<PAGE>
As filed with the Securities and Exchange Commission on December 12, 1997
Registration No. 333-37155
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
PRE-EFFECTIVE AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
I.C. ISAACS & COMPANY, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 2253 52-1377061
(State of Incorporation) (Primary Standard Industrial (I.R.S. Employer
Classification Code Number) Identification No.)
3840 BANK STREET
BALTIMORE, MARYLAND 21224-2522
(410) 342-8200
</TABLE>
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
<TABLE>
<S> <C>
ROBERT J. ARNOT GERALD W. LEAR
CHAIRMAN OF THE BOARD AND CO-CHIEF EXECUTIVE OFFICER PRESIDENT AND CO-CHIEF EXECUTIVE OFFICER
I.C. ISAACS & COMPANY, INC. I.C. ISAACS & COMPANY, INC.
350 FIFTH AVENUE, SUITE 1029 3840 BANK STREET
NEW YORK, NEW YORK 10118 BALTIMORE, MARYLAND 21224-2522
(212) 563-2720 (410) 342-8200
</TABLE>
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
------------------------------
Copies of all communications,
including all communications sent to the agent for service, should be sent to:
<TABLE>
<S> <C>
EARL S. WELLSCHLAGER, ESQUIRE JOEL J. HUGHEY, ESQUIRE
PIPER & MARBURY L.L.P. ALSTON & BIRD LLP
36 SOUTH CHARLES STREET 1201 W. PEACHTREE STREET
BALTIMORE, MARYLAND 21201 ATLANTA, GEORGIA 30309
(410) 539-2530 (404) 881-7000
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: AS SOON AS
PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
IF ANY OF THE SECURITIES BEING REGISTERED ON THIS FORM ARE TO BE OFFERED ON
A DELAYED OR CONTINUOUS BASIS PURSUANT TO RULE 415 UNDER THE SECURITIES ACT OF
1933, CHECK THE FOLLOWING BOX: / /
IF THIS FORM IS FILED TO REGISTER ADDITIONAL SECURITIES FOR AN OFFERING
PURSUANT TO RULE 462(B) UNDER THE SECURITIES ACT, PLEASE CHECK THE FOLLOWING BOX
AND LIST THE SECURITIES ACT REGISTRATION STATEMENT NUMBER OF THE EARLIER
EFFECTIVE REGISTRATION STATEMENT FOR THE SAME OFFERING: / /
IF THIS FORM IS A POST-EFFECTIVE AMENDMENT FILED PURSUANT TO RULE 462(C)
UNDER THE SECURITIES ACT, CHECK THE FOLLOWING BOX AND LIST THE SECURITIES ACT
REGISTRATION STATEMENT NUMBER OF THE EARLIER EFFECTIVE REGISTRATION STATEMENT
FOR THE SAME OFFERING: / /
IF THIS FORM IS A POST-EFFECTIVE AMENDMENT FILED PURSUANT TO RULE 462(D)
UNDER THE SECURITIES ACT, CHECK THE FOLLOWING BOX AND LIST THE SECURITIES ACT
REGISTRATION STATEMENT NUMBER OF THE EARLIER EFFECTIVE REGISTRATION STATEMENT
FOR THE SAME OFFERING: / /
IF DELIVERY OF THE PROSPECTUS IS EXPECTED TO BE MADE PURSUANT TO RULE 434,
PLEASE CHECK THE FOLLOWING BOX: / /
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM AGGREGATE
TITLE OF EACH CLASS OF SECURITIES TO BE REGISTERED OFFERING PRICE (1) AMOUNT OF REGISTRATION FEE (2)
<S> <C> <C>
COMMON STOCK, $.0001 PAR VALUE.............................. $61,180,000.00 $18,540.00
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
(1) INCLUDES 570,000 SHARES OF COMMON STOCK SUBJECT TO AN OPTION GRANTED TO THE
UNDERWRITERS BY THE COMPANY (AS HEREINAFTER DEFINED) TO COVER
OVER-ALLOTMENTS, IF ANY. SEE "UNDERWRITING."
(2) ESTIMATED SOLELY FOR THE PURPOSE OF CALCULATING THE REGISTRATION FEE IN
ACCORDANCE WITH RULE 457 UNDER THE SECURITIES ACT. THE REGISTRATION FEE WAS
PAID ON OCTOBER 3, 1997.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
<PAGE>
SUBJECT TO COMPLETION, DATED DECEMBER 12, 1997
PROSPECTUS
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy, nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
<PAGE>
3,800,000 SHARES
[LOGOS]
I.C. ISAACS & COMPANY, INC.
COMMON STOCK
All of the 3,800,000 shares of Common Stock offered hereby are being sold by
I.C. Isaacs & Company, Inc. (the "Company"). Prior to the Offering, there has
been no public market for the Common Stock of the Company. It is currently
anticipated that the initial public offering price will be between $12.00 and
$14.00 per share. See "Underwriting" for information relating to the
determination of the initial public offering price. Application has been made to
list the Common Stock on the Nasdaq National Market under the symbol "ISAC."
SEE "RISK FACTORS" BEGINNING ON PAGE 9 FOR A DISCUSSION OF CERTAIN
INFORMATION THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON
STOCK OFFERED HEREBY.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)(3)
<S> <C> <C> <C>
Per Share................................................ $ $ $
Total(4)................................................. $ $ $
</TABLE>
(1) See "Underwriting" for a description of the indemnification arrangements
with the Underwriters and other matters.
(2) Before deducting offering expenses payable by the Company estimated to be
$542,000.
(3) It is estimated that between $19.0 million and $20.0 million of the net
proceeds will be used to pay the S Corporation Distribution. See "Company
Organization--Prior S Corporation Status."
(4) The Company has granted the Underwriters a 30-day option to purchase up to
570,000 additional shares of Common Stock solely to cover over-allotments,
if any. If such option is exercised in full, the total Price to Public,
Underwriting Discounts and Commissions and Proceeds to Company will be
$ , $ and $ , respectively. See "Underwriting."
------------------------
The shares of Common Stock are offered severally by the Underwriters named
herein, subject to prior sale, when, as and if received and accepted by them,
subject to their right to reject orders, in whole or in part, and to certain
other conditions. It is expected that delivery of the certificates representing
such shares will be made against payment therefor in immediately available funds
at the office of The Robinson-Humphrey Company, LLC on or about , 1997.
The Robinson-Humphrey Company Legg Mason Wood Walker
Incorporated
The date of this Prospectus is , 1997
<PAGE>
"BOSS-REGISTERED TRADEMARK-," "LORD ISAACS-REGISTERED TRADEMARK-," "I. C.
ISAACS-REGISTERED TRADEMARK-," "PIZZAZZ-REGISTERED TRADEMARK-" AND "I.G.
DESIGN-REGISTERED TRADEMARK-" ARE TRADEMARKS OF THE COMPANY. ALL OTHER
TRADEMARKS OR SERVICE MARKS, INCLUDING "GIRBAUD-REGISTERED TRADEMARK-" AND
"MARITHE AND FRANCOIS GIRBAUD-REGISTERED TRADEMARK-" (COLLECTIVELY, "GIRBAUD")
AND "BEVERLY HILLS POLO CLUB-REGISTERED TRADEMARK-" APPEARING IN THIS PROSPECTUS
ARE THE PROPERTY OF THEIR RESPECTIVE OWNERS AND ARE NOT THE PROPERTY OF THE
COMPANY.
------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED IN CONNECTION
WITH ANY OFFERING MADE HEREBY TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION OTHER THAN AS CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR BY THE UNDERWRITERS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITY
OTHER THAN THE SHARES OF COMMON STOCK OFFERED HEREBY, NOR DOES IT CONSTITUTE AN
OFFER TO BUY ANY SECURITY OTHER THAN THE SHARES OF COMMON STOCK OFFERED HEREBY
TO ANY PERSON IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE ANY SUCH OFFER
OR SOLICITATION TO SUCH PERSON. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES IMPLY THAT THE INFORMATION
CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
------------------------
UNTIL ___________, 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK OFFERED HEREBY, WHETHER OR
NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER
A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Prospectus Summary............................... 4
Risk Factors..................................... 9
Forward-Looking Statements....................... 16
Company Organization............................. 16
Use of Proceeds.................................. 18
Dividend Policy.................................. 18
Capitalization................................... 19
Dilution......................................... 20
Selected Financial Data.......................... 21
Management's Discussion and Analysis of Financial
Condition and Results of Operations............ 22
<CAPTION>
PAGE
-----
<S> <C>
Business......................................... 31
Management....................................... 49
Certain Transactions............................. 54
Principal Stockholders........................... 55
Shares Eligible for Future Sale.................. 56
Description of Capital Stock..................... 57
Underwriting..................................... 59
Legal Matters.................................... 60
Experts.......................................... 60
Additional Information........................... 61
Index to Financial Statements.................... F-1
</TABLE>
------------------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING OVER-ALLOTMENT, STABILIZING AND SHORT-COVERING TRANSACTIONS IN SUCH
SECURITIES, AND THE IMPOSITION OF A PENALTY BID, IN CONNECTION WITH THE
OFFERING. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
3
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND FINANCIAL STATEMENTS (INCLUDING THE NOTES THERETO) APPEARING
ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE NOTED, THE "COMPANY" REFERS TO
I.C. ISAACS & COMPANY, INC. (FORMERLY I.G. DESIGN, INC.) AND ITS PREDECESSORS,
SUBSIDIARIES AND AFFILIATED COMPANIES, INCLUDING I.C. ISAACS & COMPANY L.P. SEE
"COMPANY ORGANIZATION." UNLESS OTHERWISE NOTED, ALL COMMON STOCK SHARE AMOUNTS,
PER SHARE DATA AND OTHER INFORMATION SET FORTH IN THIS PROSPECTUS (I) HAVE BEEN
ADJUSTED TO REFLECT A 246.9898-FOR-1 STOCK SPLIT, WHICH WILL BE EFFECTED PRIOR
TO CONSUMMATION OF THE OFFERING AND OTHERWISE GIVE EFFECT TO THE REORGANIZATION
(AS DEFINED IN "COMPANY ORGANIZATION") AND (II) ASSUME THAT THE UNDERWRITERS'
OVER-ALLOTMENT OPTION HAS NOT BEEN EXERCISED.
THE COMPANY
I.C. Isaacs & Company, Inc. is a rapidly growing designer, manufacturer and
marketer of branded sportswear. Founded in 1913, the Company has assembled a
portfolio of brands that addresses distinct fashion segments resulting in a
diverse customer base. The Company offers full lines of sportswear for young
men, women and boys under the BOSS brand in the United States and Puerto Rico
and sportswear for men and women under the Beverly Hills Polo Club brand in the
United States, Puerto Rico and Europe. Beginning in 1998, the Company will also
offer a collection of men's sportswear under the Girbaud brand in the United
States and Puerto Rico. Through a focused strategy of providing fashionable,
branded merchandise at value prices, the Company has emerged as a significant
fashion source for youthful and contemporary consumers who purchase sportswear
and outerwear through specialty and department stores. The Company also offers
women's sportswear under various other Company-owned brand names as well as
under third-party private labels. Net sales of the Company grew from $85.3
million in 1994 to $118.7 million in 1996, and operating income grew from $4.7
million in 1994 to $9.3 million in 1996. In the first nine months of 1997, net
sales and operating income totaled $127.2 million and $15.0 million,
respectively, as compared to $86.7 million and $8.0 million, respectively, in
the first nine months of 1996.
The Company manufactures and markets certain sportswear under the BOSS brand
for sale at specified price points in the United States and Puerto Rico subject
to a concurrent use agreement. The Company has positioned the BOSS line to
appeal to consumers who desire a fresh, urban, fashion-forward look. Through
creative and innovative marketing, the Company has created powerful brand appeal
for the BOSS line and has become an active influence in young men's fashion. The
BOSS collection has been expanded from an initial line of denim products to a
full array of sportswear consisting of jeans, tee shirts, sweatshirts, shorts,
knit and woven shirts and outerwear, many of which are characterized by
innovative design, creative graphics and bold uses of color. The Company also
markets a juniors' sportswear line under the BOSS brand for young women, which
includes a full selection of denim products and active sportswear. The Company's
net sales of BOSS sportswear increased at an annual growth rate of 37.1% in
1994, 10.8% in 1995 and 39.3% in 1996. In 1996, net sales of BOSS sportswear
accounted for 72.6% of the Company's net sales.
The Company manufactures and markets certain sportswear under the Beverly
Hills Polo Club brand in the United States, Puerto Rico and Europe under an
exclusive license. The Company targets men and women who desire updated
traditional sportswear at competitive prices. To reach a broader demographic
customer base, the Beverly Hills Polo Club collection combines contemporary
design details and innovative fabrics with classic American sportswear styling.
The Beverly Hills Polo Club collection consists primarily of cotton clothing,
including jeans, pants, shorts, knit and woven shirts and outerwear targeting
the active, image-conscious consumer. The Company's Beverly Hills Polo Club line
was introduced in the spring of 1994. The Company's net sales of Beverly Hills
Polo Club sportswear increased at an annual growth rate of 83.5% in 1995 and
102.3% in 1996. In 1996, net sales of Beverly Hills Polo Club sportswear
accounted for 12.0% of the Company's net sales.
4
<PAGE>
In November 1997, the Company acquired an exclusive license to manufacture
and market certain men's sportswear under the Girbaud brand in the United States
and Puerto Rico. The Girbaud brand is an internationally recognized designer
sportswear label with a distinct European influence. By targeting men who desire
contemporary, international fashion, the Girbaud brand will enable the Company
to address another consumer segment within its branded product portfolio. The
Company intends to reposition the Girbaud line with a broader assortment of
products, styles and fabrications reflecting a contemporary European look. The
Company plans to introduce the fall men's collection in early 1998.
In the late 1980's, management made a decision to change the Company's
marketing focus from a manufacturing-driven to a brand-driven strategy. As a
result, the Company believes it has developed distinct competitive strengths
that position it for continued success. See "Business--Competitive Strengths."
The Company's key competitive strengths include:
- EMPHASIS ON BRAND IDENTITY. The Company believes that brand identity, as
well as the image and lifestyle that a brand conveys, are important
factors that influence retail purchasing decisions. The BOSS, Beverly
Hills Polo Club and Girbaud lines have strong brand identities and enable
the Company to offer a broad continuum of designs and products well
recognized by fashion-conscious consumers.
- COMBINATION OF FASHION AND VALUE. Through its manufacturing, sourcing and
merchandising expertise, the Company achieves a distinct combination of
fashion and value. The Company provides its customers with fashionable,
brand name sportswear which typically sells at retail prices below those
of many well known designer brands.
- CREATIVE AND INNOVATIVE MARKETING. Through a coordinated merchandising,
advertising and marketing strategy, the Company has built strong name
recognition and brand image for its BOSS and Beverly Hills Polo Club
products. The Company targets youthful and contemporary consumers who are
influenced by fashion, music and sports by utilizing a variety of
advertising media, including television, print, outdoor signage and
professional sports sponsorships.
- FLEXIBLE MANUFACTURING AND SOURCING. The Company believes that its ability
to source products from its United States facilities and third party
foreign and domestic manufacturers enhances the Company's production
flexibility and capacity while enabling it to control more efficiently the
delivery, quality and pricing of its products. Currently, the Company
utilizes approximately 50 factories in more than 10 countries including
China, Hong Kong, Korea, Mexico, the Philippines, Taiwan, Thailand and the
United States. The Company does not have long-term contracts with any
manufacturers and most of the Company's manufacturers supply the Company
on a non-exclusive basis pursuant to purchase orders.
The Company's growth strategy includes continued capitalization on its
competitive strengths and the implementation of specific strategies for
continued expansion. See "Business--Growth Strategy." The Company's principal
growth strategies are as follows:
- BROADEN PRODUCT OFFERINGS. The Company believes it can effectively broaden
its product offerings through the expansion of products offered under
existing brands as well as the possible addition of new brands. Expansion
within the BOSS product line is expected to be driven by tops and
outerwear as well as the development of the boys', youth and juniors'
lines. In addition, the Company recently added polo shirts and swimwear
under the BOSS brand. Similarly, the Beverly Hills Polo Club brand
includes a number of product lines that are in the early stages of market
penetration, such as outerwear, and a number of potential product line
expansions, such as men's dress shirts. To further develop the Beverly
Hills Polo Club brand, product offerings within the women's line are being
expanded, and the Company is reorganizing and increasing its women's sales
force. The recent addition of the Girbaud brand adds a European-influenced
designer sportswear brand to the Company's sportswear lines.
5
<PAGE>
- ENHANCE MARKETING PROGRAMS. While the Company believes that its current
marketing strategy is one of its primary competitive strengths, the
Company intends to continue its efforts to increase net sales by enhancing
consumer recognition of its brand names and images through expanded
marketing efforts. These efforts will include increased television, print,
outdoor and point-of-sale advertising, as well as an expanded
"Shop-in-Shop" program at the retail level.
- EXPAND CHANNELS OF DISTRIBUTION. As demand for its sportswear increases,
the Company believes that it can continue to expand and penetrate various
channels of distribution. In recent years, the Company has expanded its
distribution channels beyond specialty stores and specialty store chains
with its BOSS label to begin significant distribution to department store
customers. The Beverly Hills Polo Club brand has not penetrated the
department store channel to the same extent as the BOSS brand, and the
expanded distribution of Beverly Hills Polo Club products is a primary
growth focus of the Company. The Company intends to market the Girbaud
brand to specialty stores, specialty store chains and department stores.
- INCREASE EUROPEAN PRESENCE FOR BEVERLY HILLS POLO CLUB. The Company
believes that it is well positioned to capitalize on the acceptance of the
Beverly Hills Polo Club brand name by continuing to expand its European
sportswear distribution. The classic American sportswear look conveyed by
the Beverly Hills Polo Club line is popular with European youth, and the
Company is expanding its wholesale and retail channels of distribution in
Europe to meet this increasing demand. The Company currently has
distributors in nine countries in Europe and has three franchise stores in
Spain.
S CORPORATION DISTRIBUTION AND RECENT DEVELOPMENTS
Since January 1, 1993, the Company has elected to be treated for federal and
state income tax purposes as an S corporation under Subchapter S of the Internal
Revenue Code of 1986, as amended, and under comparable state laws. One day prior
to the consummation of the transactions related to the Offering, the Company's S
corporation status will be terminated. On such date, the Company will declare a
dividend distribution to the stockholders of record of the Company, including
certain officers and directors of the Company, in an aggregate amount of
approximately $20.0 million, representing all earned but undistributed S
corporation earnings of the Company. On and after such date, the Company will no
longer be treated as an S corporation and, accordingly, will be fully subject to
federal and state income taxes. Purchasers of shares of Common Stock in the
Offering will not receive any portion of the S Corporation Distribution (as
hereinafter defined). See "Company Organization--Prior S Corporation Status."
The Company's right to use the BOSS brand name and image in the manufacture
and sale of apparel is dependent on third party concurrent use and license
agreements. Pursuant to a recent settlement of litigation (the "Settlement")
among the Company, Hugo Boss AG ("Hugo Boss"), Brookhurst, Inc. ("Brookhurst"),
Ambra Inc., a wholly-owned subsidiary of Hugo Boss ("Ambra"), and others, the
Company acquired certain domestic and foreign trademark common law and
registration rights to the BOSS brand name and image previously owned by
Brookhurst, the Company's former licensor. Neither Hugo Boss nor Ambra is
affiliated with Brookhurst or the Company. The Company conveyed the foreign
rights to the BOSS brand name and image to Ambra and received a license to
continue to manufacture apparel in certain foreign countries using the BOSS
brand name and image for sale in the United States and Puerto Rico. The Company
retained ownership of domestic rights to the BOSS brand name and image subject
to certain restrictions contained in a concurrent use agreement with Hugo Boss.
As a result of the Settlement, the Company's rights to manufacture and market
BOSS sportswear were expanded to allow broader product offerings and significant
Company control over styling, advertising and distribution. The Company does not
anticipate that the Settlement will have a material effect on the Company's
financial condition or results of operations. See "Business--Licenses and Other
Rights Agreements--BOSS Trademark Rights; and --Litigation."
The Company's principal executive offices are located at 3840 Bank Street,
Baltimore, Maryland 21224-2522 (telephone number (410) 342-8200) and 350 Fifth
Avenue, Suite 1029, New York, New York 10118 (telephone number (212) 563-2720).
6
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company hereby......... 3,800,000 shares
Common Stock to be outstanding after the Offering 7,800,000 shares
(1)..............................................
Use of Proceeds.................................... The estimated net proceeds of the
Offering of approximately $45.4 million
will be used (i) to repay approximately
$20.0 million of the Company's
outstanding debt under the Company's
credit facilities, (ii) to pay the
Initial S Corporation Distribution (as
hereinafter defined) of approximately
$18.5 million and the Subsequent S
Corporation Distribution (as
hereinafter defined) estimated to be
$0.9 million and (iii) for general
corporate and working capital purposes.
See "Use of Proceeds."
Nasdaq National Market Symbol...................... Application has been made for quotation
of the Common Stock on the Nasdaq
National Market under the symbol
"ISAC."
</TABLE>
- ------------------------
(1) Excludes 500,000 shares of Common Stock reserved for issuance under the
Company's 1997 Omnibus Stock Plan. See "Management--1997 Omnibus Stock
Plan."
RISK FACTORS
See "Risk Factors" beginning on page 9 for a discussion of certain
information that should be considered by prospective purchasers of the Common
Stock offered hereby. Such factors include, among others, competition and
changes in consumer demands; dependence upon licenses and other rights
agreements; recent Settlement of the BOSS litigation; uncertainties regarding
maintaining and managing growth in net sales; credit risks; dependence upon
unaffiliated manufacturers; risks related to foreign operations and sourcing;
dependence upon key personnel; dependence upon certain customers; potential
shortages of fabrics; environmental controls and other regulatory requirements;
lack of significant operating history in Europe; seasonality and quarterly
fluctuations; control by existing stockholders; anti-takeover provisions;
dilution; dividend policy; absence of public market and possible volatility of
stock price; and future sales by existing stockholders and shares eligible for
future sale.
7
<PAGE>
SUMMARY HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL DATA
The summary historical and pro forma consolidated financial data set forth
below should be read in conjunction with the more detailed consolidated
financial statements, including the notes thereto, and "Management's Discussion
and Analysis of Financial Condition and Results of Operations" included
elsewhere herein.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------------------ ---------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1992 1993 1994 1995 1996 1996 1997
--------- --------- --------- --------- ---------- --------- ----------
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Net sales..................................... $ 62,232 $ 72,414 $ 85,298 $ 93,271 $ 118,655 $ 86,680 $ 127,247
Cost of sales................................. 48,051 54,880 62,216 68,530 84,421 60,188 85,677
--------- --------- --------- --------- ---------- --------- ----------
Gross profit.................................. 14,181 17,534 23,082 24,741 34,234 26,492 41,570
Selling, license, distribution, general and
administrative fees and expenses............ 12,282 15,214 18,333 20,267 25,627 18,468 26,674
Recovery of legal fees........................ -- -- -- -- (718) -- (117)
--------- --------- --------- --------- ---------- --------- ----------
Operating income.............................. 1,899 2,320 4,749 4,474 9,325 8,024 15,013
Interest expense.............................. 997 1,260 1,191 1,247 1,365 995 1,619
Other income (expense) (1).................... 55 1,215 1,235 (3) 85 (21) 28
Minority interest............................. -- -- (53) (33) (82) (71) (134)
--------- --------- --------- --------- ---------- --------- ----------
Income before extraordinary items (1)(2)...... 957 2,275 4,740 3,191 7,963 6,937 13,288
PRO FORMA STATEMENT OF INCOME DATA:
Income before income taxes.................... 3,184 2,275 5,129 3,191 7,963 6,937 13,288
Income tax provision (3)...................... 1,236 933 2,103 1,308 3,265 2,844 5,448
--------- --------- --------- --------- ---------- --------- ----------
Net income.................................... $ 1,948 $ 1,342 $ 3,026 $ 1,883 $ 4,698 $ 4,093 $ 7,840
--------- --------- --------- --------- ---------- --------- ----------
--------- --------- --------- --------- ---------- --------- ----------
Net income per share (4)...................... $ 0.87 $ 1.45
---------- ----------
---------- ----------
Weighted average common shares outstanding
(4)......................................... 5,423 5,423
</TABLE>
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1997
--------------------------------------
<S> <C> <C> <C>
AS FURTHER
AS ADJUSTED ADJUSTED
ACTUAL (5) (5)
--------- -------------- -----------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Working capital........................................................................ $ 22,359 $ 3,524 $ 48,374
Total assets........................................................................... 63,521 64,486 68,347
Distribution payable................................................................... -- 18,500 --
Notes payable and long-term debt....................................................... 23,437 23,437 398
Stockholders' equity................................................................... 26,182 8,982 54,382
</TABLE>
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(1) Includes income from settlement of license disputes of $0.3 million, $1.5
million and $1.2 million in 1992, 1993 and 1994, respectively.
(2) Before extraordinary gains of $2.2 million in 1992 and $0.4 million in 1994
related to extinguishment of debt.
(3) Reflects historical provision for income taxes in 1992 and pro forma
provision for income taxes as if the Company had been taxed as a C
corporation for the years ended December 31, 1993, 1994, 1995 and 1996 and
the nine months ended September 30, 1996 and 1997, respectively.
(4) Pro forma income per share is based on the weighted average number of shares
of Common Stock outstanding plus the estimated number of shares being sold
by the Company which would be necessary to fund the distribution of earned
and undistributed S corporation earnings totaling approximately $18.5
million as of September 30, 1997. See "Use of Proceeds."
(5) Adjusted to reflect (i) the liability for the Initial S Corporation
Distribution consisting of all earned but undistributed S corporation
earnings as of September 30, 1997, (ii) the recording of an estimated $1.3
million of deferred tax assets determined as if the Company's S corporation
status had been terminated on September 30, 1997 and (iii) the purchase of
the minority interest at September 30, 1997 for approximately $335,000.
Further adjusted to reflect the sale of 3.8 million shares of Common Stock
by the Company assuming an initial public offering price of $13.00 per share
and the application of approximately $41.5 million of the net proceeds to
pay the Initial S Corporation Distribution and outstanding borrowings under
its credit facilities as of September 30, 1997. The Company anticipates that
the Subsequent S Corporation Distribution (as hereinafter defined)
consisting of all earned but undistributed S corporation earnings for the
period beginning on October 1, 1997 and ending on the S Termination Date (as
hereinafter defined) will be approximately $0.9 million. See "Use of
Proceeds" and "Company Organization."
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RISK FACTORS
PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED HEREBY SHOULD CONSIDER
CAREFULLY THE FACTORS SET FORTH BELOW, AS WELL AS THE OTHER INFORMATION SET
FORTH IN THIS PROSPECTUS, IN EVALUATING AN INVESTMENT IN THE COMMON STOCK.
COMPETITION AND CHANGES IN CONSUMER DEMANDS
The apparel industry is highly competitive, fragmented and subject to
rapidly changing consumer demands and preferences. The Company believes that its
success depends in large part upon its ability to anticipate, gauge and respond
to changing consumer demands and fashion trends in a timely manner and upon the
continued appeal to consumers of the BOSS, Beverly Hills Polo Club and Girbaud
brand names. Failure by the Company to identify and respond appropriately to
changing consumer demands and fashion trends could adversely affect consumer
acceptance of its products and could have a material adverse effect on the
Company's financial condition and results of operations. The Company competes
with numerous apparel manufacturers and distributors, many of which have greater
financial resources than the Company. The Company's products also compete with a
substantial number of designer and non-designer lines. Although the level and
nature of competition differ among its product categories, the Company believes
that it competes primarily on the basis of brand image, quality of design and
value pricing. Increased competition by existing and future competitors could
result in reductions in sales or prices of the Company's products, which could
have a material adverse effect on the Company's financial condition and results
of operations. In addition, there is no assurance that the Company will be able
to introduce a competitive line of Girbaud products or that such products will
achieve market acceptance. The apparel industry historically has been subject to
substantial cyclical variations, and a recession in the general economy or
uncertainties regarding future economic prospects that affect consumer spending
habits could have a material adverse effect on the Company's financial condition
or results of operations. See "Business--Licenses and Other Rights Agreements;
and --Competition."
DEPENDENCE UPON LICENSES AND OTHER RIGHTS AGREEMENTS
The Company's business is heavily dependent upon its use of the BOSS,
Beverly Hills Polo Club and Girbaud brand names and images, which are in turn
dependent upon the existence and continuation of certain licenses and other
rights agreements. The Company's use of the BOSS brand name and image is limited
to certain specified products at specified price points in the United States and
Puerto Rico. The initial term of the BOSS agreements is four years; however, the
agreements may be extended at the Company's option through December 31, 2007.
The Company's right to use the BOSS brand name and image in the manufacture and
sale of apparel is substantially dependent on third party concurrent use and
license agreements. The Company's rights are subject to material restrictions on
the Company's right to manufacture and sell apparel using the BOSS brand name
and image, including, but not limited to, (i) prohibitions on using the BOSS
brand name or image on certain types of clothing and on non-apparel items, (ii)
parameters governing advertising, wholesale price points and the size, location,
appearance, style and coloring of the BOSS logotype on different product
categories and (iii) the requirement that the Company use the phrase "BOSS by
I.G. Design" in the BOSS logotype on its BOSS products. The Company is also
dependent upon the rights of the licensor of the Beverly Hills Polo Club brand
name and image in the use of such name and image on the Company's products. The
Company's licenses for use of the Beverly Hills Polo Club brand name and image
are limited to certain specified products in the United States, Puerto Rico and
Europe and may be extended at the Company's option through December 31, 2004.
The Company's license for use of the Girbaud brand name and image is limited to
certain specified products in the United States, Puerto Rico and the U.S. Virgin
Islands and may be extended at the Company's option through December 31, 2002.
There can be no assurance that the Company will be able to retain its right to
use the BOSS, Beverly Hills Polo Club and Girbaud brand names and images or
enter into comparable arrangements upon the expiration of the current
agreements. In addition, each of the agreements contains provisions that, under
certain circumstances (not all of which are under the Company's control), could
permit the licensor and third parties to terminate the agreements. Such
provisions
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include, among other things (i) a default in the payment of certain amounts
payable under the applicable agreement that continues beyond the specified grace
period and (ii) the failure to comply with the covenants contained in the
applicable agreement. Any termination of these agreements would result in the
Company losing its rights to use the BOSS, Beverly Hills Polo Club or Girbaud
brand names and images and could have a material adverse effect on the Company's
financial condition or results of operations. In addition, under the agreements,
the licensor and third parties retain the right to produce, distribute,
advertise and sell, and to authorize others to produce, distribute, advertise
and sell, certain garments that are similar to some of the Company's products.
Any such production, distribution, advertisement or sale of such garments by
such parties or other authorized parties could have a material adverse effect on
the Company's financial condition or results of operations.
No assurance can be given that others will not assert rights in, or
ownership of, these trademarks or other proprietary rights. If successful on the
merits, such claims could have a material adverse effect on the Company's
financial condition or results of operations. In the event of any litigation
arising from such claim, any claiming party could have significantly greater
resources than the Company to pursue litigation of such claims, and the Company
could be forced to incur substantial costs to defend legal actions taken against
it relating to the Company's use of trademarks or other proprietary rights. In
addition, if any such third party is successful in challenging the Company's use
of trademarks, the Company could be forced to pay significant damages or enter
into expensive royalty or licensing arrangements with such third party. See
"Business--Licenses and Other Rights Agreements."
RECENT SETTLEMENT OF BOSS LITIGATION
Pursuant to a recent Settlement of litigation relating to use of the BOSS
trademark among the Company, Hugo Boss, Brookhurst, Ambra and others, the
Company acquired certain domestic and foreign trademark common law and
registration rights to the BOSS brand name and image previously owned by
Brookhurst, the Company's former licensor. The Company conveyed the foreign
rights to the BOSS brand name and image to Ambra, a Delaware corporation and
wholly-owned subsidiary of Hugo Boss with its principal place of business in the
United States in New York, New York, and received a license to continue to
manufacture apparel in certain foreign countries using the BOSS brand name and
image for sale in the United States and Puerto Rico. The Company retained
ownership of domestic rights to the BOSS brand name and image, which is subject
to a concurrent use agreement with Hugo Boss. In addition, Ambra holds an option
dated November 5, 1997 to purchase the Company's domestic BOSS trademark rights
(the "Option") at any time between November 5, 2006 and December 31, 2007 or
earlier upon certain termination or default events. The Company's rights to use
the BOSS name will terminate upon exercise of the Option or upon earlier
termination of any of the other agreements. Any termination of the Company's
rights to use the BOSS name would have a material adverse effect on the
Company's financial condition and results of operations. Neither Hugo Boss nor
Ambra is affiliated with Brookhurst or the Company. There is no assurance that
the Settlement will preclude any future claims or litigation regarding the use
of the BOSS brand name or image. Such claims or litigation could have a material
adverse effect on the Company's financial condition or results of operations.
See "Business--Licenses and Other Rights Agreements--BOSS Trademark Rights; and
- --Litigation."
UNCERTAINTIES REGARDING MAINTAINING AND MANAGING GROWTH IN NET SALES
The Company's net sales have grown substantially over the last three years.
No assurance can be given that the level of net sales will not decline or that
the Company will be successful in increasing net sales in the future. For
example, the Company had unfilled orders of approximately $45 million as of
September 30, 1997, a decrease of $6 million as compared to approximately $51
million of such orders as of September 30, 1996. Although the Company believes
the decline was due primarily to variations in the timing of product orders by
specialty store customers, there can be no assurance that additional factors
such as seasonality, weather conditions, a change in demand and the scheduling
of manufacturing have not caused the decline in backlog since September 30,
1996, or that such factors may cause backlog, and the level of net sales, to
continue to fluctuate in the future. To manage growth effectively, the Company
must
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anticipate trends, changes in styles and customer demand, continue to implement
changes in certain aspects of its business, continue to expand its operations
(including the development of a new distribution facility), attract and retain
qualified personnel (including management), and develop, train and manage an
increasing number of management-level and other employees. Any unexpected
difficulties encountered during expansion, including, but not limited to,
possible delays in successfully manufacturing and marketing a Girbaud line of
products or delays in the construction and opening of the Company's new
distribution facility, could have a material adverse effect on the Company's
financial condition or results of operations. Additionally, each of the
Company's agreements to use the BOSS, Beverly Hills Polo Club and Girbaud brand
names and images provides that minimum annual royalties must be paid by the
Company regardless of the level of the Company's sales of those products. If the
Company does not achieve a sufficient level of sales, paying such minimum annual
royalties could have a material adverse effect on the Company's financial
condition or results of operations. See "--Seasonality and Quarterly
Fluctuations," "Business-- Licenses and Other Rights Agreements; and --Backlog
and Seasonality."
CREDIT RISKS
The Company extends credit to its customers based on an evaluation of each
customer's financial condition and credit history and, due to growth, continues
to experience increases in the amount of its outstanding accounts receivable. In
1994, 1995 and 1996, the Company's credit losses were $0.4 million, $0.4 million
and $0.9 million, respectively. In each of these years, the Company's credit
losses as a percentage of net sales has been less than three-quarters of one
percent. There can be no assurance that the Company's credit losses will
continue to be immaterial. The failure to accurately assess the credit risk from
its customers, changes in overall economic conditions and other factors could
cause the Company's credit losses to increase, which could have a material
adverse effect on the Company's financial condition or results of operations.
See "Business--Credit Control."
DEPENDENCE UPON UNAFFILIATED MANUFACTURERS
Approximately 72% of the Company's manufacturing needs are currently met
through contracting with third party manufacturers such that the Company is
largely dependent upon independent contractors for the manufacture of its
products. The Company believes that its dependence on independent contractors
will continue to increase. The Company currently contracts with approximately 50
manufacturers in more than 10 countries. The Company does not have long-term
contracts with any manufacturers and most of those manufacturers supply the
Company on a non-exclusive basis pursuant to purchase orders. During 1996,
approximately 9% of the Company's purchases of raw materials, labor and finished
goods for its apparel were made in Mexico; approximately 28% were made in Asia;
approximately 23% were made at third party facilities elsewhere in the United
States; and the balance was made in Company-operated facilities in the United
States. The Company anticipates that a significant portion of the manufacturing
of its Girbaud line of products will be performed by third party manufacturers
outside the United States. The inability of a manufacturer to ship the Company's
products in a timely manner or to meet the Company's quality standards could
adversely affect the Company's ability to deliver products to its customers in a
timely manner. The Company's reliance on third party manufacturers has not
resulted in the past in material delays or disruptions in service that have had
a material adverse effect on the Company's financial condition or results of
operations. However, delays in delivery caused by manufacturing delays,
disruption in services of delivery carriers or other factors could result in
cancellations of orders, refusals to accept deliveries or a reduction in
purchase prices, any of which could have a material adverse effect on the
Company's financial condition or results of operations.
The Company manufactures a substantial portion of its BOSS brand apparel
through unaffiliated foreign manufacturers, and the Company's activities through
these manufacturers are subject to a foreign manufacturing rights agreement with
Ambra. This agreement contains certain restrictions governing use of the BOSS
brand and the operations of third party manufacturers over which the Company may
have limited control. See "--Dependence Upon Licenses and Other Rights
Agreements" and "Business-- Manufacturing and Product Sourcing."
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RISKS RELATED TO FOREIGN OPERATIONS AND SOURCING
The Company's operations may be affected adversely by political instability
resulting in the disruption of trade with the countries in which the Company's
contractors are located, the imposition of additional regulations relating to
imports, the imposition of additional duties, tariff and other charges on
imports, significant fluctuations in the value of the dollar against foreign
currencies or restrictions on the transfer of funds. Such factors have not
previously had a material adverse effect on the Company's financial condition or
results of operations but there can be no assurance of such in the future. All
of the Company's products manufactured abroad are paid for in United States
dollars. Accordingly, the Company does not engage in any currency hedging
transactions.
The Company's import operations are subject to constraints imposed by
bilateral textile agreements between the United States and a number of foreign
countries. These agreements, which have been negotiated either under the
framework established by the Arrangement Regarding International Trade in
Textiles, known as the Multifiber Agreement, or other applicable statutes,
impose quotas on the amounts and types of merchandise that may be imported into
the United States from these countries. These agreements also allow the United
States to impose restraints at any time and on very short notice on the
importation of categories of merchandise that, under the terms of the
agreements, are not currently subject to specified limits. These agreements and
statutes have not previously had a material adverse effect on the Company's
financial condition or results of operations but there can be no assurance of
such in the future. Imported products are also subject to United States customs
duties, which comprise a material portion of the cost of the merchandise. A
substantial increase in customs duties could have a material adverse effect on
the Company's financial condition or results of operations. The United States or
the countries in which the Company's products are produced or sold may, from
time to time, impose new quotas, duties, tariffs or other restrictions, or
adversely adjust prevailing quota, duty or tariff levels, any of which could
have a material adverse effect on the Company's financial condition or results
of operations.
The Company's policy is to notify its independent manufacturers through its
agents of the expectation that such manufacturers operate in compliance with
applicable laws and regulations. While the Company's policies promote ethical
business practices and the Company's staff periodically visits and monitors the
operations of its independent manufacturers, the Company does not control such
manufacturers or their labor practices. The violation of labor or other laws by
an independent manufacturer of the Company or the divergence of an independent
manufacturer's labor practices from those generally accepted as ethical in the
United States could have a material adverse effect on the Company's financial
condition or results of operations. See "Business--Manufacturing and Product
Sourcing."
DEPENDENCE UPON KEY PERSONNEL
The success of the Company is largely dependent upon the personal efforts
and abilities of its senior management, particularly Messrs. Robert J. Arnot,
Chairman of the Board and Co-Chief Executive Officer, Gerald W. Lear, President
and Co-Chief Executive Officer, Gary B. Brashers, Vice President-- Manufacturing
and Chief Operating Officer, Eugene C. Wielepski, Vice President--Finance and
Chief Financial Officer, and Thomas P. Ormandy, Vice President--Sales. Effective
upon consummation of the Offering, these individuals, in the aggregate, will
beneficially own approximately 19.6% of the Company's outstanding Common Stock.
The Company has entered into employment agreements with each of these
individuals. See "Management--Employment Agreements." The loss of the services
of one or more of such individuals for an extended period of time could have a
material adverse effect on the Company's financial condition or results of
operations. The Company maintains and is the beneficiary of life insurance
policies in the amount of $1.0 million on the lives of each of Messrs. Arnot,
Lear and Brashers and in the amount of $0.5 million on the life of Mr.
Wielepski. See "Business--Employees" and "Management."
DEPENDENCE UPON CERTAIN CUSTOMERS
The Company's three largest customers accounted for an aggregate of
approximately 20% of net sales in 1996. The Company's largest single customer in
1996 was J.C. Penney Company, Inc., which accounted
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for approximately 13% of net sales. No other customer of the Company accounted
for 10.0% or more of net sales in 1996. The Company does not have long-term
agreements with any of its customers. Instead, its customers purchase the
Company's products pursuant to purchase orders and are otherwise under no
obligation to continue to purchase the Company's products. The loss of one or
more of the Company's largest customers could have a material adverse effect on
the Company's financial condition or results of operations. The retail apparel
industry has periodically experienced consolidation and other ownership changes.
In the future, the Company's customers may consolidate, undergo restructurings,
reorganizations or bankruptcies, or realign these affiliations, any of which
could decrease the number of stores that carry the Company's products or
increase the ownership concentration within the retail apparel industry. Such
factors have not previously had a material adverse effect on the Company's
financial condition or results of operations but there can be no assurance of
such in the future. See "Business--Customers and Sales."
POTENTIAL SHORTAGES OF FABRICS
The Company is dependent upon the ability of its suppliers to furnish
fabrics in sufficient volumes at satisfactory prices and to meet performance,
quality and delivery criteria for its domestic and Mexican pant producers. The
Company does not have any contracts with its suppliers that obligate them to
continue selling fabrics to the Company. The Company has not previously
experienced material shortages of fabrics. However, if shortages of fabrics
occur, or if the prices of these fabrics rise and if the Company is unable to
increase its prices to recover such costs increases, a material adverse effect
on the Company's financial condition or results of operations could result. See
"Business--Manufacturing and Product Sourcing; and --Quality Control."
ENVIRONMENTAL CONTROLS AND OTHER REGULATORY REQUIREMENTS
The Company is subject to various federal, state and local environmental
laws and regulations governing, among other things, the discharge, storage,
handling and disposal of a variety of hazardous and nonhazardous substances and
wastes used in or resulting from its present and past operations. The Company's
operations also are governed by laws and regulations relating to employee safety
and health, principally the Occupational Safety and Health Act and the
regulations thereunder, that, among other things, establish exposure limitations
for cotton dust, formaldehyde, asbestos and noise and regulate chemical and
ergonomic hazards in the workplace. There can be no assurance that regulatory
requirements will not become more stringent in the future or that the Company
will not incur significant costs relating to these matters in the future. The
Company cannot predict the possible impact of additional or more stringent
regulatory requirements on its financial condition or results of operations. See
"Business-- Environmental Matters."
LACK OF SIGNIFICANT OPERATING HISTORY IN EUROPE
The Company acquired a license to distribute, manufacture and market Beverly
Hills Polo Club brand sportswear in Europe in the third quarter of 1996 and has
had no significant operating history against which to assess the reasonableness
of its strategy to expand sales internationally. The Company's European business
strategy relies heavily upon its ability to align itself with effective
distributors that are able to market the Beverly Hills Polo Club products to
retailers. The Company is also dependent upon the services of contract warehouse
facilities for the timely and accurate shipment of its products to its
distributors and retail stores. A general failure by the Company to maintain and
control its existing international distribution arrangements or to procure
additional international distribution relationships could have a material
adverse effect on the Company's financial condition or results of operations.
Thus, no assurance can be given that the Company's international strategy will
be successfully and properly implemented. In addition, due to the Company's
utilization of franchise store arrangements in Europe, the Company's European
expansion strategy is also dependent upon selecting franchisees that can
successfully execute a retail strategy. See "Business--Growth Strategy."
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SEASONALITY AND QUARTERLY FLUCTUATIONS
The Company's business is subject to significant seasonal and quarterly
fluctuations that are characteristic of the apparel and retail industries. The
Company's backlog of orders and overall results of operations may fluctuate from
quarter to quarter as a result of, among other things, variations in the timing
of product orders by customers, weather conditions that may affect purchases at
the wholesale and retail levels, the amount and timing of shipments, advertising
and marketing expenditures and increases in the number of employees and overhead
to support growth. In the Company's segment of the apparel industry, sales are
generally higher in the first and third quarters. Historically, the Company has
taken greater markdowns in the second and fourth quarters. See "--Uncertainties
Regarding Maintaining and Managing Growth in Net Sales," "Management's
Discussion and Analysis of Financial Condition and Results of
Operation--Selected Quarterly Results" and "Business--Backlog and Seasonality."
