (jointly and
severally against the Guez defendants) of approximately $650,000. In October
2008, the Court granted the Company’s petition for attorneys’ fees with respect
to approximately $7.7 million of fees (mostly against Sweet and Azteca), but did
not award any non-statutory (contractual) costs. In December 2008, the earlier
judgments were amended to add the cost award against all the Guez defendants, as
well as $100,000 of attorneys’ fees awarded against ADS.
 
 In sum,
the trial court entered judgment in the Company’s favor of over $12 million and
has confirmed, but not reduced to judgment, additional amounts owed of
approximately $15 million, which consists of the confirmed verdicts plus the fee
and cost awards against Sweet and Azteca. All of these amounts accrue interest
at an annual rate of 10%. All parties have filed notices of appeal. The
Company’s notice of appeal related to, among other things, those parts of the
jury’s verdicts vacated by the Court. In December 2008, the Company also filed a
notice of appeal from the Court’s orders relating to attorneys’ fees awarded
against ADS, statutory costs and non-statutory costs. The Guez defendants have
posted an aggregate of approximately $51.7 million in undertakings with the
Court to secure the judgments. The Company is unable to pursue collection
of the monetary portions of the judgments during the pendency of the
appeals.
 
 The
Company intends to vigorously pursue its appeals, and vigorously defend against
the Guez defendants’ appeal.


Normal
Course litigation





From time
to time, the Company is also made a party to litigation incurred in the normal
course of business. While any litigation has an element of uncertainty, the
Company believes that the final outcome of any of these routine matters will not
have a material effect on the Company’s financial position or future
liquidity.





12.  Related
Party Transactions





Kenneth
Cole Productions, Inc.





On May 1,
2003, the Company granted Kenneth Cole Productions, Inc. the exclusive worldwide
license to design, manufacture, sell, distribute and market footwear under its
Bongo brand. The chairman of Kenneth Cole Productions is Kenneth Cole, who is
the brother of Neil Cole, the Company's Chief Executive Officer and President.
During the Current Six Months and Prior Year Six Months, the Company earned $0.3
million and $0.6 million, respectively, in royalties from Kenneth Cole
Productions.  During the Current Quarter, Kenneth Cole Productions,
Inc. informed the Company that it has elected to terminate the license,
effective December 31, 2009.




Candie’s
Foundation





The
Candie's Foundation, a charitable foundation founded by Neil Cole for the
purpose of raising national awareness about the consequences of teenage
pregnancy, owed the Company $0.7 million and $0.8 million at June 30, 2009 and
December 31, 2008, respectively. The Candie's Foundation intends to pay-off the
entire borrowing from the Company during 2009, although additional advances will
be made as and when necessary.


21


Travel


The
Company recorded expenses of approximately $158,000 and $199,000 for
Current Six Months and Prior Year Six Months, respectively, for the hire and use
of aircraft solely for business purposes owned by a company in which the
Company’s chairman, chief executive officer and president is the sole owner.
Management believes that all transactions were made on terms and conditions no
less favorable than those available in the marketplace from unrelated
parties.





13.   Segment
and Geographic Data





The
Company has one reportable segment, licensing and commission revenue generated
from its brands. The geographic regions consist of the United States and Other
(which principally represents Canada, Japan and Europe). Long lived assets are
substantially all located in the United States. Revenues attributed to each
region are based on the location in which licensees are located.





The net
revenues by type of license and information by geographic region are as
follows:




For
      the three months ended
                            
                            
                            For
      the six months ended(000's
      omitted)
                            
                            June
      30,
                            
                            
                            June
      30,2009
                            
                            
                            2008
                            
                            
                            2009
                            
                            
                            2008Revenues
      by product line:Direct-to-retail
      license
                            
                            $
                            30,990
                            
                            
                            $
                            13,902
                            
                            
                            $
                            54,026
                            
                            
                            $
                            29,774Wholesale
      license
                            
                            
                            25,033
                            
                            
                            
                            37,191
                            
                            
                            
                            52,038
                            
                            
                            
                            76,411Other
                            
                            
                            385
                            
                            
                            
                            607
                            
                            
                            
                            845
                            
                            
                            
                            1,182$
                            56,408
                            
                            
                            $
                            51,700
                            
                            
                            $
                            106,909
                            
                            
                            $
                            107,367Revenues
      by geographic region:United
      States
                            
                            $
                            53,481
                            
                            
                            $
                            47,956
                            
                            
                            $
                            101,714
                            
                            
                            $
                            100,792Other
                            
                            
                            2,927
                            
                            
                            
                            3,744
                            
                            
                            
                            5,195
                            
                            
                            
                            6,575$
                            56,408
                            
                            
                            $
                            51,700
                            
                            
                            $
                            106,909
                            
                            
                            $
                            107,367




22





Item 2. Management’s Discussion and Analysis
of Financial Condition and Results of Operations





Safe Harbor Statement under the
Private Securities Litigation Reform Act of 1995. The statements that are
not historical facts contained in this report are forward looking statements
that involve a number of known and unknown risks, uncertainties and other
factors, all of which are difficult or impossible to predict and many of which
are beyond our control, which may cause our actual results, performance or
achievements to be materially different from any future results, performance or
achievements expressed or implied by such forward looking statements. These
risks are detailed our Form 10-K for the fiscal year ended December 31, 2008 and
other SEC filings. The words “believe”, “anticipate,” “expect”, “confident”,
“project”, provide “guidance” and similar expressions identify forward-looking
statements. Readers are cautioned not to place undue reliance on these forward
looking statements, which speak only as of the date the statement was
made.





Executive Summary. We are a
brand management company engaged in licensing, marketing and providing trend
direction for a diversified and growing consumer brand portfolio. Our brands are
sold across every major segment of retail distribution, from luxury to mass. As
of June 30, 2009, we owned 17 iconic consumer brands: Candie’s, Bongo, Badgley
Mischka, Joe Boxer, Rampage, Mudd, London Fog, Mossimo, Ocean Pacific/OP,
Danskin, Rocawear, Cannon, Royal Velvet, Fieldcrest, Charisma, Starter, and
Waverly. In addition, Scion LLC, a joint venture in which we have a 50%
investment, owns the Artful Dodger brand. On May 4, 2009 we acquired a 50%
interest in Hardy Way LLC (“Hardy Way”), the owner of the Ed Hardy brands and
trademark.  We license our brands worldwide through approximately 190
direct-to-retail and wholesale licenses for use across a wide range of product
categories, including footwear, fashion accessories, sportswear, home products
and décor, and beauty and fragrance. Our business model allows us to focus on
our core competencies of marketing and managing brands without many of the risks
and investment requirements associated with a more traditional operating
company. Our licensing agreements with leading retail and wholesale partners
throughout the world provide us with a predictable stream of guaranteed minimum
royalties.