CONTROL BY EXISTING STOCKHOLDERS
Following the consummation of the Offering, the Company's existing
stockholders, all of whom are parties to the Amended and Restated Shareholders'
Agreement (the "Restated Shareholders' Agreement"), will beneficially own an
aggregate of approximately 51.3% of the outstanding Common Stock. Accordingly,
such stockholders will have the ability to control the election of directors and
the results of other matters submitted to a vote of stockholders. Such
concentration of ownership, together with the Restated Shareholders' Agreement
and the anti-takeover effects of certain provisions in the Delaware General
Corporation Law and in the Company's Amended and Restated Certificate of
Incorporation (the "Restated Certificate") and Amended and Restated By-laws (the
"Restated By-laws"), may have the effect of delaying or preventing a change in
control of the Company. See "--Anti-Takeover Provisions," "Principal
Stockholders," "Description of Capital Stock" and "Certain
Transactions--Restated Shareholders' Agreement."
ANTI-TAKEOVER PROVISIONS
The Company's Restated Certificate and Restated By-laws include provisions
that may have the effect of discouraging a non-negotiated takeover of the
Company and preventing certain changes of control. These provisions, among other
things (i) classify the Company's Board of Directors into three classes serving
staggered, three-year terms, (ii) permit the Company's Board of Directors,
without further stockholder approval, to issue up to 5.0 million shares of
preferred stock with rights and preferences determined by the Board of Directors
at the time of issuance, (iii) require a 66.7% vote of the Company's
stockholders to approve any amendment, addition or termination of the Restated
By-laws of the Company and (iv) restrict the ability of stockholders to call
special meetings of the stockholders, nominate individuals for election to the
Board of Directors or submit stockholder proposals. The Restated Shareholders'
Agreement designates Messrs. Robert J. Arnot, Gerald W. Lear, Ira J. Hechler and
Jon Hechler as principal shareholders (the "Principal Shareholders") and
provides that the other stockholders subject to the Restated Shareholders'
Agreement (the "Non-Principal Shareholders") shall vote, in elections of
directors to fill Class I or Class II of the Board of Directors, for nominees of
the Principal Shareholders. In addition, certain of the Company's agreements for
use of the BOSS brand name provide that certain specified changes in the control
of ownership of the Company may result in termination of such agreement. The
Restated Shareholders' Agreement also provides for certain rights of first
refusal and "drag along" rights. The provisions of the Restated Certificate, the
Restated By-laws and the Restated Shareholders' Agreement might, therefore, have
the effect of inhibiting stockholders' ability to realize the maximum value for
their shares of Common Stock that might otherwise be realized because of a
merger or other event affecting the control of the Company. See "Description of
Capital Stock" and "Certain Transactions--Restated Shareholders' Agreement."
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DILUTION
The initial public offering price is substantially higher than the book
value per share of Common Stock. Investors purchasing shares of Common Stock in
the Offering will therefore incur immediate and substantial dilution of $6.43
per share. See "Dilution."
DIVIDEND POLICY
The Company anticipates that, after payment of the S Corporation
Distribution to stockholders of record as of the S Termination Date (as
hereinafter defined), all earnings of the Company will be retained for the
foreseeable future for use in the operations of the Company's business.
Purchasers of shares of Common Stock in the Offering will not receive any
portion of the S Corporation Distribution. Any future determination as to the
payment of dividends will be at the discretion of the Company's Board of
Directors and will depend upon the Company's results of operations, financial
condition, restrictions in the Company's credit facility and other factors
deemed relevant by the Board of Directors. See "Dividend Policy."
ABSENCE OF PUBLIC MARKET AND POSSIBLE VOLATILITY OF STOCK PRICE
Prior to the Offering, there has been no public market for the Common Stock,
and there can be no assurance that an active trading market will develop or be
sustained. The initial public offering price of the Common Stock offered hereby
will be determined through negotiations among the Company and the Underwriters
and may bear no relationship to the market price for the Common Stock after the
Offering. Subsequent to the Offering, prices for the Common Stock will be
determined by the market and may be influenced by a number of factors, including
depth and liquidity of the market for the Common Stock, investor perceptions of
the Company, changes in conditions or trends in the Company's industry or in the
industry of the Company's significant customers, publicly traded comparable
companies and general economic and other conditions. See "Underwriting."
FUTURE SALES BY EXISTING STOCKHOLDERS; SHARES ELIGIBLE FOR FUTURE SALE
The Common Stock offered hereby will be freely tradable (other than by an
"affiliate" of the Company as such term is defined in the Securities Act of
1933, as amended ( the "Securities Act")) without restriction or registration
under the Securities Act. Immediately after the Offering, the Company's existing
stockholders will beneficially own an aggregate of approximately 51.3% of the
outstanding Common Stock. Subject to the restrictions set forth below, such
stockholders will be free to sell such shares from time to time to take
advantage of favorable market conditions or for any other reason. Future sales
of shares of Common Stock by the Company or its stockholders could adversely
affect the prevailing market price of the Common Stock. The Company and each of
its executive officers, directors and stockholders beneficially owning in the
aggregate 4.0 million shares of Common Stock have entered into lock-up
agreements with The Robinson-Humphrey Company, LLC and Legg Mason Wood Walker,
Incorporated, as representatives of the Underwriters, pursuant to which they
have agreed not to, directly or indirectly, sell, offer to sell, contract to
sell, solicit an offer to buy, grant any option for the purchase or sale of,
assign, pledge, distribute or otherwise transfer, dispose of or encumber any of
their shares of Common Stock (other than those being sold pursuant to this
Offering) or any securities convertible into or exercisable or exchangeable for
shares of Common Stock without the prior written consent of the representatives
of the Underwriters, for a period of 180 days after the date of this Prospectus
(the "Lockup Period"). In addition, certain restrictions on transfers of shares
of Common Stock by the existing stockholders of the Company are contained in the
Restated Shareholders' Agreement. After the Lockup Period, approximately 3.97
million shares of Common Stock will be eligible for sale pursuant to Rule 144
promulgated under the Securities Act. Sales of substantial amounts of Common
Stock in the public market, or the perception that such sales may occur, could
have a material adverse effect on the market price of the Common Stock. See
"Shares Eligible for Future Sale," "Underwriting" and "Certain
Transactions--Restated Shareholders' Agreement."
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FORWARD-LOOKING STATEMENTS
This Prospectus contains certain forward-looking statements including, among
other things, the Company's anticipated growth strategies, the Company's
intention to continue to develop new products under the BOSS and Beverly Hills
Polo Club brand names, the Company's ability to successfully manufacture and
market a Girbaud line of products, the Company's expectation that it will fill
substantially all of its orders that were unfilled as of September 30, 1997 by
the end of 1997, the Company's future expenditures on capital projects and
advertising, construction and opening of the Company's new distribution
facility, continued operation under the licenses and other rights agreements
relating to the BOSS, Beverly Hills Polo Club and Girbaud brands, European
expansion, the Company's ability to limit credit risk exposure to its customers
and other aspects of the business of the Company. These forward-looking
statements are subject to risks and uncertainties, many of which are beyond the
Company's control, which could cause actual results to differ materially from
those contemplated in such forward-looking statements, including in particular
the risks and uncertainties described under "Risk Factors," including, among
other things (i) changes in the marketplace for the Company's products,
including consumer tastes, (ii) the introduction of new products or pricing
changes by the Company's competitors, (iii) changes in the economy and (iv)
termination of one or more of its agreements for use of the BOSS, Beverly Hills
Polo Club and Girbaud brand names and images in the manufacture and sale of the
Company's products. Prospective investors are cautioned not to place undue
reliance on these forward-looking statements, which speak only as of the date
hereof. The Company undertakes no obligation to publicly update or revise any of
these forward-looking statements, whether as a result of new information, future
events or circumstances or otherwise. There can be no assurance that the events
described in these forward-looking statements will occur.
COMPANY ORGANIZATION
BACKGROUND
The Company was founded by Mr. Isaac C. Isaacs in Baltimore, Maryland in
1913. It remained a family-owned business until 1984, when it was reorganized as
I.C. Isaacs & Company L.P. (the "Partnership") by a group comprised of
management and outside investors. Since that time, the Company has operated as
the Partnership's general partner and holds a 99.0% ownership interest. Ira J.
Hechler, a director and stockholder of the Company, is currently the
Partnership's limited partner and holds a 1.0% ownership interest (the "Limited
Partnership Interest"). The business of the Company is conducted through the
Partnership. Upon consummation of the Offering, the Company's wholly-owned
subsidiary, Isaacs Design, Inc., will become the limited partner of the
Partnership. See "--The Reorganization."
PRIOR S CORPORATION STATUS
Since January 1, 1993, the Company has elected to be treated for federal and
state income tax purposes as an S corporation under Subchapter S of the Internal
Revenue Code of 1986, as amended (the "Code"), and under comparable state laws.
As a result, the Company's stockholders, rather than the Company, have been
taxed directly on the income of the Company for federal and certain state income
tax purposes, whether or not such income was distributed. One day prior to the
consummation of the transactions related to the Offering, the Company's S
corporation status will be terminated (the "S Termination Date").
On the S Termination Date the Company will declare the following dividend
distributions to the stockholders of record of the Company, including certain
officers and directors of the Company: (i) a dividend distribution in the
aggregate amount of approximately $18.5 million, which represents all earned but
undistributed S corporation earnings of the Company as of September 30, 1997
(the "Initial S Corporation Distribution"); and (ii) a dividend distribution in
the aggregate amount of the Company's earned but undistributed S corporation
earnings for the period beginning on October 1, 1997 and ending
16
<PAGE>
on the S Termination Date (the "Subsequent S Corporation Distribution" and,
together with the Initial S Corporation Distribution, the "S Corporation
Distribution"). The Company estimates that the amount of the Subsequent S
Corporation Distribution will be approximately $0.9 million. Although the amount
of the Initial S Corporation Distribution is not subject to any significant
change, the estimated amount of the Subsequent S Corporation Distribution could
be materially higher or lower depending upon the Company's earnings for the
period beginning on October 1, 1997 and ending on the S Termination Date. Only
stockholders of record as of the S Termination Date will participate in the S
Corporation Distribution. The Initial S Corporation Distribution is expected to
be paid on the date of consummation of the transactions relating to the Offering
(the "Closing Date"); the Subsequent S Corporation Distribution is expected to
be paid within 30 days after the Closing Date. The Company expects to pay the S
Corporation Distribution with a portion of the net proceeds from this Offering.
Purchasers of shares of Common Stock in the Offering will not receive any
portion of the S Corporation Distribution. See "Use of Proceeds." On and after
the S Termination Date, the Company will no longer be treated as an S
corporation and, accordingly, will be fully subject to federal and state income
taxes. See "Capitalization" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Pro Forma Adjustments for Income
Taxes."
THE REORGANIZATION
Prior to the Closing Date, the Company will (i) form a wholly-owned
subsidiary, Isaacs Design, Inc., which will acquire the Limited Partnership
Interest from Ira J. Hechler in exchange for approximately $335,000 in cash,
which is an amount equal to the book value of that interest, (ii) file with the
Secretary of State of Delaware an Amended and Restated Certificate of
Incorporation changing the authorized shares of capital of the Company from
20,000 shares of common stock, par value $1.00 per share, to 50.0 million shares
of Common Stock, par value $.0001 per share (the "Common Stock"), and 5.0
million shares of preferred stock, par value $.0001 per share (the "Preferred
Stock"), (iii) effect a 246.9898-for-1 stock split and (iv) declare a dividend
in the amount of the S Corporation Distribution. After the acquisition of the
Limited Partnership Interest, the Company will have sole control of the
Partnership. All of such transactions are referred to collectively herein as the
"Reorganization" and are conditioned upon the closing of the Offering.
17
<PAGE>
USE OF PROCEEDS
The net proceeds to be received by the Company from the Offering are
estimated to be approximately $45.4 million, assuming an initial public offering
price of $13.00 per share (the mid-point of the range set forth on the cover
page of this Prospectus) and after deducting the estimated underwriting discount
and offering expenses payable by the Company. The Company intends to use such
net proceeds as follows: (i) to repay approximately $20.0 million of the
Company's outstanding borrowings under its credit facilities; (ii) to pay the S
Corporation Distribution (estimated to be between $19.0 million and $20.0
million); and (iii) for general corporate and working capital purposes. The
Company's credit facilities consist of a $1.0 million term loan, which will
mature on June 30, 2001 and has an annual interest rate equal to the prime rate
of interest plus 2.5%, and a revolving line of credit, which will mature on June
30, 1998 and has an annual interest rate equal to the prime rate of interest
plus 1.0%. Amounts outstanding under the Company's credit facilities were used
for working capital purposes. Pending application of the net proceeds as
described above, the Company will invest the net proceeds in short-term,
interest bearing instruments or other investment grade securities. See "Company
Organization" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Liquidity and Capital Resources."
DIVIDEND POLICY
Since January 1, 1993, the Company has elected to be treated for federal and
state income tax purposes as an S corporation. As a result, the Company's
stockholders, rather than the Company, have been taxed directly on the earnings
of the Company for federal and certain state income tax purposes, whether or not
such earnings were distributed. In 1995, 1996 and thus far in 1997, the Company
made cash distributions to its stockholders in the amounts of $2.9 million, $3.2
million and $6.5 million, respectively, which were to be used to fund the
stockholders' tax obligations as a result of the Company's status as an S
corporation. One day prior to the Closing Date, the Company's S corporation
status will be terminated. See "Company Organization."
The Company anticipates that, after payment of the S Corporation
Distribution to stockholders of record as of the S Termination Date, all
earnings of the Company will be retained for the foreseeable future for use in
the operations of the Company's business. Purchasers of shares of Common Stock
in the Offering will not receive any portion of the S Corporation Distribution.
Any future determination as to the payment of dividends will be at the
discretion of the Company's Board of Directors and will depend upon the
Company's results of operations, financial condition, restrictions in the
Company's credit facility and other factors deemed relevant by the Board of
Directors.
18
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company (i) as of
September 30, 1997, (ii) as adjusted as of that date to give effect to the
Initial S Corporation Distribution, termination of the Company's S corporation
status and the recording of an estimated $1.3 million of net deferred tax assets
determined as if the Company's S corporation status had been terminated on
September 30, 1997 and (iii) as further adjusted to reflect the sale of 3.8
million shares of Common Stock by the Company in the Offering at an assumed
initial public offering price of $13.00 per share (the mid-point of the range
set forth on the cover page of this Prospectus), after deducting the estimated
underwriting discount and offering expenses payable by the Company, and the
application of the estimated net proceeds therefrom to pay the Initial S
Corporation Distribution, outstanding borrowings under the credit facilities and
the application of the remainder of the net proceeds as further described under
"Use of Proceeds." The information below should be read in conjunction with the
Company's consolidated financial statements and the related notes thereto, which
are included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1997
-------------------------------------
AS AS FURTHER
ACTUAL ADJUSTED(1) ADJUSTED(1)
--------- ------------- -----------
<S> <C> <C> <C>
(IN THOUSANDS)
Short-term debt:
Current maturities of term loan and revolving line of credit............ $ 22,489 $ 22,489 $ --
Current maturities of capital lease obligations......................... 142 142 142
--------- ------------- -----------
Total short-term debt................................................. $ 22,631 $ 22,631 $ 142
--------- ------------- -----------
--------- ------------- -----------
Distribution payable...................................................... $ -- $ 18,500 $ --
--------- ------------- -----------
--------- ------------- -----------
Long-term debt:
Term loan, net of current maturities.................................... $ 550 $ 550 $ --
Capital lease obligations............................................... 256 256 256
--------- ------------- -----------
Total long-term debt.................................................. 806 806 256
Stockholders' equity:
Preferred Stock, par value $.0001 per share, 5,000,000 shares -- -- --
authorized, none issued and outstanding...............................
Common Stock, par value $.0001 per share, 50,000,000 shares authorized, 1 1 1
4,024,699 shares issued; 4,000,000 shares outstanding, 7,824,699
shares issued and outstanding as further adjusted(2)..................
Additional paid-in capital.............................................. 266 266 45,666
Retained earnings....................................................... 25,930 8,730 8,730
Treasury stock, at cost (24,699 shares)................................. (15) (15) (15)
--------- ------------- -----------
Total stockholders' equity............................................ 26,182 8,982 54,382
--------- ------------- -----------
Total capitalization.................................................. $ 26,988 $ 9,788 $ 54,638
--------- ------------- -----------
--------- ------------- -----------
</TABLE>
- ------------------------------
(1) Adjusted to reflect (i) the liability for the Initial S Corporation
Distribution consisting of all earned but undistributed S corporation
earnings as of September 30, 1997 and (ii) the recording of an estimated
$1.3 million of net deferred tax assets determined as if the Company's S
corporation status had been terminated on September 30, 1997. Further
adjusted to reflect the sale of 3.8 million shares of Common Stock by the
Company assuming an initial public offering price of $13.00 per share and
the application of approximately $41.5 million of the net proceeds to pay
the Initial S Corporation Distribution and outstanding borrowings under its
credit facilities as of September 30, 1997.
(2) Excludes 500,000 shares of Common Stock reserved for issuance pursuant to
awards under the 1997 Omnibus Stock Plan (the "Plan"). See
"Management--Employment Agreements; and --1997 Omnibus Stock Plan."
19
<PAGE>
DILUTION
The net tangible book value of the Company at September 30, 1997 was
approximately $24 million, or $6.09 per share of Common Stock. After giving
effect to the Reorganization and the Initial S Corporation Distribution, as if
the distribution had been recorded as of September 30, 1997 and the Company's S
corporation status had terminated at such date, the as adjusted net tangible
book value of the Company at September 30, 1997 would have been approximately
$5.9 million or $1.47 per share of Common Stock. After giving effect to the sale
by the Company of shares of Common Stock in the Offering at an assumed initial
public offering price of $13.00 per share (the mid-point of the range set forth
on the cover page of this Prospectus) and after deducting the estimated
underwriting discount and offering expenses payable by the Company and the
application of the estimated net proceeds therefrom to pay the Initial S
Corporation Distribution, the as further adjusted net tangible book value of the
Company at September 30, 1997 would have been approximately $51.3 million, or
$6.57 per share. See "Company Organization" and "Use of Proceeds." This
represents an immediate increase in net tangible book value of $5.10 per share
to the Company's existing stockholders and an immediate net tangible book value
dilution of $6.43 per share to investors purchasing shares in the Offering. The
following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Initial public offering price per share (1)................. $ 13.00
Net tangible book value per share at September 30, 1997... $ 6.09
Decrease attributable to pro forma adjustments............ (4.62)
---------
As adjusted net tangible book value per share at
September 30, 1997...................................... 1.47
Increase attributable to new investors in the Offering.... 5.10
---------
Net tangible book value, as further adjusted, per share
after the Offering (2).................................... 6.57
---------
Dilution per share to new investors......................... $ 6.43
---------
---------
</TABLE>
The following table summarizes, on a pro forma basis as of September 30,
1997, the number of shares of Common Stock purchased from the Company, the total
consideration paid and the average consideration paid per share by the existing
stockholders and by the new investors, assuming an initial public offering price
of $13.00 per share but before deducting the underwriting discount and estimated
offering expenses:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
----------------------- -------------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders............................... 4,000,000 51.3% $ 252,113 0.5% $ 0.04
New investors....................................... 3,800,000 48.7 49,400,000 99.5 $ 13.00
---------- ----- ------------- -----
Total............................................. 7,800,000 100.0% $ 49,652,113 100.0%
---------- ----- ------------- -----
---------- ----- ------------- -----
</TABLE>
- ------------------------
(1) Before deducting estimated underwriting discounts and commissions and
estimated expenses of the Offering payable by the Company.
(2) Excludes 500,000 shares of Common Stock reserved for issuance pursuant to
awards under the Plan. See "Management--1997 Omnibus Stock Plan."
20
<PAGE>
SELECTED FINANCIAL DATA
The selected financial data set forth below have been derived from the
consolidated financial statements of the Company and the related notes thereto.
The statement of income data for the years ended December 31, 1994, 1995 and
1996 and the nine months ended September 30, 1996 and 1997 and the balance sheet
data as of December 31, 1995 and 1996 and September 30, 1997 are derived from
the consolidated financial statements of the Company, which have been audited by
BDO Seidman, LLP, independent certified public accountants, and which are
contained elsewhere in this Prospectus. The statement of income data for the
years ended December 31, 1992 and 1993 and the balance sheet data as of December
31, 1992, 1993 and 1994 are derived from the consolidated financial statements
of the Company, which have been audited but are not contained herein. The
results of operations for the nine months ended September 30, 1997 are not
necessarily indicative of the results to be expected for the entire year. The
following selected financial data should be read in conjunction with the
Company's consolidated financial statements and the related notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," which are included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------
1992 1993 1994 1995 1996
------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF INCOME DATA:
Net sales.............................................. $62,232 $72,414 $85,298 $93,271 $118,655
Cost of sales.......................................... 48,051 54,880 62,216 68,530 84,421
------- ------- ------- ------- --------
Gross profit......................................... 14,181 17,534 23,082 24,741 34,234
Selling expenses....................................... 5,874 6,853 7,462 8,927 11,898
License fees........................................... 805 2,182 3,012 3,174 4,817
Distribution and shipping expenses..................... 3,756 4,276 2,046 2,379 2,669
General and administrative expenses.................... 1,847 1,903 5,813 5,787 6,243
Recovery of legal fees................................. -- -- -- -- (718)
------- ------- ------- ------- --------
Operating income..................................... 1,899 2,320 4,749 4,474 9,325
Interest, net.......................................... 997 1,260 1,191 1,247 1,365
Other income (expense) (1)............................. 55 1,215 1,235 (3) 85
Minority interest...................................... -- -- (53) (33) (82)
------- ------- ------- ------- --------
Income before extraordinary item....................... 957 2,275 4,740 3,191 7,963
Extraordinary item (2)................................. 2,227 -- 389 -- --
------- ------- ------- ------- --------
Net income........................................... $ 3,184 $ 2,275 $ 5,129 $ 3,191 $ 7,963
------- ------- ------- ------- --------
------- ------- ------- ------- --------
PRO FORMA STATEMENT OF INCOME DATA:
Income before income taxes............................. 3,184 2,275 5,129 3,191 7,963
Income tax provision (3)............................... 1,236 933 2,103 1,308 3,265
------- ------- ------- ------- --------
Net income........................................... $ 1,948 $ 1,342 $ 3,026 $ 1,883 $ 4,698
------- ------- ------- ------- --------
------- ------- ------- ------- --------
Net income per share (4)............................... $ 0.87
--------
--------
Weighted average common shares outstanding (4)......... 5,423
<CAPTION>
NINE MONTHS ENDED
-----------------------------
SEPTEMBER 30, SEPTEMBER 30,
1996 1997
------------- -------------
<S> <C> <C>
STATEMENT OF INCOME DATA:
Net sales.............................................. $86,680 $127,247
Cost of sales.......................................... 60,188 85,677
------------- -------------
Gross profit......................................... 26,492 41,570
Selling expenses....................................... 8,932 12,154
License fees........................................... 3,478 5,927
Distribution and shipping expenses..................... 1,906 3,223
General and administrative expenses.................... 4,152 5,370
Recovery of legal fees................................. -- (117)
------------- -------------
Operating income..................................... 8,024 15,013
Interest, net.......................................... 995 1,619
Other income (expense) (1)............................. (21) 28
Minority interest...................................... (71) (134)
------------- -------------
Income before extraordinary item....................... 6,937 13,288
Extraordinary item (2)................................. -- --
------------- -------------
Net income........................................... $ 6,937 $ 13,288
------------- -------------
------------- -------------
PRO FORMA STATEMENT OF INCOME DATA:
Income before income taxes............................. 6,937 13,288
Income tax provision (3)............................... 2,844 5,448
------------- -------------
Net income........................................... $ 4,093 $ 7,840
------------- -------------
------------- -------------
Net income per share (4)............................... $ 1.45
-------------
-------------
Weighted average common shares outstanding (4)......... 5,423
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-------------------------------------------
1992 1993 1994 1995 1996
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS)
BALANCE SHEET DATA:
Working capital............................ $ 5,343 $ 6,787 $10,035 $10,807 $16,274
Total assets............................... 24,443 27,201 30,103 31,764 37,257
Distribution payable....................... -- -- -- -- --
Total debt................................. 8,640 9,405 8,798 8,645 7,796
Stockholders' equity....................... 9,924 10,824 14,428 14,645 19,393
<CAPTION>
AS OF SEPTEMBER 30, 1997
------------------------------------------
AS AS FURTHER
ACTUAL ADJUSTED (5) ADJUSTED (5)
------- --------------- ---------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Working capital............................ $22,359 $ 3,524 $48,374
Total assets............................... 63,521 64,486 68,347
Distribution payable....................... -- 18,500 --
Total debt................................. 23,437 23,437 398
Stockholders' equity....................... 26,182 8,982 54,382
</TABLE>
- ------------------------
(1) Includes income from settlement of license disputes of $0.3 million, $1.5
million and $1.2 million in 1992, 1993 and 1994, respectively.
(2) In connection with the early extinguishment of certain debt, the Company
recorded an extraordinary gain of $2.2 million and $0.4 million in 1992 and
1994, respectively.
(3) Reflects historical provision for income taxes in 1992 and pro forma
provision for income taxes as if the Company had been taxed as a C
corporation for the years ended December 31, 1993, 1994, 1995 and 1996 and
the nine months ended September 30, 1996 and 1997, respectively.
(4) Pro forma income per share is based on the weighted average number of shares
of Common Stock outstanding plus the estimated number of shares being sold
by the Company which would be necessary to fund the distribution of earned
and undistributed S corporation earnings totaling approximately $18.5
million as of September 30, 1997.
(5) Adjusted to reflect (i) the liability for the Initial S Corporation
Distribution consisting of all earned but undistributed S corporation
earnings as of September 30, 1997, (ii) the recording of an estimated $1.3
million of net deferred tax assets determined as if the Company's S
corporation status had been terminated on September 30, 1997 and (iii) the
purchase of the minority interest at September 30, 1997 for approximately
$335,000. Further adjusted to reflect the sale of 3.8 million shares of
Common Stock by the Company assuming an initial public offering price of
$13.00 per share and the application of approximately $41.5 million of the
net proceeds to pay the Initial S Corporation Distribution and outstanding
borrowings under its credit facilities as of September 30, 1997.
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH THE
"SELECTED FINANCIAL DATA" AND THE COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS
AND THE RELATED NOTES THERETO, WHICH ARE INCLUDED ELSEWHERE IN THIS PROSPECTUS.
OVERVIEW
During its first 77 years, the Company became one of the leading
manufacturers of pants, trousers and jeans in the United States. The Company was
able to utilize its fabric sourcing and manufacturing expertise to build a well
known franchise in the men's and women's bottoms segment of the apparel
industry. In this period, the Company's marketing efforts were typically driven
by its manufacturing capabilities, and branding was limited to Company-owned
brands and third-party private labels.
In the late 1980's, management made a decision to change the Company's
marketing focus from a manufacturing-driven to a brand-driven strategy. This
fundamental shift within the Company reflected senior management's belief that
the American sportswear market would be dominated by recognized brands with
clearly established images. Management also concluded that increasing market
share would go to those companies that were market-driven and able to service
their customers with diversified manufacturing and sourcing capabilities.
Recognizing its strength in bottoms manufacturing, in 1990 the Company entered
into a license agreement for the exclusive use of the BOSS brand name on men's
denim apparel and on all types of juniors' sportswear for the young women's
market. In 1994, the Company expanded its license agreement to include use of
the BOSS brand name on men's, women's, boys' and youth sportswear in the United
States and Puerto Rico. In 1997, the Company's rights to manufacture and market
BOSS sportswear were further expanded to allow broader product offerings and
significant Company control over styling, advertising and distribution. In the
fall of 1993, the Company entered into license agreements for the use of the
Beverly Hills Polo Club brand name on men's and women's sportswear in the United
States and Puerto Rico. License rights were expanded to include Europe in 1996
and to include men's dress shirts in 1997. See "Business--Licenses and Other
Rights Agreements."
In November 1997, the Company acquired an exclusive license to manufacture
and market certain men's sportswear under the Girbaud brand in the United States
and Puerto Rico. Over the last ten years, the Girbaud brand was manufactured and
marketed in the United States under license by VF Corp. The Girbaud brand is an
internationally recognized designer sportswear label with a distinct European
influence. By targeting men who desire contemporary international fashion, the
Girbaud brand will enable the Company to address another consumer segment within
its branded product portfolio. The Company intends to reposition the Girbaud
line with a broader assortment of products, styles and fabrications reflecting a
contemporary European look. The Company plans to introduce the fall men's
collection in early 1998. The Company anticipates that it will incur
approximately $600,000 in costs related to the implementation of the Girbaud
brand, including, but not limited to, minimum royalty payments, expenditures for
additional office and showroom space and costs related to adding merchandising
and sales personnel. See "Business--Licenses and Other Rights
Agreements--Girbaud License."
The Company also manufactures and markets women's sportswear under its own
"I.C. Isaacs," "Lord Isaacs" and "Pizzazz" brand names and under third-party
private labels. The Company intends to continue to manufacture and market this
sportswear for the foreseeable future. See "Business--Licenses and Other Rights
Agreements."
Over the past three years, the Company has completed its strategic
repositioning from a manufacturing-driven company to a marketing and
brand-driven company. Through a focused strategy of providing fashionable,
branded merchandise at value prices, the Company has emerged as a significant
fashion influence for youthful and contemporary consumers who purchase
sportswear through specialty and department stores. The Company's brand-driven
market strategy is evidenced by the increase of licensed,
22
<PAGE>
branded apparel as a percentage of the Company's net sales. In 1996, the BOSS
and Beverly Hills Polo Club brands comprised 72.6% and 12.0% of net sales,
respectively. Concurrent with this strategy, the Company has also shifted its
product mix from predominately bottoms to a full array of sportswear, including
tops and outerwear. As a result, net sales of the BOSS tops and outerwear lines
have more than doubled since 1994 to approximately $29 million in 1996. The
Company has also expanded its branded lines to include sportswear for boys,
youth and juniors. Historically, the Company has recognized markdowns for
specific unsold inventory in the second and fourth quarters. These specific
markdowns are reflected in cost of sales and the related gross margins at the
conclusion of the appropriate selling season. The following table sets forth,
for the periods indicated, the Company's net sales categorized by brand and
product category:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------- --------------------
<S> <C> <C> <C> <C> <C>
1994 1995 1996 1996 1997
--------- --------- --------- --------- ---------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
MEN'S(1)
BOSS Bottoms................................................... $ 37,724 $ 37,234 $ 44,667 $ 32,360 $ 44,238
BOSS Tops...................................................... 6,709 15,882 29,284 21,014 35,543
BOSS Boys'..................................................... 1,834 3,264 6,736 4,201 10,833
Men's BHPC..................................................... 2,795 5,219 12,226 8,103 19,584
Men's Private Label............................................ 3,227 4,299 500 485 83
--------- --------- --------- --------- ---------
Men's net sales............................................ 52,289 65,898 93,413 66,163 110,281
--------- --------- --------- --------- ---------
WOMEN'S(1)
BOSS Juniors'(2)............................................... 9,528 5,424 5,413 5,263 3,204
Women's BHPC................................................... 1,048 1,833 2,043 1,775 1,128
Women's Other(3)............................................... 22,433 20,116 17,786 13,479 12,634
--------- --------- --------- --------- ---------
Women's net sales.......................................... 33,009 27,373 25,242 20,517 16,966
--------- --------- --------- --------- ---------
Total net sales............................................ $ 85,298 $ 93,271 $ 118,655 $ 86,680 $ 127,247
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
- ------------------------
(1) The net sales totals incorporate product returns allocated in proportion to
gross sales.
(2) Results for the year ended December 31, 1994 include approximately $2.5
million of net sales of tee shirts and sweatshirts with unisex styling that
were discontinued after the Company obtained a license to manufacture and
sell men's BOSS tops in the fourth quarter of 1994. As a result, these
products were recategorized in men's BOSS tops in 1995 and thereafter.
(3) Includes Company-owned brands and third-party private labels.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage
relationship to net sales of certain items in the Company's consolidated
statements of income for the periods shown below:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------------- --------------------
<S> <C> <C> <C> <C> <C>
1994 1995 1996(1) 1996 1997(1)
--------- --------- ----------- --------- ---------
Net sales................................................ 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales............................................ 72.9 73.5 71.1 69.4 67.3
--------- --------- ----- --------- ---------
Gross profit............................................. 27.1 26.5 28.9 30.6 32.7
Selling expenses......................................... 8.8 9.5 10.0 10.3 9.6
License fees............................................. 3.5 3.4 4.1 4.0 4.7
Distribution and shipping expenses....................... 2.4 2.6 2.2 2.2 2.5
General and administrative expenses...................... 6.8 6.2 4.7 4.8 4.1
--------- --------- ----- --------- ---------
Operating income......................................... 5.6% 4.8% 7.9% 9.3% 11.8%
--------- --------- ----- --------- ---------
--------- --------- ----- --------- ---------
</TABLE>
- ------------------------
(1) General and administrative expenses have been reduced to reflect the receipt
in 1996 and 1997 of approximately $0.7 million and $0.1 million,
respectively, related to an agreement with the Company's insurance carrier
to reimburse it for legal fees associated with litigation billed in prior
years.
23
<PAGE>
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1996
NET SALES. Net sales increased 46.7% to $127.2 million in the nine months
ended September 30, 1997 from $86.7 million in the nine months ended September
30, 1996. Substantially all of this increase was due to higher volume shipments
of BOSS and Beverly Hills Polo Club sportswear. Net sales of BOSS sportswear
increased $31.0 million or 49.4% to $93.8 million primarily driven by strong
growth in the men's tops, boys' and youth segments and continued strength of the
jeans segment. Net sales of the BOSS tops segment were $35.5 million in the nine
months ended September 30, 1997 versus $21.0 million in the nine months ended
September 30, 1996. Net sales of Beverly Hills Polo Club sportswear increased
$10.8 million or 109.1% to $20.7 million over the same period, primarily driven
by strong growth in the men's business. International sales were insignificant
in the nine months ended September 30, 1997.
GROSS PROFIT. Gross profit increased 57.0% to $41.6 million in the nine
months ended September 30, 1997 from $26.5 million in the nine months ended
September 30, 1996. Gross profit as a percentage of net sales increased to 32.7%
from 30.6% over the same period. The increase in gross profit was due in part to
the expansion of the BOSS tops product line, which typically carries a higher
gross margin than the bottoms product line. In addition, the tops line had
improved gross margins due to reduced costs on imported tops resulting from
volume purchase discounts. Also, the continued shift of production of denim
bottoms from the United States to Mexico and the accompanying decrease in labor
and overhead costs contributed to the improved gross margin. The Company's
improved gross margin was also a result of increased sales of products at full
margin, particularly in the first quarter, offset somewhat by markdowns taken in
the second quarter related to unsold spring and summer goods.
SELLING, DISTRIBUTION, GENERAL AND ADMINISTRATIVE EXPENSES. Selling,
distribution, general and administrative ("SG&A") expenses increased 44.3% to
$26.7 million in the nine months ended September 30, 1997 from $18.5 million in
the nine months ended September 30, 1996. As a percentage of net sales, SG&A
expenses decreased to 20.9% from 21.3% over the same period. This improvement
reflects overall declines in SG&A expenses resulting from cost containment
efforts in certain expense areas and expense leverage associated with the
Company's growth. Selling expenses increased $3.3 million to $12.2 million over
the same period as a result of higher commissions to the Company's salespersons
and higher advertising expenditures which increased $0.5 million to $2.4 million
as the Company continued to focus on enhancing the identity and image of its
brands through increased media exposure. Distribution and shipping expenses
increased $1.3 million to $3.2 million due to higher unit shipments and
increased overtime costs. The Company opted to incur additional overtime wages
rather than adding personnel to process the increase in unit shipments. General
and administrative expenses increased $1.1 million to $5.3 million due to salary
increases for existing employees and salaries and costs associated with the
hiring of new management and administrative personnel.
LICENSE FEES. License fees increased $2.4 million to $5.9 million in the
nine months ended September 30, 1997 from $3.5 million in the nine months ended
September 30, 1996. As a percentage of net sales, license fees increased to 4.7%
from 4.0%. This increase was due to greater sales growth of non-denim branded
products, which have higher royalty rates than other branded products. The
Company believes that its license fees will increase as the percentage of net
sales of branded products increases.
OPERATING INCOME. Operating income increased 87.5% to $15.0 million or
11.8% of net sales in the nine months ended September 30, 1997, from $8.0
million or 9.3% of net sales in the nine months ended September 30, 1996. This
increase resulted primarily from the increase in net sales and gross profit
margins.
INTEREST EXPENSE. Interest expense increased $0.6 million to $1.6 million
in the nine months ended September 30, 1997 due to an increase in working
capital borrowing requirements. In the nine months ended September 30, 1997, the
average debt balance was $17.9 million, with an average effective interest rate
of 9.5%. In the nine months ended September 30, 1996, the average debt balance
was $9.1 million with an average effective interest rate of 9.25%.
24
<PAGE>
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
NET SALES. Net sales increased 27.2% to $118.7 million in 1996 from $93.3
million in 1995. Substantially all of the increase in net sales was due to
greater unit volume shipments of both the BOSS and Beverly Hills Polo Club
sportswear lines. Net sales of BOSS sportswear increased 39.3% to $86.1 million
in 1996 from $61.8 million in 1995. The volume increase in BOSS sportswear was
primarily driven by strong growth in the tops segment, continued strength of the
jeans segment and, to a lesser extent, growth in the boys' and youth segments.
Net sales of BOSS tops and outerwear nearly doubled from $15.9 million in 1995
to $29.3 million in 1996, as a result of the Company's continued product
expansion and increased consumer acceptance and demand. The BOSS bottoms segment
also showed strong growth, as net sales increased 20.2% in 1996 to $44.7
million. Net sales of Beverly Hills Polo Club sportswear increased 101.4% to
$14.3 million during the same period primarily driven by strong growth in the
men's segment. This success was due in part to increased acceptance of the
product after its first full year of sales and the ongoing reconfiguration of
the Company's Beverly Hills Polo Club sales force to more effectively market to
specialty store customers. These increases in net sales were partially offset by
a decline in sales of the Company's men's private label collection and women's
Company-owned and private label collections as the Company continued to place
more emphasis on branded labels. The Company discontinued the men's private
label collection in 1996 due to unsatisfactory gross margins relative to BOSS
and Beverly Hills Polo Club sportswear. The Company did not incur any material
costs in connection with the discontinuation. International sales were
insignificant in 1996.
GROSS PROFIT. Gross profit increased 38.5% to $34.2 million in 1996 from
$24.7 million in 1995. Gross profit as a percentage of net sales increased to
28.9% in 1996 from 26.5% in 1995. The increase in gross margin was primarily due
to the expansion of the BOSS tops product line as a percentage of total net
sales. The tops line had a higher gross margin due to reduced costs on imported
tops resulting from volume purchase discounts. Also, the continued shift of
production of denim bottoms from the United States to Mexico and accompanying
decrease in labor and overhead costs contributed to the improved gross margin.
SELLING, DISTRIBUTION, GENERAL AND ADMINISTRATIVE EXPENSES. SG&A expenses
increased 22.7% to $24.9 million in 1996 from $20.3 million in 1995. As a
percentage of net sales, SG&A expenses decreased to 21.1% in 1996 from 21.8% in
1995. This improvement reflects overall declines in SG&A expenses resulting from
cost containment efforts in certain expense areas and expense leverage
associated with the Company's growth. Selling expense increased $3.0 million to
$11.9 million over the same period, as a result of higher commissions to the
Company's salespersons and higher advertising expenditures which increased $1.0
million to $2.5 million as the Company initiated an advertising campaign to
promote the BOSS brand. Distribution and shipping expenses increased $0.3
million to $2.7 million due to higher unit shipments and overtime wages for
employees at the Company's distribution center. The Company opted to incur
additional overtime wages rather than adding personnel to process the increase
in unit shipments. General and administrative expenses increased $0.4 million to
$6.2 million during the same period primarily due to higher data processing
expenses.
LICENSE FEES. License fees increased $1.6 million to $4.8 million in 1996
from $3.2 million in 1995. As a percentage of net sales, license fees increased
to 4.1% from 3.4%. License fees increased at a rate in excess of the growth in
net sales due to the increase in sales of non-denim branded products.
OPERATING INCOME. Operating income increased 106.7% to $9.3 million or 7.9%
of net sales in 1996, from $4.5 million or 4.8% of net sales in 1995. This
increase primarily resulted from the increase in net sales and gross profit
margins as well as the receipt of approximately $0.7 million related to an
agreement with the Company's insurance carrier to reimburse it for legal fees
associated with litigation billed in prior years.
INTEREST EXPENSE. Interest expense increased to $1.4 million from $1.2
million in 1996 due to an increase in working capital borrowing requirements
which was partially offset by a reduction in borrowing costs. For 1996, the
average outstanding short-term debt balance was $9.8 million, with an average
effective interest rate of 9.25%. For 1995, the average balance was $8.5
million, with an average effective interest rate of 9.88%.
25
<PAGE>
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
NET SALES. Net sales increased 9.4% to $93.3 million in 1995 from $85.3
million in 1994. Substantially all of this increase was due to greater unit
shipments of BOSS sportswear which was due to greater penetration of the
specialty store channel and initial shipments to a major department store chain.
Net sales of BOSS sportswear increased $6.0 million or 10.8% to $61.8 million in
1995 primarily due to the expansion of the tops product line. The overall
increase in net sales was partially offset by weaker sales of colored denim
shorts. Net sales of Beverly Hills Polo Club sportswear increased $3.3 million
or 86.8% to $7.1 million over the same period as it continued to grow from its
initial introduction by the Company in the first quarter of 1994. There were no
international sales in 1995 or 1994.
GROSS PROFIT. Gross profit increased 6.9% to $24.7 million in 1995 from
$23.1 million in 1994. However, gross profit as a percentage of net sales
decreased to 26.5% from 27.1% over the same period. The decrease in gross profit
as a percentage of net sales resulted from weaker sales of higher gross margin
colored denim shorts combined with stronger sales of the Company's lower gross
margin private label products.
SELLING, DISTRIBUTION, GENERAL AND ADMINISTRATIVE EXPENSES. SG&A expenses
increased 10.9% to $20.3 million in 1995 from $18.3 million in 1994. As a
percentage of net sales, SG&A expenses increased to 21.8% from 21.5% in 1994 as
the Company increased investment in organizational structure and personnel to
support growth and expanded advertising. Selling expenses increased $1.4 million
to $8.9 million during the same period primarily due to a $1.1 million increase
in advertising expenditures. Total advertising expenditures more than tripled to
$1.5 million as the Company significantly expanded its campaign to increase
awareness of the BOSS brand. Also, commission expenses to the Company's
salespersons rose as sales of BOSS and Beverly Hills Polo Club sportswear
continued to increase as a percentage of total net sales. Distribution and
shipping expenses increased $0.4 million to $2.4 million over the same period as
a result of increased unit shipments and overtime wages for employees at the
Company's distribution center. General and administrative expenses were
essentially unchanged from the $5.8 million experienced in 1994 as the Company
contained personnel costs.
LICENSE FEES. License fees increased $0.2 million to $3.2 million in 1995
from $3.0 million in 1994. This increase was attributable to increases in sales
of BOSS sportswear.
OPERATING INCOME. Operating income decreased 4.3% to $4.5 million or 4.8%
of net sales in 1995, from $4.7 million or 5.6% of net sales in 1994. This
decrease primarily resulted from lower gross margins coupled with higher SG&A
expenses.
INTEREST EXPENSE. Interest expense increased minimally to $1.3 million in
1995 primarily due to an increase in average outstanding borrowings. For 1995,
the average outstanding short-term debt balance was $8.5 million, with an
average effective interest rate of 9.88%. For 1994, the average balance was $6.6
million, with an average effective interest rate of 9.72%.
OTHER INCOME (EXPENSE). There was no significant other income in 1995 as
compared to other income of $1.2 million in 1994. In 1994, the Company received
approximately $1.2 million as the final payment related to the settlement of a
license dispute with a third party.
EXTRAORDINARY ITEM. The Company recognized an extraordinary gain of $0.4
million in 1994 related to early extinguishment of senior subordinated debt due
a former partner. There was no comparable item in 1995.
26
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company has relied primarily on internally generated funds, trade credit
and asset-based borrowings to finance its operations and expansion. The
Company's capital requirements primarily result from working capital needed for
inventory and accounts receivable.