Our
growth strategy is focused on increasing licensing revenue from our existing
portfolio of brands through adding new product categories, expanding the retail
penetration of our existing brands and optimizing the sales of our licensees. We
will also seek to continue the international expansion of its brands by
partnering with leading licensees and/or joint venture partners throughout the
world. Finally, we believe we will continue to acquire iconic consumer brands
with applicability to a wide range of merchandise categories and an ability to
further diversify our brand portfolio.





We have
focused and continue to focus on cost-saving measures.  These measures
have included a reduction of the total number of total full-time employees in
the Current Six Months, as well as a continued review of all operating
expenses.





Results
of Operations





For
the three months ended June 30, 2009





Revenue. Revenue for the
Current Quarter increased to $56.4 million from $51.7 million for the Prior Year
Quarter.  The primary driver of this increase was an aggregate
increase of approximately $7.8 million from our three direct-to-retail brands
with Walmart Stores, Inc., herein referred to as Walmart, and a slight increase
in revenue attributable to our Waverly brand (which was acquired in December
2008) for which there was no comparable revenue in the Prior Year
Quarter.  These increases were partially offset by an aggregate
decrease of approximately $2.8 million from our Rocawear brand, as well as
our Mudd brand as a result of its transition to a direct-to-retail license with
Kohl’s Department Stores, Inc., herein referred to as Kohl’s, which will only
first be launched in Kohl’s stores in the second half of 2009.




Operating Expenses.
Consolidated selling, general and administrative, herein referred to as
SG&A, expenses totaled $17.4 million in the Current Quarter compared to
$18.3 million in the Prior Year Quarter. The decrease of $0.9 million was driven
by a variety of cost saving initiatives, including: (i) a decrease of
approximately $1.2 million in payroll costs related to a reduction in employee
headcount; (ii) a decrease of approximately $0.8 million in professional fees;
and (iii) a decrease of approximately $0.2 million in employee travel related
expenses.  These decreases were partially offset by an increase of
approximately $1.1 million in advertising and marketing related
expenses.




For the
Current Quarter and the Prior Year Quarter, our expenses related to specific
litigation included an expense for professional fees of approximately $0.1
million and $0.2 million, respectively, relating to litigation involving
Unzipped. See Notes 9 and 10 of Notes to Consolidated Financial
Statements.





Operating Income. Operating
income for the Current Quarter increased to $39.0 million, or approximately 69%
of total revenue, compared to $33.2 million or approximately 64% of total
revenue in the Prior Year Quarter. The increase in our operating margin
percentage is primarily the result of the increase in revenue and decrease in
SG&A, for the reasons detailed above.


23


Other Expenses - Net – Other
expenses - net decreased by approximately $1.7 million in the Current Quarter to
$8.8 million, compared to other expenses - net of $10.4 million for the Prior
Year Quarter.  This decrease was primarily due to interest expense
related to our variable rate debt decreasing as a result of both a lower average
debt balance as well as a decrease in our effective interest rate to 3.47% in
the Current Quarter from 5.08% in the Prior Year Quarter, as well as an
aggregate of $0.8 million in equity earnings related to our joint ventures, of
which there was no comparable revenue in the Prior Year Quarter. This was
offset by a decrease of $0.3 million in interest income related to a decrease in
interest rates on money invested by us during the Current Quarter.





Provision for Income Taxes.
The effective income tax rate for the Current Quarter is approximately 36.1%
resulting in the $10.9 million income tax expense, as compared to an effective
income tax rate of 35.7% in the Prior Year Quarter which resulted in the $8.1
million income tax expense.




Net Income. Our net income
was $19.3 million in the Current Quarter, compared to net income of $14.6
million in the Prior Year Quarter, as a result of the factors discussed
above.





For
the six months ended June 30, 2009





Revenue. Revenue for the Current Six
Months, decreased to $106.9 million from $107.4 million for the six months ended
June 30, 2008, herein referred to as the Prior Year Six
Months.  Although the aggregate net change in revenue was minimal,
revenue from our Ocean Pacific/OP and Danskin brands, which have
direct-to-retail licenses with Walmart, increased by approximately $7.8
million.  The primary driver of the offsetting decrease in revenue
was an aggregate decrease from our Mudd brand as a result of its
transition to a direct-to-retail license with Kohl’s which will only first be
launched in Kohl’s stores in the second half of 2009, a decrease
in  revenue from our Rocawear brand and a decrease in revenue from our
Cannon brand which is currently transitioning to a direct-to-retail license with
Kmart.





Operating Expenses.
Consolidated SG&A expenses totaled $33.6 million in the Current Six Months
compared to $37.0 million in the Prior Year Six Months. The decrease of $3.4
million was driven by a variety of cost saving initiatives, including: (i) a
decrease of approximately $1.8 million in payroll costs related to a reduction
in employee headcount, which was partially offset by the cost of severance for
terminated employees; (ii) a decrease of approximately $1.3 million in
professional fees; and (iii) a decrease of approximately $0.5 million in
employee travel related expenses.  These decreases were partially
offset by an increase of approximately $0.5 million in advertising and marketing
related expenses.




For the
Current Six Months and the Prior Year Six Months, our expenses related to
specific litigation included an expense for professional fees of approximately
$0.1 million and $0.4 million, respectively, relating to litigation involving
Unzipped. See Notes 9 and 10 of Notes to Unaudited Condensed Consolidated
Financial Statements.





Operating Income. Operating
income for the Current Six Months increased to $73.1 million, or approximately
68% of total revenue, compared to approximately $70.0 million or approximately
65% of total revenue in the Prior Year Six Months. The increase in our operating
margin percentage is primarily the result of the decrease in SG&A, offset by
the decrease in revenue, for the reasons detailed above.




Other Expenses - Net – Other
expenses - net decreased by $3.3 million in the Current Six Months to $18.6
million, compared to other expenses - net of $21.8 million for the Prior Year
Six Months.  This decrease was primarily due to interest expense
related to our variable rate debt decreasing as a result of both a lower average
debt balance as well as a decrease in our effective interest rate to 3.78% in
the Current Six Months from 4.44% in the Prior Year Six Months, as well as an
aggregate of $0.8 million in equity earnings related to our joint ventures, of
which there was no comparable revenue in the Prior Year Six Months.  This
was offset by a decrease of $1.2 million in interest income related to a
decrease in interest rates on money invested by us during the Current Six
Months,





Provision for Income Taxes.
The effective income tax rate for the Current Six Months is approximately 36.0%
resulting in the $19.6 million income tax expense, as compared to an effective
income tax rate of 35.3% in the Prior Year Six Months which resulted in the
$17.0 million income tax expense.




Net Income.  Our
net income was $34.9 million in the Current Six Months, compared to net income
of $31.2 million in the Prior Year Six Months, as a result of the factors
discussed above.





Liquidity
and Capital Resources





Liquidity





Our
principal capital requirements have been to fund acquisitions, working capital
needs, and to a lesser extent, capital expenditures. We have historically relied
on internally generated funds to finance our operations and our primary source
of capital needs for acquisition has been the issuance of debt and equity
securities. At June 30, 2009 and December 31, 2008, our cash totaled $200.2
million and $67.3 million, respectively, including short-term restricted cash of
$5.2 million and $0.9 million, respectively.  Of the $5.2 million of
short-term restricted cash at June 30, 2009, $4.1 million is in a cash
collateral account in our name (see Note 3 of Notes to Unaudited Condensed
Consolidated Financial Statements).


24


The Term
Loan Facility requires us to repay the principal amount of the term loan
outstanding in an amount equal to 50% of the excess cash flow of the
subsidiaries subject to the term loan facility for the most recently completed
fiscal year.   During the Current Six Months, we paid $38.7
million of the principal balance of the Term Loan Facility, which represents 50%
of the excess cash flow of the subsidiaries subject to the Term Loan Facility
for the year ended December 31, 2008.





On May 4,
2009, we acquired a 50% interest in Hardy Way, the owner of the Ed Hardy brand
and trademarks, for $17.0 million, including $9.0 million in cash, which was
funded entirely from cash on hand.





We
believe that cash from future operations as well as currently available cash
will be sufficient to satisfy our anticipated working capital requirements for
the foreseeable future. We intend to continue financing future brand
acquisitions through a combination of cash from operations, bank financing and
the issuance of additional equity and/or debt securities. See Note 6 of Notes to
Unaudited Condensed Consolidated Financial Statements for a description of
certain prior financings consummated by us.





As of
June 30, 2009, our marketable securities consist of auction rate securities,
herein referred to as ARS. Beginning in the third quarter of 2007, $13.0 million
of our ARS had failed auctions due to sell orders exceeding buy orders. In
December 2008, the insurer of the ARS exercised its put option to replace the
underlying securities of the auction rate securities with its preferred
securities. Further, although these ARS have paid dividends according to their
stated terms, the Company has received notice from the insurer that the payment
of cash dividends will cease after July 31, 2009 and will only be resumed if the
board of directors of the insurer declares such cash dividends to be payable at
a later date.  These funds will not be available to us until a
successful auction occurs or a buyer is found outside the auction
process. Prior to
the cessation of cash dividend payments, we estimated the fair value of our
ARS with a discounted cash flow model where we used the expected rate of cash
dividends to be received.  As the cash dividend payments will cease
after July 31, 2009, we changed our methodology for estimating the fair value of
the ARS as of June 30, 2009.  As of June 30, 2009, we estimated the
fair value of our ARS using the present value of the weighted average of several
scenarios of recovery based on our assessment of the probability of each
scenario. We considered a variety of factors in our analysis including:
credit rating of the issuer and insurer, comparable market data (if available),
current macroeconomic market conditions, quality of the underlying securities,
and the probabilities of several levels of recovery and reinstatement of cash
dividend payments.  As the aggregate result of our quarterly
evaluations, $13.0 million of our ARS have been written down to $6.8 million as
a cumulative unrealized pre-tax loss of $6.2 million to reflect a temporary
decrease in fair value. As the write-down of $6.2 million has been identified as
a temporary decrease in fair value, the write-down has not impacted our earnings
and is reflected as an other comprehensive loss in the stockholders’ equity
section of our unaudited condensed consolidated balance
sheet.   We believe this decrease in fair value is temporary due
to general macroeconomic market conditions,.  Further, we have the
ability and intent to hold the ARS until an anticipated full redemption. We
believe our cash flow from future operations and our existing cash on hand will
be sufficient to satisfy our anticipated working capital requirements for the
foreseeable future, regardless of the timeliness of the auction
process.





Changes
in Working Capital





At June
30, 2009 and December 31, 2008 the working capital ratio (current assets to
current liabilities) was 3.69 to 1 and 1.26 to 1, respectively. This increase in
our working capital ratio was driven by the factors set forth
below:





Operating
Activities





Net cash
provided by operating activities increased $4.3 million to $41.9 million in the
Current Six Months from $37.6 million of net cash provided by operating
activities in the Prior Year Six Months.  This increase is primarily
due to an increase of $3.8 million in net income from $31.2 million in the Prior
Year Six Months to $34.9 million in the Current Six Months,





Investing
Activities





Net cash
used in investing activities increased approximately $13.4 million to $18.5
million in the Current Six Months from $5.1 million of net cash used in
investing activities in the Prior Year Six Months.  This increase is
primarily due to $9.0 million of cash paid for the acquisition of a 50% interest
in Ed Hardy, as well as cash earn-out payments totaling $9.4 million made during
the Current Six Months relating to the Official-Pillowtex acquisition and
Rocawear acquisition, as compared to an earn-out payment of $1.7 million made in
the Prior Year Six Months related to the Official-Pillowtex
acquisition.  This increase was offset by purchases of property and
equipment in the Prior Year Six Months for $4.1 million related to the purchase
of fixturing for certain brands, as compared to the Current Six Months in which
purchases of property and equipment totaled less than $0.1 million.





Financing
Activities





Net cash
provided by financing activities increased approximately $119.8 million to
$105.2 million in the Current Six Months from $14.6 million of net cash used in
financing activities in the Prior Year Quarter.  This increase is
primarily due to the net proceeds of our common stock offering of $152.8
million, which was offset primarily by the payment of long term debt of $49.6
million.  Specifically, our payment in the Prior Year Six Months of
50% of our excess cash flow from the subsidiaries subject to the Term Loan
Facility for fiscal 2007 was $15.6 million, as compared to our payment for
fiscal 2008 in the Current Six Months of $38.7 million, which represented 50% of
our excess cash flow from the subsidiaries subject to the term loan facility for
fiscal 2008.  Additionally, short-term restricted cash increased $4.4
million primarily as a result of an investment through our joint venture Scion
(see Note 12 of Notes to Unaudited Condensed Consolidated Financial Statements),
which was offset by a non-controlling interest contribution of $2.1
million.  Further, in the Current Six Months the excess tax benefit
from share-based payment arrangements was $3.3 million, as compared to a $6.8
million tax benefit in the Prior Year Six Months.  Lastly, during the
Current Six Months, we repurchased shares of our common stock for $1.5 million
related to a stock repurchase plan authorized by our Board of Directors in
November 2008.  There were no such repurchases in the Prior Year Six
Months.


25





Other
Matters





New
Accounting Standards





In April
2009, the FASB issued FSP No. FAS 107-1 and APB 28-1, “Interim Disclosures about
Fair Value of Financial Instruments” (“FSP 107-1 and APB 28-1”). FSP 107-1 and
APB 28-1 require that disclosures about the fair value of a company’s financial
instruments be made whenever summarized financial information for interim
reporting periods is made. The provisions of FSP 107-1 are effective for interim
reporting periods ending after June 15, 2009, and its requirements are reflected
herein.