OPERATING CASH FLOW
Cash used by operations totaled $9.5 million for the nine months ended
September 30, 1997 due to a significant increase in accounts receivable and
inventory which resulted from higher sales of BOSS and Beverly Hills Polo Club
sportswear. This was partially offset by higher levels of accounts payable and
improved operating results. Cash used for investing activities totaled $0.8
million for the nine months ended September 30, 1997 and was used primarily for
the purchase of machinery for the Company's factories. Cash provided by
financing activities totaled $10.8 million for the nine months ended September
30, 1997. The Company borrowed $9.5 million under its credit facilities
primarily to finance the growth in accounts receivable and inventory and
borrowed $6.5 million to fund distributions to its stockholders for the payment
of federal and state income taxes.
Accounts receivable and inventories increased $16.3 million and $8.4
million, respectively, from December 31, 1996 to September 30, 1997 due to
higher sales of BOSS and Beverly Hills Polo Club sportswear and higher levels of
finished goods. The increase in accounts receivable was greater than the
increase in sales due to lower than expected cash collections beginning in May
and continuing through September 30, 1997. Also, the increase in the finished
goods inventories was greater than the increase in sales due to growth in
imported merchandise for which the Company pays via letters of credit prior to
delivery in the United States. The Company manages its inventory levels by
scheduling production and purchases of imported inventory to meet firm purchase
orders. There was a $2.1 million increase in the overdraft directly related to
the higher inventory levels necessary to support anticipated sales growth in
early 1997 and a $16.0 million increase in outstanding borrowings under the
Company's revolving line of credit from December 31, 1996 to September 30, 1997.
Capital expenditures were $0.8 million for the nine months ended September
30, 1997 and $0.7 million in both 1996 and 1995. The Company's capital
expenditures were comprised primarily of purchases of computer equipment and
sewing machinery for its domestic factories. The Company anticipates that
capital expenditures will be approximately $6.0 to $7.0 million in 1998,
primarily related to the construction of a new 150,000 square foot distribution
center in Milford, Delaware to be financed through a mortgage loan. The Company
does not currently have commitments for any other material capital expenditures
in 1998. A significant portion of the Company's fixed assets are located at its
manufacturing facilities in Mississippi. Although the Company has no current
plans to dispose of these manufacturing facilities, it does not plan to upgrade
the manufacturing facilities as they become obsolete, but rather intends to
transfer the production capacity to domestic and foreign independent
contractors. The Company has made no provision in its financial statements in
connection with these plans.
As of September 30, 1997, the Company had outstanding borrowings under its
revolving line of credit and term loan facility of $23.0 million compared to
$7.2 million as of December 31, 1996. The higher borrowing level was necessary
to support the growth in accounts receivable and inventory experienced in the
first nine months of 1997.
Because of the Company's treatment as an S corporation for federal and state
income tax purposes, the Company has provided funds to its stockholders for the
payment of income taxes on the earnings of the Company. Accordingly, the Company
made cash distributions to its stockholders in the amounts of $2.9 million, $3.2
million and $6.5 million in 1995, 1996 and thus far in 1997, respectively. Prior
to the Closing Date, the Company will declare the S Corporation Distribution.
The amount of the Initial S Corporation Distribution will be approximately $18.5
million, which represents all earned but undistributed S corporation earnings of
the Company as of September 30, 1997. The amount of the Subsequent S Corporation
27
<PAGE>
Distribution is estimated to be approximately $0.9 million, which will represent
all earned but undistributed S corporation earnings of the Company for the
period beginning on October 1, 1997 and ending on the S Termination Date. On and
after the S Termination Date, the Company will no longer be treated as an S
corporation. After completion of the Offering, the Company's immediate cash flow
needs will not reflect any dividend distributions to the Company's stockholders
for payment of income taxes on the earnings of the Company. However, the Company
will assume responsibility for payment of federal and state income taxes, which
will partially offset the Company's former cash commitment to provide its
stockholders with funds for the payment of income taxes.
CREDIT FACILITIES
The Company has an asset-based revolving line of credit with Congress
Financial Corporation that allows it to borrow up to $30.0 million based on a
percentage of eligible accounts receivable and inventory. Outstanding borrowings
at December 31, 1995, December 31, 1996 and September 30, 1997 were $7.2
million, $6.3 million and $22.3 million, respectively. Borrowings under the
revolving line of credit bear interest at the lender's prime rate plus 1.0%.
Also, the Company has a term loan facility with the lender, which allows it to
continually borrow up to $1.0 million. Outstanding borrowings under the term
loan were $0.3 million, $0.9 million and $0.7 million at December 31, 1995,
December 31, 1996 and September 30, 1997, respectively. The Company will use a
portion of the net proceeds of the Offering to repay the amounts outstanding
under these credit facilities. See "Use of Proceeds." The Company intends to
enter into a new credit facility after consummation of the Offering, which will
replace the existing revolving line of credit and term loan facilities. The
Company does not expect to incur material costs in connection with entering into
a new credit facility.
In November 1997, the Company borrowed $11.25 million from Ambra to finance
the acquisition of certain BOSS trademark rights. This obligation is evidenced
by a secured limited recourse promissory note which matures on December 31, 2007
(the "Note"). The Note bears interest at 10.0% per annum, payable quarterly;
principal is payable in full upon maturity of the Note, which is collateralized
by the Domestic BOSS Trademark Rights. See "Business--Licenses and Other Rights
Agreements."
The Company extends credit to its customers. Accordingly, the Company may
have significant risk in collecting accounts receivable from its customers. The
Company has credit policies and procedures which it uses to minimize its
exposure to credit losses. The Company's collection personnel regularly contact
customers with receivable balances outstanding beyond 30 days to expedite
collection. If these collection efforts are unsuccessful, the Company may
discontinue merchandise shipments until the outstanding balance is paid.
Ultimately, the Company may engage an outside collection organization to collect
past due accounts. The timely contact with customers by collection personnel has
been effective in reducing credit losses to an immaterial amount. In 1994, 1995
and 1996, the Company's credit losses were $0.4 million, $0.4 million and $0.9
million, respectively. In each of these years, the Company's actual credit
losses as a percentage of net sales has been less than three-quarters of one
percent. See "Business--Credit Control."
The Company believes that the net proceeds of the Offering, together with
cash from operations and its existing credit facilities, will be sufficient to
meet its capital requirements for the next 12 months.
PRO FORMA ADJUSTMENTS FOR INCOME TAXES
Prior to the Reorganization, the Company's earnings were not subject to
federal, state and local income taxes. In connection with the Reorganization,
the Company's earnings will become subject to such taxes. In addition, as a
result of the Reorganization, the Company will record a net deferred tax asset
and a corresponding tax benefit in its statement of income in accordance with
the provisions of Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes." If the Offering occurred on September 30, 1997,
the deferred tax asset and corresponding tax benefit would have been
approximately $1.3 million. The Company's pro forma effective tax rate, which
excludes the non-recurring tax benefit
28
<PAGE>
discussed above, for the years ended December 31, 1994, 1995 and 1996 and for
the nine months ended September 30, 1996 and September 30, 1997 was 41.0%. The
effect of taxes is not discussed herein because the historic taxation of the
earnings of the Company is not meaningful with respect to periods after the
Reorganization.
SELECTED QUARTERLY RESULTS
The Company's business is impacted by the general seasonal trends that are
characteristic of the apparel and retail industries. In the Company's segment of
the apparel industry, sales are generally higher in the first and third
quarters. However, the Company's strong growth in 1996 minimized this seasonal
effect. Historically, the Company has taken greater markdowns in the second and
fourth quarters. As the timing of the shipment of products may vary from year to
year, the results for any particular quarter may not be indicative of results
for the full year. The Company has not had significant overhead and other costs
generally associated with large seasonal variations. See "Risk
Factors--Seasonality and Quarterly Fluctuations."
The following table sets forth certain unaudited quarterly financial
information for the periods shown:
<TABLE>
<CAPTION>
QUARTER ENDED
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30,
1996 1996 1996 1996 1997 1997 1997
----------- ----------- ------------- ------------- ----------- ----------- -------------
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales............. $ 25,902 $ 25,997 $ 34,781 $ 31,975 $ 39,312 $ 38,398 $ 49,537
Gross profit.......... 7,839 7,837 10,817 7,741 13,313 12,376 15,881
GROSS PROFIT MARGIN... 30.3% 30.1% 31.1% 24.2% 33.9% 32.2% 32.1%
Operating income...... $ 2,089 $ 1,567 $ 4,367 $ 1,302 $ 4,854 $ 3,968 $ 6,191
OPERATING MARGIN...... 8.1% 6.0% 12.6% 4.1% 12.3% 10.3% 12.5%
</TABLE>
INFLATION
The Company does not believe that the relatively moderate rates of inflation
experienced in the United States over the last three years have had a
significant effect on its net sales or profitability. Although higher rates of
inflation have been experienced in a number of foreign countries in which the
Company's products are manufactured, the Company does not believe that they have
had a material effect on the Company's net sales or profitability.
IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation ("SFAS 123"). SFAS 123 will begin to affect the Company in 1997
with the establishment of the 1997 Omnibus Stock Plan. See "Management-- 1997
Omnibus Stock Plan." The Company will adopt only the disclosure provisions of
SFAS 123 and account for stock-based compensation using the intrinsic value
method set forth in APB Opinion 25.
In March 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, Earnings Per Share ("SFAS 128"). SFAS
128 provides a different method of calculating earnings per share than is
currently used in APB Opinion 15. SFAS 128 provides for the calculation of basic
and diluted earnings per share. Basic earnings per share includes no dilution
and is computed by dividing income available to common stockholders by the
weighted average number of common shares outstanding for the period. Diluted
earnings per share reflects the potential dilution of securities that could
share in the earnings of an entity, similar to existing fully diluted earnings
per share. As required by the policies of the Securities and Exchange Commission
(the "Commission"), the Company has treated the shares being sold to fund the S
Corporation Distribution as outstanding prior to the Offering. SFAS 128 does not
have a provision requiring such treatment. The Commission is currently
evaluating its policies concerning this issue. Assuming shares issued to fund
the S Corporation Distribution continue to be
29
<PAGE>
treated as outstanding prior to the Offering, the Company believes adopting SFAS
128 will not have a material effect on its calculation of earnings per share.
The Company will adopt the provisions for computing earnings per share set forth
in SFAS 128 in December 1997.
Statement of Financial Accounting Standards No. 129, Disclosure of
Information about Capital Structure ("SFAS 129"), effective for periods ending
after December 15, 1997, establishes standards for disclosing information about
an entity's capital structure. SFAS 129 requires disclosure of the pertinent
rights and privileges of various securities outstanding (stock, options,
warrants, preferred stock, debt and participation rights) including dividend and
liquidation preferences, participant rights, call prices and dates, conversion
or exercise prices and redemption requirements. Adoption of SFAS 129 will have
no effect on the Company because it currently discloses the information
specified.
In June 1997, the Financial Accounting Standards Board issued two new
disclosure standards. The Company's results of operations and financial position
will be unaffected by implementation of these new standards.
Statement of Financial Accounting Standards No. 130, Reporting Comprehensive
Income ("SFAS 130"), establishes standards for reporting and display of
comprehensive income, its components and accumulated balances. Comprehensive
income is defined to include all changes in equity except those resulting from
investments by owners and distributions to owners. Among other disclosures, SFAS
130 requires that all items that are required to be recognized under current
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements.
Statement of Financial Accounting Standards No. 131, Disclosure about
Segments of a Business Enterprise ("SFAS 131"), establishes standards for the
way that public enterprises report information about operating segments in
annual financial statements and requires reporting of selected information about
operating segments in interim financial statements issued to the public. It also
establishes standards for disclosures regarding products and services,
geographic areas and major customers. SFAS 131 defines operating segments as
components of an enterprise about which separate financial information is
available and that is evaluated regularly by the chief operating decision maker
in deciding how to allocate resources and in assessing performance.
Both SFAS 130 and SFAS 131 are effective for financial statements for
periods beginning after December 15, 1997 and require comparative information
for earlier years to be restated. Due to the recent issuance of these standards,
management has been unable to fully evaluate the impact, if any, they may have
on future financial statement disclosures.
30
<PAGE>
BUSINESS
INTRODUCTION
I.C. Isaacs & Company, Inc. is a rapidly growing designer, manufacturer and
marketer of branded sportswear. Founded in 1913, the Company has assembled a
portfolio of brands that addresses distinct fashion segments resulting in a
diverse customer base. The Company offers full lines of sportswear for young
men, women and boys under the BOSS brand in the United States and Puerto Rico
and sportswear for men and women under the Beverly Hills Polo Club brand in the
United States, Puerto Rico and Europe. Beginning in 1998, the Company will also
offer a collection of men's sportswear under the Girbaud brand in the United
States and Puerto Rico. Through a focused strategy of providing fashionable,
branded merchandise at value prices, the Company has emerged as a significant
fashion source for youthful and contemporary consumers who purchase sportswear
and outerwear through specialty and department stores. The Company also offers
women's sportswear under various other Company-owned brand names as well as
under third-party private labels. Net sales of the Company grew from $85.3
million in 1994 to $118.7 million in 1996, and operating income grew from $4.7
million in 1994 to $9.3 million in 1996. In the first nine months of 1997, net
sales and operating income totaled $127.2 million and $15.0 million,
respectively, as compared to $86.7 million and $8.0 million, respectively, in
the first nine months of 1996.
The Company manufactures and markets certain sportswear under the BOSS brand
for sale at specified price points in the United States and Puerto Rico subject
to a concurrent use agreement. The Company has positioned the BOSS line to
appeal to consumers who desire a fresh, urban, fashion-forward look. Through
creative and innovative marketing, the Company has created powerful brand appeal
for the BOSS line and has become an active influence in young men's fashion. The
BOSS collection has been expanded from an initial line of denim products to a
full array of sportswear consisting of jeans, tee shirts, sweatshirts, shorts,
knit and woven shirts and outerwear, many of which are characterized by
innovative design, creative graphics and bold uses of color. The Company also
markets a juniors' sportswear line under the BOSS brand for young women, which
includes a full selection of denim products and active sportswear. The Company's
net sales of BOSS sportswear increased at an annual growth rate of 37.1% in
1994, 10.8% in 1995 and 39.3% in 1996. In 1996, net sales of BOSS sportswear
accounted for 72.6% of the Company's net sales.
The Company manufactures and markets certain sportswear under the Beverly
Hills Polo Club brand in the United States, Puerto Rico and Europe under an
exclusive license. The Company targets men and women who desire updated
traditional sportswear at competitive prices. To reach a broader demographic
customer base, the Beverly Hills Polo Club collection combines contemporary
design details and innovative fabrics with classic American sportswear styling.
The Beverly Hills Polo Club collection consists primarily of cotton clothing,
including jeans, pants, shorts, knit and woven shirts and outerwear targeting
the active, image-conscious consumer. The Company's Beverly Hills Polo Club line
was introduced in the spring of 1994. The Company's net sales of Beverly Hills
Polo Club sportswear increased at an annual growth rate of 83.5% in 1995 and
102.3% in 1996. In 1996, net sales of Beverly Hills Polo Club sportswear
accounted for 12.0% of the Company's net sales.
In November 1997, the Company acquired an exclusive license to manufacture
and market certain men's sportswear under the Girbaud brand in the United States
and Puerto Rico. The Girbaud brand is an internationally recognized designer
sportswear label with a distinct European influence. By targeting men who desire
contemporary, international fashion, the Girbaud brand will enable the Company
to address another consumer segment within its branded product portfolio. The
Company intends to reposition the Girbaud line with a broader assortment of
products, styles and fabrications reflecting a contemporary European look. The
Company plans to introduce the fall men's collection in early 1998.
The Company also manufactures and markets women's sportswear under its own
"I.C. Isaacs," "Lord Isaacs" and "Pizzazz" brand names and under third-party
private labels. The Company intends to continue to manufacture and market this
sportswear for the foreseeable future.
31
<PAGE>
COMPETITIVE STRENGTHS
In the late 1980's, management made a decision to change the Company's
marketing focus from a manufacturing-driven to a brand-driven strategy. As a
result, the Company believes it has developed distinct competitive strengths
which position it for continued success. The Company's key competitive strengths
include:
EMPHASIS ON BRAND IDENTITY. The Company believes that brand identity, as
well as the image and lifestyle that a brand conveys, are important factors that
influence retail purchasing decisions. The Company believes that the BOSS and
Beverly Hills Polo Club brands have developed strong name recognition and
consumer appeal. The Company has consistently positioned the BOSS line to be a
fashion-forward brand with an urban attitude. The word "boss" conveys images of
power and authority and is commonly used by today's youth as an expression of
excellence. Similarly, the Company believes that the Beverly Hills Polo Club
brand name, together with the accompanying distinctive horse and rider logo,
connotes a "classic American" upscale image with which retail consumers easily
identify. In addition, Girbaud is an internationally recognized designer brand
and will be positioned to appeal to contemporary consumers who desire high
quality, European-influenced fashion. The combination of these brands enables
the Company to offer a broad continuum of designs and products that are
well-recognized by fashion-conscious consumers.
COMBINATION OF FASHION AND VALUE. The Company is able to provide consumers
with fashionable brand name sportswear at affordable prices. The BOSS and
Beverly Hills Polo Club product lines both consistently provide exciting,
fashion-forward products using fresh colors, striking graphic designs, unique
fabrics, unusual trimmings and elaborate embroidery. The Company offers a wide
array of traditional products such as jeans, tee shirts, polo shirts and
sweatshirts that are updated with creative design details and innovative
fabrics. The Company's manufacturing, sourcing and merchandising expertise
enables it to provide its customers with fashion, image-oriented products at
value prices. As a result, BOSS and Beverly Hills Polo Club products typically
sell at retail prices below those of many well known designer brands. The
Company anticipates that its Girbaud line of products will sell at retail prices
below those of many other internationally recognized designer brands.
CREATIVE AND INNOVATIVE MARKETING. The Company has built strong name
recognition and brand image for its BOSS and Beverly Hills Polo Club products
through a coordinated merchandising, advertising and promotion strategy. Since
the Company has not had the resources to commit to a major mass media campaign,
it has relied on innovation and creativity to reach its target customers who are
image conscious and influenced by fashion, music and sports. In advertising its
products, the Company uses magazines such as VIBE, SOURCE, SLAM, GQ and POV,
television shows and networks including Turner Network Television (TNT), Black
Entertainment Television (BET), MTV: Music Television, Univision, Telemundo and
various amateur and professional sporting events. The Company is also a sponsor
of the Chicago Bulls, New York Knicks, New Jersey Nets, Atlanta Hawks, Detroit
Pistons and Los Angeles Clippers professional basketball teams and promotes the
image of its BOSS and Beverly Hills Polo Club products by providing celebrities
with its branded clothing and featuring its products in television programs and
movies. The Company influences the presentation of those brands and products at
the retail level by providing in-store signage, video advertisements and the
"Shop-in-Shop" concept. The "Shop-in-Shop" concept involves the retailer
grouping of the Company's products by a retailer in one designated area and
complementing the presentation of the Company's products with signage and
fixturing to enhance the visibility of the brand. The Company intends to market
its Girbaud line of products following a similar strategy.
FLEXIBLE MANUFACTURING AND SOURCING. The Company believes that its ability
to source products from its United States facilities and third party foreign and
domestic manufacturers provides it with significant manufacturing flexibility.
The Company owns and operates three manufacturing facilities in the United
States for the production of bottoms. In addition, the Company contracts for the
manufacture of its products through third party foreign and domestic
manufacturers. Currently, the Company utilizes approximately 50 factories in
more than 10 countries including China, Hong Kong, Korea, Mexico, the
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Philippines, Taiwan, Thailand and the United States. See "--Manufacturing and
Product Sourcing." The Company achieves rapid delivery capability by producing
jeans in its own manufacturing facilities and tee shirts at domestic
contractors. In addition, the Company gains a significant cost advantage by
utilizing factories in Mexico and Asia for the manufacture of innovative and
labor intensive products that typically cannot be produced competitively in the
United States. The Company does not have long-term contracts with any
manufacturers, and most of the Company's manufacturers supply the Company on a
non-exclusive basis pursuant to purchase orders. This combination of
manufacturing and sourcing capabilities enhances the Company's production
flexibility and capacity while effectively enabling it to control the timing,
quality and pricing of its products.
GROWTH STRATEGY
The Company's growth strategy includes continued capitalization on its
competitive strengths and the implementation of specific strategies for
continued expansion. The Company's principal growth strategies are as follows:
BROADEN PRODUCT OFFERINGS. The Company believes it can effectively broaden
its product offerings through the expansion of products offered under existing
brands as well as the possible addition of new brands. As the BOSS brand has
developed, the Company has shifted its product mix from predominantly bottoms to
a broader collection of sportswear, driven by tops and outerwear. This evolution
is consistent with many sportswear companies, which generally sell several tops
for each pair of bottoms. Currently, the Company sells approximately the same
number of units of tops as bottoms, but the Company believes this ratio will
increase to three to four tops for each pair of bottoms sold. The continued
evolution of the product mix provides significant growth opportunities for the
Company's tops segment. The Company is growing its BOSS line by adding new
product categories, such as polo shirts and swimwear, broadening its outerwear
collection and expanding its boys', juniors' and youth lines. Similarly, the
Beverly Hills Polo Club brand includes a number of product lines that are in the
early stages of market penetration, such as outerwear, and a number of potential
product line expansions, such as men's dress shirts. To further develop the
Beverly Hills Polo Club brand, product offerings within the Beverly Hills Polo
Club women's line are also being expanded, and the Company is reorganizing and
increasing its women's sales force. The recent addition of the Girbaud brand
adds a European-influenced designer sportswear brand to the Company's sportswear
lines. The Company intends to offer a full array of men's bottoms, knit and
woven tops and outerwear under the Girbaud brand.
ENHANCE MARKETING PROGRAMS. While the Company believes that its current
marketing strategy is one of its primary competitive strengths, it intends to
continue its efforts to increase net sales by enhancing consumer recognition of
its brand names and images through expanded marketing efforts. The BOSS brand is
currently advertised through a variety of media, including television and print,
while the Beverly Hills Polo Club brand is primarily advertised through print
media. As the Company continues to grow, it plans to use its increased financial
resources to further support and expand the brand exposure for BOSS, Beverly
Hills Polo Club and Girbaud through increased television and print advertising,
and various forms of outdoor advertising such as billboards and signage on buses
and at bus stops. To further differentiate its products at the retail level, the
Company also plans to expand its point-of-sale advertising. Specifically, the
Company intends to build upon its existing programs to provide signage and
posters and to expand its presence in the stores by providing additional
permanently identified free-standing fixtures and presentation services. The
Company also plans to enhance the visibility of its products at the retail level
through the "Shop-in-Shop" concept. The Company believes an expanded
"Shop-in-Shop" program will further stimulate retailers to make longer term
commitments to the Company's products and will encourage each store to carry a
broader array of the Company's products each season.
EXPAND CHANNELS OF DISTRIBUTION. As demand for its sportswear increases,
the Company believes that it can continue to expand and penetrate various
channels of distribution, primarily the department store channel. In recent
years, the Company has expanded its distribution channels beyond the specialty
stores
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and specialty store chains with its BOSS label to begin significant distribution
to department store customers. As a result, J.C. Penney Company, Inc. was the
Company's largest customer in 1996. Under the BOSS brand, the Company is also
selling to other major department stores including The May Department Stores
Company, Federated Department Stores, Inc. and Dayton Hudson Corporation.
Further penetration of these accounts with the BOSS product line is a primary
focus of the Company, and the recently introduced "Shop-in-Shop" concept should
help facilitate this department store expansion. The Beverly Hills Polo Club
brand has not penetrated the department store channel to the same extent as the
BOSS brand, and the expanded distribution of Beverly Hills Polo Club products in
department stores is a primary growth focus of the Company. The Company intends
to market the Girbaud line to specialty stores, specialty store chains and
department stores. In addition, the Company will continue to increase the number
of products distributed to specialty stores and specialty store chains. The
Company already sells to over 4,000 specialty stores and specialty store chains
and believes that this broad cross-section of active accounts distinguishes it
from many of its competitors. Utilizing its 44 sales representatives and
in-house credit department, the Company plans to expand the product categories
that it sells to the specialty store channel of distribution.
INCREASE EUROPEAN PRESENCE FOR BEVERLY HILLS POLO CLUB. The Company
believes that it is well positioned to capitalize on the acceptance of the
Beverly Hills Polo Club brand name by continuing to expand its European
sportswear distribution. The classic American sportswear look conveyed by the
Beverly Hills Polo Club line is popular with European youth, due in part to the
proliferation of American entertainment, including music, movies, television
programs and professional sports. The Company is expanding its wholesale and
retail channels of distribution in Europe to meet this increasing demand. While
the Company has only recently entered the European market in the fourth quarter
of 1996, it currently has distributors in Belgium, France, Greece, Italy,
Luxembourg, the Netherlands, Norway, Portugal and the United Kingdom. To meet
the consumer demand for its Beverly Hills Polo Club sportswear, the Company has
been moving to expand its network of wholesale distributors in Europe and is
currently negotiating agreements to add distribution capabilities in Austria,
Germany and Switzerland. Each of the Company's distributors has an agreement
with the Company pursuant to which the distributor is the exclusive distributor
of specified products of the Company within a specified territory. In addition,
the Company has established three franchise stores in Spain, including a
showcase store in Madrid. Discussions are currently underway for several
additional franchise stores in Spain and elsewhere in Europe.
PRODUCTS
The Company's sportswear collections under the BOSS and Beverly Hills Polo
Club brands provide a broad range of product offerings for young men, women and
boys, including a variety of tops, bottoms and outerwear. Beginning in early
1998, the Company plans to provide a collection of men's sportswear under the
Girbaud brand including a broad array of bottoms, tops and outerwear. While
these brands reflect a distinct image and style, each is targeted to consumers
who are seeking high quality, fashionable products at competitive prices. The
Company also manufactures and markets women's sportswear under its own "I.C.
Isaacs," "Lord Isaacs" and "Pizzazz" brand names as well as under third-party
private labels. Consistent with its focus on branded products, the Company
discontinued its manufacture of men's private label apparel in the fourth
quarter of 1996. The following table sets forth, for the periods indicated, the
Company's net sales categorized by brand and product category:
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<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------- --------------------
<S> <C> <C> <C> <C> <C>
1994 1995 1996 1996 1997
--------- --------- --------- --------- ---------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
MEN'S(1)
BOSS Bottoms................................................... $ 37,724 $ 37,234 $ 44,667 $ 32,360 $ 44,238
BOSS Tops...................................................... 6,709 15,882 29,284 21,014 35,543
BOSS Boys'..................................................... 1,834 3,264 6,736 4,201 10,833
Men's BHPC..................................................... 2,795 5,219 12,226 8,103 19,584
Men's Private Label............................................ 3,227 4,299 500 485 83
--------- --------- --------- --------- ---------
Men's net sales............................................ 52,289 65,898 93,413 66,163 110,281
--------- --------- --------- --------- ---------
WOMEN'S(1)
BOSS Juniors'(2)............................................... 9,528 5,424 5,413 5,263 3,204
Women's BHPC................................................... 1,048 1,833 2,043 1,775 1,128
Women's Other(3)............................................... 22,433 20,116 17,786 13,479 12,634
--------- --------- --------- --------- ---------
Women's net sales.......................................... 33,009 27,373 25,242 20,517 16,966
--------- --------- --------- --------- ---------
Total net sales............................................ $ 85,298 $ 93,271 $ 118,655 $ 86,680 $ 127,247
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
- ------------------------
(1) The net sales totals incorporate product returns allocated in proportion to
gross sales.
(2) Results for the year ended December 31, 1994 include approximately $2.5
million of net sales of tee shirts and sweatshirts with unisex styling that
were discontinued after the Company obtained a license to manufacture and
sell men's BOSS tops in the fourth quarter of 1994. As a result, these
products were recategorized in men's BOSS tops in 1995 and thereafter.
(3) Includes Company-owned brands and third-party private labels.
BOSS PRODUCTS
The BOSS brand is a full sportswear line characterized by innovative
fabrication, creative graphics and bold uses of color. BOSS products appeal to
young men, young women and boys, who want a fresh, fashion-forward look with an
urban attitude at a competitive price. As the line has expanded and matured, the
demographics of BOSS customers have expanded beyond their urban base to include
fashion-conscious young consumers across the United States. Over the past three
years, the Company has placed increased emphasis on expansion of the top's
segment, and it anticipates that this segment will continue to be the fastest
growing category of products in the BOSS collection.
Bottoms
The Company's BOSS products began as a line of high-quality jeans and other
denim casual wear. The bottoms line currently consists of a wide variety of
denim jeans in a broad array of colors, designs and styles together with
corduroy and twill pants. Many of the BOSS jeans feature elements such as unique
pocket treatments, innovative trim and embroidered logos. The Company maintains
its own washing facilities, which allow it to create a variety of washes for its
denim products. The Company identified an underserved niche in the young men's
market for fashion jeans at moderate price points as compared with many designer
jeans, which retail for $60 and up per pair. The estimated retail price for the
Company's jeans is between $35 and $50 per pair. In the spring of 1997, the
Company expanded its product offerings by introducing a swimwear collection.
Estimated retail prices for swimwear range from $30 to $40.
Tops and Outerwear
The BOSS young men's line includes a variety of tops, tee shirts and
outerwear. The BOSS tops collection consists of a range of products including
cotton tee shirts, polo shirts, cotton pique shirts, novelty knit tops and
fleece sweatshirts. These products utilize unique combinations of textured
polyester fabrications, as well as a broad array of appliqued logos and
innovative graphics. The styling of many of the BOSS tops is influenced by
sports clothing and uniforms and conveys an energetic, youthful attitude. The
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Company has expanded its outerwear line, which includes a variety of products
including nylon jackets and downfilled parkas. The estimated retail prices range
from $19 to $22 for tee shirts, $30 to $55 for tops and $50 to $100 for
outerwear products.
Boys', Youth and Juniors' (Young Women)
The Company complements its BOSS young men's line with BOSS boys' and youth
lines, which are targeted to appeal to boys ages 4 to 7 and youth ages 8 to 16.
The BOSS boys' and youth product lines are substantially similar to the young
men's line and include jeans, tee shirts, tops, sweatshirts and outerwear.
Because the boys' market is more price conscious, some of the styles use less
expensive fabrication and design detail. The boys' and youth lines typically
sell at retail prices approximately 10% to 20% below the young men's line.
The BOSS juniors' line is the female counterpart to the BOSS young men's
line and is targeted to appeal to fashion-conscious girls and women ages 16 to
25. The BOSS juniors' collection maintains its own identity as contemporary
sportswear with an urban attitude. The product line includes denim jeans, tee
shirts, skirts, tops and jackets. Many of these styles are characterized by
close-fitting designs utilizing textured fabrics and bold colors. The estimated
retail prices for the juniors' line range from $15 to $20 for tee shirts, $25 to
$50 for tops, $30 to $45 for jeans and $30 to $75 for outerwear.
BEVERLY HILLS POLO CLUB PRODUCTS
The Beverly Hills Polo Club sportswear products are positioned to be an
updated traditional sportswear brand. The products combine contemporary design
details and innovative fabric with classic American styling. With a broader
demographic appeal than the BOSS brand, Beverly Hills Polo Club products are
targeted to appeal to consumers 16 years and older. Today, the Beverly Hills
Polo Club name and accompanying horse and rider logo symbolize quality,
traditional sportswear at competitive prices.
Tops and Outerwear
The Company has merchandised the Beverly Hills Polo Club men's line to place
more emphasis on tops, including a full line of tee shirts, polo shirts, rugby
shirts, denim shirts and sweatshirts made primarily in cotton fabrics such as
pique, jersey and jersey fleece. While classic in styling, the tops line is
distinguished by innovative use of design, embroidery and fabric detail. The
collections also include more contemporary styles and a broader array of novelty
fabrics as well as product offerings such as woven shirts and outerwear,
including jackets and downfilled parkas. In 1998, the Company intends to
introduce a new line of men's dress shirts. Estimated retail prices range from
$19 to $22 for tee shirts, $30 to $60 for tops and $60 to $120 for outerwear.
Bottoms
While the primary focus of the Beverly Hills Polo Club men's line has been
on tops, the collection also includes a full line of bottoms consisting of denim
jeans, twill pants and corduroy casual pants. While somewhat more conservative
in styling compared to the BOSS line, the Beverly Hills Polo Club bottoms line
combines classic styling with unique trim, embroidery and pocket treatments.
Estimated retail prices for jeans and casual pants range from $40 to $55 per
pair.
Women's
The Company's Beverly Hills Polo Club women's sportswear line has a focus
similar to that of the men's sportswear line. It targets active, image-conscious
women 16 years and older and combines classic American styling with distinctive
design detail and fabrication. The product offerings include tee shirts, polo
shirts, denim shirts, jeans and casual pants. The collection also includes many
activewear items which utilize a variety of fabrics and graphic elements.
Estimated retail prices range from $18 to $20 for tee shirts, $30 to $60 for
tops and $40 to $55 for bottoms.
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<PAGE>
GIRBAUD PRODUCTS
The Girbaud brand is an internationally recognized designer sportswear
label. The Company's collection of Girbaud products will include a full line of
bottoms consisting of jeans and casual pants in a variety of fabrications
including denim, stretch denim, cotton twill and nylon. The Girbaud tops
collection will include cotton tee shirts, polo shirts, knit and woven tops,
sweaters and outerwear. Influenced by European design, each of these collections
will be characterized by innovative styling and fabrication and will be targeted
to men ages 16 to 40. The Company plans to introduce the fall men's collection
in early 1998.
COMPANY-OWNED AND THIRD-PARTY PRIVATE LABEL PRODUCTS
The Company also produces sportswear for women under its own brands,
including "I.C. Isaacs," "Lord Isaacs" and "Pizzazz," as well as under
customers' private labels. These brands focus on pull-on elastic waist pants and
belted trousers in cotton, bleached and stonewashed denim, blended polyester and
rayon. These pants are designed to appeal to more mature women looking for basic
styling at value prices. The Company offers pants in a variety of fits including
missy, petite and large sizes. Color-coordinated tops and sweaters in cotton,
acrylic, blended polyester rayon and ramie cottons complete the mix. Estimated
retail prices range from $13 to $50 for bottoms and $20 to $60 for tops.
CUSTOMERS AND SALES
The Company's products are sold in over 4,000 specialty stores, specialty
store chains and department stores. The Company uses both sales representatives
and distributors for the sale of its products. Sales representatives include
employees of the Company as well as independent contractors. Each of the
Company's distributors and non-employee sales representatives has an agreement
with the Company pursuant to which they serve as the exclusive distributor or
sales representative of specified products of the Company within a specified
territory. The Company does not have long-term contracts with any of its
customers. Instead, its customers purchase the Company's products pursuant to
purchase orders and are under no obligation to continue to purchase the
Company's products. The Company's BOSS products are sold throughout the United
States and Puerto Rico in over 1,500 specialty stores and specialty store
chains, such as Fine's and Miller's Outpost. The Company's newest level of
distribution is to department stores, and its single largest customer in 1996
was J.C. Penney Company, Inc., which accounted for approximately 13% of net
sales. No other customer of the Company accounted for 10.0% or more of net sales
in 1996. Other department store customers include Federated Department Stores,
Inc., The May Department Stores Company and Dayton Hudson Corporation. The
Company's BOSS products are sold and marketed under the direction of its
national sales office headquartered in New York. In addition to executive
selling based in New York and Dallas, the Company has 18 commissioned sales
representatives who work out of regional showrooms throughout the United States
and Puerto Rico. The Company considers its professional sales force to be one of
its major assets and one of the principal reasons why it has been successful in
establishing relationships with department stores and thousands of specialty
stores and specialty retail chains. See "Risk Factors--Dependence Upon Certain
Customers."
The Company's Beverly Hills Polo Club sportswear is sold in the United
States, Puerto Rico and Europe. Although the Company is only in its third year
of distributing Beverly Hills Polo Club sportswear, the products are sold to
over 1,000 specialty stores, specialty store chains and department stores, such
as J.C. Penney, Inc. and Maurice's. The Company has begun to sell Beverly Hills
Polo Club products to department stores and believes that there is significant
potential for expanded department store sales. The Company's Beverly Hills Polo
Club products are sold and marketed under the direction of its men's and women's
national sales offices in New York. In addition to executive selling based in
New York and Dallas, the Company has a sales force consisting of 14 sales
representatives for its line of men's sportswear and 11 sales representatives
for its line of women's sportswear. To more effectively market the Beverly Hills
Polo Club women's collection, the Company is currently in the process of
reconfiguring and increasing its women's sales force. See "Risk
Factors--Dependence Upon Certain Customers."
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The Company's Beverly Hills Polo Club sportswear has recently begun to be
sold throughout Europe through wholesale distributors, all of whom buy products
directly from the Company. Since January 1, 1997, the Company has entered into
wholesale distribution arrangements with distributors in Belgium, France,
Greece, Italy, Luxembourg, the Netherlands, Norway, Portugal and the United
Kingdom and is negotiating agreements with distributors in Austria, Germany and
Switzerland. Under these arrangements, the distributors purchase goods from the
Company's Spanish subsidiary in United States dollars under irrevocable letters
of credit or by prepayment, thereby minimizing the Company's credit risk. In
addition, the Company has established three franchise stores in Spain, including
a showcase store in Madrid. Discussions are currently underway for several
additional franchise stores in Spain and elsewhere in Europe. See "Risk
Factors--Lack of Significant Operating History in Europe."
The Company intends to begin sales of its Girbaud products in the United
States and Puerto Rico in early 1998 when it introduces the fall men's
collection. The Company anticipates that these products will be sold and
marketed under the direction of a newly created sales force to be headquartered
in New York.
The Company-owned branded products and third-party private label products
are sold under the direction of the women's sales headquarters in New York and
by 15 commissioned sales representatives throughout the United States. The
products are distributed to department stores such as Dayton Hudson Corporation,
Mercantile Stores Company, Inc. and Sears Roebuck and Co.; mass merchandisers
and discounters such as Hills Department Store Company and Ames Department
Stores, Inc.; catalogs such as National Wholesale Co., Inc. and Arizona
Mail-Order Company, Inc. and approximately 1,500 specialty stores nationwide.
DESIGN AND MERCHANDISING
The Company's designers and merchandisers travel around the world in order
to monitor emerging fashion trends and search for styling inspiration and
fabrics. These sources, together with new styling and graphics developed by the
Company's designers, serve as the primary creative influences for the Company's
product lines. In addition, designers and merchandisers regularly meet with
sales management to gain additional market insight and further refine the
products to be consistent with the needs of each of the Company's markets. The
Company's in-house design and product development is carried out by
merchandising departments in New York. Many of the Company's products are
developed using computer-aided design equipment, which allows designers to view
and easily modify images of a new design. From 1994 to 1997 the Company's design
staff grew from 6 to 13 people. The Company expects an increase to 22 people in
1998. Design expenditures incurred were approximately $0.6 million, $0.9
million, $1.3 million and $1.3 million for 1994, 1995, 1996 and the nine months
ended September 30, 1997, respectively. The Company estimates that design
expenditures will be approximately $2.2 million in 1998.
ADVERTISING AND MARKETING
The Company prides itself on its ability to efficiently utilize its
advertising budget. Although the Company has increased its expenditures on
advertising to approximately $2.5 million or 2.1% of net sales in 1996, this is
still a relatively modest amount as compared with some of its competitors. In
1994, 1995 and 1996, the Company's expenditures for advertising and marketing
activities totaled $0.4 million, $1.5 million and $2.5 million, respectively. As
the Company continues to grow, it plans to use its increased financial resources
to further support and expand the brand exposure for each of its brands.
The Company aggressively communicates and reinforces the brand and image of
its BOSS and Beverly Hills Polo Club products through creative and innovative
advertising and marketing efforts. The Company's advertising and marketing
strategies are directed by its national sales offices and developed in
collaboration with its advertising agency. The Company's advertising strategy is
geared towards its youthful consumers whose lifestyles are influenced by music,
sports and fashion. The Company has been advertising the BOSS brand since 1992
and the Beverly Hills Polo Club brand since 1994, and its advertising campaigns
have evolved from trade magazines to a wide variety of media, including
billboards, television, fashion magazines and professional sports endorsements.
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Print advertisements for the BOSS brand appear regularly in VIBE, SOURCE and
SLAM magazines, while television advertisements appear on various networks
including Turner Network Television (TNT), Black Entertainment Television (BET),
MTV: Music Television, Univision and Telemundo. Advertisements for the BOSS
brand also appear on a variety of outdoor advertising media, including
billboards and bus stops. Print advertisements for the Beverly Hills Polo Club
brand are targeted to appeal to a broader demographic base and appear in
magazines such as GQ and POV. Television advertisements for the Beverly Hills
Polo Club brand are currently being developed. The Company's products can also
be seen on some of today's most visible sports and music celebrities, whose
attitude and image are captured by the BOSS and Beverly Hills Polo Club brands.
In addition, the Company is a sponsor of selected professional basketball teams,
including the Chicago Bulls, New York Knicks, New Jersey Nets, Atlanta Hawks,
Detroit Pistons and Los Angeles Clippers.
Recognizing that point of sale advertising is highly effective, the Company
provides an array of in-store signage, fixtures and product videos for both BOSS
and Beverly Hills Polo Club products. In addition, through the "Shop-in-Shop"
concept, the Company seeks to enhance brand recognition and to differentiate its
products from other branded apparel by creating an environment that is
consistent with the image of its products. For example, J.C. Penney Company,
Inc. currently has approximately 250 stores using the "Shop-in-Shop" concept to
showcase BOSS young men's products and approximately 75 stores using the
"Shop-in-Shop" concept to showcase Beverly Hills Polo Club men's merchandise.
The Company plans to expand the "Shop-in-Shop" program to build longer term
commitments with retailers and enable retailers to carry a broader array of the
product lines each season.
The Company intends to advertise and market its Girbaud line of products
following a similar strategy including the use of a variety of print and
television advertisements as well as the use of the "Shop-in Shop" concept.
MANUFACTURING AND PRODUCT SOURCING
GENERAL
The Company believes that its flexible manufacturing and sourcing
capabilities enable it effectively to control the timing, quality and pricing of
products while providing customers with increased value. The Company uses its
own facilities as well as both domestic and foreign contractors for the
production of its products. During 1996, approximately 9% of the Company's
purchases of raw materials, labor and finished goods for its apparel were made
in Mexico; approximately 28% were made in Asia; approximately 23% were made at
third-party facilities in the United States; and the balance was made at the
Company's facilities in the United States. For the first nine months of 1997,
approximately 72% of the Company's manufacturing and sourcing was done by third
parties, all through arrangements with independent contractors. Each of the
Company's independent contractors and independent buying agents has an agreement
with the Company pursuant to which they perform manufacturing or purchasing
services for the Company on a non-exclusive basis. The Company evaluates its
contractors frequently and believes that there are a number of manufacturers
capable of producing products that meet the Company's quality standards. The
Company represents all or a significant portion of many of its contractors'
production and has the ability to terminate its arrangements with any of its
contractors at any time. The Company intends to apply a similar manufacturing
and product sourcing strategy with respect to its Girbaud line of products. See
"Risk Factors--Dependence Upon Unaffiliated Manufacturers; --Risks Relating to
Foreign Operations and Sourcing; and --Potential Shortages of Fabrics."
UNITED STATES AND MEXICO
The Company operates three manufacturing facilities in the United States and
currently utilizes seven contractors in the United States and three in Mexico.
The majority of the production in these facilities is of bottoms and tee shirts.
The Company produces approximately 50% of its bottoms (slacks, jeans, shorts and
skirts) in three Company-operated manufacturing facilities in Mississippi, which
combine to employ approximately 720 people. All three facilities utilize a level
of automation that enables the Company to
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competitively price its products and maintain the flexibility necessary to meet
its customers' changing demands.
The Company safeguards its manufacturing capacity by utilizing contractors
in both the United States and Mexico to produce the same product lines. The
Company has established ongoing relationships with all of these contractors but
is not bound by written agreements to continue to do business with any of them.
The Company also uses a variety of contractors in both the United States and
Mexico as needed for value added functions such as embroidery, screen printing
and laundering. Seasonal fluctuations in production requirements are
accommodated by adjusting contracted quantities, while maintaining more
consistent levels of production in Company-operated facilities. All contractors
in the United States and Mexico are selected and managed by the Company's
manufacturing staff in Mississippi and Mexico.
The Company uses a variety of raw materials, principally consisting of woven
fabrics including denim, cotton, polyrayons and various trim items. While the
Company must make commitments for a significant portion of its fabric purchases
in advance of sales, the Company's risk is reduced because a substantial portion
of the Company's products are sewn in basic denim.
ASIA
In addition to the Company's domestic and Mexican pant and tee shirt
production facilities, the balance of the Company's sportswear products is
produced by approximately 50 different manufacturers in more than 10 countries.
Virtually all of the Company's products other than pants and tee shirts are
produced in Asia, but none of the Asian contractors engaged by the Company
accounted for more than 10.0% of the Company's total production in 1996. The
Company has well established relationships with many of its contractors although
it does not have written agreements with them. The Company retains independent
buying agents in various countries in Asia to assist in selecting and overseeing
independent manufacturers, sourcing fabric, trim and other materials and
monitoring quotas. The independent buying agents also perform quality control
functions on behalf of the Company including inspecting materials and
manufactured products prior to accepting delivery. The sourcing and
merchandising staffs in the Company's New York offices oversee all aspects of
Asian fabric and product development, apparel manufacturing, price negotiation
and quality control, as well as the research and development of new Asian
sources of supply.
The Company seeks to achieve the most efficient means for the timely
delivery of its high quality products. With rare exceptions, the Company does
not purchase fabrics but instead negotiates a finished garment price from its
contractors. The contractor must then purchase the approved fabric as part of
the package. Orders are generally placed after the Company has received customer
orders, and delivery of finished goods to customers generally occurs 90 to 150
days after placement of the order. All of the Company's products manufactured
abroad are paid for in United States dollars. Accordingly, the Company does not
engage in any currency hedging transactions. During the last several years, the
volume of the Company's products produced in Asia has increased dramatically,
and this trend is likely to continue in the future.
WAREHOUSING AND DISTRIBUTION
The Company has serviced its United States customers for the last 38 years
utilizing a Company-owned and operated distribution center in Milford, Delaware.
This primary facility has been expanded during that time, resulting in its
present size of approximately 70,000 square feet. Over the last few years, the
Company has leased additional space in the Milford area to accommodate increased
capacity requirements fueled by growth in sales. The Company is in the process
of establishing a computerized "Warehouse Management System" with real-time
internal tracking information and the ability to provide its customers with
electronically transmitted "Advance Shipping Notices." The accuracy of shipments
is increased by the ability to scan coded garments at the packing operation.
This process also provides for computerized routing and customer invoicing. The
vast majority of shipments are handled by UPS, common carriers or parcel post.
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The Company believes that its increased distribution requirements as a
result of rapid growth can be better met by consolidating its warehousing and
distribution functions into a new 150,000 square foot facility to be located in
Milford, Delaware. Consolidating all the receiving, stocking, packing and
shipping functions into one facility should result in improved management
control and less redundancy in supervision and operational functions. The
Company believes that its engineering plan for the new facility will provide the
capacity to accommodate substantial growth in the Company's domestic volume and
will reduce labor costs and improve response times. The Company believes the
construction of this facility should be completed in 1998 at an estimated cost
of between $6.0 million and $7.0 million to be financed through a mortgage loan.
In order to ensure against the possibility of interrupted flow of goods to its
customers, the Company plans to occupy the new facility in phases.
The Company currently services its European customers through a contractual
arrangement with a distribution center in Barcelona, Spain, where the Company
maintains its European headquarters.
QUALITY CONTROL
The Company's quality control program is designed to ensure that all of the
Company's products meet its high quality standards. The quality of piece goods
is monitored prior to garments being produced, and prototypes of each product
are inspected and approved before production runs are commenced.
The goods produced by Company-operated facilities, as well as by United
States and Mexican contractors, undergo continual audits by quality personnel
during production. The quality control efforts of Company-operated facilities
are directed and coordinated by the Company's Quality Control Manager located in
Mississippi. Frequent visits are made by the Quality Control Manager and other
support staff to all outside contractors to ensure compliance with the Company's
rigorous quality standards. Audits are also performed by quality personnel at
the Milford, Delaware distribution center on all categories of incoming
merchandise. The Company employs a full-time staff of 43 persons dedicated to
the quality control efforts of its United States and Mexican production. See
"Risk Factors--Potential Shortages of Fabrics; and --Dependence Upon
Unaffiliated Manufacturers."
All garments produced for the Company in Asia must be produced in accordance
with the Company's specifications. The Company's import quality control program
is designed to ensure that all of the Company's products meet its high quality
standards. The Company monitors the quality of fabrics prior to the production
of garments and inspects prototypes of products before production runs are
commenced. In many cases, the Company requires its agents or manufacturers to
submit fabric to an independent outside laboratory for testing prior to
production. The Company requires each agent to perform both in-line and final
quality control checks during and after production before the garments leave the
contractor. Personnel from the Company's New York office also visit Asia to
conduct inspections. See "Risk Factors-- Potential Shortages of Fabrics; and
- --Dependence upon Unaffiliated Manufacturers."
BACKLOG AND SEASONALITY
The Company's business is impacted by the general seasonal trends that are
characteristic of the apparel and retail industries. In the Company's segment of
the apparel industry, sales are generally higher in the first and third
quarters. The Company generally receives orders for its products three to five
months prior to the time the products are delivered to stores. As of September
30, 1997, the Company had unfilled orders of approximately $45 million, compared
to approximately $51 million of such orders as of September 30, 1996. The
Company expects to fill substantially all of these orders in 1997. The backlog
of orders at any given time is affected by a number of factors, including
seasonality, weather conditions, scheduling of manufacturing and shipment of
products. These factors, combined with variations in the timing of product
orders by specialty store customers, contributed to the decrease in backlog from
September 30, 1996 to September 30, 1997. All such orders are subject to
cancellation for causes such as late delivery. Accordingly, a comparison of
backlogs of orders from period to period is not necessarily meaningful and may
not be indicative of eventual actual shipments. See "Risk Factors--Uncertainties
Regarding Maintaining and Managing Growth in Net Sales; and --Seasonality and
Quarterly Fluctuations."
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LICENSES AND OTHER RIGHTS AGREEMENTS
The Company's business is heavily dependent upon its use of the BOSS,
Beverly Hills Polo Club and Girbaud brand names and images, which are in turn
dependent upon the existence and continuation of certain licenses and other
rights agreements as described below. See "Risk Factors--Dependence Upon
Licenses and Other Rights Agreements."
BOSS TRADEMARK RIGHTS
In 1990, the Company obtained a license from Brookhurst to use the
registered trademark BOSS in the United States and Puerto Rico in connection
with certain items of sportswear for men and women. Brookhurst and its
predecessors had utilized the BOSS trademark since the late nineteenth century.
As part of the Settlement, Brookhurst (i) sold its BOSS trademark rights
worldwide (excluding Mexico), goodwill and registrations to the Company, (ii)
assigned its rights with respect to the BOSS trademark under certain agreements
with third parties (the rights under (i) and (ii) above referred to collectively
as the "BOSS Trademark Rights") to the Company and (iii) agreed to cease using
the BOSS brand name and image (except for a limited sell-off of certain uniforms
and samples bearing the BOSS mark). As part of the Settlement, the Company sold
its foreign BOSS trademark rights and its rights under related agreements
acquired from Brookhurst (the "BOSS Foreign Trademark Rights") to Ambra. Neither
Hugo Boss nor Ambra is affiliated with Brookhurst or the Company. The Company
also entered into a foreign manufacturing rights agreement with Ambra (the
"Foreign Rights Agreement") under which the Company obtained a license to
manufacture apparel in certain foreign countries for sale in the United States
using the BOSS brand name and image. The Company retained its ownership of
domestic BOSS Trademark Rights ("Domestic BOSS Trademark Rights") subject to a
concurrent use agreement with Hugo Boss (the "Concurrent Use Agreement").
Subject to the terms of the Concurrent Use Agreement, Hugo Boss retained the
right to manufacture and market sportswear and other products using the BOSS
name. In the event Hugo Boss manufactures and markets sportswear products which
the Company is permitted to manufacture and market under the Concurrent Use
Agreement, Hugo Boss must sell such products at or above specified wholesale
price points in the United States and Puerto Rico, which are generally higher
than the price points of the Company. Although there is some degree of overlap
in the wholesale price points of the Company and Hugo Boss under the Concurrent
Use Agreement, the Company does not currently sell or intend to sell BOSS brand
sportswear within those overlapping price points and does not anticipate any
material adverse effect on the Company's financial condition or results of
operations if Hugo Boss were to manufacture and market sportswear within those
overlapping price points. See "Risk Factors--Recent Settlement of BOSS
Litigation."
Under the agreements entered into in connection with the Settlement, the
Company's BOSS rights were expanded to allow broader product offerings and
additional Company control over styling, advertising and distribution. In
addition to the categories of apparel which the Company was permitted to
manufacture, distribute, market and sell under its previous license agreement
with Brookhurst, under the Settlement, the Company acquired the right to
manufacture, distribute, market and sell, within specified wholesale price
points, the following categories of apparel under the BOSS brand in a specified
microgramma style (the "BOSS Logotype"): swimwear, jogging suits, polo shirts
and belts (as parts of garments). The Company may use the BOSS trademark in
forms other than the BOSS Logotype with the prior approval of the other parties
to the agreements. The Company is prohibited from using the BOSS brand name or
image on footwear, formal and tailored clothing, leather clothing, body wear,
underwear, intimate apparel, loungewear, sleepwear and robes, clothing designed
for the primary purpose of engaging in skiing, tennis, motor sports, windsurfing
and any non-apparel items. The Concurrent Use Agreement sets forth specific
parameters governing the use by the Company of the BOSS Logotype with respect to
advertising, wholesale pricing points and the size, location, appearance, style
and coloring of the trademark on different product categories and advertising,
and requires that the Company use the phrase "BOSS by
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I.G. Design" in the BOSS Logotype on its BOSS products. No material adverse
effect on the Company's financial condition or results of operations is expected
as a result of the Concurrent Use Agreement.
Under the Foreign Rights Agreement, the Company continues to have the right
to manufacture BOSS apparel in foreign countries, including those in which the
Company is currently manufacturing BOSS apparel and several additional
countries. No significant changes are anticipated with respect to the Company's
foreign manufacturing activities and therefore no material adverse effect on the
Company's financial condition or results of operations is expected. The Foreign
Rights Agreement will terminate on December 31, 2001, but may be extended, at
the Company's option, through December 31, 2007.
Under the Foreign Rights Agreement, the Company will pay annual royalties of
12.5%: (i) on the first $32.0 million of net sales attributable to apparel
manufactured in those foreign countries in which the Company currently
manufactures or will manufacture BOSS products ("Territory Net Sales") for each
of the first four years of the agreement; (ii) on the first $20.0 million in
Territory Net Sales for year five of the agreement; and (iii) on the first $16.0
million of Territory Net Sales in years six through ten of the agreement. The
base royalties on such amounts of Territory Net Sales would increase to as much
as 19.5% upon any prepayment of the Note. For the first four years of the
agreement, an aggregate additional royalty of 5.0% is payable annually on
Territory Net Sales from $84.0 million to approximately $105.3 million and an
aggregate additional royalty of 4.0% is payable annually on Territory Net Sales
of $158.0 million and up. Additional royalties in years five through ten of the
agreement increase for certain corresponding sales levels. The Company is
required (i) to generate minimum annual Territory Net Sales of at least $32.0
million for each of the first four years of the agreement, $20.0 million for the
fifth year of the agreement and $16.0 million for each of years six through ten
of the agreement and (ii) to pay annual royalties on such sales based on the
percentages described above The Company's Territory Net Sales for any given year
under the agreement must equal at least 95.0% of total net sales attributable to
BOSS apparel manufactured worldwide. To the extent that the Company does not
achieve the required Territory Net Sales, the Company will have the right, in
order to avoid termination of the agreement, to pay royalties as if such
Territory Net Sales had been achieved. In the event that the Company's
cumulative payment of royalties under the Foreign Rights Agreement and interest
paid under the Note exceed: (i) $16.0 million paid at any time during the first
four years of the agreement, (ii) $6.5 million paid at any time during years
five through seven of the agreement, (iii) $6.0 million paid at any time during
years eight through ten of the agreement, or (iv) $26.0 million paid at any time
during the entire term of the agreement, the requirement to generate minimum
annual Territory Net Sales, as described above, terminates and the Company shall
continue to pay royalties based on the percentages described above.
The Foreign Rights Agreement may be terminated by the licensor upon the
occurrence of certain events, including, but not limited to (i) a material
breach by the Company after expiration of the applicable grace period, (ii)
certain events of bankruptcy, insolvency or assignment for the benefit of all
creditors relating to the Company or the appointment of a receiver or trustee
for the Company (a "Bankruptcy Event"), (iii) certain specified changes in the
control of the ownership of the Company and (iv) certain uncured breaches by the
Company's foreign manufacturers of the terms of the agreements. In addition to
terminating the agreement, the licensor may require the Company to pay on an
accelerated basis all royalties due under certain sales assumptions through the
then current term of the agreement upon the occurrence of certain events
including, but not limited to (i) the failure of the Company to pay royalties
when due or to meet certain minimum sales requirements, (ii) the failure of the
Company to manufacture products in certain foreign countries, (iii) the sale of
the licensed products outside the United States, (iv) certain attempts by the
Company to create or establish trademark rights in the word BOSS in its own name
anywhere outside of the United States, (v) the willful and material breach of
the agreement and (vi) the occurrence of a Bankruptcy Event. The Company's
rights to use the BOSS name will terminate upon exercise of the Option (as
hereinafter defined) or upon earlier termination of any of the other agreements.
Any termination of the Company's rights to use the BOSS name would have a
material adverse effect on the Company's financial condition and results of
operations.
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Ambra holds an option dated November 5, 1997 to purchase the Domestic BOSS
Trademark Rights from the Company (the "Option") for an amount equal to the
original principal amount of the Note at any time between November 5, 2006 and
December 31, 2007 or earlier upon (i) certain breaches of the Concurrent Use
Agreement, (ii) an event of default under the Note or (iii) termination for any
reason of the Foreign Rights Agreement. See "Risk Factors--Dependence Upon
Licenses and Other Rights Agreements" and "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Liquidity and Capital
Resources."
BEVERLY HILLS POLO CLUB LICENSES
Beverly Hills Polo Club Domestic Licenses
Since 1993, the Company has had exclusive wholesale licensing agreements
(collectively, the "BHPC Agreements") with BHPC Marketing, Inc. for the
manufacture and promotion of certain men's and women's sportswear bearing the
registered trademark Beverly Hills Polo Club with an accompanying horse and
rider design (the "BHPC Trademark") for sale to moderate or better department
stores and specialty stores in the United States and its possessions, including
Puerto Rico. Under the BHPC Agreements, the Company may sell up to 25.0% of its
total volume for each of the men's and women's categories to warehouse clubs.
The licenses generally allow the Company to use the BHPC Trademark on sportswear
designed by or for the Company, subject to a quality approval process for
marketing and advertising materials, manufacturing premises and products bearing
the trademark. Under each of these licenses, as amended through April 1997, the
Company is required to make payments to the licensor in an amount equal to 5.0%
of the Company's net invoiced sales of licensed merchandise and to spend an
amount equal to 1.0% of net invoiced sales of such merchandise in advertising
for the licensed products. Under each license, the Company pays a monthly
royalty equal to the greater of 8.3% of the guaranteed minimum annual royalty or
the actual royalty earned by the licensor in the preceding month.
Under the Beverly Hills Polo Club men's agreement (the "Men's Agreement")
the Company has been granted an exclusive license to use the BHPC Trademark in
connection with menswear fashions made of materials other than silk in the
following categories: denim sportswear, outerwear, knit, woven and dress shirts,
knit and woven casual pants and shorts, sweaters, basic and fashion fleece tops
and bottoms, overalls and shortalls, knit tops (including tee shirts and polo
shirts), swimwear and warm-ups. The Men's Agreement has an initial term expiring
December 31, 1998 and is renewable at the option of the Company, provided the
Company is not in breach thereof at the time renewal notice is given, for two
consecutive three-year periods commencing January 1, 1999, through December 31,
2004.
The Company's payment of royalties under the Men's Agreement is subject to a
guaranteed minimum annual royalty of $350,000 for the contract year ending
December 31, 1997 and $400,000 for the contract year ending December 31, 1998. A
guaranteed minimum annual royalty payment of $300,000, which was required for
the contract year ending December 31, 1996, was exceeded by the Company.
Notwithstanding its term, the Men's Agreement may be terminated by the licensor
in the event the Company fails to make net shipments of products for the
contract year ending December 31, 1997 in the amount of $7.0 million and for the
contract year ending December 31, 1998 in the amount of $8.0 million. Guaranteed
minimum annual royalties and guaranteed annual net shipments for each of the
renewal terms will be the greater of (i) 80.0% of the immediately preceding
contract year's actual royalties and net shipments or (ii) the previous year's
guaranteed minimum royalty and guaranteed net shipments.
The Beverly Hills Polo Club women's agreement (the "Women's Agreement")
grants the Company the right to use the BHPC Trademark in connection with
women's, missy, junior, petite and large size coordinated sportswear, sweaters,
sweater dresses, sweater suits, basic fleece tops and bottoms, basic tee shirts,
basic polo shirts, warm ups in knit and woven fabrics and women's tennis and
golf related shorts sets, skort sets and pant sets in knit and woven fabrics.
The Women's Agreement has an initial term expiring December 31, 1998 and is
renewable at the option of the Company, provided the Company is not in breach
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<PAGE>
thereof at the time renewal notice is given, for two consecutive three-year
periods commencing January 1, 1999, through December 31, 2004.
The Company's payment of royalties under the Women's Agreement is subject to
a guaranteed minimum annual royalty of $100,000 for the contract year ending
December 31, 1997 and $150,000 for the contract year ending December 31, 1998.
No guaranteed minimum annual royalty payment was required for the contract year
ending December 31, 1996. Notwithstanding the term of the Women's Agreement, the
women's license may be terminated by the licensor in the event the Company fails
to make net shipments of products for the contract year ending December 31, 1997
in the amount of $2.0 million and for the contract year ending December 31, 1998
in the amount of $3.0 million. Such termination provision has been waived for
the contract year ending December 31, 1997. Guaranteed minimum annual royalties
and guaranteed annual net shipments for each of the renewal terms will be the
greater of (i) 80.0% of the immediately preceding contract year's actual
royalties and net shipments or (ii) the previous year's guaranteed minimum
royalty and guaranteed net shipments.
Each of the Men's and the Women's Agreements may be terminated by the
licensor upon the occurrence of certain events, including but not limited to the
following: (i) a breach by the Company of any obligation under the Agreement
that remains uncured within 30 days following the receipt of written notice of
such breach, (ii) the Company becomes insolvent, is the subject of a petition in
bankruptcy or otherwise enters into any composition with its creditors,
including reorganization, or (iii) the Company has committed three breaches of
the Agreement, in which case no right to cure the breach is afforded to the
Company.
During the term of the Beverly Hills Polo Club domestic Men's and Women's
Agreements, the Company is prohibited from manufacturing or otherwise
distributing any merchandise under a brand name which closely resembles the BHPC
Trademark and from using on non-Beverly Hills Polo Club products any graphic,
style or design which closely resembles any items supplied to the Company by the
licensor. In addition, the rights of the Company under the Men's and Women's
Agreements are subject to the terms of a Settlement Agreement and Consent
Judgment between the licensor and Polo Fashions Inc., which imposes certain
restrictions on the licensor's manner of use and advertising of the BHPC
Trademark, including a prohibition on the use of the words "Polo" and "Polo
Club" alone on any item of apparel. The Company believes that the BHPC
Trademark, as licensed to the Company, complies with those restrictions.
Beverly Hills Polo Club International Licenses
On August 15, 1996, I.C. Isaacs Europe, S.L., a Spanish limited corporation
and wholly-owned subsidiary of the Company, entered into retail and wholesale
license agreements (collectively, the "International Agreements") for use of the
BHPC Trademark in Europe. The International Agreements, as amended through April
28, 1997, provide certain exclusive rights to use the BHPC Trademark in all
countries of Europe for an initial term of three years ending December 31, 1999,
renewable at the Company's option through two consecutive three-year extensions
ending December 31, 2004. The International Agreements are subject to
substantially the same terms and conditions as the BHPC Agreements described
above. The Company commenced its operations under the International Agreements
by January 1, 1997, as required by the terms thereof.
The international retail agreement (the "Retail Agreement") grants the
Company the right to use the BHPC Trademark in connection with the manufacture
and sale through authorized Beverly Hills Polo Club retail stores and franchised
stores in Europe of the following categories of products: (i) men's pants, woven
shirts, knit shirts, jeans, shorts, sweaters and outerwear (excluding dress
shirts and suits); (ii) women's slacks, skirts, dresses, sweaters, outerwear,
blouses and jeans; and (iii) all other products licensed by the Beverly Hills
Polo Club licensor to other third parties (which must be purchased by the
Company from the authorized third-party licensees). The Retail Agreement
excludes dress shirts and suits. Under the Retail Agreement, the Company is
required to pay the licensor royalties equal to (i) 4.0% of the wholesale
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purchases by the Company of Beverly Hills Polo Club products sold to Beverly
Hills Polo Club retail stores and (ii) 2.0% of retail sales of licensed products
by Beverly Hills Polo Club retail stores. The Company is subject to guaranteed
minimum annual royalty payments of $60,000 in 1998 and $100,000 in 1999 and
guaranteed net shipment volumes of $1.0 million in 1998 and $2.0 million in
1999. There are no guaranteed minimum annual royalty payments or guaranteed net
shipment volumes for the contract year ended December 31, 1997. The Retail
Agreement is subject to applicable franchising laws in Europe and, as a result,
the licensor may terminate the agreement if the Company is unable to obtain any
necessary governmental approval or to make any necessary governmental filings
within four months from the date of the first franchise agreement.
The international wholesale agreement (the "Wholesale Agreement") grants the
Company the right to use the BHPC Trademark in connection with the manufacture
and sale at wholesale, for distribution to department stores and specialty
stores in Europe, of the following categories of products: (i) men's apparel
(excluding suits, ties, underwear, shoes and full length rainwear); and (ii)
women's apparel (excluding hosiery, intimate apparel, business suits, underwear,
accessories, shoes and full length rainwear). Under the Wholesale Agreement, the
Company is required to pay the licensor a royalty equal to 6.0% of net shipments
by the Company of licensed products directly to authorized Beverly Hills Polo
Club distributors or to retail stores. The Wholesale Agreement imposes
guaranteed minimum annual royalty payments of $120,000 in 1998 and $240,000 in
1999 and guaranteed net shipment volumes of $2.0 million in 1998 and $4.0
million in 1999. There are no guaranteed minimum annual royalty payments or
guaranteed net shipment volumes for the contract year ended December 31, 1997.
GIRBAUD LICENSE
In November 1997, the Company entered into an exclusive license agreement
(the "Girbaud Agreement") with Girbaud Design, Inc. and its affiliate Wurzburg
Holding S.A. to manufacture and market men's jeanswear, casualwear and outerwear
under the Girbaud brand and certain related trademarks (the "Girbaud Marks") in
all channels of distribution in the United States, including Puerto Rico and the
U.S. Virgin Islands. The Girbaud Agreement includes the right to manufacture the
licensed products in a number of foreign countries. This Girbaud Agreement has
an initial term of two years through December 31, 1999, and may be extended at
the option of the Company for an additional three-year term. The Company holds
certain rights of first refusal to extend the Girbaud product lines to include
men's activewear, and women's, boys' and girls' jeanswear, activewear and
casualwear. The Girbaud Agreement generally allows the Company to use the
Girbaud Marks on apparel designed by or for the Company or based on designs and
styles previously associated with the Girbaud brand, subject to quality control
by the licensor over the final designs of the products, marketing and
advertising materials and manufacturing premises.
Under the Girbaud Agreement the Company is required to make payments to the
licensor in an amount equal to 6.25% of the Company's net sales of regular
licensed merchandise, and 3.0% in the case of certain irregular and closeout
licensed merchandise. The Company is subject to guaranteed minimum annual
royalty payments of $1.2 million in 1998, $1.5 million in 1999, $2.0 million in
2000, $2.5 million in 2001 and $3.0 million in 2002. On a quarterly basis during
the term, commencing with the first quarter of 1998, the Company is obligated to
pay the greater of (i) actual royalties earned by the licensor under the license
or (ii) 8.3% of the minimum guaranteed royalties for that year. The Company is
required to spend at least $350,000 in advertising for the Girbaud brand in 1998
and $500,000 each year thereafter while the Girbaud Agreement is in effect. The
Girbaud Agreement may be terminated by the licensor upon the occurrence of
certain events, including, but not limited to, a breach by the Company of any
obligation under the Girbaud Agreement that remains uncured following certain
specified grace periods.
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CREDIT CONTROL
The Company manages its own credit and collection functions and has never
used a factoring service or outside credit insurance. The Company sells to
approximately 4,100 accounts throughout the United States and Puerto Rico. All
of the functions necessary to service this large volume of accounts are handled
by the Company's in-house credit department in Baltimore, Maryland. The Company
currently employs eight people in its credit department and believes that
managing its own credit gives it unique flexibility as to which customers the
Company can sell and how much business it can do with each. The Company obtains
and periodically updates information regarding the financial condition and
credit histories of customers. Credit personnel evaluate this information and,
if appropriate, establish a line of credit. Credit personnel track payment
activity for each customer using customized computer software and directly
contact customers with receivable balances outstanding beyond 30 days. Under
certain circumstances, the Company may discontinue merchandise shipments until
the outstanding balance is paid. Ultimately, the Company may determine to engage
an outside collection organization to collect past due accounts. The Company
believes this provides a selling advantage over those competitors who factor
their receivables. In 1994, 1995 and 1996, the Company's credit losses were $0.4
million, $0.4 million and $0.9 million, respectively. In each of these years,
the Company's actual credit losses as a percentage of net sales has been less
than three-quarters of one percent. See "Risk Factors--Credit Risks."
COMPETITION
The apparel industry is highly competitive and fragmented and is subject to
rapidly changing consumer demands and preferences. The Company believes that its
success depends in large part upon its ability to anticipate, gauge and respond
to changing consumer demands and fashion trends in a timely manner and upon the
continued appeal to consumers of the BOSS, Beverly Hills Polo Club and Girbaud
brands. The Company competes with numerous apparel brands and distributors
(including Calvin Klein, DKNY, Fila, FUBU, Guess?, Tommy Hilfiger, JNCO and
Nautica). Many of the Company's competitors have greater financial resources
than the Company. Although the level and nature of competition differ among its
product categories, the Company believes that it competes on the basis of its
brand image, quality of design and value pricing. In addition, under the
Concurrent Use Agreement, the BHPC Agreements and the Girbaud Agreement, certain
third parties have retained the right to produce, distribute, advertise and
sell, and to authorize others to produce, distribute, advertise and sell certain
garments that are similar to some of the Company's products, including, in the
case of the BOSS brand, similar garments using the BOSS name at generally higher
wholesale price points. Any such production, distribution, advertisement or sale
of such garments by such licensor or another authorized party could have a
material adverse effect on the Company's financial condition or results of
operations. See "Risk Factors--Competition and Changes in Consumer Demands."
MANAGEMENT INFORMATION SYSTEMS
The Company believes that advanced information processing is essential to
maintaining its competitive position. The Company is currently upgrading systems
that allow areas of the business to be more pro-active to customer requirements,
to improve internal communication flow, to increase process efficiency and to
support management decisions. The Company's systems provide, among other things,
comprehensive order processing, production, accounting and management
information for the marketing, selling, manufacturing, retailing and
distribution functions of the Company's business. The Company's software program
allows it to track, among other things, orders, manufacturing schedules,
inventory and sales of its products. The program includes centralized management
information systems, which provide the various operating departments with
financial, sales, inventory and distribution related information. Via electronic
data interchange, the Company is able to ship orders to certain customers within
24 to 72 hours from the time of order receipt.
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EMPLOYEES
The Company believes that its employees are one of its most valuable
resources. As of September 30, 1997, the Company had 930 full-time employees.
The Company is not a party to any labor agreements, and none of its employees is
represented by a labor union. The Company considers its relationship with its
employees to be good and has not experienced any material interruption of its
operations due to labor disputes. See "Risk Factors--Dependence Upon Key
Personnel."
PROPERTIES
Certain information concerning the Company's principal facilities is set
forth below:
<TABLE>
<CAPTION>
LEASED OR APPROXIMATE AREA
LOCATION OWNED USE IN SQUARE FEET
- ----------------------------------------- ----------- ----------------------------------------- ----------------
<S> <C> <C> <C>
Baltimore, MD............................ Owned Administrative Headquarters and Office 40,000
Facilities
New York, NY............................. Leased Sales, Merchandising, Marketing and 7,449
Sourcing Headquarters
New York, NY............................. Leased Sales, Marketing and Sourcing 4,300
Headquarters
Barcelona, Spain......................... Leased European Headquarters 2,000
Milford, DE.............................. Owned Distribution Center 70,000
Newton, MS............................... Leased Manufacturing Plant 101,000
Carthage, MS............................. Leased Manufacturing Plant 110,000
Raleigh, MS.............................. Leased Manufacturing Plant 90,000
</TABLE>
The Company also has regional sales offices, all of which are leased, in the
following cities: Atlanta, Georgia; Dallas, Texas; Miami, Florida; Seattle,
Washington; Los Angeles, California; Philadelphia, Pennsylvania; Boston,
Massachusetts; Minneapolis, Minnesota; Charlotte, North Carolina; and Santurce,
Puerto Rico. The Company believes that its existing facilities are well
maintained and in good operating condition. The Company also believes that its
increased distribution requirements can be better met by consolidating its
warehousing and distribution functions into a new 150,000 square foot facility
to be located in Milford, Delaware. See Note 5 of Notes to Consolidated
Financial Statements for further information regarding current lease
obligations.
ENVIRONMENTAL MATTERS
The Company is subject to federal, state and local laws, regulations and
ordinances that (i) govern activities or operations that may have adverse
environmental effects (such as emissions to air, discharges to water, and the
generation, handling, storage and disposal of solid and hazardous wastes) or
(ii) impose liability for the costs of clean up or other remediation of
contaminated property, including damages from spills, disposals or other
releases of hazardous substances or wastes, in certain circumstances without
regard to fault. Certain of the Company's operations routinely involve the
handling of chemicals and wastes, some of which are or may become regulated as
hazardous substances. The Company has not incurred any significant expenditures
or liabilities for environmental matters. Although the Company believes that its
environmental obligations will not have a material adverse effect on its
financial condition or results of operations, environmental compliance matters
are subject to inherent risks and uncertainties. See "Risk
Factors--Environmental Controls and Other Regulatory Requirements."
LITIGATION
The Company recently entered into a Settlement of litigation involving use
of the BOSS trademark. The original complaint was filed in the United States
District Court for the Southern District of New York on February 11, 1993 by
Hugo Boss Fashions, Inc., International Fashions Apparel Corporation and Hugo
Boss and sought injunctive relief and compensatory damages for misappropriation,
infringement of trademark rights, unfair competition, dilution, use of name with
intent to deceive, violations under the
48
<PAGE>
Lanham Act, breach of contract and tortious interference with contractual
relations. The original complaint named Brookhurst, Boss Sportswear (USA), Inc.
and the Company as defendants and was subsequently amended to add Boss Golf
Company, Inc. The defendants filed a counterclaim against the plaintiffs
alleging trademark infringement and related matters arising out of the
plaintiffs' use of the BOSS trademark. In November 1997, the parties entered
into the Settlement pursuant to which the Company will continue to be able to
use the BOSS brand name and image in connection with the manufacture of BOSS
brand apparel in the United States and certain foreign countries, subject to the
terms of the Concurrent Use Agreement, for distribution in the United States and
Puerto Rico. Although its insurance carrier paid approximately $650,000 pursuant
to the Settlement, the Company did not admit any liability and such payment was
made based on the cost of ligitation rather than any assessment of the Company's
potential liability in the suit. See "--Licenses and Other Rights
Agreements--BOSS Trademark Rights."
From time to time the Company is a party to various claims, complaints and
other legal actions that have arisen in the ordinary course of business. The
Company is not presently aware of any such legal proceedings which, in the
aggregate, it believes would have a material adverse effect on the Company's
financial condition or results of operations.
49
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information concerning the directors
and executive officers of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------------------------- --- -----------------------------------------------------
<S> <C> <C>
Robert J. Arnot...................................... 49 Chairman of the Board, Co-Chief Executive Officer and
Director
Gerald W. Lear....................................... 55 President, Co-Chief Executive Officer and Director
Gary B. Brashers..................................... 50 Vice President--Manufacturing, Chief Operating
Officer and Director
Eugene C. Wielepski.................................. 51 Vice President--Finance, Chief Financial Officer and
Director
Ira J. Hechler....................................... 79 Director
Jon Hechler.......................................... 44 Director
Ronald S. Schmidt.................................... 53 Director
Thomas P. Ormandy.................................... 47 Vice President--Sales
</TABLE>
The Company has two Chief Executive Officers, Robert J. Arnot and Gerald W.
Lear. Messrs. Arnot and Lear share decision-making responsibility with respect
to business strategy, product pricing, budgeting, financial management,
institutional relationships, licensing decisions, European operations and legal
issues.
ROBERT J. ARNOT has been a Director of the Company since 1984, Vice
President of Planning and Corporate Development from 1989 to 1991, Chairman of
the Board of Directors since 1991 and Co-Chief Executive Officer since 1996. He
has been employed by the Company since 1989. In addition to sharing overall
decision-making responsibility as described above, Mr. Arnot has lead
responsibility for the following operating areas, which report directly to him
in New York: BOSS, Beverly Hills Polo Club and Girbaud design and merchandising,
Asian sourcing and manufacturing, BOSS, Beverly Hills Polo Club and Girbaud
sales management and advertising.
GERALD W. LEAR has been a Director of the Company since 1980 and President
and Chief Executive Officer since 1987. He was Vice President from 1975 to 1984
and Executive Vice President from 1984 to 1986. He has been employed by the
Company since 1962. In addition to sharing overall decision-making
responsibility as described above, Mr. Lear has lead responsibility for the
following operating areas, which report directly to him in Baltimore: United
States and Mexican production of bottoms, United States tee shirt production,
I.C. Isaacs bottoms merchandising, bottoms design department, cost accounting,
shipping and warehousing and corporate administration (which includes management
information systems, credit, accounting, customer service and personnel).
GARY B. BRASHERS has been a Director and Chief Operating Officer since 1988
and Vice President-- Manufacturing since 1985. Prior to that he held positions
with the Company in quality control and manufacturing. He has been employed by
the Company since 1978. Prior to joining the Company, he held various
manufacturing management positions in the apparel industry since 1969.
50
<PAGE>
EUGENE C. WIELEPSKI has been a Director, Vice President--Finance and Chief
Financial Officer of the Company since 1991. He has held the positions of
Secretary and Treasurer since 1976. From 1976 to 1990 he was Controller. He is a
Certified Public Accountant and has been employed by the Company since 1973.
IRA J. HECHLER has been a Director of the Company since 1984. He is a
private investor who is also a member of the Board of Directors of American
Banknote Corporation and Concord Camera Corporation. He is Vice Chairman of the
Board of Directors of A.R.T./New York and a member of the Board of Trustees and
Treasurer of the Nassau County Museum of Art.
JON HECHLER has been a Director of the Company since 1984. He has been
employed by Ira J. Hechler and Associates, an investment company, since 1980. He
also serves as President of T. Eliot, Inc., a manufacturer of bathroom
equipment. He is the son of Ira J. Hechler.
RONALD S. SCHMIDT has been a Director of the Company since 1990. He is
President and Chief Executive Officer of I.B. Diffusion, a manufacturer of
ladies' apparel.
THOMAS P. ORMANDY has been Vice President--Sales of the Company since 1986.
Previously, he was a salesman with Thompson and Company, an apparel
manufacturer, since 1975. He is responsible for the sales and marketing of the
BOSS men's, boys' and juniors' lines as well as the Beverly Hills Polo Club
men's line.
BOARD OF DIRECTORS
The Company's Board of Directors is currently comprised of seven members.
There are currently two vacancies, and following the consummation of the
Offering, the Company intends to appoint two additional directors who will be
neither officers nor employees of the Company or its affiliates.
The Company's Board of Directors is divided into three classes of three
members each. Directors of each class will be elected at the annual meeting of
stockholders held in the year in which the term for such class expires and will
serve for three years thereafter. The first class, whose term will expire at the
first annual meeting after the Offering, currently consists of Messrs. Arnot,
Lear and Wielepski; the second class, whose term will expire at the second
annual meeting after the Offering, currently consists of Messrs. Ira J. Hechler,
Jon Hechler and Gary B. Brashers; the third class, whose term will expire at the
third annual meeting after the Offering, currently consists of Mr. Ronald S.
Schmidt. The vacancies in Class III will be filled when the Company appoints two
additional directors after the Offering. For further information on the effect
of the classified Board of Directors, see "Description of Capital Stock--Certain
Certificate of Incorporation, By-law and Statutory Provisions Affecting
Stockholders."
Pursuant to the Restated Shareholders' Agreement, all of the existing
stockholders of the Company have agreed to vote their shares of Common Stock in
elections to fill Class I and Class II of the Board of Directors in favor of the
nominees of the Principal Stockholders (as hereinafter defined). See "Certain
Transactions--Restated Shareholders' Agreement."
The Company has established a Compensation Committee consisting of Messrs.
Ira J. Hechler, Jon Hechler and Ronald S. Schmidt. The Compensation Committee is
responsible for reviewing and approving all compensation arrangements with
officers of the Company and will also be responsible for administering the 1997
Omnibus Stock Plan. See "--1997 Omnibus Stock Plan."
Within 90 days following the consummation of the Offering, the Board of
Directors will establish an Audit Committee. The Audit Committee will be
responsible for recommending to the Board of Directors the engagement of the
independent auditors of the Company and reviewing with the independent auditors
the scope and results of the audits, the internal accounting controls of the
Company, audit practices and the professional services furnished by the
independent auditors.
The General Corporation Law of the State of Delaware (the "Delaware
Corporation Law") provides that a company may indemnify its directors and
officers as to certain liabilities. The Company's Restated
51
<PAGE>
Certificate and Restated By-laws provide for the indemnification of the
Company's directors and officers to the fullest extent permitted by law, and the
Company intends to enter into separate indemnification agreements with each of
its directors and officers to effectuate these provisions and to purchase
directors' and officers' liability insurance. The effect of such provisions is
to indemnify, to the fullest extent permitted by law, the directors and officers
of the Company against all costs, expenses and liabilities incurred by them in
connection with any action, suit or proceeding which they are involved by reason
of their affiliation with the Company. See "Description of Capital
Stock--Certain Certificate of Incorporation, By-law and Statutory Provisions
Affecting Stockholders; and --Director and Officer Indemnification."
COMPENSATION OF DIRECTORS
Directors who are employees of the Company receive no compensation for
serving on the Board of Directors. Directors who are not employees of the
Company will receive an annual retainer fee of $10,000 for their services and
attendance fees of $750 per Board or committee meeting attended. All directors
are reimbursed for expenses incurred in connection with attendance at Board or
committee meetings. In addition, members of the Board of Directors will be
eligible to participate in the Company's 1997 Omnibus Stock Plan. See "--1997
Omnibus Stock Plan."
EXECUTIVE COMPENSATION
The following table sets forth the compensation paid or awarded to, or
earned by, the Co-Chief Executive Officers and the four most highly compensated
officers other than the Co-Chief Executive Officers (the "Named Executive
Officers") for the year ended December 31, 1996.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION(1)(2)
-------------------------------
<S> <C> <C> <C>
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS
- --------------------------------------------------------------------------------------- --------- --------- ---------
Robert J. Arnot........................................................................ 1996 $ 275,676 $ 50,000
Chairman of the Board and
Co-Chief Executive Officer
Gerald W. Lear......................................................................... 1996 300,220 50,000
President and
Co-Chief Executive Officer
Gary B. Brashers....................................................................... 1996 200,220 25,000
Vice President--Manufacturing and
Chief Operating Officer
Eugene C. Wielepski.................................................................... 1996 160,220 20,000
Vice President--Finance and
Chief Financial Officer
Thomas P. Ormandy...................................................................... 1996 240,000 110,000
Vice President--Sales
Marc Baff.............................................................................. 1996 107,620 --
Vice President--Sales
</TABLE>
- ------------------------------
(1) In their capacity as stockholders of the Company, the officers listed above
were reimbursed during 1996 for payment of taxes on income of the Company
that was passed through to the stockholders. See "Dividend Policy."
(2) Perquisites did not exceed the lesser of $50,000 or 10.0% of the total
salary and bonus for any of the Named Executive Officers.
52
<PAGE>
EMPLOYMENT AGREEMENTS
The Company has entered into individual employment agreements (the
"Executive Employment Agreements") with each of Messrs. Arnot, Lear, Brashers,
Wielepski and Ormandy (collectively, the "Executives"). The initial term of the
Executive Employment Agreements began on May 15, 1997 (the "Effective Date") and
will terminate on the third anniversary of the Effective Date in the case of
Messrs. Arnot and Lear and on the second anniversary of the Effective Date in
the case of Messrs. Brashers, Wielepski and Ormandy. The Executive Employment
Agreements will automatically extend after the initial term for successive
one-year terms, unless notice not to extend is given by either party at least 60
days prior to the end of the then current term. The Executive Employment
Agreements provide for an annual base salary of $400,000, $400,000, $240,000,
$200,000 and $300,000 plus up to 20.0% thereof as bonus, respectively, which may
be increased based on periodic reviews by the Compensation Committee. In
addition, the Executive Employment Agreements provide that the Executives are
entitled to participate in any bonus and stock option plans, programs,
arrangements and practices sponsored by the Company as may be established from
time to time by the Board of Directors of the Company for the benefit of such
executive employees, in accordance with the terms of such plans. Each Executive
is also entitled to certain fringe benefits, including Company-paid health and
life insurance. If any of the Executives is terminated without cause (as such
term is defined in the Executive Employment Agreements), then such Executive
will receive as severance his then current base salary for the remainder of his
term of employment. The Executive will also continue to participate in
Company-sponsored health, life insurance and other fringe benefit plans and
programs during the severance period. The Executive Employment Agreements also
include certain noncompetition, nonsolicitation and confidentiality provisions.
1997 OMNIBUS STOCK PLAN
On May 15, 1997, the Board of Directors of the Company and the Company's
stockholders adopted the 1997 Omnibus Stock Plan (the "Plan"). The purpose of
the Plan is to promote the long-term growth and profitability of the Company by
providing key people with incentives to improve stockholder value and contribute
to the growth and financial success of the Company, and by enabling the Company
to attract, retain and reward the best-available persons for positions of
substantial responsibility. The maximum number of shares of Common Stock that
may be issued with respect to awards granted under the Plan is 500,000. The Plan
is administered by the Compensation Committee of the Board of Directors.
Participation in the Plan will be open to all employees, officers, directors and
consultants of the Company or any of its affiliates, as may be selected by the
Compensation Committee from time to time. The Plan allows for stock options,
stock appreciation rights, stock awards, phantom stock awards and performance
awards to be granted. The Compensation Committee will determine the prices,
vesting schedules, expiration dates and other material conditions upon which
such awards may be exercised.
DEFINED BENEFIT PENSION PLAN
The Company maintains a defined benefit pension plan (the "Pension Plan")
for its employees. The normal retirement benefit, payable at age 65, is 20.0% of
base compensation up to $10,000 plus 39.5% of base compensation over $10,000,
prorated for service less than 30 years. A reduced benefit is also payable on
early retirement, after age 55 and after 15 years of service. The Pension Plan
also provides disability retirement and death benefits. The Company pays the
full cost of the benefits under the Pension Plan through its contributions to a
trust. The Company's cash contributions to the Pension Plan during the year
ended December 31, 1996 aggregated $0.6 million.
53
<PAGE>
The Pension Plan Table below provides the estimated annual benefits payable
under the I.C. Isaacs Pension Plan upon retirement in specified compensation and
years of service classifications.
PENSION PLAN TABLE
<TABLE>
<CAPTION>
YEARS OF SERVICE
-----------------------------------------------------
RENUMERATION
- -------------
<C> <S> <C> <C> <C> <C> <C>
15 20 25 30 35
--------- --------- --------- --------- ---------
$ 100,000 ............................................. $ 13,838 $ 18,451 $ 23,063 $ 27,676 $ 27,676
125,000 ............................................. 13,838 18,451 23,063 27,676 27,676
150,000 ............................................. 13,838 18,451 23,063 27,676 27,676
175,000 ............................................. 13,838 18,451 23,063 27,676 27,676
200,000 ............................................. 13,838 18,451 23,063 27,676 27,676
225,000 ............................................. 13,838 18,451 23,063 27,676 27,676
250,000 ............................................. 13,838 18,451 23,063 27,676 27,676
300,000 ............................................. 13,838 18,451 23,063 27,676 27,676
400,000 ............................................. 13,838 18,451 23,063 27,676 27,676
450,000 ............................................. 13,838 18,451 23,063 27,676 27,676
500,000 ............................................. 13,838 18,451 23,063 27,676 27,676
</TABLE>
The compensation considered in determining benefits under the plan (as
provided in the column titled "Remuneration") is the annual average compensation
for the five consecutive calendar years producing the highest average. The
compensation considered is limited to $75,000. All amounts of salary, bonus and
other compensation as reported in the Summary Compensation Table, up to $75,000,
are included in compensation considered under the plan. The amounts of benefit
provided in the Pension Plan Table are the amounts of benefit payable per year
in equal monthly installments for the life expectancy of the participants (i.e.,
straight life annuity amounts). The plan is integrated with Social Security, and
its benefit formula is as follows: (i) 0.6667% of compensation, multiplied by
years of service up to 30 years; plus (ii) 0.65% of compensation in excess of
$10,000 multiplied by years of service up to 30 years.