In April
2009, the FASB issued FSP No. FAS 157-4, “Determining Fair Value When the Volume
and Level of Activity for the Asset or Liability Have Significantly Decreased
and Identifying Transactions That Are Not Orderly” (“FSP 157-4”). FSP 157-4 does
not change the definition of fair value as detailed in FAS 157, but provides
additional guidance for estimating fair value in accordance with FAS 157 when
the volume and level of activity for the asset or liability have significantly
decreased. The provisions of FSP 157-4 are effective for interim and annual
reporting periods ending after June 15, 2009, and its requirements are reflected
herein.





In April
2009, the FASB issued FSP No. FAS 115-2 and FAS 124-2, “Recognition and
Presentation of Other-Than-Temporary Impairments” (“FSP 115-2 and FAS 124-2”).
FSP 115-2 and FAS 124-2 amends the other-than-temporary impairment guidance in
U.S. GAAP for debt securities and provides additional disclosure requirements
for other-than-temporary impairments for debt and equity securities. FSP 115-2
and FAS 124-2 address the determination as to when an investment is considered
impaired, whether that impairment is other than temporary, and the measurement
of an impairment loss. The provisions of FSP 115-2 and FAS 124-2 are effective
for interim and annual reporting periods ending after June 15, 2009, and its
requirements are reflected herein.




In May
2009, the FASB issued FAS No. 165, "Subsequent Events" (“SFAS
165”).  SFAS No. 165 establishes principles and requirements for
subsequent events, which are events or transactions that occur after the balance
sheet date but before financial statements are issued or are available to be
issued. In particular, SFAS No. 165 sets forth (a) the period after the balance
sheet date during which management of a reporting entity shall evaluate events
or transactions that may occur for potential recognition or disclosure in the
financial statements, (b) the circumstances under which an entity shall
recognize events or transactions occurring after the balance sheet date in its
financial statements, and (c) the disclosures that an entity shall make about
events or transactions that occurred after the balance sheet date. SFAS No. 165
is effective for interim or annual financial periods ending after June 15, 2009
and is to be applied prospectively. The adoption of SFAS No. 165 did not have a
material impact on our results of operations or our financial
position.





In June
2009, the FASB issued Statement No. 167, Amendments to FASB Interpretation
No. 46(R) (“FAS 167”). FAS 167 amends the consolidation guidance for
variable interest entities (“VIE”) by requiring an on-going qualitative
assessment of which entity has the power to direct matters that most
significantly impact the activities of a VIE and has the obligation to absorb
losses or benefits that could be potentially significant to the VIE. FAS 167 is
effective for the Company beginning in 2010. The Company is currently assessing
the impact of the standard on its financial statements.





In
June 2009, the FASB issued SFAS No. 168, The “FASB Accounting Standards
Codification” and the Hierarchy of Generally Accepted Accounting Principles(“SFAS 168”). This standard replaces SFAS No. 162, The Hierarchy of Generally Accepted
Accounting Principles, and establishes only two levels of U.S. generally
accepted accounting principles (“GAAP”), authoritative and non-authoritative.
The FASB Accounting Standards Codification (the “Codification”) will become the
source of authoritative, nongovernmental GAAP, except for rules and interpretive
releases of the Securities and Exchange Commission (“SEC”), which are sources of
authoritative GAAP for SEC registrants. All other non-grandfathered, non-SEC
accounting literature not included in the Codification will become
non-authoritative. This standard is effective for financial statements for
interim or annual reporting periods ending after September 15, 2009. The
Company will begin to use the new guidelines and numbering system prescribed by
the Codification when referring to GAAP in the third quarter of 2009. As the
Codification was not intended to change or alter existing GAAP, it will not have
any impact on the Company’s consolidated financial statements.





Summary
of Critical Accounting Policies.





Several
of the our accounting policies involve management judgments and estimates that
could be significant. The policies with the greatest potential effect on our
consolidated results of operations and financial position include the estimate
of reserves to provide for collectability of accounts receivable. We estimate
the collectability considering historical, current and anticipated trends of our
licensees related to deductions taken by customers and markdowns provided to
retail customers to effectively flow goods through the retail channels, and the
possibility of non-collection due to the financial position of its licensees'
and their retail customers. Due to our licensing model, we do not have any
inventory risk and reduced its operating risks, and can reasonably forecast
revenues and plan expenditures based upon guaranteed royalty minimums and sales
projections provided by our retail licensees.


26





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





In
connection with our licensing model, we have entered into various trademark
license agreements that provide revenues based on minimum royalties and
additional revenues based on a percentage of defined sales. Minimum royalty
revenue is recognized on a straight-line basis over each period, as defined, in
each license agreement. Royalties exceeding the defined minimum amounts are
recognized as income during the period corresponding to the licensee's
sales.





In June
2001, the FASB issued Statement of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets,", herein referred to as SFAS 142, which
changed the accounting for goodwill from an amortization method to an
impairment-only approach. Upon our adoption of SFAS 142 on February 1, 2002, we
ceased amortizing goodwill. As prescribed under SFAS 142, we had goodwill tested
for impairment during the years ended December 31, 2008, 2007 and 2006, and no
write-downs from impairments were necessary. Our tests for impairment utilize
discounted cash flow models to estimate the fair values of the individual
assets. Assumptions critical to our fair value estimates are as follow: (i)
discount rates used to derive the present value factors used in determining the
fair value of the reporting units and trademarks; (ii) royalty rates used in our
trade mark valuations; (iii) projected average revenue growth rates used in the
reporting unit and trademark models; and (iv) projected long-term growth rates
used in the derivation of terminal year values.  These tests factor in
economic conditions and expectations of management and may change in the future
based on period-specific facts and circumstances.





Impairment
losses are recognized for long-lived assets, including certain intangibles, used
in operations when indicators of impairment are present and the undiscounted
cash flows estimated to be generated by those assets are not sufficient to
recover the assets carrying amount. Impairment losses are measured by comparing
the fair value of the assets to their carrying amount.  For the years
ended December 31, 2008, 2007, and 2006 there was no impairment present for
these long-lived assets.





Effective
January 1, 2006, we adopted Statement of Financial Accounting Standards
No. 123(R), “Accounting for Share-Based Payment”, herein referred to as
SFAS 123(R), which requires companies to measure and recognize compensation
expense for all stock-based payments at fair value. Under SFAS 123(R), using the
modified prospective method, compensation expense is recognized for all
share-based payments granted prior to, but not yet vested as of, January 1,
2006. Prior to the adoption of SFAS 123(R), we accounted for our
stock-based compensation plans under the recognition and measurement principles
of accounting principles board, or APB, Opinion No. 25, “Accounting for
stock issued to employees,” and related interpretations. Accordingly, the
compensation cost for stock options had been measured as the excess, if any, of
the quoted market price of our common stock at the date of the grant over the
amount the employee must pay to acquire the stock.