The estimated credited years of service for each of the Named Executive
Officers were as follows, estimated as of January 1, 1997:
<TABLE>
<CAPTION>
ESTIMATED CREDITED
NAME YEARS OF SERVICE
- -------------------------------------------------------------------------- -----------------------
<S> <C>
Robert J. Arnot........................................................... 5
Gerald W. Lear............................................................ 34
Gary B. Brashers.......................................................... 18
Eugene C. Wielepski....................................................... 23
Thomas P. Ormandy......................................................... 10
Marc Baff................................................................. 19
</TABLE>
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company did not have a Compensation Committee during 1996, but each of
Messrs. Arnot and Lear (each of whom also served as an executive officer of the
Company during 1996) participated in deliberations concerning executive
compensation. The Executive Employment Agreements were approved by the Company's
current Compensation Committee.
KEY MAN INSURANCE
The following individuals are key employees of the Company, and their
contribution to the Company has been and will be a significant factor in the
Company's future success: Robert J. Arnot, Gerald W. Lear, Gary B. Brashers and
Eugene C. Wielepski. The loss of the services of one or more of these executive
54
<PAGE>
officers for an extended period of time could have a material adverse effect on
the Company's financial condition or results of operations. The Company
maintains and is the beneficiary of life insurance policies in the amount of
$1.0 million on the lives of each of Messrs. Arnot, Lear and Brashers and in the
amount of $0.5 million on the life of Mr. Wielepski.
CERTAIN TRANSACTIONS
RESTATED SHAREHOLDERS' AGREEMENT
The Company's Shareholders' Agreement dated December 20, 1984, as amended,
has been amended and restated, effective as of the time of consummation of the
Offering. No consideration was paid in connection with the execution of the
Restated Shareholders' Agreement. Pursuant to the Restated Shareholders'
Agreement, Messrs. Robert J. Arnot, Gerald W. Lear, Ira J. Hechler and Jon
Hechler are designated as principal shareholders (the "Principal Shareholders")
and the other stockholders of the Company immediately prior to consummation of
the Offering are designated as non-principal shareholders (the "Non-Principal
Shareholders"). The Principal Shareholders and the Non-Principal Shareholders
have agreed to vote their shares of Common Stock, in elections to fill Class I
and Class II of the Board of Directors, to elect nominees of the Principal
Shareholders. The Restated Shareholders' Agreement provides that each of the
Principal Shareholders has granted to each of the other Principal Shareholders
and to the Company rights of first refusal (the "Refusal Right") with respect to
the sale of any shares of the Company's outstanding Common Stock. The Restated
Shareholders' Agreement provides that each of the Non-Principal Shareholders
holding, at the time of the contemplated transfer, in excess of 0.5% of the
outstanding Common Stock of the Corporation has granted to (i) each of the
Principal Shareholders, (ii) each Non-Principal Shareholder and (iii) the
Company, rights of first refusal with respect to the sale of any shares of the
Company's outstanding Common Stock. The Restated Shareholders' Agreement also
provides that in the event that any two of (i) Robert J. Arnot, (ii) Gerald W.
Lear and (iii) Ira J. Hechler and Jon Hechler (a "Majority") agree to enter into
a transaction with a third party for the tender of shares (including, without
limitation, in a change of control transaction), the rights of first refusal set
forth above shall not apply and the Majority or the Company may require the
other Principal Shareholders and Non-Principal Shareholders to participate in
such transaction on the same terms and conditions applicable to the Majority.
The Refusal Right terminates upon the earlier of May 15, 2001 or upon the
Principal Shareholders beneficially owning 20% or less of the shares of Common
Stock outstanding. The remainder of the Restated Shareholders' Agreement
terminates upon the earlier of May 15, 2003 or upon the Principal Shareholders
beneficially owning 20% or less of the shares of Common Stock outstanding.
ACQUISITION OF LIMITED PARTNERSHIP INTEREST
Prior to the Closing Date, the Company's wholly-owned subsidiary, Isaacs
Design, Inc., will acquire the Limited Partnership Interest from Ira J. Hechler,
a director and stockholder of the Company, in exchange for approximately
$335,000 in cash, which the Company believes represents terms no less favorable
than as could have been received from a disinterested third party. After the
acquisition, the Company will have sole control of the Partnership. See "Company
Organization."
55
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of the Company's Common Stock as of October 31, 1997, and
as adjusted to reflect the sale of the Common Stock being offered hereby
(assuming no exercise of the Underwriters' over-allotment option) by (i) each
person (or group of affiliated persons) who is known by the Company to own
beneficially more than 5.0% of the outstanding Common Stock, (ii) each of the
Company's directors, (iii) each of the Named Executive Officers and (iv) all
directors and executive officers of the Company as a group:
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP OF BENEFICIAL OWNERSHIP
COMMON STOCK PRIOR TO OF COMMON STOCK
THE OFFERING AFTER THE OFFERING
----------------------- -----------------------
NAME OF BENEFICIAL OWNERS (1) NUMBER PERCENT NUMBER PERCENT
- --------------------------------------------------------------------- ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Robert J. Arnot...................................................... 447,792 11.19% 447,792 5.74%
Gerald W. Lear....................................................... 447,792 11.19 447,792 5.74
Gary B. Brashers..................................................... 288,237 7.21 288,237 3.70
Eugene C. Wielepski.................................................. 185,242 4.63 185,242 2.37
Thomas P. Ormandy.................................................... 158,320 3.96 158,320 2.03
Ira J. Hechler....................................................... 811,361 20.28 811,361 10.40
Jon Hechler.......................................................... 365,791 9.14 365,791 4.69
The Stanley Keller Irrevocable Trust (2)............................. 263,538 6.59 263,538 3.38
Ronald S. Schmidt.................................................... 0 * 0 *
Marc Baff............................................................ 0 * 0 *
All directors and executive officers as a group (10 persons)......... 2,968,073 74.20% 2,968,073 38.05%
</TABLE>
- ------------------------------
* Less than one percent.
(1) The business address of each person listed above beneficially owning more
than 5.0% of the outstanding Common Stock is c/o I.C. Isaacs & Company,
Inc., 3840 Bank Street, Baltimore, Maryland 21224-2522. Except as described
below and subject to the Restated Shareholders' Agreement and applicable
community property laws and similar laws, each person listed above has sole
voting and investment power with respect to such shares. See "Certain
Transactions--Restated Shareholders' Agreement."
(2) The trustees of The Stanley Keller Irrevocable Trust are Barbara Keller and
Howard Schultz.
56
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to the Offering, there has been no public market for the Common Stock.
No predictions can be made as to the effect, if any, that future sales of Common
Stock, and options to acquire shares of Common Stock, or the availability of
shares for future sale, will have on the market price prevailing from time to
time. Sales of substantial amounts of Common Stock in the public market, or the
perception that such sales may occur, could have a material adverse effect on
the market price of the Common Stock. See "Risk Factors--Future Sales by
Existing Stockholders; Shares Eligible for Future Sale" and "Management--1997
Omnibus Stock Plan."
Upon the consummation of the Offering, the Company will have 7.8 million
shares of Common Stock outstanding. Of these shares, the 3.8 million shares of
Common Stock sold by the Company in the Offering will be freely tradable without
restriction or further registration under the Securities Act, unless held by an
"affiliate" of the Company (as that term is defined under the Securities Act).
Any such affiliate will be subject to the resale limitations of Rule 144 adopted
under the Securities Act. The remaining 4.0 million shares of Common Stock
outstanding are "restricted securities" for purposes of Rule 144 and are held by
"affiliates" of the Company within the meaning of Rule 144 under the Securities
Act. Restricted securities may not be resold in a public distribution except in
compliance with the registration requirements of the Securities Act or pursuant
to an exemption therefrom, including the exemption provided by Rule 144.
In general, under Rule 144, a person (or persons whose shares are
aggregated), including a person who may be deemed to be an "affiliate" of the
Company, is entitled to sell within any three-month period a number of shares
beneficially owned for at least one year that does not exceed the greater of (i)
1.0% of the then outstanding shares of Common Stock or (ii) the average weekly
trading volume of the outstanding shares of Common Stock during the four
calendar weeks preceding such sale. Sales under Rule 144 are also subject to
certain requirements as to the manner of sale, notice and the availability of
current public information about the Company. However, a person (or persons
whose shares are aggregated) who is not an "affiliate" of the Company during the
90 days preceding a proposed sale by such person and who has beneficially owned
"restricted securities" for at least two years is entitled to sell such shares
under Rule 144 without regard to the volume, manner of sale or notice
requirements.
The Company, together with each of its executive officers, directors and
stockholders beneficially owning in the aggregate 51.3% of the shares of Common
Stock outstanding after the Offering have entered into lock-up agreements with
The Robinson-Humphrey Company, LLC and Legg Mason Wood Walker, Incorporated, as
representatives of the Underwriters, pursuant to which they have agreed not to,
directly or indirectly, sell, offer to sell, contract to sell, solicit an offer
to buy, grant any option for the purchase or sale of, assign, pledge, distribute
or otherwise transfer, dispose of or encumber (or make any announcement with
respect to any of the foregoing), any of their shares of Common Stock (other
than those being sold pursuant to this Offering) or any options, rights,
warrants or other securities convertible into or exercisable or exchangeable for
Common Stock or evidencing any right to purchase or subscribe for shares of
Common Stock for a period of 180 days following the date of this Prospectus
without the prior written consent of the representatives of the Underwriters. In
addition, certain restrictions on transfers of shares of Common Stock by the
existing stockholders of the Company are contained in the Restated Stockholders'
Agreement. Sales of substantial amounts of Common Stock in the public market, or
the perception that such sales may occur, could have a material adverse effect
on the market price of the Common Stock. See "Certain Transactions--Restated
Shareholders' Agreement."
The Company has adopted the 1997 Omnibus Stock Plan, pursuant to which an
aggregate of 500,000 shares are available for option grants and other equity
awards. See "Management--1997 Omnibus Stock Plan." The Company intends to file a
registration statement on Form S-8 under the Securities Act to register all of
the shares of Common Stock reserved for issuance under the 1997 Omnibus Stock
Plan. Such registration statement is expected to be filed as soon as practicable
after the date of the Offering and will automatically become effective upon
filing. Shares issued under the 1997 Omnibus Stock Plan after the registration
statement is filed may thereafter be sold in the public market, subject, in the
case of the various holders, to the Rule 144 volume limitations applicable to
affiliates, the lock-up agreement described above and any transfer or vesting
restrictions imposed on the date of the grant.
57
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The following summary description of the capital stock of the Company is
qualified in its entirety by reference to the form of Restated Certificate and
the form of Restated By-laws, each to become effective upon consummation of the
Offering and each filed as an exhibit to the Registration Statement of which
this Prospectus forms a part.
The authorized capital stock of the Company consists of 50.0 million shares
of Common Stock, par value $.0001 per share, and 5.0 million shares of Preferred
Stock, par value $.0001 per share.
COMMON STOCK
Holders of Common Stock are entitled to one vote for each share held on all
matters submitted to a vote of the stockholders, including the election of
directors. The Restated Certificate does not provide for cumulative voting in
the election of directors. Accordingly, holders of a majority of the shares of
Common Stock entitled to vote in any election of directors may elect all of the
directors standing for election. Subject to preferences that may be applicable
to any Preferred Stock outstanding at the time, holders of Common Stock are
entitled to receive ratably such dividends, if any, as may be declared from time
to time by the Board of Directors out of funds legally available therefor. See
"Dividend Policy." In the event of a liquidation, dissolution or winding up of
the Company, holders of Common Stock have no preemptive rights and no rights to
convert their Common Stock into any other securities and there are no redemption
provisions with respect to such shares. All of the outstanding shares of Common
Stock are fully paid and non-assessable. The rights, preferences and privileges
of holders of Common Stock are subject to, and may be adversely affected by, the
rights of the holders of shares of any series of Preferred Stock that the Board
of Directors may designate and that the Company may issue in the future.
At present there is no established trading market for the Common Stock.
Application has been made for quotation of the Common Stock on the Nasdaq
National Market under the symbol "ISAC."
The transfer agent and registrar for the Common Stock is American Stock
Transfer & Trust Company, New York, New York.
PREFERRED STOCK
The Restated Certificate provides that the Board of Directors, without
further action by the stockholders, may issue shares of the Preferred Stock in
one or more series and may fix or alter the relative, participating, optional or
other rights, preferences, privileges and restrictions, including the voting
rights, redemption provisions (including sinking fund provisions), dividend
rights, dividend rates, liquidation preferences and conversion rights, and the
description of and number of shares constituting any wholly unissued series of
Preferred Stock. The Board of Directors, without further stockholder approval,
can issue Preferred Stock with voting and conversion rights, which could
adversely affect the voting power of the holders of Common Stock. No shares of
Preferred Stock presently are outstanding, and the Company currently has no
plans to issue shares of Preferred Stock. The issuance of Preferred Stock in
certain circumstances may have the effect of delaying or preventing a change of
control of the Company without further action by the stockholders, may
discourage bids for the Company's Common Stock at a premium over the market
price of the Common Stock and may adversely affect the market price and the
voting and other rights of the holders of Common Stock.
CERTAIN CERTIFICATE OF INCORPORATION, BY-LAW AND STATUTORY PROVISIONS AFFECTING
STOCKHOLDERS
CLASSIFIED BOARD OF DIRECTORS. The Company's Board of Directors is divided
into three classes of directors, designated Class I, Class II and Class III.
Each class shall consist, as nearly as possible, of one-third of the total
number of directors. The term of the initial Class I directors will terminate on
the date of the annual meeting of stockholders (an "Annual Meeting") in 1998,
the term of the initial Class II directors
58
<PAGE>
will expire on the date of the 1999 Annual Meeting, and the term of the initial
Class III directors will expire on the date of the 2000 Annual Meeting. At each
Annual Meeting, beginning in 1998, successors to the class of directors whose
term expires at that Annual Meeting will be elected for a three-year term. See
"Management--Board of Directors." At least two annual meetings of stockholders,
instead of one, generally will be required to change the majority of the
Company's Board of Directors.
SPECIAL MEETINGS OF STOCKHOLDERS; STOCKHOLDER ACTION BY WRITTEN
CONSENT. The Restated Certificate provides that any action required or
permitted to be taken by the Company's stockholders may be effected without a
meeting, without prior notice and without a vote if a consent in writing is
signed by the holders of a number of shares that would be sufficient to take
such action at a meeting of the stockholders. Additionally, the Restated By-laws
provide that special meetings of the stockholders of the Company may be called
only by the Chairman of the Board of Directors, the Chief Executive Officer or
the President of the Company.
ADVANCE NOTICE REQUIREMENTS OF STOCKHOLDER PROPOSALS AND DIRECTOR
NOMINATIONS. The Restated By-laws provide that stockholders seeking to bring
business before or to nominate directors at any meeting of stockholders, must
provide timely notice thereof in writing. To be timely, a stockholder's notice
must be delivered to, or mailed and received at, the principal executive offices
of the Company not less than 60 days nor more than 90 days prior to the
anniversary date of the immediately preceding annual meeting of stockholders;
provided, however, that (i) in the event that the annual meeting is called for a
date that is not within 30 days before or after such anniversary date or (ii) in
the case of the annual meeting of stockholders held during the 1998 fiscal year
of the Company, notice by the stockholder in order to be timely must be so
received not later than the close of business on the tenth day following the day
on which notice of the date of the annual meeting was mailed or public
disclosure of the date of the annual meeting was made, whichever first occurs.
The Restated By-laws also specify certain requirements for a stockholder's
notice to be in proper written form. These provisions may preclude some
stockholders from bringing matters before the stockholders or from making
nominations for directors.
DIRECTOR AND OFFICER INDEMNIFICATION. The Delaware Corporation Law provides
that a Delaware corporation may include provisions in its certificate of
incorporation relieving each of its directors of monetary liability arising out
of his or her conduct as a director for breach of his or her fiduciary duty
except liability for (i) any breach of such director's duty of loyalty to the
corporation or its stockholders, (ii) acts or omissions that are not in good
faith or involve intentional misconduct or a knowing violation of law, (iii)
conduct violating Section 174 of the Delaware Corporation Law (which section
relates to unlawful distributions) or (iv) any transaction from which a director
derived an improper personal benefit. The Company's Restated Certificate
includes such provisions.
To the fullest extent permitted by the Delaware Corporation Law, as amended
from time to time, the Company's Restated Certificate and Restated By-laws
provide that the Company shall indemnify and advance expenses to each of its
currently acting and former directors and officers, and may so indemnify and
advance expenses to each of its current and former employees and agents. The
Company believes the foregoing provisions are necessary to attract and to retain
qualified persons as directors and officers. Following consummation of the
Offering, the Company intends to enter into separate indemnification agreements
with each of its directors and executive officers in order to effectuate such
provisions.
59
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below, for whom The Robinson-Humphrey Company, LLC and Legg
Mason Wood Walker, Incorporated are acting as representatives (the
"Representatives"), have severally agreed to purchase from the Company and the
Company has agreed to sell to the Underwriters, the number of shares of Common
Stock set forth opposite their respective names.
<TABLE>
<CAPTION>
NUMBER
OF
UNDERWRITER SHARES
- --------------------------------------------------------------------------------- ----------
<S> <C>
The Robinson-Humphrey Company, LLC...............................................
Legg Mason Wood Walker, Incorporated.............................................
----------
Total........................................................................ 3,800,000
----------
----------
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters thereunder are subject to approval of certain legal matters by
counsel and to various other conditions. The nature of the Underwriters'
obligations is such that they are committed to purchase all shares of Common
Stock offered hereby if any are purchased.
The Underwriters propose to offer the shares of Common Stock directly to the
public at the initial public offering price set forth on the cover page of this
Prospectus and to certain dealers at such price less a concession not in excess
of $ per share. The Underwriters may allow, and such dealers may reallow, a
concession not in excess of $ per share in sales to certain other dealers.
After the Offering, the public offering price and other selling terms may be
changed.
The Company has granted to the Underwriters a 30-day option to purchase up
to an additional 570,000 shares of Common Stock at the Offering price less the
underwriting discount set forth on the cover page of this Prospectus to cover
over-allotments, if any.
Prior to the offering made hereby, there has been no public market for the
Common Stock. The initial public offering price for the Common Stock will be
determined through negotiations among the Company and the Representatives and
will not be based upon any independent appraisal or valuation of the Company.
Among the factors to be considered in making such determination are prevailing
market and general economic conditions, the market capitalization of
publicly-traded companies that the Company and the Representatives believe to be
comparable to the Company, the revenues and earnings of the Company in recent
periods, the experience of the Company's management, the economic characteristic
of the business in which the Company competes, estimates of the business
potential of the Company, the present state of the Company's development and
other factors deemed relevant.
The Underwriters do not intend to confirm sales of shares of Common Stock to
any account over which they exercise discretionary authority. The
Representatives intend to make a market in the Common Stock after completion of
this Offering.
The Company, together with each of its executive officers and directors and
stockholders beneficially owning in the aggregate approximately 4.0 million
shares of Common Stock, have entered into lock-up agreements with the
Representatives pursuant to which they have agreed not to, directly or
indirectly, sell, offer to sell, contract to sell, solicit an offer to buy,
grant any option for the purchase or sale of, assign, pledge, distribute or
otherwise transfer, dispose of or encumber (or make any announcement with
respect to any of the foregoing) any shares of Common Stock (other than those
being sold pursuant to this
60
<PAGE>
Offering) or any options, rights, warrants or other securities convertible into
or exercisable or exchangeable for Common Stock or evidencing any right to
purchase or subscribe for shares of Common Stock for a period of 180 days from
the date of this Prospectus without the prior written consent of the
Representatives.
In connection with the Offering, the Underwriters may purchase and sell
shares of Common Stock in the open market. These transactions may include
over-allotment and stabilizing transactions and purchases to cover syndicate
short positions created in connection with the Offering. Stabilizing
transactions consist of certain bids or purchases for the purpose of preventing
or retarding a decline in the market price of the Common Stock, and syndicate
short positions involve the sale by the Underwriters of a greater number of
shares of Common Stock than they are required to purchase from the Company in
the Offering. The Underwriters also may impose a penalty bid, whereby selling
concessions allowed to syndicate members or other broker-dealers in respect of
the shares sold in the Offering may be reclaimed by the syndicate if such shares
of Common Stock are repurchased by the syndicate in stabilizing or covering
transactions. These activities may stabilize, maintain or otherwise affect the
market price of the Common Stock, which may be higher than the price that might
otherwise prevail in the open market; and these activities, if commenced, may be
discontinued at any time. These transactions may be effected in the Nasdaq
National Market, in the over-the-counter market or otherwise.
The Company has agreed to indemnify the Underwriters against, and to
contribute to losses arising out of, certain liabilities, including liabilities
under the Securities Act.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by Piper & Marbury L.L.P. Certain legal matters relating to the Offering
will be passed upon for the Underwriters by Alston & Bird LLP.
EXPERTS
The consolidated financial statements and schedule included in this
Prospectus and in the Registration Statement have been audited by BDO Seidman,
LLP, independent certified public accountants, to the extent and for the periods
set forth in their reports appearing elsewhere herein and in the Registration
Statement and have been included herein in reliance upon such reports given upon
the authority of said firm as experts in accounting and auditing.
61
<PAGE>
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement under the
Securities Act with respect to the Common Stock offered hereby. This Prospectus,
which is part of the Registration Statement, does not contain all of the
information set forth in the Registration Statement and the exhibits and
schedules thereto, certain items of which are omitted as permitted by the rules
and regulations of the Commission. For further information with respect to the
Company or the Common Stock, reference is made to the Registration Statement and
the exhibits and schedules filed as a part thereof. Statements contained in this
Prospectus regarding the contents of any contract or any other document are not
necessarily complete and, in each instance, reference is hereby made to the copy
of such contract or other document filed as an exhibit to such Registration
Statement. The Registration Statement, including exhibits thereto, may be
inspected, without charge, and copies of all or any part thereof may be obtained
upon payment of prescribed fees at the public reference facilities of the
Commission, maintained by the Commission at its principal office located at 450
Fifth Street, N.W., Washington, D.C. 20549, the New York Regional Office located
at Seven World Trade Center, 13th Floor, New York, New York 10048 and the
Chicago Regional Office located at Northwestern Atrium Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661. Such material may also be accessed
electronically by means of the Commission's home page on the Internet at
http:\\www.sec.gov.
Statements contained in this Prospectus concerning the contents of any
contract or other document are not necessarily complete and, in each instance,
reference is made to the copy of such contract or other document filed as an
exhibit to the Registration Statement, each such statement being qualified in
all respects by such reference.
The Company intends to furnish its stockholders with annual reports
containing financial statements audited by independent accountants and with
quarterly reports containing unaudited financial information for each of the
first three quarters of each fiscal year.
62
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Certified Public Accountants.................................... F-2
Consolidated Balance Sheets at December 31, 1995, 1996 and September 30, 1997......... F-3
Consolidated Statements of Income for the years ended December 31, 1994, 1995, 1996
and the nine months ended September 30, 1996 and September 30, 1997................. F-4
Consolidated Statements of Stockholders' Equity for the years ended December 31, 1994,
1995, 1996 and the nine months ended September 30, 1996 and September 30, 1997...... F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1994, 1995,
1996 and the nine months ended September 30, 1996 and September 30, 1997............ F-6
Notes to Consolidated Financial Statements............................................ F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
I.C. Isaacs & Company, Inc.
Baltimore, Maryland
We have audited the accompanying consolidated balance sheets of I.C. Isaacs
& Company, Inc. and subsidiaries as of December 31, 1995 and 1996 and September
30, 1997 and the related consolidated statements of income, stockholders' equity
and cash flows for each of the three years in the period ended December 31, 1996
and the nine month periods ended September 30, 1996 and 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of I.C. Isaacs
& Company, Inc. and subsidiaries at December 31, 1995 and 1996 and September 30,
1997 and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1996 and the nine month periods
ended September 30, 1996 and 1997 in conformity with generally accepted
accounting principles.
/s/ BDO Seidman, LLP
Washington, D.C.
October 31, 1997, except for
Note 5, the date of which is
November 13, 1997
F-2
<PAGE>
I.C. ISAACS & COMPANY, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, PRO FORMA
---------------------------- SEPTEMBER 30, SEPTEMBER 30,
1995 1996 1997 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
(UNAUDITED)
ASSETS
Current
Cash, including temporary investments of $779,436, $368,175
and $127,514................................................ $ 1,411,954 $ 938,799 $ 1,492,535 $ 1,158,036
Accounts receivable, less allowance for doubtful accounts of
$350,000, $660,000 and $1,120,000 (Note 3).................. 10,365,050 16,582,990 32,937,439 32,937,439
Inventories (Notes 1 and 3)................................... 14,323,730 14,090,974 22,526,000 22,526,000
Prepaid expenses and other (Note 6)........................... 703,267 1,266,655 1,601,737 1,601,737
------------- ------------- ------------- -------------
Total current assets............................................ 26,804,001 32,879,418 58,557,711 58,223,212
Property, Plant and Equipment, at cost, less accumulated
depreciation and amortization (Notes 2 and 3)................. 2,818,637 2,399,822 2,514,518 2,514,518
Goodwill, less accumulated amortization of $731,025, $797,265
and $846,945.................................................. 1,921,075 1,854,835 1,805,155 1,805,155
Other Assets (Note 5)........................................... 219,941 122,565 643,190 1,943,190
------------- ------------- ------------- -------------
$ 31,763,654 $ 37,256,640 $ 63,520,574 $ 64,486,075
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current
Checks issued against future deposits......................... $ 1,217,832 $ 1,150,679 $ 3,333,423 $ 3,333,423
Current maturities of term loan and revolving line of credit
(Note 3).................................................... 7,417,500 6,520,418 22,489,284 22,489,284
Current maturities of capital lease obligations (Note 3)...... 223,999 216,764 142,040 142,040
Accounts payable.............................................. 5,110,126 6,378,310 6,295,096 6,295,096
Accrued expenses and other current liabilities (Note 4)....... 1,816,957 2,144,277 3,611,297 3,611,297
Accrued compensation.......................................... 210,810 194,710 327,509 327,509
Distribution payable.......................................... -- -- -- 18,500,000
------------- ------------- ------------- -------------
Total current liabilities....................................... 15,997,224 16,605,158 36,198,649 54,698,649
------------- ------------- ------------- -------------
Long-term Debt (Note 3)
Term loan..................................................... 116,649 699,994 549,991 549,991
Capital lease obligations..................................... 575,403 358,638 255,335 255,335
Junior subordinated notes..................................... 311,130 -- -- --
------------- ------------- ------------- -------------
Total long-term debt............................................ 1,003,182 1,058,632 805,326 805,326
------------- ------------- ------------- -------------
Minority interest............................................... 118,431 200,273 334,499 --
------------- ------------- ------------- -------------
Commitments and Contingencies (Notes 3,
5 and 6)
STOCKHOLDERS' EQUITY (Note 9):
Preferred stock; $.0001 par value; 5,000,000 shares
authorized, none outstanding................................ -- -- -- --
Common stock; $.0001 par value; 50,000,000 shares authorized;
4,024,699 shares issued; 4,000,000 shares outstanding....... 402 402 402 402
Additional paid-in capital.................................... 266,579 266,579 266,579 266,579
Retained earnings............................................. 14,392,704 19,140,464 25,929,987 8,729,987
Treasury stock, at cost (24,699 shares)....................... (14,868) (14,868) (14,868) (14,868)
------------- ------------- ------------- -------------
Total stockholders' equity...................................... 14,644,817 19,392,577 26,182,100 8,982,100
------------- ------------- ------------- -------------
$ 31,763,654 $ 37,256,640 $ 63,520,574 $ 64,486,075
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
F-3
<PAGE>
I.C. ISAACS & COMPANY, INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
NINE MONTHS
YEARS ENDED DECEMBER 31, ENDED SEPTEMBER 30,
-------------------------------------------- -----------------------------
1994 1995 1996 1996 1997
------------- ------------- -------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
Net sales................................. $ 85,298,186 $ 93,271,157 $ 118,655,253 $ 86,679,910 $ 127,246,549
Cost of sales............................. 62,216,041 68,529,969 84,421,651 60,188,034 85,676,570
------------- ------------- -------------- ------------- --------------
Gross profit.............................. 23,082,145 24,741,188 34,233,602 26,491,876 41,569,979
------------- ------------- -------------- ------------- --------------
Operating Expenses
Selling (Note 5)........................ 7,461,438 8,926,800 11,897,834 8,932,030 12,153,727
License fees (Note 5)................... 3,012,193 3,174,656 4,817,037 3,478,514 5,926,964
Distribution and shipping............... 2,045,911 2,378,728 2,669,093 1,905,655 3,223,690
General and administrative.............. 5,813,853 5,786,524 6,243,327 4,151,834 5,369,729
Recovery of legal fees (Note 5)......... -- -- (718,558) -- (117,435)
------------- ------------- -------------- ------------- --------------
Total operating expenses.................. 18,333,395 20,266,708 24,908,733 18,468,033 26,556,675
------------- ------------- -------------- ------------- --------------
Operating income.......................... 4,748,750 4,474,480 9,324,869 8,023,843 15,013,304
------------- ------------- -------------- ------------- --------------
Other Income (Expense)
Interest................................ (1,191,047) (1,247,353) (1,365,163) (994,545) (1,619,198)
Other, net (Note 8)..................... 1,235,030 (3,178) 84,795 (21,492) 28,272
------------- ------------- -------------- ------------- --------------
Total other income (expense).............. 43,983 (1,250,531) (1,280,368) (1,016,037) (1,590,926)
------------- ------------- -------------- ------------- --------------
Income before minority interest and
extraordinary item...................... 4,792,733 3,223,949 8,044,501 7,007,806 13,422,378
Minority interest......................... (52,520) (32,593) (81,842) (70,768) (134,226)
------------- ------------- -------------- ------------- --------------
Income before extraordinary item.......... 4,740,213 3,191,356 7,962,659 6,937,038 13,288,152
Extraordinary Item--Gain on extinguishment
of debt (Note 3)........................ 388,770 -- -- -- --
------------- ------------- -------------- ------------- --------------
Net income................................ $ 5,128,983 $ 3,191,356 $ 7,962,659 $ 6,937,038 $ 13,288,152
------------- ------------- -------------- ------------- --------------
------------- ------------- -------------- ------------- --------------
Pro forma financial information:
Income before income taxes, as
presented............................... $ 5,128,983 $ 3,191,356 $ 7,962,659 $ 6,937, 038 $ 13,288,152
Pro forma provision for income taxes
(unaudited)............................. 2,103,000 1,308,000 3,265,000 2,844,000 5,448,000
------------- ------------- -------------- ------------- --------------
Pro forma net income (unaudited).......... $ 3,025,983 $ 1,883,356 $ 4,697,659 $ 4,093,038 $ 7,840,152
------------- ------------- -------------- ------------- --------------
------------- ------------- -------------- ------------- --------------
Pro forma earnings per share
(unaudited)............................. $ 0.87 $ 1.45
Weighted average shares outstanding....... 5,423,077 5,423,077
</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
F-4
<PAGE>
I.C. ISAACS AND COMPANY, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL
------------------------ ---------------------- PAID-IN RETAINED TREASURY
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS STOCK TOTAL
----------- ----------- --------- ----------- ----------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1993... -- -- 4,024,699 $ 402 $ 247,791 $10,611,742 $ (63,143) $10,796,792
Net income..................... -- -- -- -- -- 5,128,983 -- 5,128,983
Stockholder distributions...... -- -- -- -- -- (1,603,511) -- (1,603,511)
Purchase of treasury stock
(24,699 shares).............. -- -- -- -- -- -- (13,579) (13,579)
----------- ----------- --------- ----------- ----------- ---------- --------- ----------
Balance at December 31, 1994... -- -- 4,024,699 402 247,791 14,137,214 (76,722) 14,308,685
Net income..................... -- -- -- -- 3,191,356 -- 3,191,356
Stockholder distributions...... -- -- -- -- -- (2,935,866) (2,935,866)
Sale of treasury stock (24,699
shares)...................... -- -- -- -- 18,788 -- 61,854 80,642
----------- ----------- --------- ----------- ----------- ---------- --------- ----------
Balance at December 31, 1995... -- -- 4,024,699 402 266,579 14,392,704 (14,868) 14,644,817
Net income..................... -- -- -- -- -- 7,962,659 7,962,659
Stockholder distributions...... -- -- -- -- -- (3,214,899) -- (3,214,899)
----------- ----------- --------- ----------- ----------- ---------- --------- ----------
Balance at December 31, 1996... -- -- 4,024,699 402 266,579 19,140,464 (14,868) 19,392,577
Net income..................... -- -- -- -- -- 13,288,152 -- 13,288,152
Stockholder distributions...... -- -- -- -- -- (6,498,629) -- (6,498,629)
----------- ----------- --------- ----------- ----------- ---------- --------- ----------
Balance at September 30,
1997......................... -- -- 4,024,699 $ 402 $ 266,579 $25,929,987 $ (14,868) $26,182,100
----------- ----------- --------- ----------- ----------- ---------- --------- ----------
----------- ----------- --------- ----------- ----------- ---------- --------- ----------
</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
F-5
<PAGE>
I.C. ISAACS & COMPANY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------------- -----------------------
1994 1995 1996 1996 1997
---------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Operating Activities
Net income..................................... $5,128,983 $3,191,356 $7,962,659 $6,937,038 $13,288,152
Adjustments to reconcile net income to net cash
provided by operating activities
Write-off of other assets.................... 61,981 -- -- -- --
Extraordinary gain........................... (388,770) -- -- -- --
Provision for doubtful accounts.............. 278,338 398,451 1,193,693 543,775 1,251,425
Write-off of accounts receivable............. (428,338) (398,451) (883,693) (443,775) (791,425)
Provision for sales returns and discounts.... 5,545,414 5,104,266 5,955,658 3,596,697 8,122,576
Sales returns and discounts.................. (5,483,107) (5,062,285) (5,633,525) (3,445,857) (8,529,067)
Provision of overcharges..................... -- -- -- -- 174,150
Depreciation and amortization................ 1,512,934 1,477,450 1,359,252 1,076,778 759,513
(Gain) loss on sale of assets................ -- 99,116 (71,800) -- --
Minority interest............................ 52,520 32,593 81,842 70,768 134,226
(Increase) decrease in assets
Accounts receivable........................ (2,915,062) 886,051 (6,850,073) (9,848,535) (16,582,108)
Inventories................................ 470,913 (2,936,042) 232,756 (727,936) (8,435,026)
Prepaid expenses and other................. 459,543 (161,621) (563,388) (137,593) (335,082)
Other assets............................... (325,000) -- -- -- (43,624)
Increase (decrease) in liabilities
Accounts payable........................... (1,099,403) 971,255 1,268,184 230,923 (83,214)
Accrued expenses and other current
liabilities.............................. 665,696 43,334 327,320 874,931 1,467,020
Accrued compensation....................... 52,470 (44,030) (16,100) 61,494 132,799
---------- ---------- ---------- ---------- -----------
Cash provided by (used in) operating
activities....................................... 3,589,112 3,601,443 4,362,785 (1,211,292) (9,469,685)
---------- ---------- ---------- ---------- -----------
Investing Activities
Proceeds from sale of assets................... -- 13,750 71,800 -- --
Capital expenditures........................... (676,648) (669,464) (701,821) (382,238) (780,495)
---------- ---------- ---------- ---------- -----------
Cash used in investing activities................ (676,648) (655,714) (630,021) (382,238) (780,495)
---------- ---------- ---------- ---------- -----------
Financing Activities
Checks issued against future deposits.......... 440,374 345,929 (67,153) (139,071) 2,182,744
(Purchase) sale of treasury stock.............. (13,579) 80,642 -- -- --
Stockholder distributions...................... (1,603,511) (2,935,866) (3,214,899) (2,060,997) (6,498,629)
Principal payments on debt..................... (1,783,263) (760,618) (1,632,216) (325,734) (328,030)
Principal proceeds from debt................... 833,230 291,552 783,349 4,036,211 15,968,866
Deferred financing costs....................... -- -- (75,000) (75,000) (521,035)
---------- ---------- ---------- ---------- -----------
Cash provided by (used in) financing
activities....................................... (2,126,749) (2,978,361) (4,205,919) 1,435,409 10,803,916
---------- ---------- ---------- ---------- -----------
Increase (decrease) in cash and cash
equivalents...................................... 785,715 (32,632) (473,155) (158,121) 553,736
Cash and Cash Equivalents, at beginning of
period........................................... 658,871 1,444,586 1,411,954 1,411,954 938,799
---------- ---------- ---------- ---------- -----------
Cash and Cash Equivalents, at end of period...... $1,444,586 $1,411,954 $ 938,799 $1,253,833 $ 1,492,535
---------- ---------- ---------- ---------- -----------
---------- ---------- ---------- ---------- -----------
</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
F-6
<PAGE>
I.C. ISAACS & COMPANY, INC.
SUMMARY OF ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of I.C. Isaacs &
Company, Inc. ("ICI"), I.C. Isaacs Europe, S.L. ("Isaacs Europe") and I.C.
Isaacs & Company L.P. (the "Partnership"). Collectively, ICI, Isaacs Europe and
the Partnership are referred to herein as the "Company." ICI, operates as the
general partner of the Partnership and has a 99.0% ownership interest. The
limited partner, with a 1.0% ownership interest, is an individual. The Company
has accounted for the limited partner's ownership interest as a minority
interest in the accompanying consolidated financial statements. The Company
established Isaacs Europe in July 1996 as the exclusive licensee of Beverly
Hills Polo Club sportswear in Europe. Isaacs Europe did not have any significant
revenue or expenses in 1996 or through September 30, 1997. All intercompany
balances and transactions have been eliminated.
BUSINESS DESCRIPTION
The Company, which operates in one business segment, designs, manufactures
and markets branded sportswear for men, women and boys under the BOSS brand in
the United States and Puerto Rico and under the Beverly Hills Polo Club brand in
the United States, Puerto Rico and Europe. The Company also manufactures women's
sportswear under various Company-owned brand names as well as under third-party
private labels.
INTERIM FINANCIAL INFORMATION
In the opinion of management, the interim financial information as of
September 30, 1997 and for the nine months ended September 30, 1996 and 1997
contains all adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation of the results for such periods. Results for
interim periods are not necessarily indicative of results to be expected for an
entire year.
REORGANIZATION AND PRO FORMA INFORMATION (UNAUDITED)
ICI has or will initiate certain events (the "Reorganization") in connection
with its initial public offering of common stock. ICI has established a
wholly-owned subsidiary ("Isaacs Design, Inc.") to purchase, at book value, the
1.0% limited partnership interest in the Partnership held by the limited
partner. Consequently, upon completion of the initial public offering, the
consolidated group will include ICI, Isaacs Design, Inc., Isaacs Europe and the
Partnership. In connection with the Reorganization, ICI will declare a dividend
to the stockholders representing earned but undistributed earnings through the
closing date of the Reorganization.
Concurrently with the Reorganization, ICI will terminate its Subchapter S
corporation status and will become subject to federal and state income taxes.
The accompanying consolidated statements of income reflect a pro forma provision
for income taxes for the years ended December 31, 1994, 1995 and 1996 and for
the nine month periods ended September 30, 1996 and 1997, based upon pretax
income as if the consolidated group discussed above had been subject to federal
and state income taxes, based on an estimated effective tax rate of 41.0%. The
difference between the statutory and estimated effective tax rates is due to
state income taxes (4.5%), nondeductible entertainment expense (2.0%) and
nondeductible goodwill amortization (0.5%). In connection with termination of
its Subchapter S corporation status, ICI will record a net deferred tax asset
and accompanying tax benefit to reflect the differences in the financial
statement and income tax bases of the assets and liabilities which principally
relate to uniform inventory capitalization ($0.1 million), allowance for
doubtful accounts ($0.4 million), depreciation ($0.7 million) and other accruals
($0.1 million). If the Subchapter S corporation status had terminated on
September 30,
F-7
<PAGE>
I.C. ISAACS & COMPANY, INC.
SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
1997, the net deferred tax asset that would have been recognized would have been
approximately $1.3 million.
Pro forma earnings per share are based on pro forma net income and the
weighted average number of shares of common stock outstanding adjusted to
include the estimated number of shares (1,423,077) being sold by ICI which would
be necessary to fund the distribution of all previously earned but undistributed
Subchapter S corporation earnings. This amount, estimated at $18.5 million as of
September 30, 1997, will be paid as the initial Subchapter S corporation
distribution upon the closing of the initial public offering.
Supplementary pro forma net income per share for the year ended December 31,
1996 and the nine months ended September 30, 1997 of $0.79 and $1.09,
respectively, is based upon the weighted number of shares of common stock used
in the calculation of pro forma net income per share increased by the sale of
555,416 and 1,772,252 shares, respectively, assuming an initial offering price
of $13.00 per share, the proceeds of which would be necessary to repay
approximately $7,220,408 and $23,039,275, respectively, of the Company's term
loan and revolving line of credit.
The pro forma balance sheet as of September 30, 1997 reflects the
termination of the Subchapter S corporation status, establishment of the net
deferred tax asset, declaration of the dividend of the earned but undistributed
Subchapter S corporation earnings and the purchase of the minority interest as
if they had occurred on September 30, 1997.
RISKS AND UNCERTAINTIES
The apparel industry is highly competitive. The Company competes primarily
with larger, well capitalized companies, which may seek to increase market share
through price reductions. The risk to the Company is that such a strategy may
ultimately lead to reduced profit margins. In the past several years, many of
the Company's competitors have switched much of their apparel manufacturing from
the United States to foreign locations such as Mexico, the Dominican Republic
and throughout Asia. As competitors lower production costs it gives them greater
flexibility to alter prices. Over the last several years, the Company has
switched a significant portion of its production to contractors outside the
United States to reduce costs. Management believes that it will continue this
strategy for the foreseeable future.
The Company faces the uncertainty of the continued availability of increases
in its borrowing capacity. Adequate working capital is essential to an apparel
manufacturer due to the significant cash investment in inventory and accounts
receivable and the long lead time between payment for such inventory and
collection of customer receivables. The Company believes that it has an
excellent relationship with its asset-based lender and that it will be able to
obtain sufficient working capital to finance its requirements.
The Company faces other risks inherent in the apparel industry. These risks
include changes in fashion trends and related consumer acceptance and the
continuing consolidation in the retail segment of the apparel industry. The
Company's ability, or inability, to manage these risk factors could influence
future financial and operating results.
USE OF ESTIMATES
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make certain estimates and
assumptions, particularly regarding valuation of accounts receivable and
inventory, recognition of liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements. Actual results could differ
from those estimates.
F-8
<PAGE>
I.C. ISAACS & COMPANY, INC.
SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially expose the Company to concentrations
of credit risk consist primarily of trade accounts receivable. The Company's
customer base is not concentrated in any specific geographic region but is
concentrated in the retail industry. For the years ended December 31, 1994, 1995
and 1996 sales to one customer were 20.0%, 19.0% and 13.0% of total sales,
respectively. The significant customer was the same in 1994 and 1995, but was
different in 1996. For the nine months ended September 30, 1996 and 1997 sales
to one customer were 12.3% and 14.6% of total sales, respectively. The Company
establishes an allowance for doubtful accounts based upon factors surrounding
the credit risk of specific customers, historical trends and other information.
The Company's actual credit losses as a percentage of net sales has been less
than three-quarters of one percent.
The Company is also subject to concentrations of credit risk with respect to
its cash and cash equivalents, which it minimizes by placing these funds with
high-quality institutions.
The Company is exposed to credit losses in the event of nonperformance by
the counterparties to the letter of credit agreements, but it does not expect
any financial institutions to fail to meet their obligation given their high
credit rating.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined by
the first-in, first-out (FIFO) method.
PROPERTY, PLANT AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed over the
estimated useful lives of the assets by both straight-line and accelerated
methods. Leasehold improvements are amortized using the straight-line method
over the life of the lease.
GOODWILL
The Company has recorded goodwill based on the excess of purchase price over
net assets acquired, and it is being amortized on a straight-line basis over 40
years. The Company analyzes the operating income of the women's Company-owned
and private label line in relation to the goodwill amortization for evidence of
impairment. The Company analyzes only the profitability of this product line
because it is the remaining activity of the business acquired in 1984 which gave
rise to the goodwill.
LICENSES
Included in other assets is the cost of certain licenses which allow the
Company to manufacture and market certain branded apparel. The Company
capitalized the cost of obtaining the licenses, and the cost of the licenses is
being amortized on a straight-line basis over the initial term of three years.
The Company accrues royalty expense related to the licenses at the greater of
the specified percentage of sales or the minimum guaranteed royalty set forth in
the license agreements.
REVENUE RECOGNITION
Sales are recognized upon shipment of products. Allowances for estimated
returns are provided when sales are recorded.
F-9
<PAGE>
I.C. ISAACS & COMPANY, INC.
SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
ADVERTISING COSTS
Advertising costs, included in selling expenses, are expensed as incurred
and were $368,765, $1,498,001, $2,529,109, $1,945,039 and $2,441,603 for the
years ended December 31, 1994, 1995, 1996 and nine months ended September 30,
1996 and 1997, respectively.
CASH EQUIVALENTS
For purposes of the statements of cash flows, all temporary investments
purchased with a maturity of three months or less are considered to be cash
equivalents.
INCOME TAXES
The entities in the consolidated group include principally a Subchapter S
corporation and a partnership which are not subject to federal or certain state
income taxes. Therefore, the Company has made no provision for income taxes in
the accompanying financial statements as taxes are the liability of the
respective stockholders and partners.
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes ("SFAS
109"). Under SFAS 109, deferred taxes are determined using the liability method
which requires the recognition of deferred tax assets and liabilities based on
differences between financial statement and income tax bases using presently
enacted tax rates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Financial instruments of the Company include long-term debt. Based upon
current borrowing rates available to the Company, estimated fair values of these
financial instruments approximate their recorded amounts.
RECENT ACCOUNTING PRONOUNCEMENTS
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation ("SFAS 123"). SFAS 123 will begin to affect the Company in fiscal
1997 with the establishment of the 1997 Omnibus Stock Plan. See
"Management--1997 Omnibus Stock Plan." The Company will adopt only the
disclosure provisions of SFAS 123 and account for stock-based compensation using
the intrinsic value method set forth in APB Opinion 25.
In March 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, Earnings Per Share ("SFAS 128"). SFAS
128 provides a different method of calculating earnings per share than is
currently used in APB Opinion 15. SFAS 128 provides for the calculation of basic
and diluted earnings per share. Basic earnings per share includes no dilution
and is computed by dividing income available to common stockholders by the
weighted average number of common shares outstanding for the period. Diluted
earnings per share reflects the potential dilution of securities that could
share in the earnings of an entity, similar to existing fully diluted earnings
per share. As required by the policies of the Securities and Exchange Commission
(the "Commission"), the Company has treated the shares being sold to fund the S
Corporation Distribution as outstanding prior to the Offering. SFAS 128 does not
have a provision requiring such treatment. The Commission is currently
evaluating its policies concerning this issue. Assuming shares issued to fund
the S Corporation Distribution continue to be treated as outstanding prior to
the Offering, the Company believes adopting SFAS 128 will not have a material
effect on its calculation of earnings per share. The Company will adopt the
provisions for computing earnings per share set forth in SFAS 128 in December
1997.
F-10
<PAGE>
I.C. ISAACS & COMPANY, INC.
SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
Statement of Financial Accounting Standards No. 129, Disclosure of
Information about Capital Structure ("SFAS 129") effective for periods ending
after December 15, 1997, establishes standards for disclosing information about
an entity's capital structure. SFAS 129 requires disclosure of the pertinent
rights and privileges of various securities outstanding (stock, options,
warrants, preferred stock, debt and participation rights) including dividend and
liquidation preferences, participant rights, call prices and dates, conversion
or exercise prices and redemption requirements. Adoption of SFAS 129 will have
no effect on the Company as it currently discloses the information specified.
In June 1997, the Financial Accounting Standards Board issued two new
disclosure standards. The Company's results of operations and financial position
will be unaffected by implementation of these new standards.
Statement of Financial Accounting Standards No. 130, Reporting Comprehensive
Income ("SFAS 130"), establishes standards for reporting and display of
comprehensive income, its components and accumulated balances. Comprehensive
income is defined to include all changes in equity except those resulting from
investments by owners and distributions to owners. Among other disclosures, SFAS
130 requires that all items that are required to be recognized under current
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements.
Statement of Financial Accounting Standards No. 131, Disclosure about
Segments of a Business Enterprise ("SFAS 131"), establishes standards for the
way that public enterprises report information about operating segments in
annual financial statements and requires reporting of selected information about
operating segments in interim financial statements issued to the public. It also
establishes standards for disclosures regarding products and services,
geographic areas and major customers. SFAS 131 defines operating segments as
components of an enterprise about which separate financial information is
available that is evaluated regularly by the chief operating decision maker in
deciding how to allocate resources and in assessing performance.
Both SFAS 130 and SFAS 131 are effective for financial statements for
periods beginning after December 15, 1997 and require comparative information
for earlier years to be restated. Due to the recent issuance of these standards,
management has been unable to fully evaluate the impact, if any, they may have
on future financial statement disclosures.
F-11
<PAGE>
I.C. ISAACS & COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------- SEPTEMBER 30,
1995 1996 1997
------------- ------------- -------------
<S> <C> <C> <C>
Raw materials................................... $ 3,330,394 $ 3,146,405 $ 3,653,870
Work-in-process................................. 1,738,602 3,345,545 2,653,752
Finished goods.................................. 9,254,734 7,599,024 16,218,378
------------- ------------- -------------
$ 14,323,730 $ 14,090,974 $ 22,526,000
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
2. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, ESTIMATED
-------------------------- SEPTEMBER 30, USEFUL
1995 1996 1997 LIVES
------------ ------------ ------------- -----------
<S> <C> <C> <C> <C>
Land................................ $ 185,660 $ 185,660 $ 185,660
Buildings and improvements.......... 5,301,761 5,301,761 5,339,371 18 years
Machinery, equipment and fixtures... 7,878,836 8,570,577 9,225,110 5-7 years
Other............................... 1,025,362 1,035,442 1,123,795 various
------------ ------------ -------------
14,391,619 15,093,440 15,873,936
Less accumulated depreciation and
amortization...................... 11,572,982 12,693,618 13,359,418
------------ ------------ -------------
$2,818,637 $ 2,399,822 $ 2,514,518
------------ ------------ -------------
------------ ------------ -------------
</TABLE>
3. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------- SEPTEMBER 30,
1995 1996 1997
------------ ------------ -------------
<S> <C> <C> <C>
Term loan (a)..................................... $ 316,653 $ 899,998 $ 749,995
Revolving line of credit (a)...................... 7,207,496 6,320,414 22,289,280
Installment purchase obligations (b).............. 10,000 -- --
------------ ------------ -------------
7,534,149 7,220,412 23,039,275
Capital lease obligations (c)..................... 799,402 575,402 397,375
Junior subordinated notes (d)..................... 311,130 -- --
------------ ------------ -------------
Total............................................. $ 8,644,681 $ 7,795,814 $ 23,436,650
Less current maturities of long-term debt and
revolving line of credit........................ 7,417,500 6,520,418 22,489,284
Less current maturities of capital lease
obligations..................................... 223,999 216,764 142,040
------------ ------------ -------------
$ 1,003,182 $ 1,058,632 $ 805,326
------------ ------------ -------------
------------ ------------ -------------
</TABLE>
F-12
<PAGE>
I.C. ISAACS & COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. LONG-TERM DEBT (CONTINUED)
(a) The Company has a renewable term loan agreement with a borrowing limit
of $1,000,000. The term loan facility is payable in 60 monthly installments of
$16,667 and is collateralized by property and equipment. The term loan facility
may be renewed for periods of 60 months at the option of the lender. The term
loan facility bears interest at the prime rate of interest plus 2.5%
(effectively 11.0% at September 30, 1997) and is payable monthly.
The revolving line of credit agreement and letter of credit arrangement
provide that the Company may borrow up to 80% of the net amount of eligible
accounts receivable and a portion of imported inventory, as defined in the
financing agreement. The revolving line of credit expires on June 30, 1998.
Borrowings under the revolving line of credit and outstanding letters of credit
(limited to $10.0 million) may not exceed $30.0 million and bear interest at the
prime rate of interest plus 1.0% (effectively 9.5% at September 30, 1997).
Additional borrowings available under the revolving line of credit and letter of
credit agreements are approximately $2.5 million at September 30, 1997.
Borrowings under these agreements are collateralized by the Company's accounts
receivable, imported inventories and other assets. Outstanding letters of credit
approximated $5.2 million at September 30, 1997. Among the provisions of the
financing agreement are requirements to maintain specified levels of working
capital and net worth. Retained earnings of approximately $8.0 million are
restricted as to the payment of dividends.
Average short-term borrowings and the related interest rates are as follows:
<TABLE>
<CAPTION>
NINE MONTHS
YEARS ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
---------------------------- -------------
1995 1996 1997
------------- ------------- -------------
<S> <C> <C> <C>
Borrowings under revolving line of credit....... $ 7,207,496 $ 6,320,414 $ 22,289,280
Weighted average interest rate.................. 9.88% 9.25% 9.50%
Maximum month-end balance during the period..... $ 10,649,725 $ 11,024,807 $ 22,950,740
Average balance during the period............... $ 8,518,496 $ 9,814,896 $ 17,893,654
</TABLE>
(b) The Company's plants were financed by the issuance of industrial revenue
and general obligation bonds by municipalities in Mississippi. These obligations
bore interest at rates varying between 5% and 14%. The Company repaid the
remaining obligation in 1996.
(c) The Company leases equipment under various capital leases which are
included in property, plant and equipment in the amount of $1,048,037 at
December 31, 1995 and 1996 and September 30, 1997. Amortization expense related
to assets under capital leases amounted to $156,813, $211,512, $191,490,
$143,617 and $126,830 for the years ended December 31, 1994, 1995, 1996 and the
nine months ended September 30, 1996 and 1997, respectively.
F-13
<PAGE>
I.C. ISAACS & COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. LONG-TERM DEBT (CONTINUED)
As of December 31, 1996, future net minimum lease payments under capital
leases that have initial or remaining noncancelable lease terms in excess of one
year are as follows:
<TABLE>
<S> <C>
1997.............................................................. $ 267,208
1998.............................................................. 202,827
1999.............................................................. 189,551
2000.............................................................. 6,296
---------
Total minimum lease payments...................................... 665,882
Less: amount representing interest................................ (90,480)
---------
Present value of net minimum lease payments....................... 575,402
Less: current portion............................................. (216,764)
---------
Long-term capital lease obligations............................... $ 358,638
---------
---------
</TABLE>
(d) Junior subordinated notes totaling $311,130 were due to stockholders of
ICI and had a maturity date of June 1998. Interest was calculated at the prime
rate of interest plus 1.5% but could not exceed 16.0%. The Company repaid these
subordinated notes in October 1996.
As of December 31, 1993, the Company had two junior subordinated notes
outstanding to a former partner in the Partnership which totalled $1,500,000
plus approximately $150,000 in contingent fees. The notes were due in full by
February 1995. On September 30, 1994, the Company repaid the two notes, at a
discount of 15.0%, as well as accrued interest through September 30, 1994. The
Company recognized an extraordinary gain of $388,770 for the difference between
the carrying value of the subordinated debt, including accrued interest and
contingent payments of $1,810,104 and the repayment amount of $1,421,334.
Scheduled maturities of the Company's term loan and revolving line of credit
as of December 31, 1996 are as follows:
<TABLE>
<S> <C>
1997............................................................... $6,520,418
1998............................................................... 200,004
1999............................................................... 200,004
2000............................................................... 200,004
2001............................................................... 99,982
---------
$7,220,412
---------
---------
</TABLE>
F-14
<PAGE>
I.C. ISAACS & COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------- SEPTEMBER 30,
1995 1996 1997
------------ ------------ -------------
<S> <C> <C> <C>
Royalties.......................................... $ 878,918 $ 1,194,637 $ 2,080,544
Accrued professional fees.......................... 100,000 150,000 100,000
Payable to salesmen................................ 233,818 152,701 517,209
Severance agreements............................... 145,913 103,745 --
Payroll tax withholdings........................... 231,142 145,736 98,817
Customer credit balances........................... 177,402 254,244 132,409
Accrued bonuses.................................... -- -- 250,000
Other.............................................. 49,764 143,214 432,318
------------ ------------ -------------
$ 1,816,957 $ 2,144,277 $ 3,611,297
------------ ------------ -------------
------------ ------------ -------------
</TABLE>
5. COMMITMENTS AND CONTINGENCIES
The Company rents real and personal property under leases expiring at
various dates through 1999. Certain of the leases stipulate payment of real
estate taxes and other occupancy expenses. Minimum annual rental commitments
under noncancellable operating leases in effect at December 31, 1996 are
summarized as follows:
<TABLE>
<CAPTION>
COMPUTER
TRUCKS SHOWROOMS HARDWARE MACHINERY TOTAL
---------- ------------ ---------- ---------- ------------
<S> <C> <C> <C> <C> <C>
1997.................................................... $ 137,942 $ 365,677 $ 138,585 $ 189,969 $ 832,173
1998.................................................... 98,898 171,020 144,731 77,269 491,918
1999.................................................... 56,784 133,350 52,851 3,653 246,638
2000.................................................... 56,784 135,572 22,224 -- 214,580
2001.................................................... 56,784 138,684 5,556 -- 201,024
Thereafter.............................................. 42,588 219,583 -- -- 262,171
---------- ------------ ---------- ---------- ------------
$ 449,780 $ 1,163,886 $ 363,947 $ 270,891 $ 2,248,504
---------- ------------ ---------- ---------- ------------
---------- ------------ ---------- ---------- ------------
</TABLE>
Total rent expense is as follows:
<TABLE>
<CAPTION>
NINE MONTHS
YEARS ENDED DECEMBER 31, ENDED SEPTEMBER 30,
------------------------------------ --------------------------
1994 1995 1996 1996 1997
---------- ---------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Minimum rentals................................ $ 536,862 $ 344,047 $ 773,987 $ 552,773 $ 667,622
Other lease costs.............................. 397,705 566,533 459,823 430,705 389,388
---------- ---------- ------------ ------------ ------------
$ 934,567 $ 910,580 $ 1,233,810 $ 983,478 $ 1,057,010
---------- ---------- ------------ ------------ ------------
---------- ---------- ------------ ------------ ------------
</TABLE>
During 1990, the Company executed a license agreement for the manufacture
and sale of "sports-wear" under the BOSS trademark. This agreement had an
expiration date in December 1999 with additional options to extend it through
2004. The agreement provided for certain minimum license fees and additional
license fees of 5.0% of denim sales and 6.0% of non-denim sales, as defined.
Total license fees amounted to $2,908,532, $2,753,422, $4,209,750, $3,008,634
and $5,021,331 for the years ended December 31, 1994, 1995, 1996 and the nine
months ended September 30, 1996 and 1997, respectively. The
F-15
<PAGE>
I.C. ISAACS & COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Company executed certain agreements on September 30, 1997 pursuant to which it
acquired the BOSS trademark, subject to certain restrictions, and conveyed the
foreign rights to the BOSS brand to Ambra Inc., a wholly-owned subsidiary of
Hugo Boss AG ("Ambra").
The percentage of BOSS sportswear sales to total sales was 65.1%, 66.3%,
72.2%, 73.4% and 77.3% for the years ended December 31, 1994, 1995 and 1996 and
the nine months ended September 30, 1996 and 1997, respectively.
In September 1993, the Company purchased a license to manufacture and sell
certain apparel under the Beverly Hills Polo Club trademark. The agreement was
amended in 1996 and expires in December 1998, with options to extend through
2004. The licensor may terminate the agreement if the Company does not meet
minimum sales requirements as set forth in the agreement. The agreement provides
for minimum annual license fees or license fees of 5.0% of sales whichever is
greater. Also, the Company is required to spend 1.0% of annual sales on product
advertising. The license fees were $103,661, $421,234, $607,287, $469,880 and
$905,633 for the years ended December 31, 1994, 1995, 1996 and the nine months
ended September 30, 1996 and 1997, respectively.
In 1996, Isaacs Europe executed an exclusive license for the manufacture and
sale, in Europe, of sportswear under the Beverly Hills Polo Club trademark. The
license agreement has an initial term of three years with three one-year renewal
options. The agreement provides for minimum annual license fees, beginning in
the second year, or 6.0% of sales whichever is greater.
The minimum license fees under the Beverly Hills Polo Club agreement are as
follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
- ----------------------------------------------------------------------------------
<S> <C>
1997.............................................................................. $ 112,500
1998.............................................................................. 330,000
1999.............................................................................. 360,000
----------
$ 802,500
----------
----------
</TABLE>
In February 1993, the owner of the BOSS trademark filed suit against the
licensor of the BOSS trademark in the United States and several licensees,
including the Company. The complaint alleged trademark infringement related to
use of the BOSS trademark. However, the complaint did not challenge the
exclusive right of the Company to use the BOSS trademark in connection with the
manufacture and sale of certain clothing as set forth in its exclusive license
agreement.
The Company executed certain agreements in November 1997 which resulted in
the settlement of the BOSS trademark litigation described above. In November
1997, as part of the BOSS litigation settlement, the Company borrowed $11.25
million to finance the acquisition of certain BOSS trademark rights. This
obligation is evidenced by a secured limited recourse promissory note which
matures on December 31, 2007. The note bears interest at 10.0% per annum,
payable quarterly; principal is payable in full upon maturity of the Note, which
is collateralized by the domestic BOSS trademark rights. The settlement allowed
the Company to acquire the domestic rights to the BOSS trademark for use in the
manufacture and sale of apparel, subject to certain restrictions as set forth in
the agreements, and the Company's transfer of the foreign rights to the BOSS
trademark to Ambra. The Company also entered into a foreign
F-16
<PAGE>
I.C. ISAACS & COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. COMMITMENTS AND CONTINGENCIES (CONTINUED)
rights manufacturing agreement with Ambra under which the Company obtained the
license to manufacture apparel in foreign countries in which the Company is
currently manufacturing BOSS products for sale in the United States and Puerto
Rico. Under the foreign rights agreement, the Company will pay annual royalties
of 12.5% on the first $32.0 million of net sales (the "Minimum Net Sales")
attributable to apparel manufactured in specified foreign countries for each of
the first four years of the agreement; on the first $20.0 million of such net
sales in year five of the agreement and on the first $16.0 million of such net
sales in years six through ten of the agreement. For the first four years of the
agreement, an additional royalty of 5.0% is payable annually on net sales from
$84.0 million to approximately $105.3 million and an additional royalty of 4.0%
is payable annually on net sales in excess of $158.0 million. Additional
royalties in years five through ten of the agreement increase for certain
corresponding sales levels. To the extent that the Company does not achieve the
Minimum Net Sales requirements, it will have the right, in order to avoid
termination of the foreign rights agreement, to pay royalties as if it had
achieved such net sales requirement. The foreign rights agreement has an initial
term of four years but may be extended at the Company's option through December
31, 2007. The domestic BOSS trademark is subject to an option to purchase from
the Company under conditions set forth in the agreements.
Subsequent to September 30, 1997, the Company and one of its insurance
carriers reached an agreement whereby the insurance company will provide
reimbursement for the legal costs associated with the litigation described
above. The Company records the reimbursement when received from the insurance
carrier. As part of this agreement, the Company received $718,558 in 1996 and
$117,435 thus far in 1997.
In November 1997, the Company entered into an exclusive license agreement
with Girbaud Design, Inc. and its affiliate to manufacture and sell men's jeans
and casual apparel under the Girbaud brand and certain related trademarks in the
United States, Puerto Rico and the U.S. Virgin Islands. The agreement has an
initial term of two years and may be extended at the option of the Company for
an additional three-year term. Under the agreement the Company is required to
make payments to the licensor in an amount equal to 6.25% of net sales of
regular licensed merchandise and 3.0% of certain irregular and closeout licensed
merchandise. Payments are subject to guaranteed minimum annual royalties as
follows:
<TABLE>
<S> <C>
1998............................................................ $1,200,000
1999............................................................ $1,500,000
2000............................................................ $2,000,000
2001............................................................ $2,500,000
2002............................................................ $3,000,000
</TABLE>
Beginning with the first quarter of 1998, the Company is obligated to pay the
greater of actual royalties earned or 8.3% of the minimum guaranteed royalties
for that year. The Company is required to spend at least $350,000 in advertising
for the Girbaud brand in 1998 and $500,000 each year thereafter while the
agreement is in effect.
The Company is party to employment agreements with five executive officers
which provide for specified levels of compensation and certain other benefits.
The agreements also provide for severance payments from the termination date
through the expiration date under certain circumstances.
F-17
<PAGE>
I.C. ISAACS & COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. RETIREMENT PLAN
The Company sponsors a defined benefit pension plan that covers
substantially all employees with more than one year of service. The Company's
policy is to fund pension costs accrued. Contributions to the plan reflect
benefits attributed to employees' service to date, as well as service expected
to be earned in the future. The benefits are based on the number of years of
service and the employee's compensation during the three consecutive complete
years of service prior to or including the year of termination of employment.
Plan assets consist primarily of common stocks, fixed income securities and
cash. The latest available actuarial valuation is as of December 31, 1996.
Pension expense for the years ended December 31, 1994, 1995 and 1996 and the
nine months ended September 30, 1996 and September 30, 1997 was $305,000,
$310,000, $284,000, $282,000 and $270,000, respectively. The components of
pension expense for the last three years are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
<S> <C> <C> <C>
1994 1995 1996
---------- ---------- ----------
Service cost of current period........................... $ 244,000 $ 223,000 $ 208,000
Interest on the projected benefit obligation............. 470,000 485,000 555,000
Return on plan assets.................................... (456,000) (445,000) (526,000)
Net other costs.......................................... 47,000 47,000 47,000
---------- ---------- ----------
Pension cost............................................. $ 305,000 $ 310,000 $ 284,000
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The following table sets forth the Plan's funded status and amounts
recognized at December 31, 1995 and 1996:
<TABLE>
<CAPTION>
1995 1996
------------ ------------
<S> <C> <C>
Vested benefits................................................... $ 5,987,000 $ 6,730,000
Nonvested benefits................................................ 37,000 56,000
------------ ------------
Accumulated benefit obligation.................................... 6,024,000 6,786,000
Effect of anticipated future compensation levels and other
events.......................................................... 457,000 862,000
------------ ------------
Projected benefit obligation...................................... 6,481,000 7,648,000
Fair value of assets held in the plan............................. 6,139,000 7,357,000
------------ ------------
Excess of projected benefit obligation over plan assets........... (342,000) (291,000)
Unrecognized net loss from past experience different from that
assumed......................................................... 344,000 661,000
Unrecognized prior service cost................................... 159,000 143,000
Unamortized liability at transition............................... 155,000 124,000
------------ ------------
Net prepaid periodic pension cost................................. $ 316,000 $ 637,000
------------ ------------
------------ ------------
</TABLE>
With respect to the above table, the weighted average discount rate used to
measure the projected benefit obligation was 8.0%; the rate of increase in
future compensation levels was 3.0%; and the expected long-term rate of return
on assets was 8.0%. The net prepaid periodic pension cost is included in prepaid
expenses and other current assets in the accompanying consolidated balance
sheets.
F-18
<PAGE>
I.C. ISAACS & COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for interest amounted to $1,192,040, $1,272,794, $1,389,023,
$991,844 and $1,616,692 for the years ended December 31, 1994, 1995, 1996 and
the nine months ended September 30, 1996 and 1997, respectively.
During 1994 and 1995 the Company purchased property and equipment totalling
$731,792 and $316,245, respectively, by issuing notes payable.
8. NON-RECURRING INCOME
During 1991, the Company received $6.0 million under the provisions of a
settlement agreement related to termination of a license. Additionally, the
agreement provided that, if certain conditions are met, the Company could
receive up to $3.0 million through 1998. The Company had received the maximum
amount allowable under this agreement as of December 31, 1994. Included in other
income for 1994 are payments of approximately $1.18 million.
9. COMMON AND PREFERRED STOCK
In May 1997, the Board of Directors of ICI authorized the filing of a
registration statement for an initial public offering of the Company's common
stock.
In May 1997, the stockholders approved an amended and restated Certificate
of Incorporation which increased the authorized common shares from 20,000 to
50.0 million and established a class of preferred shares with 5.0 million shares
authorized. On November 13, 1997, the Board of Directors of ICI approved a
246.9898-for-1 stock split of the common stock, which will be paid in the form
of a stock dividend to the stockholders effective November 13, 1997. The change
in the Company's common stock for the stock dividend has been given retroactive
effect for all periods presented.
In May 1997, the Company adopted the 1997 Omnibus Stock Plan. Under the 1997
Omnibus Stock Plan, the Company may grant qualified and nonqualified stock
options, stock appreciation rights, restricted stock or performance awards,
payable in cash or shares of common stock, to selected employees. The 1997
Omnibus Stock Plan will be administered by the Board of Directors. The Company
has reserved 500,000 shares of common stock for issuance under the 1997 Omnibus
Stock Plan.
F-19
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the expenses in connection with this
Registration Statement. The Company will pay all expenses of the Offering. All
of such expenses are estimates, other than the filing fees payable to the
Securities and Exchange Commission, NASD and Nasdaq.
<TABLE>
<S> <C>
Securities and Exchange Commission Filing Fee..................................... $ 18,591
NASD Filing Fee................................................................... 6,618
Nasdaq Listing Fee................................................................ 37,000
Printing and Engraving Fees and Expenses.......................................... 150,000
Legal Fees and Expenses........................................................... 174,791
Accounting Fees and Expenses...................................................... 150,000
Transfer Agent Fees............................................................... 5,000
---------
TOTAL..................................................................... $ 542,000
---------
---------
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Pursuant to Section 145 of the General Corporation Law of Delaware (the
"Delaware Corporation Law"), Article IX of the Restated By-laws of the
Registrant, a copy of which is filed as Exhibit 3.02 to this Registration
Statement, provides that the Registrant shall indemnify any person in connection
with any threatened, pending or completed legal proceeding (other than a legal
proceeding by or in the right of the Registrant) by reason of the fact that he
is or was a director, officer, employee or agent of the Registrant or is or was
serving at the request of the Registrant as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred in connection with
such legal proceeding if he acted in good faith and in a manner that he
reasonably believed to be in or not opposed to the best interests of the
Registrant, and with respect to any criminal action or proceeding, if he has no
reasonable cause to believe that his conduct was unlawful. If the legal
proceeding is by or in the right of the Registrant, the director or officer may
be indemnified by the Registrant against expenses (including attorneys' fees)
actually and reasonably incurred in connection with the defense or settlement of
actually and reasonably incurred in connection with the defense or settlement of
such legal proceeding if he acted in good faith and in a manner he reasonably
believed to be in or not opposed to the best interest of the Registrant and
believed to be in or not opposed to the best interest of the Registrant and
except that he may not be indemnified in respect of any claim, issue or matter
as to which he shall have been adjudged to be liable to the Registrant unless a
court determines otherwise.
Article IX of the Registrant's Restated By-laws also allows the Registrant
to maintain liability insurance on behalf of any person who is or was a
director, officer, employee or agent of the Registrant or such person who serves
or served as director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise at the request of the
Registrant.
Pursuant to Section 102(b)(7) of the Delaware Corporation Law, Article VII
of the Restated Certificate of the Registrant, a copy of which is filed with
Exhibit 3.01 to this Registration Statement, provides that no director of the
Registrant shall be personally liable to the Registrant or its stockholders for
monetary damages for any breach of his fiduciary duty as a director; provided,
however, that such clause shall not apply to any liability of a director (1) for
any breach of his loyalty to the Registrant or its stockholders, (2) for acts or
omissions that are not in good faith or involve intentional misconduct or a
knowing violation of the law, (3) under Section 174 of the Delaware Corporation
Law, or (4) for any transaction from which the director derived an improper
personal benefit.
II-1
<PAGE>
The form of Underwriting Agreement, filed as Exhibit 1.01 hereto, contains
provisions by which the Underwriters will agree to indemnify the Registrant and
each officer, director and controlling person of the Registrant against certain
liabilities.
The Form of Indemnification Agreement, filed as Exhibit 10.09 hereto,
contains provisions by which the Registrant will agree to indemnify each of its
officers and directors against certain liabilities.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
On January 17, 1997, the Company issued 24,699 shares of Common Stock to
Thomas P. Ormandy, an executive officer of the Company, for $39,485 cash.
On September 2, 1997, the Company issued 5,746 shares of Common Stock to
existing stockholders of the Company in consideration of the cancellation of
stock certificates that had been issued at a time when the Company did not have
a sufficient number of authorized shares of Common Stock.
Immediately prior to the consummation of the Offering the Company will
effect a 246.9898-for-1 stock split pursuant to which it will issue an aggregate
of approximately 4.0 million shares of Common Stock to the Company's existing
stockholders. See "Company Organization."
Each of the foregoing transactions was exempt from the registration
requirements of the Securities Act of 1933, as amended (the "Securities Act"),
in reliance on Section 3(a)(9) and/or Section 4(2) of the Securities Act on the
basis that such transaction was solely with existing security holders and/or did
not involve a public offering. No underwriters were involved in connection with
any of the foregoing transactions.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(A) EXHIBITS:
<TABLE>
<CAPTION>
EXHIBIT NO DESCRIPTION
- ----------- ------------------------------------------------------------------------------------------------
<C> <S>
*1.01 Form of Underwriting Agreement
*3.01 Amended and Restated Certificate of Incorporation
*3.02 Amended and Restated By-laws
*4.01 Specimen Common Stock Certificate
*5.01 Opinion of Piper & Marbury L.L.P.
*10.01(a) Form of Amended and Restated Shareholders' Agreement
*10.01(b) Form of Amendment No. 1 to Amended and Restated Shareholders' Agreement
*10.02 Employment Agreement dated as of May 15, 1997, between the Registrant and Robert J. Arnot
*10.03 Employment Agreement dated as of May 15, 1997, between the Registrant and Gerald W. Lear
*10.04 Employment Agreement dated as of May 15, 1997, between the Registrant and Gary B. Brashers
*10.05 Employment Agreement dated as of May 15, 1997, between the Registrant and Eugene C. Wielepski
*10.06 Employment Agreement dated as of May 15, 1997, between the Registrant and Thomas Ormandy
*10.07 1997 Omnibus Stock Plan
*10.08(a) Accounts Financing Agreement dated June 16, 1992
*10.08(b) Covenant Supplement to Accounts Financing Agreement dated June 16, 1992
*10.08(c) Inventory and Equipment Security Agreement Supplement to Accounts Financing Agreement dated June
16, 1992
*10.08(d) Trade Financing Agreement Supplement to Accounts Financing Agreement (Security Agreement) dated
June 16, 1992
*10.08(e) Amendment to Financing Agreements dated October 30, 1992
*10.08(f) Second Amendment to Financing Agreements dated January 4, 1993
*10.08(g) Third Amendment to Financing Agreements dated March 10, 1993
*10.08(h) Fourth Amendment to Financing Agreements dated May 1, 1993
*10.08(i) Fifth Amendment to Financing Agreements dated January 1, 1994
*10.08(j) Sixth Amendment to Financing Agreements dated September 1, 1993
*10.08(k) Seventh Amendment to Financing Agreements dated August, 1994
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO DESCRIPTION
- ----------- ------------------------------------------------------------------------------------------------
*10.08(l) Eighth Amendment to Financing Agreements dated December 31, 1994
<C> <S>
*10.08(m) Ninth Amendment to Financing Agreements dated April, 1995
*10.08(n) Tenth Amendment to Financing Agreements dated June 23, 1995
*10.08(o) Eleventh Amendment to Financing Agreements dated January 1, 1996
*10.08(p) Twelfth Amendment to Financing Agreements dated June 25, 1996
*10.08(q) Thirteenth Amendment to Financing Agreements dated August, 1996
*10.08(r) Term Promissory Note dated June, 1996
*10.08(s) Trademark Collateral Assignment and Security Agreement dated June 16, 1992
*10.09 Form of Indemnification Agreement
*10.10(a) BOSS Worldwide Rights Acquisition Agreement dated September 30, 1997
*10.10(b) Promissory Note dated November 5, 1997
*10.10(c) Guaranty of Promissory Note dated November 5, 1997
*10.10(d) Trademark Assignment dated November 5, 1997
*10.10(e) Trademark Assignment dated November 5, 1997
*10.10(f) Trademark Assignment dated November 5, 1997
*10.10(g) Trademark Assignment dated November 5, 1997
*10.10(h) Assignment and Assumption Agreement dated November 5, 1997
*10.10(i) Escrow Agreement dated November 5, 1997
*10.10(j) Collateral Assignment of Trademarks dated November 5, 1997
10.10(k) Termination of License Agreement dated November 5, 1997
*10.10(l) Logo Typeface
*10.10(m) Certain Provisions in Settlement Agreement
*10.11(a) Foreign BOSS Rights Acquisition Agreement dated September 30, 1997
*10.11(b) Trademark Assignment dated November 5, 1997
*10.11(c) Assignment and Assumption Agreement dated November 5, 1997
*+10.11(d) Concurrent Use Agreement dated November 5, 1997
+10.11(e) Foreign Manufacturing Rights Agreement dated November 5, 1997
*10.11(f) Option Agreement dated November 5, 1997
*10.11(g) Secured Limited Recourse Promissory Note dated November 5, 1997
*10.11(h) Note Assumption Agreement dated November 5, 1997
*10.11(i) Guaranty of Promissory Note dated November 5, 1997
*10.11(j) Agreement Regarding Consent to Release and Waiver of Brookhurst Note Claims dated November 5,
1997
*10.11(k) Certain Provisions in Settlement Agreement
*10.11(l) Indemnification Agreement dated November 5, 1997
*10.12 Uniforms License Agreement dated November 5, 1997
*10.13 Trademark License Agreement Relating to BOSS Golf and Other Marks dated November 5, 1997
*10.14 Beverly Hills Polo Club Exclusive Domestic License Agreement dated December 14, 1995
*10.15 Beverly Hills Polo Club Amendment to Exclusive License Agreement (Men's) dated June 3, 1997
*10.16 Beverly Hills Polo Club Exclusive Domestic License Agreement dated June 1, 1993
*10.17 Beverly Hills Polo Club Assignment of Licenses (Women's) dated August 31, 1993
*10.18 Beverly Hills Polo Club Amendment (Women's) dated September 1, 1993
*10.19 Beverly Hills Polo Club Amendment to Exclusive License Agreement (Women's) dated June 3, 1997
*10.20 Beverly Hills Polo Club Amendment to Exclusive License Agreement (Men's) dated July 29, 1997
*10.21 Beverly Hills Polo Club International Exclusive License Agreement (Wholesale) dated August 15,
1996
*10.22 Beverly Hills Polo Club Amendment to Exclusive License Agreement (Wholesale) dated June 3, 1997
*10.23 Beverly Hills Polo Club International Exclusive License Agreement (Retail) dated August 15, 1996
*10.24 Beverly Hills Polo Club Amendment to International Exclusive License Agreement (Retail) dated
June 3, 1997
*10.25 Beverly Hills Polo Club Amendment to Exclusive License Agreement dated July 29, 1997
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO DESCRIPTION
- ----------- ------------------------------------------------------------------------------------------------
*10.26 Girbaud Trademark License and Technical Assistance Agreement dated November 1, 1997
<C> <S>
*10.27(a) Defined Benefit Pension Plan
*10.27(b) First Amendment to Defined Benefit Pension Plan
*21.01 List of Subsidiaries
23.01 Consent of BDO Seidman, LLP
*23.02 Consent of Piper & Marbury L.L.P. (included in Exhibit 5.01)
*24.01 Power of Attorney (included on signature pages to the Registration Statement)
</TABLE>
- ------------------------
* Previously filed.
+ Certain portions of this exhibit have been omitted pursuant to a request for
confidential treatment and have been filed separately with the Securities
and Exchange Commission.
(B) FINANCIAL STATEMENT SCHEDULES:
<TABLE>
<CAPTION>
SCHEDULE
NUMBER DESCRIPTION PAGE NO.
- --------- ----------------------------------------------------------------------------- -------------
<S> <C> <C>
II Valuation and Qualifying Accounts S-2
</TABLE>
ITEM 17. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (the "Securities Act") may be permitted to directors,
officers and controlling persons of the Registrant pursuant to the provisions
described in this Registration Statement or otherwise, the Registrant has been
advised that in the opinion of the Commission such indemnification is against
public policy as expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer or
controlling persons of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question of whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes to provide to the underwriters
at the closing specified in the Underwriting Agreement (filed herewith as
Exhibit 1.01) certificates in such denominations and registered in such names as
required by the underwriter to permit prompt delivery to each purchaser.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement or Amendment to be signed on its
behalf by the undersigned, thereunto duly authorized, in Baltimore, Maryland on
this 12th day of December 1997.
I.C. ISAACS & COMPANY, INC.
By: /s/ ROBERT J. ARNOT
-----------------------------------------
Robert J. Arnot
Chairman of the Board
and Co-Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement or Amendment has been signed below by the following
persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
/s/ ROBERT J. ARNOT Chairman of the Board and December 12, 1997
- ------------------------------ Co-Chief Executive Officer
Robert J. Arnot and Director (Principal
Executive Officer)
/s/ GERALD W. LEAR President and Co-Chief December 12, 1997
- ------------------------------ Executive Officer and
Gerald W. Lear Director (Principal
Executive Officer)
/s/ EUGENE C. WIELEPSKI Vice President and Chief December 12, 1997
- ------------------------------ Financial Officer and
Eugene C. Wielepski Director (Principal
Financial and Accounting
Officer)
/s/ GARY B. BRASHERS* Director December 12, 1997
- ------------------------------
Gary B. Brashers
/s/ IRA J. HECHLER* Director December 12, 1997
- ------------------------------
Ira J. Hechler
II-5
<PAGE>
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
/s/ JON HECHLER* Director December 12, 1997
- ------------------------------
Jon Hechler
/s/ RONALD S. SCHMIDT* Director December 12, 1997
- ------------------------------
Ronald S. Schmidt
<TABLE>
<S> <C>
*By: /s/ EUGENE C. WIELEPSKI
--------------------------------------
Eugene C. Wielepski
ATTORNEY-IN-FACT
</TABLE>
II-6
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE
I.C. Isaacs & Company, Inc.
The audits referred to in our report to I.C. Isaacs & Company, Inc., dated
October 31, 1997, except for Note 5, the date of which is November 13, 1997,
which is contained in the Prospectus constituting part of this Registration
Statement, included the audit of the financial statement schedule listed in the
accompanying index for each of the three years in the period ended December 31,
1996 and the nine months ended September 30, 1996 and 1997. This financial
statement schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion on the financial statement schedule
based upon our audits.
In our opinion, such schedule presents fairly, in all material respects, the
information set forth therein.
/s/ BDO Seidman, LLP
Washington, D.C.
October 31, 1997, except
for Note 5, the date
of which is
November 13, 1997
S-1
<PAGE>
SCHEDULE II
I.C. ISAACS & COMPANY, INC.
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
CHARGED
BALANCE AT TO COSTS BALANCE AT
BEGINNING AND END
DESCRIPTION OF YEAR EXPENSES DEDUCTION OF YEAR
- -------------------------------------------------------------------- ------------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Year ended December 31, 1994
Allowance for doubtful accounts................................... $ 500 $ 278 $ (428) $ 350
Reserve for sales returns and discounts........................... $ 382 $ 5,546 $ (5,483) $ 445
Year ended December 31, 1995
Allowance for doubtful accounts................................... $ 350 $ 398 $ (398) $ 350
Reserve for sales returns and discounts........................... $ 445 $ 5,104 $ (5,062) $ 487
Year ended December 31, 1996
Allowance for doubtful accounts................................... $ 350 $ 1,194 $ (884) $ 660
Reserve for sales returns and discounts........................... $ 487 $ 5,956 $ (5,634) $ 809
Nine months ended September 30, 1996
Allowance for doubtful accounts................................... $ 350 $ 544 $ (444) $ 450
Reserve for sales returns and discounts........................... $ 487 $ 3,597 $ (3,446) $ 638
Nine months ended September 30, 1997
Allowance for doubtful accounts................................... $ 660 $ 1,251 $ (791) $ 1,120
Reserve for sales returns and discounts........................... $ 809 $ 8,123 $ (8,529) $ 403
</TABLE>
S-2
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO DESCRIPTION PAGE
- ----------- ----------------------------------------------------------------------------------------- -----
<C> <S> <C>
*1.01 Form of Underwriting Agreement
*3.01 Amended and Restated Certificate of Incorporation
*3.02 Amended and Restated By-laws
*4.01 Specimen Common Stock Certificate
*5.01 Opinion of Piper & Marbury L.L.P.
*10.01(a) Form of Amended and Restated Shareholders' Agreement
*10.01(b) Form of Amendment No. 1 to Amended and Restated Shareholders' Agreement
*10.02 Employment Agreement dated as of May 15, 1997, between the Registrant and Robert J. Arnot
*10.03 Employment Agreement dated as of May 15, 1997, between the Registrant and Gerald W. Lear
*10.04 Employment Agreement dated as of May 15, 1997, between the Registrant and Gary B.
Brashers
*10.05 Employment Agreement dated as of May 15, 1997, between the Registrant and Eugene C.
Wielepski
*10.06 Employment Agreement dated as of May 15, 1997, between the Registrant and Thomas Ormandy
*10.07 1997 Omnibus Stock Plan
*10.08(a) Accounts Financing Agreement dated June 16, 1992
*10.08(b) Covenant Supplement to Accounts Financing Agreement dated June 16, 1992
*10.08(c) Inventory and Equipment Security Agreement Supplement to Accounts Financing Agreement
dated June 16, 1992
*10.08(d) Trade Financing Agreement Supplement to Accounts Financing Agreement (Security Agreement)
dated June 16, 1992
*10.08(e) Amendment to Financing Agreements dated October 30, 1992
*10.08(f) Second Amendment to Financing Agreements dated January 4, 1993
*10.08(g) Third Amendment to Financing Agreements dated March 10, 1993
*10.08(h) Fourth Amendment to Financing Agreements dated May 1, 1993
*10.08(i) Fifth Amendment to Financing Agreements dated January 1, 1994
*10.08(j) Sixth Amendment to Financing Agreements dated September 1, 1993
*10.08(k) Seventh Amendment to Financing Agreements dated August, 1994
*10.08(l) Eighth Amendment to Financing Agreements dated December 31, 1994
*10.08(m) Ninth Amendment to Financing Agreements dated April, 1995
*10.08(n) Tenth Amendment to Financing Agreements dated June 23, 1995
*10.08(o) Eleventh Amendment to Financing Agreements dated January 1, 1996
*10.08(p) Twelfth Amendment to Financing Agreements dated June 25, 1996
*10.08(q) Thirteenth Amendment to Financing Agreements dated August, 1996
*10.08(r) Term Promissory Note dated June, 1996
*10.08(s) Trademark Collateral Assignment and Security Agreement dated June 16, 1992
*10.09 Form of Indemnification Agreement
*10.10(a) BOSS Worldwide Rights Acquisition Agreement dated September 30, 1997
*10.10(b) Promissory Note dated November 5, 1997
*10.10(c) Guaranty of Promissory Note dated November 5, 1997
*10.10(d) Trademark Assignment dated November 5, 1997
*10.10(e) Trademark Assignment dated November 5, 1997
*10.10(f) Trademark Assignment dated November 5, 1997
*10.10(g) Trademark Assignment dated November 5, 1997
*10.10(h) Assignment and Assumption Agreement dated November 5, 1997
*10.10(i) Escrow Agreement dated November 5, 1997
*10.10(j) Collateral Assignment of Trademarks dated November 5, 1997
10.10(k) Termination of License Agreement dated November 5, 1997
*10.10(l) Logo Typeface
*10.10(m) Certain Provisions in Settlement Agreement
*10.11(a) Foreign BOSS Rights Acquisition Agreement dated September 30, 1997
*10.11(b) Trademark Assignment dated November 5, 1997
*10.11(c) Assignment and Assumption Agreement dated November 5, 1997
*+10.11(d) Concurrent Use Agreement dated November 5, 1997
+10.11(e) Foreign Manufacturing Rights Agreement dated November 5, 1997
*10.11(f) Option Agreement dated November 5, 1997
*10.11(g) Secured Limited Recourse Promissory Note dated November 5, 1997
*10.11(h) Note Assumption Agreement dated November 5, 1997
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO DESCRIPTION PAGE
- ----------- ----------------------------------------------------------------------------------------- -----
*10.11(i) Guaranty of Promissory Note dated November 5, 1997
<C> <S> <C>
*10.11(j) Agreement Regarding Consent to Release and Waiver of Brookhurst Note Claims dated
November 5, 1997
*10.11(k) Certain Provisions in Settlement Agreement
*10.11(l) Indemnification Agreement dated November 5, 1997
*10.12 Uniforms License Agreement dated November 5, 1997
*10.13 Trademark License Agreement Relating to BOSS Golf and Other Marks dated November 5, 1997
*10.14 Beverly Hills Polo Club Exclusive Domestic License Agreement dated December 14, 1995
*10.15 Beverly Hills Polo Club Amendment to Exclusive License Agreement (Men's) dated June 3,
1997
*10.16 Beverly Hills Polo Club Exclusive Domestic License Agreement dated June 1, 1993
*10.17 Beverly Hills Polo Club Assignment of Licenses (Women's) dated August 31, 1993
*10.18 Beverly Hills Polo Club Amendment (Women's) dated September 1, 1993
*10.19 Beverly Hills Polo Club Amendment to Exclusive License Agreement (Women's) dated June 3,
1997
*10.20 Beverly Hills Polo Club Amendment to Exclusive License Agreement (Men's) dated July 29,
1997
*10.21 Beverly Hills Polo Club International Exclusive License Agreement (Wholesale) dated
August 15, 1996
*10.22 Beverly Hills Polo Club Amendment to Exclusive License Agreement (Wholesale) dated June
3, 1997
*10.23 Beverly Hills Polo Club International Exclusive License Agreement (Retail) dated August
15, 1996
*10.24 Beverly Hills Polo Club Amendment to International Exclusive License Agreement (Retail)
dated June 3, 1997
*10.25 Beverly Hills Polo Club Amendment to Exclusive License Agreement dated July 29, 1997
*10.26 Girbaud Trademark License and Technical Assistance Agreement dated November 1, 1997
*10.27(a) Defined Benefit Pension Plan
*10.27(b) First Amendment to Defined Benefit Pension Plan
*21.01 List of Subsidiaries
23.01 Consent of BDO Seidman, LLP
*23.02 Consent of Piper & Marbury L.L.P. (included in Exhibit 5.01)
*24.01 Power of Attorney (included on signature pages to the Registration Statement)
</TABLE>
- ------------------------
* Previously filed.