We
account for income taxes in accordance with Statement of Financial Accounting
Standards No. 109 “Accounting for Income Taxes”, herein referred to as SFAS 109.
Under SFAS 109, deferred tax assets and liabilities are determined based on
differences between the financial reporting and tax basis of assets and
liabilities and are measured using the enacted tax rates and laws that will be
in effect when the differences are expected to reverse. A valuation allowance is
established when necessary to reduce deferred tax assets to the amount expected
to be realized. In determining the need for a valuation allowance, management
reviews both positive and negative evidence pursuant to the requirements of SFAS
109, including current and historical results of operations, the annual
limitation on utilization of net operating loss carry forwards pursuant to
Internal Revenue Code section 382, future income projections and the overall
prospects of our business. Based upon management's assessment of all available
evidence, including our completed transition into a licensing business,
estimates of future profitability based on projected royalty revenues from our
licensees, and the overall prospects of our business, management concluded that
it is more likely than not that the net deferred income tax asset will be
realized.





We
adopted FASB Interpretation 48, herein referred to as FIN 48, beginning January
1, 2007. The implementation of FIN 48 did not have a significant impact on our
financial position or results of operations. The total unrecognized tax benefit
was $1.1 million at the date of adoption. At December 31, 2008, the total
unrecognized tax benefit was $1.1 million. However, the liability is not
recognized for accounting purposes because the related deferred tax asset has
been fully reserved in prior years. We are continuing our practice of
recognizing interest and penalties related to income tax matters in income tax
expense. There was no accrual for interest and penalties related to uncertain
tax positions for the year ended December 31, 2008. We file federal and state
tax returns and is generally no longer subject to tax examinations for fiscal
years prior to 2004.





Marketable
securities, which are accounted for as available-for-sale, are stated at fair
value in accordance with Statement of Financial Accounting Standards No. 115,
“Accounting for Certain Investments in Debt and Equity Securities” (“SFAS 115”),
and consist of auction rate securities. Temporary changes in fair market value
are recorded as other comprehensive income or loss, whereas other than temporary
markdowns will be realized through our statement of operations. On January 1,
2008, we adopted SFAS 157, which establishes a framework for measuring fair
value and requires expanded disclosures about fair value measurement. While SFAS
157 does not require any new fair value measurements in its application to other
accounting pronouncements, it does emphasize that a fair value measurement
should be determined based on the assumptions that market participants would use
in pricing the asset or liability. Our assessment of the significance of a
particular input to the fair value measurement requires judgment and may affect
the valuation.


27




Seasonal and Quarterly
Fluctuations.





The
majority of the products manufactured and sold under our brands and licenses are
for apparel, accessories, footwear and home products and decor, for which sales
may vary as a result of holidays, weather, and the timing of product shipments.
Accordingly, a portion of our revenue from its licensees, particularly from
those mature licensees whose actual sales royalties exceed minimum royalties,
may be subject to seasonal fluctuations. The results of operations in any
quarter therefore will not necessarily be indicative of the results that may be
achieved for a full fiscal year or any future quarter.





Other
Factors





We
continue to seek to expand and diversify the types of licensed products being
produced under our various brands, as well as diversify the distribution
channels within which licensed products are sold, in an effort to reduce
dependence on any particular retailer, consumer or market sector. The success of
our company, however, will still remain largely dependent on our ability to
build and maintain brand awareness and contract with and retain key licensees
and on our licensees’ ability to accurately predict upcoming fashion trends
within their respective customer bases and fulfill the product requirements of
their particular retail channels within the global marketplace. Unanticipated
changes in consumer fashion preferences, slowdowns in the U.S. economy, changes
in the prices of supplies, consolidation of retail establishments, and other
factors noted in “Part II - Item 1A-Risk Factors,” could adversely affect our
licensees’ ability to meet and/or exceed their contractual commitments to us and
thereby adversely affect our future operating results





Effects of Inflation. We
do not believe that the relatively moderate rates of inflation experienced over
the past few years in the United States, where we primarily compete, have had a
significant effect on revenues or profitability.




Item 3. Quantitative and Qualitative
Disclosures about Market Risk





We limit
exposure to foreign currency fluctuations by requiring substantially all of our
licenses to be denominated in U.S. dollars.





We are
exposed to potential loss due to changes in interest rates. Investments with
interest rate risk include marketable securities. Debt with interest rate risk
includes the fixed and variable rate debt. As of June 30, 2009, we had
approximately $217.3 million in variable interest debt under our Term Loan
Facility. To mitigate interest rate risks, we are utilizing derivative financial
instruments such as interest rate hedges to convert certain portions of our
variable rate debt to fixed interest rates. If there were an adverse change
of 10% in interest rates, the expected effect on net income would be
immaterial.





We
invested in certain auction rate securities, herein referred to as ARS. During
the Current Six Months, our balance of ARS failed to auction due to sell orders
exceeding buy orders, and the insurer of the ARS exercised its put option to
replace the underlying securities of the ARS with its preferred securities.
Further, although the ARS have paid cash dividends according to their stated
terms, we have received notice from the insurer that the payment of dividends
will cease after July 31, 2009 and will only be resumed if the board of
directors of the insurer declares such cash dividends to be payable at a later
date.  These funds will not be available to us until a successful
auction occurs or a buyer is found outside the auction process. We
estimated the fair value of our ARS to be $6.8 million, using the present value
of the weighted average of several scenarios of recovery based on our assessment
of the probability of each scenario. We believe this decrease in fair value
is temporary due to general macroeconomic market conditions. Further, we
have the ability and intent to hold the ARS until an anticipated full
redemption. The cumulative effect of the failure to auction since the third
quarter of fiscal 2007 has resulted in an accumulated other comprehensive loss
of $6.2 million which is reflected in the stockholders’ equity section of the
condensed unaudited consolidated balance sheet.





As
described elsewhere in Note 6 of the Notes to Unaudited Condensed Consolidated
Financial Statements, in connection with the initial sale of our Convertible
Notes, we entered into Convertible Note Hedges with affiliates of Merrill Lynch,
Pierce, Fenner & Smith Incorporated and Lehman Brothers Inc. At such
time, the hedging transactions were expected, but were not guaranteed, to
eliminate the potential dilution upon conversion of the Convertible Notes.
Concurrently, we entered into warrant transactions with the hedge
counterparties.





On
September 15, 2008 and October 3, 2008, respectively, Lehman Holdings
and Lehman OTC filed for protection under Chapter 11 of the United States
Bankruptcy Code in the United States Bankruptcy Court in the Southern District
of New York. We had purchased 40% of the Convertible Note Hedges from Lehman OTC
and we had sold 40% of the warrants to Lehman OTC. If Lehman OTC does not
perform such obligations and the price of our common stock exceeds the $27.56
conversion price (as adjusted) of the Convertible Notes, the effective
conversion price of the Convertible Notes (which is higher than the actual
$27.56 conversion price due to these hedges) would be reduced and our existing
stockholders may experience dilution at the time or times the Convertible Notes
are converted.





The
effect, if any, of any of these transactions and activities on the trading price
of our common stock will depend in part on market conditions and cannot be
ascertained at this time, but any of these activities could adversely affect the
value of our common stock.




28




Item 4. Controls and
Procedures




The
Company, under the supervision and with the participation of its management,
including its principal executive officer and principal financial officer,
evaluated the effectiveness of the design and operation of its disclosure
controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) of the
Securities Exchange Act of 1934, herein referred to as the Exchange Act), as of
the end of the period covered by this report. The purpose of disclosure controls
is to ensure that information required to be disclosed in our reports filed with
or submitted to the SEC under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the SEC’s rules and
forms. Disclosure controls are also designed to ensure that such information is
accumulated and communicated to our management, including our principal
executive officer and principal financial officer, to allow timely decisions
regarding required disclosure.





Based on
this evaluation, the principal executive officer and principal financial officer
concluded that the Company’s disclosure controls and procedures are effective in
timely alerting them to material information required to be included in our
periodic SEC filings and ensuring that information required to be disclosed by
the Company in the reports that it files or submits under the Exchange Act is
recorded, processed, summarized and reported within the time period specified in
the SEC’s rules and forms.





The
principal executive officer and principal financial officer also conducted an
evaluation of internal control over financial reporting, herein referred to as
internal control, to determine whether any changes in internal control occurred
during the quarter ended June 30, 2009 that may have materially affected or
which are reasonably likely to materially affect internal control. Based on that
evaluation, there has been no change in the Company’s internal control during
the quarter ended June 30, 2009 that has materially affected, or is reasonably
likely to affect, the Company’s internal control.





PART
II. Other Information




Item 1. Legal Proceedings





See Note
11 of Notes to Unaudited Condensed Consolidated Financial
Statements.




Item 1A. Risk Factors.





In
addition to the risk factors disclosed in Part 1, Item 1A, “Risk Factors” of our
Annual Report on Form 10-K for the year ended December 31, 2008, set forth below
are certain factors that have affected, and in the future could affect, our
operations or financial condition. We operate in a changing environment that
involves numerous known and unknown risks and uncertainties that could impact
our operations. The risks described below and in our Annual Report on Form 10-K
for the year ended December 31, 2008 are not the only risks we face. Additional
risks and uncertainties not currently known to us or that we currently deem to
be immaterial also may materially adversely affect our financial condition
and/or operating results.




Our
existing and future debt obligations could impair our liquidity and financial
condition, and in the event we are unable to meet our debt obligations we could
lose title to our trademarks.




As of
June 30, 2009, our balance sheet reflects consolidated debt of approximately
$576.1 million, including secured debt of $323.5 million ($217.3 million under
our term loan facility and $106.2 million under asset-backed notes issued by our
subsidiary, IP Holdings), primarily all of which was incurred in connection with
our acquisition activities. In accordance with FSP APB 14-1, our Convertible
Notes are included in our $576.1 million of consolidated debt at a net debt
carrying value of $240.4 million; however, the principal amount owed to the
holders of our Convertible Notes is $287.5 million. We may also assume or incur
additional debt, including secured debt, in the future in connection with, or to
fund, future acquisitions. Our debt obligations:


•
              could
      impair our liquidity;
 
 •
              could
      make it more difficult for us to satisfy our other
      obligations;
 
 •
              require
      us to dedicate a substantial portion of our cash flow to payments on our
      debt obligations, which reduces the availability of our cash flow to fund
      working capital, capital expenditures and other corporate
      requirements;
 
 •
              could
      impede us from obtaining additional financing in the future for working
      capital, capital expenditures, acquisitions and general corporate
      purposes;
 
 •
              impose
      restrictions on us with respect to the use of our available cash,
      including in connection with future
  acquisitions;
 
 •
              make
      us more vulnerable in the event of a downturn in our business prospects
      and could limit our flexibility to plan for, or react to, changes in our
      licensing markets; and
 
 •
              place
      us at a competitive disadvantage when compared to our competitors who have
      less debt.




29




While we
believe that by virtue of the guaranteed minimum royalty payments due to us
under our licenses we will generate sufficient revenues from our licensing
operations to satisfy our obligations for the foreseeable future, in the event
that we were to fail in the future to make any required payment under agreements
governing our indebtedness or fail to comply with the financial and operating
covenants contained in those agreements, we would be in default regarding that
indebtedness. A debt default could significantly diminish the market value and
marketability of our common stock and could result in the acceleration of the
payment obligations under all or a portion of our consolidated indebtedness. In
the case of our term loan facility, it would enable the lenders to foreclose on
the assets securing such debt, including the Ocean Pacific/OP, Danskin,
Rocawear, Starter, Mossimo and Waverly trademarks, as well as the trademarks
acquired by us in connection with the Official-Pillowtex acquisition, and, in
the case of the asset-backed notes, it would enable the holders of such notes to
foreclose on the assets securing such notes, including the Candie’s, Bongo, Joe
Boxer, Rampage, Mudd and London Fog trademarks.




If
we are unable to identify and successfully acquire additional trademarks, our
growth may be limited, and, even if additional trademarks are acquired, we may
not realize anticipated benefits due to integration or licensing
difficulties.




A key
component of our growth strategy is the acquisition of additional trademarks.
Historically, we have been involved in numerous acquisitions of varying sizes.
We continue to explore new acquisitions. However, as our competitors continue to
pursue our brand management model, acquisitions may become more expensive and
suitable acquisition candidates could become more difficult to find. In
addition, even if we successfully acquire additional trademarks, we may not be
able to achieve or maintain profitability levels that justify our investment in,
or realize planned benefits with respect to, those additional brands. Although
we seek to temper our acquisition risks by following acquisition guidelines
relating to the existing strength of the brand, its diversification benefits to
us, its potential licensing scale and the projected rate of return on our
investment, acquisitions, whether they be of additional intellectual property
assets or of the companies that own them, entail numerous risks, any of which
could detrimentally affect our results of operations and/or the value of our
equity. These risks include, among others:


•
              unanticipated
      costs;
 
 •
              negative
      effects on reported results of operations from acquisition related charges
      and amortization of acquired
intangibles;
 
 •
              diversion
      of management’s attention from other business
  concerns;
 
 •
              the
      challenges of maintaining focus on, and continuing to execute, core
      strategies and business plans as our brand and license portfolio grows and
      becomes more diversified;
 
 •
              adverse
      effects on existing licensing
relationships;
 
 •
              potential
      difficulties associated with the retention of key employees, and the
      assimilation of any other employees, who may be retained by us in
      connection with or as a result of our acquisitions;
  and
 
 •
              risks
      of entering new domestic and international markets (whether it be with
      respect to new licensed product categories or new licensed product
      distribution channels) or markets in which we have limited prior
      experience.