+ Certain portions of this exhibit have been omitted pursuant to a request for
confidential treatment and have been filed separately with the Securities
and Exchange Commission.
<PAGE>
EXHIBIT 10.10(k)
TERMINATION OF LICENSE AGREEMENT
THIS TERMINATION OF LICENSE AGREEMENT ("Agreement") is entered into and
effective as of the 5th day of November, 1997 ("Effective Date"), by and between
BROOKHURST, INC., a California corporation ("LICENSOR"), and I.C. ISAACS & CO.,
L.P., a Delaware limited partnership ("LICENSEE").
RECITALS
A. LICENSOR and LICENSEE entered into that certain License Agreement dated
August 11, 1994 regarding the use of the mark BOSS ("License Agreement").
B. LICENSOR and LICENSEE mutually desire to terminate the License
Agreement effective as of the Effective Date.
NOW, THEREFORE, the parties agree as follows:
1. TERMINATION
The License Agreement is hereby terminated in all respects except as
otherwise provided herein, effective as of the Effective Date.
2. ROYALTIES
On or before 30 days after the Effective Date, LICENSEE shall pay to
LICENSOR 80% (eighty percent) of all royalties earned pursuant to the License
Agreement as of the Effective Date. On or before 90 days after the Effective
Date, Licensee shall pay to Licensor the remaining 20% of all royalties earned
pursuant to the License Agreement. Notwithstanding anything to the contrary
contained in the License Agreement, the sole permitted deduction from Royalties
earned shall be a deduction for bad debts incurred by the Licensee in connection
with the sale of the Licensed Products. LICENSOR shall have the right to audit
the books and records of LICENSEE with respect to all royalties paid under the
License Agreement for a period of six (6) months following the date hereof. If
such audit discloses that payments due to LICENSOR under the License Agreement
exceed the amount of payments actually made to LICENSOR, LICENSEE shall remit
such additional amount to LICENSOR within ten (10) days of notification from
LICENSOR.
<PAGE>
3. TERMINATION PROCEDURES
The termination procedures provided in paragraphs 19.a. through 19.c. of
the License Agreement are not applicable to this termination.
4. RELEASE
Notwithstanding anything to the contrary contained in the License
Agreement, LICENSOR and LICENSEE, on behalf of themselves and their respective
subsidiaries, successors and assigns, hereby remises, releases and forever
discharges the other from all attorneys fees, costs, settlement amounts and/or
damages arising out of the lawsuit in the United States District Court for the
Southern District of New York, Hugo Boss Fashions, Inc., et al. v. Brookhurst,
Inc., et al., 93 Civ. 0875 (LMM) (THK) or any other currently pending lawsuit
anywhere in the world brought by Hugo Boss (or any of its affiliates or
licensees) against LICENSOR, LICENSEE or any of their respective agents,
suppliers or manufacturers. This release does not extend to and shall not be
deemed to release any claim arising out of any conduct other than that
specifically released herein.
IN WITNESS WHEREOF, the parties agree that this Agreement shall take
effect as of the date first written above.
BROOKHURST, INC., a
California corporation
By:/s/ William Ott
-------------------------
William Ott, President
I.C. ISAACS & CO., L.P., a
Delaware limited partnership
By: /s/ Robert J. Arnot
-------------------------
Name: Robert J. Arnot
Title: Chairman and Co-Chief
Executive Officer
By: /s/ Gerald W. Lear
-------------------------
Name: Gerald W. Lear
Title: President and Co-Chief
Executive Officer
<PAGE>
Exhibit 10.11(e)
FOREIGN MANUFACTURING RIGHTS AGREEMENT
THIS FOREIGN MANUFACTURING RIGHTS AGREEMENT ("Agreement") is entered
into and effective as of the 5th day of November, 1997 ("Effective Date"), by
and between Ambra Inc. a Delaware corporation ("LICENSOR") and I. C. Isaacs &
Company L.P. ("LICENSEE"), a Delaware limited partnership.
R E C I T A L S
A. LICENSOR is the successor in interest of I. C. Isaacs & Company L.P.
which is in turn, the successor-in-interest of Brookhurst, Inc., to certain
trademark rights outside the United States (as defined below) including in
the Territory, as defined below, in the word BOSS.
B. LICENSEE desires to obtain a license to be able to cause others to
manufacture such products in the Territory and LICENSOR is willing to license
such trademarks to LICENSEE for such purpose in accordance with the terms
hereof.
C. In countries where necessary and appropriate, LICENSOR desires that
LICENSEE be recorded as a registered user of the Marks (as hereinafter
defined) in relation to the manufacture of the Licensed Products in the
Territory.
NOW, THEREFORE, in consideration of the mutual agreements set forth in
this Agreement, the parties agree as follows:
1. DEFINITIONS
For purposes of this Agreement, the following terms shall have the
meanings set forth below:
a. "Mark" or "Marks" shall mean the trademarks BOSS and the stylized
B (as set forth on Exhibit A attached hereto) whether used alone or in
combination with other words, phrases or designs, with the appearance and/or
style of the said trademark in compliance with the provisions of Exhibit A.
b. "Property" shall mean the intellectual property rights which
LICENSOR deems, in its sole reasonable discretion, to be desirable or
necessary for LICENSEE to enjoy the fruits of the license granted herein and
which are or become primarily associated with the Marks. Such Property shall
include, but not be limited to, certain titles, trademarks and names, as well
as any of the following used in connection with or as identifiers of the
Marks: fabrics, styles, designs, and colors other than those which are
standard or traditional in the industry; logos, symbols, copyrights, art
work, inventions (patentable or unpatentable), confidential information,
trade secrets, patents and pending patent applications.
- ----------------------
* Text omitted pursuant to a request for confidential treatment and filed
separately with the Securities and Exchange Commission.
<PAGE>
c. "Licensed Product" or "Licensed Products" shall mean solely the
products specified in Exhibit B attached hereto bearing Marks in compliance
with Exhibit A.
d. "Territory" or "Licensed Territory" shall mean any and all countries
listed on Exhibit C.
e. "United States" shall mean the United States of America, its
territories, possessions and commonwealths, except Saipan and American Samoa.
"United States" includes, without limitation, Puerto Rico.
f. "Territory Net Sales" shall mean the amount invoiced by or on behalf
of LICENSEE to third parties with respect to the Licensed Products
manufactured by or on behalf of LICENSEE in the Licensed Territory minus bona
fide trade, quantity and early payment discounts actually taken, actual
returns, shipping costs specifically itemized as such, uncollectible amounts
actually written off as bad debt by LICENSEE and sales or excise taxes (if
any) payable by LICENSEE in respect of and attributable directly and solely
to sales of such Licensed Products, provided that each such item is indicated
separately and appears clearly separate from product price; provided further
that for purposes of Territory Net Sales calculations uncollectible amounts
shall not exceed one half of one percent (0.5%) of Territory Net Sales
(including uncollectible amounts) for which LICENSEE is obligated to pay a
royalty. No costs incurred in the manufacture, sale, distribution,
advertisement or promotion of such Licensed Products shall be deducted from
the gross sales amounts or from any royalty payable to LICENSOR by LICENSEE.
Any sales or transfers of Licensed Products made by LICENSEE to any person or
entity that does not deal at arm's length with LICENSEE shall be computed,
for the purpose of determining Territory Net Sales, at an amount equal to the
price at which LICENSEE would have invoiced or charged purchasers which deal
at arm's length with LICENSEE, unless otherwise agreed to by LICENSOR in
writing.
g. "Total Net Sales" shall mean the amount invoiced to third parties by
or on behalf of LICENSEE with respect to all products bearing a BOSS mark
minus bona fide trade, quantity and early payment discounts actually taken,
actual returns, shipping costs specifically itemized as such, uncollectible
amounts actually written off as bad debt by LICENSEE and sales or excise
taxes (if any) payable by LICENSEE in respect of and attributable directly
and solely to sales of Licensed Products, provided that each such item is
indicated separately and appears clearly separate from product price;
provided further that for purposes of Total Net Sales calculations
uncollectible amounts shall not exceed one half of one percent (0.5%) of
Total Net Sales (including uncollectible amounts) of all products bearing a
BOSS mark. No costs incurred in the manufacture, sale, distribution,
advertisement or promotion of such products shall be deducted from the gross
sales amounts or from any royalty payable to LICENSOR by LICENSEE. Any sales
or transfers of such products made by LICENSEE to any person or entity that
does not deal at arm's length with LICENSEE shall be computed, for the
purpose of determining Total Net Sales, at an amount equal to the price at
which LICENSEE would have invoiced or charged purchasers which deal at arm's
length with LICENSEE, unless otherwise agreed to by LICENSOR in writing.
2
<PAGE>
2. RIGHTS GRANTED
a. LICENSEE acknowledges that LICENSOR owns, pursuant to that certain
Foreign Boss Rights Acquisition Agreement between LICENSOR and LICENSEE dated
September 30, 1997 any and all trademark rights relating to the word BOSS
within the Licensed Territory that BROOKHURST transferred to LICENSEE
pursuant to that certain Worldwide Rights Acquisition Agreement between
LICENSEE, BROOKHURST and William Ott dated September 30, 1997. LICENSEE
acknowledges that it does not own, or purport to own, any trademark rights
relating to the word BOSS in the Licensed Territory. Unless specifically
stated to the contrary, the provisions of this Agreement relate solely to use
of the Marks within the Licensed Territory and are not intended to apply to
LICENSEE'S activities in the United States.
b. LICENSOR hereby grants to LICENSEE, and LICENSEE accepts, upon the
terms and conditions set forth herein, a limited, nonexclusive right and
license to use, and to cause and permit third-party manufacturers
("Designated Manufacturer(s)") to use, the Marks solely in connection with
the manufacture of Licensed Products, labels, displays, and other materials
used in connection with the Licensed Products within the Territory for sale
solely to LICENSEE. The license and rights granted to LICENSEE under this
Agreement are sometimes referred to herein as the "Licensed Rights."
c. LICENSEE shall require that the Designated Manufacturer(s) perform
all obligations ascribed to such Designated Manufacturer(s) under this
Agreement, including but not limited to those obligations listed in Section
2.c. (i-xxii), and shall, within sixty (60) days of the effective date of
this Agreement, require each Designated Manufacturer(s) to enter into a
binding written agreement (whether by purchase order or otherwise) with
LICENSEE, under which each such Designated Manufacturer(s) agrees to
undertake the following obligations:
(i) The Designated Manufacturer(s) shall manufacture Licensed
Products only for and sell Licensed Products only to LICENSEE.
(ii) The Designated Manufacturer(s) shall not manufacture any
product bearing the Marks or any trademarks confusingly similar to the Marks,
other than Licensed Products.
(iii) The Designated Manufacturer(s) shall not use the name BOSS on
any corporate, partnership or other trade name or as a form of entity
identification.
(iv) The Designated Manufacturer(s) shall modify or terminate use of
the Marks if requested to do so by LICENSEE pursuant to Section 2.g. herein.
(v) The Designated Manufacturer(s) shall not use the Marks in the
Territory in any manner other than as expressly set forth in this Agreement.
(vi) The Designated Manufacturer(s) shall, following termination of
its agreement with LICENSEE, terminate any and all uses of the Marks in the
Territory.
3
<PAGE>
(vii) The Designated Manufacturer(s) shall (A) provide LICENSEE with
a list of all locations in which the Designated Manufacturer manufactures,
processes or stores Licensed Products, which list from time to time shall be
updated promptly with additional such locations as they are utilized, and (B)
provide reasonable access at each and every such location to LICENSEE and
LICENSOR; provided, however, that this provision does not apply to the
initial order placed with any Designated Manufacturer where the order does
not exceed 24,000 units. LICENSOR shall provide LICENSEE with notice and
opportunity to participate in any inspection under this provision provided
LICENSOR decides, in its sole discretion, that to do so would not impair or
hinder the purpose or effectiveness of any such inspection.
(viii) The Designated Manufacturer(s) shall comply with all
applicable labeling and other laws affecting the manufacture, storage,
shipment, labeling and sale of Licensed Products pursuant to the terms of
this Agreement, and at all times otherwise conduct its activities under its
agreement with LICENSEE in a lawful manner.
(ix) The Designated Manufacturer(s) shall permit LICENSOR, LICENSEE
and their respective agents and representatives to conduct audits with
respect to the books, records and all other documents and materials in the
possession or under the control of the Designated Manufacturer(s) relating to
the Licensed Products and its agreement with LICENSEE.
(x) The Designated Manufacturer(s) shall use the trademark and
copyright notices required by LICENSEE in connection with the Marks.
(xi) The Designated Manufacturer(s) shall acknowledge that the Marks
are owned solely and exclusively by LICENSOR and Hugo Boss AG and will not at
any time represent that it has any title or right of ownership in the Marks.
(xii) The Designated Manufacturer(s) shall acknowledge that
materials related to its agreement with LICENSEE and uniquely and
specifically associated with the Marks and/or the Licensed Products
(collectively "Works"), whether developed solely by such Designated
Manufacturer(s) or jointly with others, may qualify for copyright protection
under applicable local laws. The Designated Manufacturer(s) shall agree that
such works are to be deemed works "made for hire" for the benefit of LICENSOR
and that if such works, by operation of law or otherwise, are not works "made
for hire", such Designated Manufacturer(s) shall agree (A) to assign to
LICENSOR any or all of such Designated Manufacturer(s)' right, title and
interest in the copyright in such works throughout the world, and (B) not to
seek or obtain registration of such copyright in its own name.
(xiii) The Designated Manufacturer(s) shall agree not to seek or
obtain any registration of the Marks or any trademark confusingly similar
thereto in any name or participate directly or indirectly in such
registration without prior written permission of LICENSOR and LICENSEE.
4
<PAGE>
(xiv) In the event the Designated Manufacturer(s) has obtained or
obtains in the future in the Territory, any right, title or interest in the
Marks, or in any other trademark or service mark owned by LICENSOR, the
Designated Manufacturer(s) shall execute any and all instruments deemed by
LICENSOR and/or its attorneys or representatives to be necessary to transfer
such right, title or interest to LICENSOR.
(xv) The Designated Manufacturer(s) shall not take any action which
may in any way impair the rights of LICENSOR in the Marks, including, without
limitation, challenging or opposing, or raising or allowing to be raised,
either during the term of its agreement with LICENSEE or after its
termination, on any grounds whatsoever, any questions concerning, or
objections to, the validity of the Marks or LICENSOR'S rights therein, or any
other trademarks or service marks owned by LICENSOR containing the word BOSS
in any manner.
(xvi) The Designated Manufacturer(s) shall reasonably assist
LICENSOR in obtaining and/or maintaining registration for the Licensed Rights
including, without limitation, by providing information regarding the Marks
and samples of the Licensed Products.
(xvii) The Designated Manufacturer(s) shall appoint LICENSOR as its
respective attorney-in-fact for the limited purpose of executing any and all
documents and performing any and all other acts necessary to give effect and
legality to the provisions of this Section 2 of this Agreement.
(xviii) The Designated Manufacturer(s) shall not grant, assign,
sublicense or otherwise convey or transfer any rights inuring to such
Designated Manufacturer or any obligations or duties owed by such party to
LICENSEE or LICENSOR under this Agreement without the prior written consent
of LICENSEE, and any attempted transfer or assignment shall be null and void.
(xix) The Designated Manufacturer(s) shall cooperate with and assist
LICENSOR in protecting and defending the Marks, and shall promptly notify
LICENSEE in writing of any infringements, claims or actions by others in
derogation of the Marks in the Territory of which it becomes aware; provided,
however, that LICENSOR shall have the sole right to determine whether any
action shall be taken on account of such infringements, claims or actions.
The Designated Manufacturer(s) shall not take any action on account of any
such infringement, claim or action without the prior written consent of
LICENSOR.
(xx) In the event LICENSOR initiates or defends any legal
proceedings on account of any infringements, claims or actions by others in
derogation of the Licensed Rights, the Designated Manufacturer(s) shall
cooperate with and assist LICENSOR to the extent reasonably necessary to
protect the Licensed Rights including, but not limited to, being joined as a
necessary party to such proceedings. Any such legal proceedings which do not
result from LICENSEE'S breach of this Agreement or the Designated
Manufacturer's breach of its agreement with LICENSEE shall be initiated or
defended by LICENSOR; provided, however, that under no circumstances shall
LICENSOR be responsible for the costs or expenses incurred
5
<PAGE>
by the Designated Manufacturer(s) in any such legal proceeding in which it
elects to be represented by its own counsel.
(xxi) The Designated Manufacturer(s) shall obtain all government
approvals and registrations which are required under the laws of the
Territory as a result of the Designated Manufacturer(s) activities in
connection with its contract with LICENSEE and to pay any taxes or fees
required by any such foreign government as a result of its activities under
its contract with LICENSEE.
(xxii) In the manufacture of Licensed Products, the Designated
Manufacturer(s) shall not employ children under fourteen (14) years of age.
d. Beginning sixty (60) days after the Effective Date of this
Agreement, LICENSEE shall not authorize any third party to manufacture
Licensed Products in the Territory unless and until such third party executes
a binding written agreement (by purchase order or otherwise) with LICENSEE
containing all of the obligations listed above in Section 2.c. (i-xxii).
LICENSEE shall take reasonable steps to monitor each Designated
Manufacturer's compliance with its obligations under its agreement with
LICENSEE. If any such Designated Manufacturer(s) fails to comply with any of
the foregoing obligations listed above in Section 2.c. (i-xxii), LICENSEE,
upon having acquired knowledge thereof, shall immediately notify LICENSOR
thereof and of the steps being taken to obtain compliance by such Designated
Manufacturer(s) with such obligations. If any such failure to comply
constitutes a material breach of the Designated Manufacturer's obligations to
LICENSEE as listed above in Section 2.c. (i-xxii), LICENSEE shall, at the
request of LICENSOR, also terminate its business dealings with such
Designated Manufacturer as soon as commercially feasible; provided, however,
that as of the date LICENSEE acquires knowledge of any such breach, LICENSEE
shall not enter into any new manufacturing agreements or place any additional
orders with such noncomplying Designated Manufacturer without the written
consent of LICENSOR; provided further that such termination shall not relieve
LICENSEE of its obligations to continue to enforce its rights against such
Designated Manufacturer for breach of its obligations or LICENSEE's indemnity
obligations to LICENSOR under this Agreement.
e. LICENSEE shall bear all costs and expenses associated with or
incurred by it in carrying out its obligations under Sections 2.c. and 2.d.
above.
f. Notwithstanding Section 2.b. above, LICENSEE may manufacture or
cause others to manufacture the Licensed Products within the Licensed
Territory subject to the terms and restrictions contained in this Section.
The parties agree that they will amend Exhibit C to include countries listed
in Exhibit C1 upon (or as soon thereafter as is practicable) the issuance to
HUGO BOSS AG, or its designee, in each such country, of trademark
registration(s) for the word BOSS for use on products listed in Exhibit B,
Section I, as modified by Section II; provided, however, that any such
amendment shall conform to and be limited by the scope of any such trademark
registration obtained. In those countries listed in Exhibit C1 where HUGO
BOSS AG presently has no trademark application(s) pending, LICENSOR agrees,
upon the
6
<PAGE>
written request of LICENSEE, to cause HUGO BOSS AG to make such application,
and to take appropriate steps to prosecute such application and LICENSEE
agrees to reimburse HUGO BOSS AG for fifty percent (50%) of the costs,
including attorney's fees and filing fees, of obtaining such registration.
The parties agree that they will amend Exhibit C to include each country
listed on Exhibit C2 when the later of the following two events occurs (or as
soon thereafter as is practicable): (1) the issuance to HUGO BOSS AG or its
designee, of trademark registrations for the word BOSS for use on products
listed in Exhibit B, Section I, as modified by Section II, or (2) the
resolution to the satisfaction of HUGO BOSS AG of pending disputes among
third parties. At any time after the execution of this Agreement, LICENSEE
may notify LICENSOR of countries other than those referenced in Exhibits C,
C1 and C2 in which LICENSEE desires to manufacture Licensed Products.
LICENSOR shall consider such a request in good faith, and consistent with the
principles incorporated above relating to the countries listed in Exhibit C.
If LICENSOR agrees to any such request, LICENSOR and LICENSEE will either
amend this Agreement, or execute a separate manufacturing rights agreement
upon mutually agreeable terms as set forth above. The parties agree to
execute individual Manufacturing Rights Agreements for any country on Exhibit
C, if required by the laws or regulations of that country or to protect the
Mark. LICENSEE shall only manufacture or cause others to manufacture
Licensed Products in those countries identified in Exhibit C or any other
country as may be later agreed upon pursuant to this section; provided,
however, that nothing in this subsection 2.f. shall prevent LICENSEE from
manufacturing goods in the United States pursuant to its own trademark
rights.
g. Notwithstanding Section 2.b. hereof, neither LICENSEE nor the
Designated Manufacturer(s) shall have the right to use the Marks in the
Licensed Territory in any manner that conflicts with the rights of any third
party. For purposes of this Section 2.g., the term "third party" shall not
include any natural person under control of LICENSOR, any entity owned by,
controlled by, or affiliated with LICENSOR, any natural person or entity that
owns or controls LICENSOR, or any entity with whom LICENSOR enters into an
agreement relating to, or creating, the rights that conflict with LICENSEE'S
rights hereunder. If the use of the Marks on any or all of the Licensed
Products conflicts with the rights of any third party, or if a third party
makes a bona fide claim alleging such a conflict, LICENSEE agrees to
immediately terminate or modify such use in accordance with LICENSOR'S
reasonable instructions, and LICENSEE shall have no right of damage or offset
in connection with this Agreement. In the event LICENSEE fails to terminate
or modify such use, as reasonably directed by LICENSOR, LICENSOR may
terminate this Agreement under the provisions of Section 15 below as to such
country in which the rights of the third party exists or with respect to
which a bona fide claim has been made without limiting LICENSOR'S other
rights and remedies hereunder or at law or in equity. LICENSEE shall
indemnify and hold harmless LICENSOR for all damages, including attorney's
fees and costs incurred in any action or claim brought against LICENSOR by
such third party arising out of LICENSEE's actions under this Agreement.
LICENSOR agrees that neither it nor HUGO BOSS AG shall grant to any third
party an exclusive license for the manufacture of products listed on Exhibit
B, Section I, as modified by Section II, bearing a BOSS mark.
7
<PAGE>
h. LICENSEE acknowledges that it is often difficult to obtain clear,
registered title to trademarks and other intellectual property rights.
Accordingly, LICENSOR makes no representation whatsoever concerning any
rights, interest, information, agreements, restrictions or other matters
relating to the BOSS marks acquired by LICENSOR from LICENSEE under the
Foreign Rights Agreement, and LICENSEE agrees that the rights granted herein
exist only to the extent that LICENSOR owns such rights and no warranty,
express or implied, is made with respect thereto or with respect to the
rights of any third parties that may conflict with the rights granted herein.
LICENSOR warrants that the agreements listed on Exhibit D hereto are the
only agreements known to LICENSOR or HUGO BOSS AG which impose or may impose
restrictions on LICENSEE'S ability to manufacture Licensed Products in the
Territory.
i. LICENSOR shall obtain from HUGO BOSS AG throughout the term of this
Agreement a license of such of its rights (if any) relating to the
manufacture of the Products under the Marks as it possesses in the Territory
such that LICENSOR may sublicense said rights (if any) to LICENSEE to the
extent described in the grant of rights set forth in Section 2.a. and .b.
hereof, and LICENSOR hereby acknowledges that it is sublicensing said rights
to LICENSEE under said Section 2.a. and .b.
j. LICENSEE makes no representations and warranties to LICENSOR
hereunder with respect to the Marks, including, without limitation, any
matter relating to the existence, validity or enforceability of the Marks
acquired by LICENSEE from BROOKHURST Inc.
k. LICENSOR makes no representations and warranties to LICENSEE
hereunder with respect to the Licensed Marks, whether such Marks were derived
from the purchase by LICENSOR from LICENSEE (and ultimately from BROOKHURST)
or derived by license from HUGO BOSS AG.
3. TRANSFER AND OWNERSHIP OF PROPERTY
a. LICENSEE agrees that, during the term of this Agreement, it shall
not use the Marks in the Territory in any manner other than as expressly set
forth in this Agreement.
b. LICENSEE agrees that LICENSOR is and shall be the sole owner of all
items of Property. Subject to the express requirements of Exhibit A, Exhibit
B and Exhibit C of this Agreement, the parties agree that LICENSOR shall have
no right to prevent LICENSEE from using, during or after the term of this
Agreement, any fabrics, styles, designs and colors that are standard or
traditional in the industry or not primarily associated with the Licensed
Rights.
c. Following termination of this Agreement, LICENSEE agrees that it
will terminate any and all use of the Marks in the Territory, except as
otherwise expressly provided in this Agreement.
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4. QUALITY STANDARDS AND INSPECTION
a. The parties acknowledge and agree that great value is placed on the
Marks and the goodwill associated therewith, that the consuming public and
the industry now associate the Marks with products of consistently high
quality, and that the terms and conditions of this Agreement are necessary
and reasonable to assure the consuming public and the industry that all
Licensed Products sold hereunder are of the same consistently high quality as
Licensed Products previously sold by LICENSEE. Accordingly, LICENSEE agrees
that all Licensed Products manufactured hereunder shall be substantially
equivalent, in terms of quality, to the products manufactured by LICENSEE for
sale during the Spring and Fall 1996 seasons. LICENSOR acknowledges that the
products bearing the word BOSS manufactured by LICENSEE for sale during the
1996 Spring and Fall seasons were of sufficiently high quality standards as
required by this paragraph. If any Licensed Products fail to conform to the
aforementioned quality standards, upon notification from LICENSOR, LICENSEE
shall discontinue any and all manufacture, shipments and distribution of such
non-conforming Licensed Products. For purposes of this Agreement, the
parties acknowledge that the quality standards apply only to the sewing,
construction and fabric of the Licensed Products.
b. Within forty-five (45) days after the Effective Date of this
Agreement, LICENSEE shall notify LICENSOR, in writing, of the identities of
each Designated Manufacturer(s) (including full business name and address),
and the locations of all manufacturing, processing and storage facilities in
the Territory in which the LICENSEE or the Designated Manufacturer(s) is
manufacturing, processing or storing or intends to manufacture, process or
store Licensed Products which is currently manufacturing Licensed Products
for LICENSEE in the Territory. Within thirty (30) days of placing any order
for the manufacture of any Licensed Products with a Designated Manufacturer
not previously identified to LICENSOR, LICENSEE shall notify LICENSOR, in
writing, of the identity of such new Designated Manufacturer, (including full
business name and address) and within thirty (30) days after placing any
order (other than an initial order for 24,000 units or less) with any such
Designated Manufacturer, the locations of all manufacturing, processing and
storage facilities in the Territory in which the LICENSEE or the Designated
Manufacturer is manufacturing, processing or storing or intends to
manufacture, process or store Licensed Products. LICENSEE shall, from time
to time, provide LICENSOR promptly with additional such locations as they are
utilized. LICENSOR and its representatives may from time to time, during all
reasonable business hours and with prior reasonable notice to LICENSEE,
inspect the operations and facilities of LICENSEE, the Designated
Manufacturer(s) and their agents with respect to performance under this
Agreement.
c. LICENSEE agrees that it shall comply with all applicable labeling
and other laws affecting the manufacture, storage, shipment, labeling and
sale of the Licensed Products pursuant to the terms of this Agreement, and at
all times otherwise conduct its activities under this Agreement in a lawful
manner.
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d. The parties agree that they will not, without the written consent of
the other, knowingly seek to obtain products from each other's manufacturers
in the Territory or otherwise interfere in each other's lawful relationships
with any manufacturers in the Territory.
e. In order to ensure that LICENSOR is fully aware of all products
LICENSEE may manufacture in the Territory, beginning with product development
for the presentation to the trade beginning in February 1998, LICENSEE shall
not sell or distribute any Licensed Product manufactured, sold or distributed
anywhere in the world, unless and until a prototype or a Computer Assisted
Design ("CAD") which displays clearly and fully each and every use of the
Mark on such product has been offered to LICENSOR for inspection. LICENSEE
shall notify LICENSOR when such prototypes or CADs are available for
inspection at LICENSEE's offices in New York ("Notification of Prototype
Availability") and LICENSOR shall, within ten (10) business days complete its
inspection. At the inspection, or at an inspection to be held within fifteen
(15) business days after receipt by LICENSOR of CADs as provided for below,
LICENSEE shall make available representative samples of tags, labels,
packaging (including cartons, containers, and wrapping or packing material)
and other advertising, promotional or display materials or stationery, sale,
documents and other items bearing or using the Mark. LICENSOR shall, within
five (5) business days of implementing its inspection, notify LICENSEE in
writing of any product that LICENSOR believes fails to meet the terms and
conditions of this Agreement including the standards set forth in Exhibit A
("Disputed Garments"). To the extent LICENSEE intends to rely upon CADs,
LICENSEE may, at its option, ship such CADs to LICENSOR for its review.
Under these circumstances, LICENSOR shall, within ten (10) business days of
receipt of such materials, notify LICENSEE in writing of any Disputed
Garments. In the event there are Disputed Garments, LICENSOR and LICENSEE
shall then meet to resolve any differences concerning such Disputed Garment
and if, after five (5) business days, no resolution has been reached, the
matter may be submitted to arbitration according to the procedures set forth
in Exhibit H1. Pending resolution of any such arbitration, LICENSEE shall
not manufacture, distribute or sell any such Disputed Garments. LICENSOR's
failure to approve or disapprove any such prototype or CAD, within thirteen
(13) business days of notification shall be deemed approval of such prototype
or CAD. LICENSEE shall provide LICENSOR with a set of prototype garments,
CADs or salesperson's samples of each such garment, each in typical or
representative color, and each accompanied by a list of colors (by references
to Pantone or other technical specification) expected to be used in
production, within ten (10) business days of Notification of Prototype
Availability. Subject to the express requirements of Exhibit A and Exhibit
B, nothing in this Agreement is intended to give LICENSOR any rights to
approve or specify the apparel styling, design, patterns, art work or colors
of Licensed Products.
f. Beginning with product development for the presentation to the trade
in February 1998, LICENSEE shall adhere to all prototypes, or CADs reviewed
by LICENSOR. Any minor departure or variance from such prototypes or CADs as
to any of the requirements or limitations in Exhibit A and Exhibit B,
including but not limited to any change of logo design, must receive the
prior written approval of LICENSOR, which shall not be unreasonably withheld.
Prior to receipt of LICENSOR'S approval, LICENSEE may, solely at its own
risk and without prejudice
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<PAGE>
to LICENSOR, take orders for and/or manufacture such Licensed Products.
Should a dispute arise between the parties over such products requiring
arbitration, the parties agree that the arbitrator shall not be advised that
such garments have been manufactured or that orders have been placed or taken
therefor.
g. LICENSEE shall notify LICENSOR in writing regarding any change to
LICENSEE's business that would materially affect the rights, obligations and
benefits of LICENSOR under this Agreement. LICENSOR shall notify LICENSEE in
writing regarding any change to LICENSOR's or HUGO BOSS AG's business that
would materially affect the rights, obligations and/or benefits of LICENSEE
under this Agreement.
h. Subject to the provisions of Section 5.c., LICENSEE agrees not to
manufacture, export, import, ship or distribute from or to any Licensed
Territory, nor give its permission to any third party to manufacture, export,
import, ship or distribute from or to any Licensed Territory, Substandard
Licensed Products without the prior written approval of LICENSOR.
Substandard Licensed Products shall be defined as damaged or defective
merchandise, irregulars, raw material seconds, made-up merchandise, and any
products not meeting the quality standards set forth in Section 4.a. above or
the logo standards set forth in Exhibit A. Nothing in this Agreement is
intended to prevent LICENSEE from manufacturing or selling seconds and
irregulars in the normal and ordinary course of business, consistent with the
past practices of LICENSEE in this regard.
i. Upon LICENSOR'S written request, LICENSEE shall furnish without cost
to LICENSOR a reasonable number of random production samples per year of each
Licensed Product being manufactured by or on behalf of LICENSEE hereunder,
together with samples of each tag, label, carton, container and packing or
wrapping material used in connection therewith.
j. LICENSEE shall submit to LICENSOR any trademark, service mark, logo
or name which is to be used in connection with the Licensed Rights other than
those referenced in Exhibit A. LICENSOR shall have the right, in its sole
reasonable discretion, to refuse to permit the use of any such trademarks,
service marks, logos or names.
k. LICENSEE shall not use the stitching designs for clothing pockets as
depicted in Exhibit E on jeans, trousers, shirts, skirts, dresses, shorts,
overalls, jackets, hats or vests or manufacture or distribute any Licensed
Products using any pocket stitching design which infringes the designs set
forth in Exhibit E. Prior to use, LICENSEE may submit to LICENSOR for
approval other stitching designs for use on clothing pockets on such
garments. In the event LICENSEE elects not to submit stitching to LICENSOR
for approval LICENSEE shall indemnify, defend and hold harmless LICENSOR from
and against any and all claims, liabilities and expenses, including
reasonable attorney's fees, disbursements and other charges relating to
LICENSEE's use of such unapproved stitching designs.
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l. LICENSOR and its representatives may, from time to time during all
reasonable business hours and with prior reasonable notice to LICENSEE,
inspect the operations and facilities of LICENSEE with respect to this
Agreement.
5. TERM
a. This Agreement shall continue in full force and effect until
December 31, 2001, when it shall terminate, unless renewed in accordance with
the terms below, or unless terminated sooner in accordance with the terms and
conditions set forth in this Agreement.
b. LICENSEE may, at it sole option, renew this Agreement for a period
of three (3) additional years commencing on January 1, 2002, and ending
December 31, 2004, if LICENSEE provides written notice of its intention to
extend by no later than June 30, 2001. LICENSEE may, at its sole option,
extend the term of this Agreement for an additional three (3) year period
commencing on January 1, 2005, and ending on December 31, 2007, if LICENSEE
provides written notice of its intention to extend by no later than June 30,
2004.
c. With respect to the limitations on the use of the Mark described in
Exhibit A, LICENSEE shall begin to phase some of the limitations into its
product line beginning with products produced by or for LICENSEE after
January 1, 1998. Thereafter, fifty percent (50%) of the products bearing the
Marks produced by or for LICENSEE during the period August 1, 1998 through
December 31, 1998 (as measured by the number of styles) must comply
therewith. LICENSEE agrees to use its reasonable efforts to ensure that
fifty percent (50%) of its projected volume of such goods comply with the
limitations described in Exhibit A. LICENSEE shall be in full compliance with
Exhibit A for all products bearing the Marks produced on or after December
31, 1998 and thereafter may not manufacture or produce
any products bearing the Marks which are not in full compliance with Exhibit
A.
6. LICENSE FEE AND ROYALTIES
a. LICENSEE agrees to pay to LICENSOR a royalty on Licensed Products
manufactured in the Territory by or on behalf of LICENSEE in accordance with
Exhibit F attached hereto. Each year during the initial term of this
Agreement, annual royalties shall be paid as follows: in anticipation of
substantial total annual royalties, and to be credited against the royalties
otherwise payable hereunder, four equal installments of one million dollars
($1,000,000), each within thirty (30) days after the end of each three month
period ending March 31, June 30, September 30 and December 31, the first such
payment being due on April 30, 1998 and within thirty (30) days of the end of
each year of this Agreement, any remaining royalties due under Exhibit F
("Annual Royalty Payment"). For each year during any of the option terms of
this Agreement royalty payments shall be based on actual sales as calculated
in accordance with Exhibit F payable quarterly and due within thirty (30)
days after the end of each three month period ending March 31, June 30,
September 30 and December 31.
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b. LICENSEE agrees (i) to generate Territory Net Sales for each year
during which this Agreement is in force as specified in Exhibit F1 and (ii)
for each such year in which such sales exceed these minimum amounts, to pay
royalties as if its Territory Net Sales are at least equal to ninety-five
percent (95%) of Total Net Sales. LICENSEE agrees to use its best efforts to
have Territory Net Sales for the period October 1, 1997 through December 31,
1997 of at least, Eight Million Dollars ($8,000,000). Once LICENSEE's
cumulative payment of royalties under this Agreement and interest payable to
LICENSOR under the Secured Limited Recourse Promissory Note ("Note") between
LICENSOR and LICENSEE ("interest") exceed, respectively (i) Sixteen Million
Dollars ($16,000,000) paid in at any time during the initial term of this
Agreement, (ii) Six Million Five Hundred Thousand Dollars ($6,500,000) paid
in at any time during the first option term of this Agreement, (iii) Six
Million Dollars ($6,000,000) paid in at any time during the second option
term of this Agreement or (iv) Twenty-Six Million Dollars ($26,000,000) paid
in at any time during the entire term of this Agreement, then (i) LICENSEE's
covenant under Section 6.b.(i) above shall cease to have effect for the term
in question, and (ii) royalties thereafter shall be paid to LICENSOR in
accordance with Exhibit F as stated in Section 6.a. and 6.b(ii) above.
c. At the time of each Annual Royalty Payment, LICENSEE shall provide
to LICENSOR a written statement illustrating the calculation of the payment
due and the volume of all sales for each product covered by Exhibit B,
Section I, as modified by Section II. The statement should be certified by an
officer of LICENSEE to be complete and accurate and shall set forth a
detailed accounting of the aggregate amount of Territory Net Sales and Total
Net Sales of all Licensed Products shipped during the contract year.
LICENSOR may provide, in its sole and reasonable discretion, a statement
form, and LICENSEE agrees to supply the information requested on such form.
The parties agree that the form attached hereto as Exhibit F2 is acceptable.
In the event LICENSEE's Territory Net Sales do not equal or exceed
ninety-five percent (95%) of its Total Net Sales, LICENSEE may provide
detailed sales information only of its Total Net Sales.
7. PAYMENT TERMS
a. Without limiting LICENSOR's right to terminate this Agreement under
Section 15, below, in the event that LICENSEE fails to make timely payments
to LICENSOR under this Agreement, LICENSEE shall pay to LICENSOR on demand
the amounts due with interest at the rate of one and one-half percent (1.5%)
per month from the due date until paid. If this rate exceeds the maximum
interest rate allowable by law, then interest shall accrue at the maximum
rate allowable by law.
b. All payments required under this Agreement shall be in U.S. Dollars
and made payable to the order of "Ambra, Inc."
c. Acceptance by LICENSOR of any payments under this Agreement shall
not prevent LICENSOR at any later date within thirty-six (36) months from the
date of any payment from disputing the amount owed or from demanding more
information from LICENSEE regarding payments finally due, and such acceptance
of any payment by LICENSOR shall not
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<PAGE>
constitute a waiver of any breach of any term or provision of this Agreement
by LICENSEE if any such breach shall have occurred. Payment by LICENSEE of
any payments under this Agreement shall not prevent LICENSEE within twelve
(12) months from the date of such payment from disputing the amount owed or
from demanding from LICENSOR the repayment of any amounts overpaid by
LICENSEE; provided, however, that LICENSEE shall be entitled to reimbursement
for any overpayment made by LICENSEE discovered by an audit conducted by
LICENSOR of LICENSEE's books and records under Section 8.c. herein,
notwithstanding the date of any such audit.
d. LICENSEE acknowledges and agrees that any manner of payment other
than that stated herein, or as required by law, including, without
limitation, offsets, payment into an escrow account or to any other third
party, shall constitute a material breach of this Agreement.
8. BOOKS AND RECORDS
a. LICENSEE shall keep complete and accurate records of all Licensed
Products manufactured and of LICENSEE'S activities under this Agreement, and
shall make the same readily available to LICENSOR and its agents and
representatives at such reasonable times as LICENSOR may from time to time
request for inspection, copying and extracting.
b. Such books and records shall be kept in accordance with generally
accepted accounting principles, consistently applied, and shall be retained
by LICENSEE and kept available for at least three (3) years after termination
of this Agreement for possible inspection, copying, extracting and/or audit
by LICENSOR.
c. LICENSOR and its agents and representatives shall have the right to
conduct audits with respect to the books, records and all other documents and
materials in the possession or under the control of LICENSEE relating to this
Agreement, the cost of which shall be borne by LICENSOR. Any such audit
shall be done during normal business hours and upon reasonable notice to
LICENSEE. If any such audit, however, discloses that royalty payments due to
LICENSOR under this Agreement exceed the amount of payments actually made to
LICENSOR during the audited period by an amount greater than three percent
(3%) of the payments made, LICENSEE shall immediately pay the cost of the
audit, as well as unpaid royalties plus interest calculated from the date
such payment(s) were actually due until the date when such payment is, in
fact, actually made. In addition to the foregoing, if any such audit
discloses that payments due to LICENSOR under this Agreement exceed the
amount of payments actually made to LICENSOR by an amount greater than ten
percent (10%) of the payments made during the audited period ("Major Error
Audit"), LICENSOR shall be entitled, in addition to all other remedies
available to it and at its sole option, to an additional payment equal to ten
percent (10%) of the full amount of the unpaid royalties. If during an audit
of a subsequent period conducted within twelve (12) months of the completion
of a Major Error Audit, the payments due to LICENSOR under this Agreement
exceed the amount of payments actually made to LICENSOR by an amount greater
than ten percent (10%) of the payments made during the
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<PAGE>
audited period, LICENSOR shall be entitled, * and all other remedies
available to it and at its sole option, to immediately terminate the
Agreement.
d. No later than one hundred twenty (120) days after the close of
LICENSEE's fiscal year, LICENSEE shall provide LICENSOR with its annual
financial statements, audited or unaudited, prepared by an independent
certified accountant. If unaudited, an officer of LICENSEE shall certify
under penalty of perjury that the financial statements are true and correct,
and have been prepared in accordance with generally accepted accounting
principles, consistently applied.
e. LICENSOR agrees that it will maintain in confidence those records of
LICENSEE disclosed to LICENSOR pursuant to paragraphs 8.a., 8.c., and 8.d.
above and any other oral or written confidential information about LICENSEE's
business and product line disclosed to LICENSOR.
9. LABELING
LICENSEE agrees to use the proper trademark and copyright notices in
connection with the Marks in the Territory. Upon the execution of this
Agreement, LICENSEE shall no longer place orders in the Territory for
Licensed Products bearing any prior trademark and copyright notice in
connection with the Licensed Rights and will take reasonable steps to ensure
that such goods are no longer manufactured in the Territory; provided,
however, that LICENSEE shall not be required to remove prior trademark and
copyright notices already affixed to such garments or to unreasonably disrupt
work in progress; any other changes shall be subject to a reasonable phase-in
period. Where appropriate, such notices shall appear in the screen for any
screen-printed design, in the salvage of any fabric, in the neck label or
waist label of any Licensed Products, and on any label or tag affixed to the
Licensed Products or otherwise attached to the Licensed Products.
10. OWNERSHIP OF THE MARKS
a. LICENSEE agrees that it has no right to ownership in the Marks in
the Territory and, in furtherance thereof, hereby transfers and conveys all
rights, title and interest, if any, in the Marks to HUGO BOSS AG, and will
not at any time represent or authorize a Designated Manufacturer(s) to
represent that such manufacturer has any title or right of ownership in the
Marks.
b. LICENSEE agrees that nothing contained in this Agreement shall give
to LICENSEE or the Designated Manufacturer(s) any right, title or interest in
the Marks except the limited license granted to LICENSEE herein, that such
Licensed Rights are the sole and exclusive property of LICENSOR and that all
such uses by LICENSEE or the Designated Manufacturer(s) of the Licensed
Rights shall inure only to the benefit of LICENSOR.