Acquiring
additional trademarks could also have a significant effect on our financial
position and could cause substantial fluctuations in our quarterly and yearly
operating results. Acquisitions could result in the recording of significant
goodwill and intangible assets on our financial statements, the amortization or
impairment of which would reduce our reported earnings in subsequent years. No
assurance can be given with respect to the timing, likelihood or financial or
business effect of any possible transaction. Moreover, as discussed below, our
ability to grow through the acquisition of additional trademarks will also
depend on the availability of capital to complete the necessary acquisition
arrangements. In the event that we are unable to obtain debt financing on
acceptable terms for a particular acquisition, we may elect to pursue the
acquisition through the issuance by us of shares of our common stock (and, in
certain cases, convertible securities) as equity consideration, which could
dilute our common stock because it could reduce our earnings per share, and any
such dilution could reduce the market price of our common stock unless and until
we were able to achieve revenue growth or cost savings and other business
economies sufficient to offset the effect of such an issuance. As a result,
there is no guarantee that our stockholders will achieve greater returns as a
result of any future acquisitions we complete.




30


A
substantial portion of our licensing revenue is concentrated with a limited
number of licensees such that the loss of any of such licensees could decrease
our revenue and impair our cash flows.




Our
licensees Wal-Mart, Target Corporation, or Target, Kohl’s, and Kmart
Corporation, or Kmart, were our four largest direct-to-retail licensees during
the Current Six Months, representing approximately 23%, 15%, 7% and 5%,
respectively, of our total revenue for such period, while Li & Fung USA
was our largest wholesale licensee, representing approximately 10% of our total
revenue for such period. Our license agreement with Target for the Mossimo
trademark grants it the exclusive U.S. license for substantially all
Mossimo-branded products for a current term expiring in January 2012; our second
license agreement with Target for the Fieldcrest mark grants it the exclusive
U.S. license for substantially all Fieldcrest-branded products for an initial
term expiring in July 2010; and our third license agreement with Target grants
it the exclusive U.S. license for Waverly Home for a broad range of Waverly
Home-branded products for a term expiring in January 2011. Our license agreement
with Wal-Mart for the Ocean Pacific and OP trademarks grants it the exclusive
license in the U.S., Canada, Mexico, China, India and Brazil for substantially
all Ocean Pacific/OP-branded products for an term expiring June 30, 2011;
our second license agreement with Wal-Mart for the Danskin Now trademark grants
it the exclusive license in the U.S., Canada, Argentina, and Central America for
substantially all Danskin Now-branded products for an initial term expiring
December 2010; and our third license agreement with Wal-Mart for the Starter
trademark grants it the exclusive license in the U.S., Canada and Mexico for
substantially all Starter-branded products for an initial term expiring December
2013. Our license agreement with Kohl’s for the Candie’s trademark grants it the
exclusive U.S. license for a wide variety of Candie’s-branded product categories
for a term expiring in January 2011, and our license agreement with Kohl’s for
the Mudd trademark grants it the exclusive U.S. license for a wide variety of
Mudd-branded product categories for an initial term expiring in January
2015. Our license agreement with Kmart grants it the exclusive U.S. license
with respect to the Joe Boxer trademark for a wide variety of product categories
for a term expiring in December 2010 and our license agreement with Kmart for
the Cannon trademark granted the exclusive license in the U.S. and Canada for a
wide variety of product categories for an initial term expiring February 1,
2014. Our license agreements with Li & Fung USA grant it the
exclusive worldwide license with respect to our Royal Velvet trademarks for a
variety of products sold exclusively at Bed Bath & Beyond in the U.S.,
and the exclusive license (in many countries outside of the U.S. and
Canada) for the Cannon trademark for a variety of products. The term for each of
these licenses with Li & Fung USA expires on December 31, 2013.
Because we are dependent on these licensees for a significant portion of our
licensing revenue, if any of them were to have financial difficulties affecting
its ability to make guaranteed payments, or if any of these licensees decides
not to renew or extend its existing agreement with us, our revenue and cash
flows could be reduced substantially.




We
are dependent upon our chief executive officer and other key executives. If we
lose the services of these individuals we may not be able to fully implement our
business plan and future growth strategy, which would harm our business and
prospects.




Our
success as a marketer and licensor of intellectual property is largely due to
the efforts of Neil Cole, our president, chief executive officer and chairman.
Our continued success is largely dependent upon his continued efforts and those
of the other key executives he has assembled. Although we have entered into an
employment agreement with Mr. Cole, expiring on December 31, 2012, as
well as employment agreements with other of our key executives, there is no
guarantee that we will not lose their services. To the extent that any of their
services become unavailable to us, we will be required to hire other qualified
executives, and we may not be successful in finding or hiring adequate
replacements. This could impede our ability to fully implement our business plan
and future growth strategy, which would harm our business and
prospects.





We
have a material amount of goodwill and other intangible assets, including our
trademarks, recorded on our balance sheet. As a result of changes in market
conditions and declines in the estimated fair value of these assets, we may, in
the future, be required to write down a portion of this goodwill and other
intangible assets and such write-down would, as applicable, either decrease our
net income or increase our net loss.





As of
June 30, 2009, goodwill represented approximately $165.0 million, or
approximately 10% of our total assets, and trademarks and other intangible
assets represented approximately $1,057.0 million, or approximately 66% of our
total assets. Under Statement of Financial Accounting Standards, or SFAS,
No. 142, goodwill and indefinite life intangible assets, including some of
our trademarks, are no longer amortized, but instead are subject to impairment
evaluation based on related estimated fair values, with such testing to be done
at least annually. While, to date, no impairment write-downs have been
necessary, any write-down of goodwill or intangible assets resulting from future
periodic evaluations would, as applicable, either decrease our net income or
increase our net loss and those decreases or increases could be
material.





Convertible
note hedge and warrant transactions that we have entered into may affect the
value of our common stock.





In
connection with the initial sale of our Convertible Notes, we entered into
Convertible Note Hedges with affiliates of Merrill Lynch, Pierce,
Fenner & Smith Incorporated and Lehman Brothers Inc. At such time, the
hedging transactions were expected, but were not guaranteed, to eliminate the
potential dilution upon conversion of the Convertible Notes. Concurrently, we
entered into warrant transactions with the hedge counterparties.





On
September 15, 2008 and October 3, 2008, respectively, Lehman Brothers
Holdings Inc., or Lehman Holdings, and its subsidiary, Lehman Brothers OTC
Derivatives Inc., or Lehman OTC, filed for protection under Chapter 11 of
the United States Bankruptcy Code in the United States Bankruptcy Court in the
Southern District of New York. We had purchased 40% of the Convertible Note
Hedges from Lehman OTC, or the Lehman note hedges, and we had sold 40% of the
warrants to Lehman OTC. Lehman OTC’s obligations under the Lehman note hedges
are guaranteed by Lehman Holdings. If the Lehman note hedges are rejected or
terminated in connection with the Lehman OTC bankruptcy, we would have a claim
against Lehman OTC and Lehman Holdings, as guarantor, for the damages and/or
close-out values resulting from any such rejection or termination. While we
intend to pursue any claim for damages and/or close-out values resulting from
the rejection or termination of the Lehman note hedges, at this point in the
Lehman bankruptcy cases it is not possible to determine with accuracy the
ultimate recovery, if any, that we may realize on potential claims against
Lehman OTC or Lehman Holdings, as guarantor, resulting from any rejection or
termination of the Lehman note hedges. We also do not know whether Lehman OTC
will assume or reject the Lehman note hedges, and therefore cannot predict
whether Lehman OTC intends to perform its obligations under the Lehman note
hedges. As a result, if Lehman OTC does not perform such obligations and the
price of our common stock exceeds the $27.56 conversion price (as adjusted) of
the Convertible Notes, the effective conversion price of the Convertible Notes
(which is higher than the actual $27.56 conversion price due to these hedges)
would be reduced and our existing stockholders may experience dilution at the
time or times the convertible notes are converted. The extent of any such
dilution would depend, among other things, on the then prevailing market price
of our common stock and the number of shares of common stock then outstanding,
but we believe the impact will not be material and will not affect our income
statement presentation. We are not otherwise exposed to counterparty risk
related to the Lehman bankruptcies. We currently believe, although there can be
no assurance, that the bankruptcy filings and their potential impact on these
entities will not have a material adverse effect on our financial position,
results of operations or cash flows. We will continue to monitor the bankruptcy
filings of Lehman Holdings and Lehman OTC.


31





Moreover,
in connection with the warrant transactions with the counterparties, to the
extent that the price of our common stock exceeds the strike price of the
warrants, the warrant transactions could have a dilutive effect on our earnings
per share.





Our
public offering which was consummated in June 2009 may be dilutive to our
per share earnings.





If we do
not make acquisitions which are sufficiently accretive to our earnings, the
issuance of our common stock in our June 2009 public offering may have a
dilutive effect on our expected earnings per share for the year ending
December 31, 2009. The actual amount of such dilution cannot be determined
at this time and will be based on numerous factors, some of which are outside of
our control. Moreover, our ability to meet our previously announced
earnings per share guidance, which relates to our existing portfolio of brands
only and assumes neither the issuance of shares in such offering nor any
acquisitions, may be adversely affected by the completion of the
offering.





Due
to the recent downturn in the market, certain of the marketable securities we
own may take longer to auction than initially anticipated, if at
all.





Marketable
securities consist of auction rate securities, herein referred to as ARS. From
the third quarter of 2007 to the present, our balance of ARS failed to auction
due to sell orders exceeding buy orders, and the insurer of the ARS exercised
its put option to replace the underlying securities of the auction rate
securities with its preferred securities. Further, although the ARS have paid
cash dividends according to their stated terms, we have received
notice from the insurer that the payment of cash dividends will cease after July
31, 2009 and will only be resumed if the board of directors of the insurer
declares such cash dividends to be payable at a later date.  These
funds will not be available to us until a successful auction occurs or a buyer
is found outside the auction process. As a result, $13.0 million of our ARS have
been written down to approximately $6.8 million, based on our evaluation, as an
unrealized pre-tax loss to reflect a temporary decrease in fair value, reflected
as an accumulated other comprehensive loss of $6.2 million in the stockholders’
equity section of our unaudited condensed consolidated balance sheet. We
estimated the fair value of our ARS using the present value of the weighted
average of several scenarios of recovery based on our assessment of the
probability of each scenario. We believe this decrease in fair value is
temporary due to general macroeconomic market conditions. Further, we have
the ability and intent to hold the securities until an anticipated full
redemption. However, there are no assurances that a successful auction will
occur, or that we can find a buyer outside the auction process.





A
decline in general economic conditions resulting in a decrease in
consumer-spending levels and an inability to access capital may adversely affect
our business.





Many
economic factors beyond our control may impact our forecasts and actual
performance. These factors include consumer confidence, consumer spending
levels, employment levels, availability of consumer credit, recession,
deflation, inflation, a general slowdown of the U.S. economy or an uncertain
economic outlook. Furthermore, changes in the credit and capital markets,
including market disruptions, limited liquidity and interest rate fluctuations,
may increase the cost of financing or restrict our access to potential sources
of capital for future acquisitions.




32





Item
2. Unregistered Sales of Equity Securities and Use of Proceeds





During
the Current Quarter, the Company issued a total of 589,363 shares of its common
stock to a total of five individuals pursuant to an exemption from registration
under section 4(2) of the Securities Act of 1933.  The shares were
issued to satisfy certain earn-out payments relating to the Company’s March 2007
acquisition of certain assets of Rocawear Licensing LLC.





The
following table represents information with respect to purchases of common stock
made by the Company during the Current Quarter:




Month of purchase
                  
                  Total number
                    of shares
                    purchased(1)
                  
                  
                  Average
                    price
                    paid per share
                  
                  
                  Total number
                    of
                    shares
                    purchased as
                    part of
                    publicly
                    announced
                    plans or
                    programs
                  
                  
                  Maximum
                    dollar
                    value of
                    shares
                    that may yet
                    be
                    purchased
                    under the
                    plans or
                    programsApril
      1 – April 30
                  
                  
                  17,877
                  
                  
                  $
                  11.03
                  
                  
                  $
                  -
                  
                  
                  $
                  71,722,003May
      1 – May 31
                  
                  
                  257
                  
                  
                  $
                  16.19
                  
                  
                  $
                  -
                  
                  
                  $
                  71,722,003June
      1 – June 30
                  
                  
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  71,722,003Total
                  
                  
                  18,134
                  
                  
                  $
                  11.10
                  
                  
                  $
                  -
                  
                  
                  $
                  71,722,003




(1)   On November
3, 2008, the Company announced that the Board of Directors authorized the
repurchase of up to $75 million of the Company's common stock over a period
ending October 30, 2011. This authorization replaced any prior plan or
authorization. The current plan does not obligate the Company to repurchase any
specific number of shares and may be suspended at any time at management's
discretion. Amounts not purchased under the stock repurchase program
represent shares surrendered to the Company to pay withholding taxes due upon
the vesting of restricted stock





Item 6. Exhibits




EXHIBIT
      NO.
                
                DESCRIPTION
      OF EXHIBITExhibit
      10.1*
                
                Membership
      Interest Purchase Agreement dated as of May 4, 2009 by and among the
      Registrant, Donald Edward Hardy and Francesca Passalacqua, trustees of the
      Hardy/Passalacqua Family Revocable Trust and Donald Edward Hardy(1)Exhibit
      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 2002Exhibit
      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 2002Exhibit
      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
  2002Exhibit
      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 pursuant to Item
      601(b)(2) of Regulation S-K and shall furnish supplementally to the
      Securities and Exchange Commission (the "SEC"), copies of any of the
      omitted schedules and exhibits upon request by the SEC.(1)  Filed
      as an exhibit to the Company’s Current Report on Form 8-K for the event
      dated May 4, 2009 and incorporated by reference
  herein.




33




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:
      August 6, 2009
              /s/
      Neil ColeNeil
      Cole
                Chairman
      of the Board, President
                and
      Chief Executive Officer
                (on
      Behalf of the Registrant)




Date:
      August 6, 2009
              /s/
      Warren ClamenWarren
      Clamen
                Executive
      Vice President
                and
      Chief Financial Officer


34