15
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* Text omitted pursuant to a request for confidential treatment and filed
separately with the Securities and Exchange Commission.
<PAGE>
c. LICENSEE agrees that it will not seek or obtain any registration of
the Marks in any name or participate directly or indirectly in such
registration without LICENSOR'S prior written permission. Subject solely to
the rights and interest granted herein, LICENSEE further agrees and
acknowledges that if it has obtained or obtains in the future, in the
Territory, any right, title or interest in the Marks, or in any marks which
are confusingly similar to the Licensed Rights, or in any other trademark or
service mark owned by LICENSOR, that LICENSEE has acted or will act as an
agent and for the benefit of LICENSOR for the limited purpose of obtaining
such registrations in the name and on behalf of LICENSOR. LICENSEE further
agrees to execute any and all instruments deemed by LICENSOR and/or its
attorneys or representatives to be necessary to transfer such right, title or
interest to LICENSOR.
d. LICENSEE agrees not to take any action which may in any way impair
LICENSOR's rights in and to the Marks, including, without limitation,
challenging or opposing, or raising or allowing to be raised, either during
the term of this Agreement or after its termination, on any grounds
whatsoever, any questions concerning, or objections to, the validity of the
Marks or LICENSOR'S rights therein, or any other trademarks or service marks
owned by LICENSOR containing the word BOSS in any manner.
e. LICENSEE agrees to reasonably assist LICENSOR in obtaining and/or
maintaining registration for the Licensed Rights including, without
limitation, by providing information regarding the Marks and samples of the
Licensed Products.
f. LICENSEE acknowledges that materials related to this Agreement and
uniquely and specifically associated with the Marks and/or the Licensed
Products (collectively "Works"), whether developed solely by LICENSEE or
jointly with others may qualify for copyright protection under applicable
local laws. LICENSEE agrees that such Works are to be deemed as Works "made
for hire" for the benefit of LICENSOR and that if such Works, by operation of
law or otherwise, are not Works "made for Hire," LICENSEE agrees (i) to
assign, and does hereby assign, to LICENSOR or its designee any and all of
LICENSEE'S right, title and interest in the copyright in such Works
throughout the world, and (ii) not to seek or obtain registration of such
copyright in its own name.
g. LICENSEE will and does hereby irrevocably appoint LICENSOR as its
respective attorney-in-fact for the limited purpose of executing any and all
documents and performing any and all other acts necessary to give effect and
legality to the provisions of this Section 10 of this Agreement. LICENSOR
agrees to provide LICENSEE with copies of all such documents it executes
under this Section 10.g.
11. INSURANCE
a. LICENSEE agrees to obtain and keep in full force and effect, during
the term of this Agreement, at its sole cost and expense, a policy of
insurance insuring against those risks customarily insured under
comprehensive general liability policies including, but not limited to,
"product liability" and "completed operations." Such policies of insurance
shall have
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endorsements or coverage with combined single limits of not less than One
Million Dollars ($1,000,000) and shall name LICENSOR as an additional insured
thereunder. LICENSEE shall use reasonable efforts to obtain at a reasonable
cost an "advertising" rider and, if such rider is purchased, shall provide
that it cannot be canceled without thirty (30) days prior written notice to
LICENSOR. It is also agreed that the "other insurance" clause, if any, will
be deleted from such policy, that the insurance under such policy shall be
primary, and that other insurance in force is neither primary nor
contributing.
b. LICENSEE shall provide to LICENSOR, within thirty (30) days of the
Effective Date of this Agreement, a certificate showing proof that such
policy of insurance is in effect. In no event shall LICENSEE manufacture,
offer for sale, sell, advertise, promote, ship and/or distribute the Licensed
Products prior to the receipt by LICENSOR of such certificate of insurance.
c. LICENSEE agrees to give LICENSOR, or cause the insurer to give
LICENSOR, as the case may be, thirty (30) days prior written notice of any
reduction in limits or termination of such policy of insurance, or of any
intention on the part of LICENSEE not to pay the premium thereof.
12. NON-TRANSFERABILITY OF RIGHTS
a. LICENSEE shall not grant, assign, sublicense or otherwise convey or
transfer any rights inuring to LICENSEE or any obligations or duties owed by
LICENSEE to LICENSOR under this Agreement, without the prior written consent
of LICENSOR, and any attempted transfer or assignment shall be null and void.
LICENSOR shall consider in good faith any request for such consent and
promptly notify LICENSEE of LICENSOR'S decision, said decision to be in
LICENSOR's sole discretion. LICENSEE shall have the right to transfer or
assign its rights under this Agreement to an affiliate of LICENSEE (i.e., an
entity in control of, controlled by or under common control with LICENSEE),
provided that any such transfer or assignment does not in any way diminish,
extinguish, or adversely affect LICENSEE'S obligations to LICENSOR under this
Agreement. Nothing in this Section 12 is intended to prevent LICENSEE, its
partners or affiliates from offering and selling stock to the public.
LICENSOR shall provide LICENSEE with written notice if LICENSOR intends to
assign or transfer to any third party any of its rights or obligations under
this Agreement.
b. Notwithstanding anything to the contrary set forth in this
Agreement, LICENSEE shall be permitted to assign and transfer LICENSEE's
rights under this Agreement to any parent, subsidiary or other affiliate of
LICENSEE if LICENSEE or its successor in interest remains fully liable for
the performance of this Agreement by such assignee or transferee and
indemnifies LICENSOR with respect to any costs and damages LICENSOR may incur
because of such assignment or transfer.
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<PAGE>
13. INDEPENDENT CONTRACTOR
The parties hereby agree that LICENSEE is and shall be an independent
contractor and that no agency (except as specified in Section 10.g.), joint
venture or partnership is created by this Agreement. The legal relationship
of any person or entity performing services for LICENSEE shall be one solely
between such parties. Neither party shall incur any obligation in the name
of the other party without the prior written consent of that party.
14. INDEMNIFICATION
a. LICENSEE agrees to indemnify, defend and hold harmless LICENSOR and
HUGO BOSS AG from and against any and all claims paid, liabilities incurred
and all other out-of-pocket expenses and costs (including reasonable
attorney's fees, disbursement and other charges but excluding lost profits)
(collectively referred to as "Expenses") actually incurred by LICENSOR or
HUGO BOSS AG arising out of any breach by LICENSEE of its obligations under
this Agreement or any breach by any Designated Manufacturer of its
obligations under its agreement with LICENSEE, including, without limitation,
Expenses incurred by LICENSOR or HUGO BOSS AG in efforts to stop the
manufacture, distribution or sale of unauthorized product bearing the Marks,
or out of any defect whether obvious or hidden and whether or not present in
any sample approved by LICENSOR, in any product bearing a BOSS mark
manufactured, distributed or sold by or on behalf of LICENSEE (regardless of
whether such product was manufactured in the Licensed Territory) under or
arising from personal injury or property damage or out of any infringement of
any rights of any other person by reason of the design, manufacture,
distribution, advertisement, promotion, sale, possession or use of the Marks
or any Licensed Products or LICENSEE's and Designated Manufacturer(s)'
failure to comply with applicable law, regulations and standards.
b. LICENSOR agrees to indemnify, defend and hold harmless LICENSEE from
and against any and all claims paid, liabilities incurred and all other
Expenses (as defined above) actually incurred by LICENSEE arising out of any
breach by LICENSOR of its obligations, if any, under this Agreement or
LICENSOR'S or HUGO BOSS' failure to comply with applicable law, solely
attributable to LICENSOR'S or HUGO BOSS' direct conduct (and not the conduct
of LICENSEE.)
15. TERMINATION
a. In the event LICENSEE commits any of the accelerating acts (defined
at Section 15.f.) or fails to make payments required under Section 15.f.,
LICENSOR may terminate this Agreement in its entirety.
b. LICENSOR may terminate this Agreement as it pertains to any country
included in the Licensed Territory only upon any of the following events in
that country:
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(i) A material breach by LICENSEE of any of the material terms and
conditions of this Agreement as it relates to a particular country, which
after due written notice of same from LICENSOR, remains uncured for a period
of thirty (30) days.
(ii) LICENSEE's failure to obtain compliance by any Designated
Manufacturer(s) with the list of locations required in Section 2.c.(vii)(A)
or Section 4b. It shall not be a breach of this Agreement, if,
notwithstanding the reasonable efforts of LICENSEE, a Designated Manufacturer
provides only a partial list of all manufacturing, processing and storage
facilities in the territory as required by Sections 2.c.(vii)(A) and 4.b.
herein, provided, however, that any such list as is provided includes all
significant locations. For purposes of a breach of LICENSEE'S obligation to
obtain lists of locations under Section 2.c.(vii)(A) or Section 4b., a cure
may be accomplished by, within thirty (30) days of receipt of a written
demand from LICENSOR, (A) delivering the required lists or (B) termination of
all business dealings with the Designated Manufacturer(s) at issue, as soon
as commercially feasible; provided however that as of the date of the written
demand from LICENSOR (and until a cure occurs), LICENSEE shall not enter into
any new manufacturing agreements or place any additional orders with such
noncomplying Designated Manufacturer(s) without the written consent of
LICENSOR; provided further that such termination shall not relieve LICENSEE
of its obligations to continue to enforce its rights against such Designated
Manufacturer(s) for breach of its obligations or LICENSEE's indemnity
obligations to LICENSOR under this Agreement.
(iii) LICENSEE's failure to obtain substantially full compliance by
any Designated Manufacturer(s) with the child labor restrictions in Section
2.c.(xxii). For purposes of a breach of LICENSEE's obligations under Section
2.c.(xxii), a cure may be accomplished by, within thirty (30) days of receipt
of a written demand, termination of all business dealings with the Designated
Manufacturer(s) at issue.
(iv) LICENSEE'S failure to obtain compliance by any Designated
Manufacturer(s) with any of the other material terms and conditions listed in
Section 2.c. (i-xxii) which, after due written notice of same from LICENSOR,
remains uncured for a period of thirty (30) days.
c. Termination shall be effective upon expiration of the applicable
cure period, if any, and receipt of written notice from LICENSOR of such
expiration. Upon any such termination, all of the rights and licenses granted
hereunder shall terminate. Any such termination by LICENSOR shall be without
prejudice to LICENSOR'S other rights and remedies for breach, including
damages.
d. If permitted under any applicable laws, including U.S. Bankruptcy
laws, LICENSOR may terminate this Agreement immediately upon: (i) the
insolvency of LICENSEE; (ii) the filing of a voluntary petition in bankruptcy
for liquidation by LICENSEE; (iii) the filing of an involuntary petition in
bankruptcy for liquidation against LICENSEE that is not vacated within one
hundred
19
<PAGE>
twenty (120) days from the date of filing; (iv) the appointment of a receiver
or trustee for LICENSEE, provided that such appointment is not vacated within
one hundred twenty (120) days from the date of such appointment; or (v) the
execution by LICENSEE of an assignment for the benefit of all creditors
generally.
e. LICENSEE shall notify LICENSOR of any change in ownership of more
than fifteen percent (15%) of LICENSEE'S total outstanding equity (on a fully
diluted basis) in any transaction or series of related transactions.
LICENSOR may terminate this Agreement upon a Change of Control. For purposes
of this Agreement, "Change of Control" shall mean:
(i) (A) the sale of all or substantially all of the assets of
LICENSEE; (B) the sale of fifteen percent (15%) or more of the
equity of LICENSEE on a nonpublic sale; (C) any merger or
consolidation of the LICENSEE; or (D) the transfer of control
(as that term is defined in Rule 405 under Regulation C of the
Securities Act of 1933, as Amended), of LICENSEE in a public
offering, in each of the foregoing circumstances (i.e., (i)
(A), (B), (C) or (D)) to, or with any one or more of the
following entities or persons, or persons or entities under
common control or ownership with them: Brookhurst, Inc., Boss
Golf Co., William Ott, Nicholas Yacobucci, James Ward, Boss
Sportswear (USA), Inc., Peter Chan, Paul Lee, Boss
Manufacturing Co., American Home Products, Inc., Vista 2000,
Inc., G. H. Bass Co., and/or Hugo Bosca; or
(ii) (A) the sale of all or substantially all of the assets of
LICENSEE; (B) the sale of fifty percent (50%) or more of the
equity of LICENSEE in a nonpublic sale; (C) any merger or
consolidation of the LICENSEE; or (D) the transfer of control
(as defined in Section 15.e.(i)) of LICENSEE in a public
offering, in each of the foregoing circumstances (i.e., (ii)
(A), (B), (C) or (D)) to, or with any entity engaged in the
manufacturing, distribution or sale (other than retail) of
clothing in direct competition with LICENSOR or HUGO BOSS AG,
(e.g., Zegna Corp., Donna Karan Corp., Hart, Shaffner & Marx;
Calvin Klein Corp., Designer Holdings, Liz Claiborne, or
Salant Corp.) LICENSOR agrees that LICENSEE, its partners and
affiliates, may offer and sell stock to the public and,
subject to the provisions of this Section 15.e., nothing in
this Agreement shall prevent or interfere with LICENSEE, or
its partners or affiliates offering and selling stock to the
public.
f. In addition to the right of termination and all other available
remedies, any of the following acts by LICENSEE during the initial term shall
at LICENSOR'S option accelerate all payments that would have been payable
during the initial term had LICENSEE achieved Territory Net Sales equal to
four times the Territory Net Sales attributable to the fourth quarter
20
<PAGE>
of 1997 in each of the years of the initial term of this Agreement and
require the immediate payment by LICENSEE to LICENSOR of the sum due and
payable throughout the initial term pursuant to Section 6 above, less the
cumulative payments made by LICENSEE to LICENSOR during this same period
under Section 6 above, but in no event shall the payment due be more than *
minus the cumulative interest previously paid under the note to LICENSOR
during the initial term of the Agreement: (i) a breach by LICENSEE of its
obligations to make the payments required by Sections 6 and 7 of this
Agreement or its obligations to achieve the minimum Territory Net Sales for
any year in accordance with Section 6.b.(i) (unless LICENSEE pays to LICENSOR
the difference between the amount actually paid in any such year and the
amount otherwise payable pursuant to this Agreement as if the applicable
minimum Territory Net Sales had actually been generated), which breach has
not been cured pursuant to the terms of this Agreement; (ii) LICENSEE'S
failure to manufacture any Licensed Products in the Licensed Territory, (iii)
any attempted termination of this Agreement by LICENSEE, except as expressly
permitted by this Agreement or as agreed to by the parties in writing during
the initial term of this Agreement; (iv) the manufacture, distribution or
sale by LICENSEE of any product bearing the marks BOSS/HUGO BOSS; HUGO/HUGO
BOSS; BALDESSARINI/HUGO BOSS; HUGO BOSS or any other trademarks owned by
LICENSOR or HUGO BOSS AG except those referenced in Section l.a. for the
products listed in Exhibit B, Section I as modified by Section II; (v) the
sale by LICENSEE of any product bearing a BOSS mark outside the United
States; (vi) any willful material breach of any term of this Agreement; (vii)
any attempt by LICENSEE other than as requested by LICENSOR or HUGO BOSS AG
to register or otherwise create or establish trademark rights in the word
BOSS in its own name anywhere outside the United States; or (viii) any act
described in Section 15.d. of this Agreement (collectively referred to as
"Accelerating Acts"). Any Accelerating Act(s) by LICENSEE during the first
option term of this Agreement shall at LICENSOR's option accelerate payment
of all payments payable during the first option term and require the
immediate payment by LICENSEE to LICENSOR of the sum of the payments due and
payable throughout the first option term pursuant to Section 6, had LICENSEE
achieved Territory Net Sales equal to four times the Territory Net Sales
attributable to the fourth quarter of 1997 in each of the years of the final
option term of this Agreement less the cumulative payments made by LICENSEE
to LICENSOR during this period under Section 6 above, but in no event shall
the payment due be more than * minus the cumulative interest previously paid
under the Note to LICENSOR during the first option term of the Agreement.
Any Accelerating Act(s) by LICENSEE during the second option term of this
Agreement shall at LICENSOR's option accelerate payment of all payments
payable during the second option term and require the immediate payment by
LICENSEE to LICENSOR of the sum of the annual payments due and payable
throughout the second option term pursuant to Section 6, had LICENSEE
achieved Territory Net Sales equal to four times the Territory Net Sales
attributable to the fourth quarter of 1997 in each of the years of the final
option term of this Agreement less the cumulative royalty payments made by
LICENSEE to LICENSOR during this same period under Section 6 above but in no
event shall the payment due be more than * minus the cumulative interest
previously paid under the Note to LICENSOR during the second option term of
the Agreement. The parties agree that this provision is not a liquidated
damages provision, but a quantification
21
- ------------
* Text omitted pursuant to a request for confidential treatment and filed
separately with the Securities and Exchange Commission.
<PAGE>
of the benefit of the bargain to LICENSOR. In the event LICENSEE fails to
make immediate payment as required by this Section, any award, in arbitration
or otherwise, to LICENSOR for an Accelerating Act(s) of this Agreement by
LICENSEE shall include, but not be limited to, the payment required by this
Section, and such other relief as may be appropriate. In the event LICENSOR
exercises its option to demand accelerated payment as set forth above,
LICENSOR shall so notify LICENSEE in writing.
g. Either party may, by written notice to the other, terminate this
Agreement upon sale by LICENSEE of its United States trademark rights to BOSS
to LICENSOR or any of its affiliates (including parents).
h. In addition to all other available remedies, LICENSOR may, solely at
its option and upon written notice to LICENSEE, terminate this Agreement as
it pertains to a particular country in the Licensed Territory if substantial,
unauthorized sale or distribution of Licensed Products occurs (i) within any
such country and/or (ii) outside any such country (except for the United
States) where the unauthorized goods were manufactured, distributed or sold
by a Designated Manufacturer(s) in such country and is documented during (i)
each of three (3) consecutive quarters (a quarter being defined as any
three-month period beginning on January 1, April 1, July 1 or October 1) or
(ii) each of three (3) consecutive years.
i. LICENSEE shall have the option to terminate this Agreement at any
time, upon providing LICENSOR with ninety (90) days written notice, if all of
the following occur: (i) LICENSEE has used the BOSS mark as required by this
Agreement; (ii) LICENSEE is prohibited by a binding order of a court of
competent jurisdiction (which order has not been vacated within ninety (90)
days of issuance) from using the word BOSS in the Microgramma typestyle and
every variation thereof on a substantial portion (by sales volume) of the
Licensed Products; and (iii) there is no reasonable alternative available;
provided, however, that if such court order is based upon LICENSEE's use of
the Marks in a manner that is inconsistent with the requirements of this
Agreement, then LICENSOR, but not LICENSEE, shall have the option to
terminate this Agreement upon ninety (90) days written notice. In the event
this Agreement is terminated by LICENSEE under this Section 15.i, and
Territory Net Sales do not exceed that required under Exhibit F1 attached
hereto, royalties due shall be based on actual net sales as provided for in
Sections 6.a. and 6.b. above. Application of the minimum royalty shall be
pro rata based on the number of days in the period from January 1 in the year
of such termination until the day of the last sale permitted by the above
referenced court order.
j. Notwithstanding any other provision of this Agreement, upon
termination of this Agreement, LICENSEE (and its secured inventory lender),
shall be entitled, subject to the terms and conditions of this Agreement, on
a non-exclusive basis, for a period of nine (9) months from the date of
termination, to complete manufacture of Licensed Products in progress on the
date of termination, and to export such completed products and any products
in Licensee's inventory on the date of termination; provided, however, that
such rights as are granted herein apply only to orders placed and goods
manufactured in the ordinary course of LICENSEE's business. After
22
<PAGE>
the expiration of such nine (9) month period, LICENSEE shall completely
remove the marks from any products not manufactured before the expiration of
such nine (9) month period.
16. RESULTS OF TERMINATION
a. Upon termination of this Agreement, subject to the terms of Section
15.j. above, all rights relating to the Licensed Products within the Licensed
Territory hereunder, shall immediately cease and LICENSEE shall:
(i) cease the manufacture of the Licensed Products except in
accordance with this Section 16;
(ii) cease all use of the Licensed Rights;
(iii) within thirty (30) days of termination, delete and henceforth
cease from making any reference to the Licensed Rights and Marks in, on or in
connection with any advertising, promotional or directory materials,
including any reference to having been previously a licensee of LICENSOR;
(iv) within ten (10) days of termination, deliver all packaging,
labels, tags and other materials and property (other than actual Licensed
Products) relating to this Agreement to LICENSOR; and
(v) within ten (10) days of termination, furnish LICENSOR with a
full and complete statement setting forth (A) the inventory of Licensed
Products manufactured or in the process of manufacture, including the
wholesale price thereof, and (B) production and distribution schedules for
the Licensed Products.
b. The termination of this Agreement shall not relieve LICENSEE of any
duties or obligations contained herein including, without limitation, the
obligation to pay royalties and interest and furnish required statements; nor
shall termination extinguish any rights of LICENSOR necessary to ensure an
expeditious conclusion of this Agreement, including, without limitation, the
right to inspect the books, records and facilities of LICENSEE and the right
to obtain prior written consents.
c. Upon any termination of this Agreement, other than termination
resulting from a breach by LICENSEE of this Agreement, LICENSEE shall be
liable to LICENSOR only for actual royalties accrued prior to termination and
royalties on any goods manufactured after termination under Section 15.j.;
provided, however, that nothing in this Section shall affect LICENSOR'S
rights or remedies for any post-termination breach by LICENSEE.
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<PAGE>
17. EQUITABLE RELIEF
The parties acknowledge that it will be impossible to measure in money
the damages that would be suffered by one if the other breaches or otherwise
fails to comply with the obligations imposed on it pursuant to this Agreement
and that, in the event of any such failure, the non-breaching party will be
irreparably damaged and will not have an adequate remedy at law. Therefore,
notwithstanding any other provision of this Agreement, the non-breaching
party shall be entitled to equitable relief, including, without limitation,
injunctive relief and/or specific performance to enforce such obligations
and, if any action should be brought in equity to enforce any provisions of
this Agreement, the breaching party shall not raise the defense that there is
an adequate remedy at law. Except as expressly provided in this Agreement,
all specific remedies provided for in this Agreement are cumulative and are
not exclusive of one another or of any other remedies available at law or in
equity.
18. LEGAL ACTION
a. LICENSEE agrees to reasonably cooperate with and assist (and to take
reasonable steps to require the Designated Manufacturer(s) to cooperate with
and assist) LICENSOR in protecting and defending the Marks, and shall
promptly notify LICENSOR in writing of any infringements, claims or actions
by others in derogation of the Marks in the Territory of which LICENSEE
becomes aware; provided, however, that LICENSOR shall have the sole right to
determine whether any action shall be taken on account of such infringements,
claims or actions. LICENSEE shall not take any action on account of any such
infringement, claim or action without the prior written consent of LICENSOR,
which consent shall not be unreasonably withheld. In the event LICENSOR
grants written permission to LICENSEE to take action on account of any such
infringement, claim or action, LICENSEE shall bear all costs and expenses
related thereto and shall not settle or otherwise compromise any claim
without LICENSOR's prior written approval, which shall not be unreasonably
withheld.
b. In the event LICENSOR initiates or defends any legal proceedings on
account of any infringements, claims or actions by others in derogation of
the Licensed Rights, LICENSEE agrees to cooperate with and assist LICENSOR to
the extent reasonably necessary to protect the Licensed Rights including, but
not limited to, being joined as a necessary party to such proceedings. Any
such legal proceedings which do not result from LICENSEE's breach of this
Agreement shall be initiated or defended by LICENSOR; provided, however, that
each party shall bear its own costs and expenses in any such legal
proceedings.
c. In the event LICENSOR determines, in its sole discretion, that it is
not in the best interest of LICENSOR to initiate any legal proceedings on
account of any such infringements, claims or action, or in the event LICENSOR
settles or resolves any such proceedings which may be initiated, LICENSEE
shall have no claim against LICENSOR for damages or otherwise, nor shall the
same affect the validity or enforceability of this Agreement.
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<PAGE>
19. NOTICES
All notices, requests or other communications required or permitted
hereunder shall be given or made in writing and shall be (i) delivered
personally (including commercial carrier), (ii) sent by registered or
certified airmail, return receipt requested, postage prepaid or (iii) sent by
telecopier, addressed to the party to whom they are directed at the following
addresses, or at such other address as may from time to time be designated by
such party to the others in accordance with this Section 19:
If to LICENSOR, to:
Ambra Inc.
c/o Hugo Boss USA Inc.
645 Fifth Avenue
New York, New York 10022
Attention: Graziano DeBoni
Telecopier: 212/940-0619
Hugo Boss AG
Dieselstrasse 12
D-72555 Metzingen
Federal Republic of Germany
Attention: General Counsel
Telecopier: 49-7123-942035
With a copy to:
Coudert Brothers
1627 I Street, N.W.
Washington, D.C. 20004
Attention: Wendy L. Addiss, Esq.
Telecopier: 202/775-1168
and
Howrey & Simon
1299 Pennsylvania Avenue, N.W.
Washington, D.C. 20006
Attention: Robert M. Bruskin, Esq.
Telecopier: 202/383-6610
25
<PAGE>
If to LICENSEE, to:
I. C. Isaacs & Company L.P.
3840 Bank Street
Baltimore, Maryland 21224
Attention: President and Co-Chief Executive Officer
Telecopier: 410/558-2096
I. C. Isaacs & Company L.P.
350 Fifth Avenue
Suite 1029
New York, New York 10118
Attention: Chairman and Co-Chief Executive Officer
Telecopier: 212/695-7579
With a copy to:
Piper & Marbury L.L.P.
Charles Center South
36 South Charles Street
Baltimore, Maryland 21201-3010
Attention: Robert J. Mathias, Esq.
Telecopier: 410/576-1064
Any notice, request or other communications shall be deemed to have been
given and to be effective upon receipt or refusal by the addressee. Any
party may change its address for notices hereunder, effective upon giving of
notice of such change hereunder to the other parties.
20. FOREIGN TAXES AND GOVERNMENT APPROVALS
a. LICENSEE agrees to obtain, all government approvals and
registrations which are required under the laws of the Territory as a result
of LICENSEE'S activities in connection with this Agreement and to pay any
taxes or fees required by any such foreign government as a result of
LICENSEE's activities under this Agreement other than any taxes payable by
LICENSOR or its affiliates as a result of its receipt of any payments
hereunder.
b. LICENSEE agrees to pay one-half (1/2) of the reasonable legal fees
necessary to have this Agreement reviewed by an attorney skilled in the laws
of any foreign country to which this Agreement relates and modified to
conform with local laws, if necessary. Wherever required, LICENSEE agrees to
pay one-half (1/2) of the reasonable legal fees necessary to have LICENSEE
registered as Registered User or a Permitted User of the Licensed Rights.
Prior to executing this Agreement LICENSOR has given LICENSEE an estimate of
all such anticipated legal fees, and LICENSEE has had at least ten (10)
business days following receipt of such estimate to determine whether it
wishes to forego entering into this Agreement as to any country or countries.
26
<PAGE>
c. LICENSEE shall not be required to pay fees or expenses which arise
out of LICENSOR's efforts to protect and defend LICENSOR's intellectual
property rights within the Territory which were not otherwise caused by
activities of LICENSEE in connection with Agreement.
21. GOVERNING LAW AND RESOLUTION OF DISPUTES
a. The validity, construction, operation and effect of any and all of
the terms and provisions of this Agreement shall be determined and enforced
in accordance with the laws of the State of New York without giving effect to
principles of conflicts of law thereunder except as to matters involving
issues of foreign trademark law, in which case the applicable foreign
trademark laws shall be applied. In the event any legal action becomes
necessary to enforce or interpret the terms of this Agreement, the parties
agree that such action will be brought in the U.S. District Court for the
Southern District of New York, and the parties hereby submit to the
jurisdiction of such court; provided, however, that any party may enforce an
arbitration award in any court of competent jurisdiction located in New York
City and the parties hereby submit to the jurisdiction of any such court.
b. Nothing in this Agreement is intended to or shall prevent LICENSOR
and/or HUGO BOSS AG from enforcing any of its rights in any jurisdiction
anywhere in the world to prevent the unauthorized manufacture, sale or
distribution of Licensed Products.
22. BINDING EFFECT
This Agreement shall be binding on the parties, their parents,
subsidiaries, successors and assigns (if any), and they each warrant that the
undersigned are authorized to execute this Agreement on behalf of the
respective parties.
23. CONFIDENTIALITY
a. This Agreement, its terms, conditions and provisions, and the trade
secrets, confidential information and property of the parties are strictly
confidential and except as provided herein, shall not be disclosed by either
party to any other person or entity without the prior written consent of the
other party, or as required by law, (i) except financial institutions,
(including, but not limited to, investment bankers and underwriters),
Designated Manufacturer(s), government officials, attorneys and accountants
with which the parties transact business; provided, however, that such third
parties agree in writing to abide by the terms of this provision, or (ii)
except as appropriate for LICENSOR to protect and/or enforce the Marks and
Property. LICENSOR and LICENSEE further agree that disclosure of this
Agreement within their organizations shall be limited to their respective
directors, officers and employees with a "need to know" and that except as
provided herein third parties will not be advised of the relationship between
the parties except as is necessary by law; to carry out the purposes of this
Agreement; or to protect the rights of either party. Nothing in this
provision is intended to prevent or substantially interfere with LICENSEE's,
its partners, affiliates or its stockholders'
27
<PAGE>
ability to make all disclosures required by law pursuant to offering and
selling stock to the public. Notwithstanding the provision of this Section
23.a, in the event of published reports regarding the Agreement or LICENSEE's
relationship with LICENSOR or HUGO BOSS AG, LICENSOR, HUGO BOSS AG and
LICENSEE agree to cooperate in good faith to provide appropriate public
responses and comments and the parties shall be free to trade accurate public
statements which are appropriate to correct or clarify the public record.
b. Notwithstanding the provisions of Section 23.a. of this Agreement,
LICENSEE may supply to its agents, Designated Manufacturers or appropriate
government officials a copy of Exhibit G or convey the information in Exhibit
G to such individuals orally. To the extent LICENSEE is unable to import or
export Licensed Products by the actions of any government and LICENSEE cannot
through due diligence and the use of Exhibit G overcome such actions because
of the requirements of Section 23.a., LICENSOR will cooperate with LICENSEE,
including submitting written materials from LICENSOR or its parent or
affiliates as necessary to appropriate government officials, so as to enable
LICENSEE to obtain all necessary clearances; provided, however, that the
failure of LICENSEE to obtain any such clearance shall not give rise to any
claim whatsoever against LICENSOR.
24. GENERAL PROVISIONS
a. No waiver or modification of any of the terms or provisions of this
Agreement shall be valid unless contained in a written document signed by
both parties. No course of conduct of dealing between the parties shall act
as a waiver of any provision of this Agreement.
b. This Agreement, including the entirety of Exhibits A through H1
attached hereto, contains the entire understanding of the parties as to the
subject matter herein, and there are no representations, warranties, promises
or undertakings other than those contained herein. This Agreement supersedes
and cancels all previous agreements between the parties hereto. This
Agreement shall be construed against both parties equally, regardless of the
party that drafted it. Notwithstanding the foregoing, nothing herein shall
affect the validity or enforceability of the Settlement Agreement and related
documents between the parties which terminated the litigation captioned Hugo
Boss Fashions, Inc. et al. v. Brookhurst, Inc., et al., Civil Action No. 93
Civ 0875 (LMM).
c. If any provision of this Agreement shall be held to be void or
unenforceable, such provision will be treated as severable, leaving valid the
remainder of this Agreement.
d. Wherever necessary to carry out the intent of the parties, certain
provisions of this Agreement including, without limitation, Sections 3, 8,
10, 14 and 16, shall survive the expiration or termination of this Agreement
and shall continue in full force and effect.
e. The parties agree to execute promptly any documents necessary to
effectuate the purpose and intent of this Agreement.
28
<PAGE>
f. Captions and paragraph headings used in this Agreement are for
convenience only and are not a part of this Agreement and shall not be used
in interpreting or construing it.
g. This Agreement may be executed in any number of duplicate
counterparts, each of which shall be deemed an original and all of which
together shall constitute one and the same instrument.
25. ARBITRATION
a. In order to expedite the resolution of legal disputes, the parties
agree to have disputes arising in connection with this Agreement finally
settled in accordance with the rules established in Exhibit H, which decision
shall be binding on the parties. The parties further agree that the first
such arbitration proceeding initiated by either party shall be conducted at a
location and under the auspices and arbitration rules (either the American
Arbitration Association Rules or the Rules of Conciliation and Arbitration of
the International Chamber of Commerce) selected by the non-complaining party;
provided that English shall be the official language of all arbitration
proceedings. For all subsequent arbitrations, the selection of location and
choice of rules shall alternate between the parties, i.e., if the LICENSOR is
the complaining party in the first arbitration under this Section, LICENSEE
shall select the location and choice of rules for that arbitration and for
the third, fifth, seventh, et seq. arbitrations, and LICENSOR shall select
the location and choice of rules for the second, fourth, sixth, et seq.
arbitrations. The parties further agree that notwithstanding this provision,
either party may, consistent with the provisions of Section 17 herein, seek
immediate injunctive relief in court prior to the initiation or pending
resolution, of any dispute in arbitration. If the non-prevailing party does
not comply with an arbitration decision, the prevailing party therein may
immediately enforce the arbitration decision in an equitable proceeding in
court with both parties' court costs and related attorney's fees paid by the
non-prevailing party in the arbitration, unless the arbitration decision is
modified, or not upheld or enforced, in which case each side shall bear its
own costs and attorney's fees. Notwithstanding anything in this Section
25.a., LICENSOR or HUGO BOSS AG may seek to enforce any of its rights to
prevent the unauthorized manufacture, sale or distribution of Licensed
Products against any entity in any tribunal anywhere in the world.
b. Notwithstanding anything in this Agreement, the parties agree that
disputes arising under Sections 4.a., 4.e., 4.f., 4.i., and 5.c. herein, may,
at the option of either party, be finally settled in accordance with the
expedited arbitration procedures set forth in Exhibit H1, which decision
shall be binding on the parties.
c. The parties agree that any decision required by this Agreement that
is committed to a party's "sole discretion" shall not be the subject of
arbitration; any decision required by this Agreement that is committed to a
party's "sole reasonable discretion" or "reasonable discretion" may be the
subject of arbitration.
d. The parties agree that in any arbitration proceeding brought under
this Section 25 where the interests of justice so require the arbitrator(s)
shall have the discretion to require one
29
<PAGE>
party to pay some or all of the costs and expenses, including legal fees,
incurred by the other party.
26. HUGO BOSS AG GUARANTY
HUGO BOSS AG hereby irrevocably and unconditionally guaranties to
LICENSEE the full and timely performance of LICENSOR's obligations to
LICENSEE under this Agreement.
IN WITNESS WHEREOF, the parties agree that this Agreement shall take
effect as of the date first written above.
AMBRA, INC., a Delaware corporation
By: /s/ Jorg-Viggo Muller
----------------------------------
Name: Jorg-Viggo Muller
Title: Chairman
By: /s/ Gert-Jurgen Frisch
----------------------------------
Name: Gert-Jurgen Frisch
Title: Vice President
HUGO BOSS AG, a corporation of the Federal
Republic of Germany
By: /s/ Jorg-Viggo Muller
----------------------------------
Name: Jorg-Viggo Muller
Title: Chief Financial Officer
By: /s/ Gert-Jurgen Frisch
----------------------------------
Name: Gert-Jurgen Frisch
Title: Attorney-in-Fact
30
<PAGE>
I.C. ISAACS & COMPANY L.P., a Delaware
limited partnership
By: I.G. DESIGN, INC., a Delaware
corporation, its general partner
By: /s/ Robert J. Arnot
----------------------------------
Name: Robert J. Arnot
Title: Chairman and Co-Chief
Executive Officer
By: /s/ Gerald W. Lear
----------------------------------
Name: Gerald W. Lear
Title: President and Co-Chief
Executive Officer
31
<PAGE>
FOREIGN MANUFACTURING RIGHTS AGREEMENT
LIST OF EXHIBITS
Exhibit A: Specifications and limitations on LICENSEE's use of the Marks
Exhibit B: List of products on which LICENSEE is permitted to use the Marks
Exhibit C: List of countries
Exhibit C1: List of pending/not filed countries
Exhibit C2: List of special circumstances
Exhibit D: List of LICENSOR Agreements
Exhibit E: Prohibited stitching designs
Exhibit F: Royalty payment schedule
Exhibit F1: Minimum Territory Net Sale schedule
Exhibit F2: Royalty calculation sheet
Exhibit G: Customs letter
Exhibit H: Non-expedited arbitration provision
Exhibit H1: Expedited arbitration provisions
<PAGE>
EXHIBIT A
THE MARKS
BOSS
("The Microgramma Typestyle")
[LOGO]
<PAGE>
In using these Marks on Licensed Products, LICENSEE will comply with the
following:
1. LICENSEE shall use the phrase "BOSS by I G Design" (or such other
name as approved by LICENSOR) on all interior labels, tags and other interior
identifiers, and on all temporary or removable exterior labels, tags,
flashers, jokers, hang tags, and similar items, consistent with the rules in
section 4 below. In addition, the phrase "by I G Design" shall be prominently
visible; this requirement is satisfied when the prominence, use, and format
of the phrase "BOSS by I G Design" are similar to the exemplars shown in
Attachment 1 to this Exhibit A or as to tops satisfies the criteria set forth
in Section 9.a.(iii) below. Notwithstanding the exemplars shown in Attachment
1 to this Exhibit A, for all purposes under this Agreement where the word
"BOSS" is smaller than one inch, the ratio of the word "BOSS" to the phrase
"by I G Design" shall be no less than 4:1; in all other uses the ratio shall
be no less than 5:1.
2. On all Licensed Products other than Bottoms (Bottoms being defined
as jeans, casual pants, slacks, trousers, shorts, and overalls and shortalls)
LICENSEE shall use the phrase "BOSS by I G Design" (or such other name as
LICENSOR approves) as a permanent exterior means of identification similar to
the exemplars shown in Attachment 1 to this Exhibit A.
3. In addition to the use of the phrase "BOSS by I G Design" (or such
other name as approved by LICENSOR) as required by Section 1 of Exhibit A,
LICENSEE may also use the word "BOSS" without the phrase "by I G Design"
permanently affixed to the exterior of any Licensed Product.
4. On all Bottoms:
a. All Bottoms will bear either (i) a pocket flasher, (ii) a waist
band ticket, or (iii) some other form of temporary, removable exterior
identification bearing the phrase "BOSS by I G Design" (or such other name as
LICENSOR approves) or a permanently affixed "BOSS by I G Design" (or such
other name as LICENSOR approves) exterior marking, as illustrated by the
exemplars shown in Attachment 1 to this Exhibit A; provided, however, that
all temporary removable exterior identification must use the phrase "BOSS by
I G Design" as illustrated by the exemplar shown in Attachment 1 to this
Exhibit A.
b. If the word "BOSS" whether used alone or with any other word,
is used on fly labels on Bottoms, the letters of the word "BOSS" must be
slanted no less than nineteen (19) degrees as shown in Attachment 6B to this
Exhibit A.
c. If the word "BOSS" is used on a signature leather patch on a
rear jeans pocket, (i) the word BOSS whether used alone or with any other
word except I G Design (or such other name as LICENSOR approves) will be
slanted no less than twenty-four (24) degrees, as illustrated by the examples
shown in Attachment 4 to this Exhibit A; or (ii) the phrase "BOSS/I G Design"
(or such other name as LICENSOR approves) will be used in a non-justified 4:1
ratio on the leather patch consistent with the terms of Section 5.d. below;
or (iii) the phrase
<PAGE>
"Boss/I G Design" (or such other name as LICENSOR approves) will be otherwise
permanently affixed to the garment, similar to the exemplar shown in
Attachment 1 of this Exhibit A.
5. Where the word "BOSS" does not appear immediately adjacent to the
phrase "I G Design" (or such other name as LICENSOR approves), the word
"BOSS" may appear either in capital letters of equal size, or, if the
individual letters comprising B-0-S-S are of different sizes, within
seventy-five percent (75%) of any other letter; provided, however, that one
or more of the following rules are met:
a. The word "BOSS" is incorporated into a graphic environment as
illustrated by the acceptable exemplars shown in Attachment 2 to
this Exhibit A; not all graphic environments are acceptable as
illustrated by the unacceptable exemplars shown in Attachment 2 to
this Exhibit A; or
b. All of the letters of "BOSS" are distorted as illustrated by the
acceptable exemplars shown in Attachment 3 to this Exhibit A; not
all distortions are acceptable as illustrated by the unacceptable
exemplars shown in Attachment 3 to this Exhibit A; or
c. The word "BOSS" appears other than in the Microgramma typestyle,
the non-Microgramma typestyle having first been approved in
accordance with the provisions of Section 10 of this Exhibit A; or
d. All of the letters of "BOSS" are slanted as follows:
(i) If used with no vertical or angled lines, then no less than
twenty-two (22) degrees, as illustrated by the exemplar shown
in Attachment 5 to this Exhibit A; or
(ii) If used with vertical or angled lines as shown in Attachment
6A, then no less than nineteen (19) degrees, as illustrated by
the exemplar shown in Attachment 6B of this Exhibit A.
e. The requirements of this Section 5. a.-d. do not apply if the word
"BOSS" is used with the letters appearing in a vertical (up and
down) manner generally consistent with the acceptable exemplars
shown in Attachment 7A to this Exhibit A. Not all vertical uses of
the word "BOSS" are acceptable as illustrated by the unacceptable
exemplar shown in Attachment 7B to this Exhibit A in which case the
requirements of this Section 5. a.-d. apply.
f. All of the foregoing rules except 5.d. shall apply to headwear.
g. In the case of belts, LICENSEE may use the word "BOSS" alone,
without the phrase "I G Design", (or such other name as approved by
LICENSOR) where the Mark appears only on the belt buckle; where the
<PAGE>
mark appears elsewhere on the exterior of the belt, it shall
incorporate the phrase "I G Design."
6. Any two-line logo or design using the word "BOSS" shall not have
justified margins or substantially justified margins.
7. LICENSEE shall not use words which indicate that its product is the
only or first BOSS product, e.g., "authentic," "genuine" or "original,"
except that LICENSEE may use such words to directly modify the phrase "I G
Design" (or such other name as LICENSOR approves).
8. LICENSEE shall not use the terms BOSS AMERICA, BOSS GOLF, GOLF, HUGO
BOSS, HUGO, BALDESSARINI, WORLDWIDE, EUROPEAN, TENNIS, SKI, FORMULA 1,
MOTORSPORT, WINDSURFING, SAIL, GERMAN or any other words that are similar in
sound, sight or meaning, as exemplified in Attachment 8 to this Exhibit A.
The parties agree that LICENSEE may use the phrases "U.S.A." and "United
States" on Licensed Products, including in graphic depictions with or near
the Marks; provided, however, that such words are not incorporated into a
corporate identity, brand, or product extension logo with the word "BOSS."
In addition, LICENSOR, by itself or on behalf of HUGO BOSS AG or LICENSEE
may, from time to time, submit to each other exemplars of logos, designs or
decorative motifs which they are using or plan to use in the next selling
season, provided that such logos, designs, or decorative motifs shall not
have been used by the other party. The party so notified shall not use any
such logos, designs or decorative motifs, or anything similar to them in the
following selling season, without the other party's written permission;
provided, however, that either party may use logos, designs or decorative
motifs that are standard in the industry. Notwithstanding the foregoing,
LICENSEE shall not use any design or decorative motif similar to the BOSS
SPORT patch shown in Attachment 9 to Exhibit A.
9. For purposes of this Agreement, "Polo shirt" shall mean a pullover
shirt for sportswear that is made of knitted fabric and has short or long
sleeves and a turnover collar or a round banded collar and placket. In
addition to all other rules herein applicable to tops, LICENSEE may use the
word "BOSS" by itself on the exterior of polo shirts only in accordance with
the following:
a. Traditional Button Placket Knit Collar Style. To the extent
LICENSEE uses the word "BOSS" by itself on the exterior left breast
area of polo shirts with button through plackets, knit turnover
collars and traditional coloration and designs, the following rules
shall apply:
(i) on the exterior of men's shirts, the size of the word "BOSS"
shall be no smaller than three (3) inches long by five eighths
(5/8) inches tall; on the exterior of boys' and women's
shirts, the size of the word "BOSS" shall be no smaller than
two and three-eighths (2 3/8) inches long by seven sixteenths
(7/16) inches tall;
(ii) The word "BOSS" shall be slanted no less than 24';
<PAGE>
(iii) The phrase "I G Design" shall be prominently visible.
This requirement shall be satisfied by the following:
the phrase shall appear and be visible on the outside
crease of one sleeve; the typestyle shall be Microgramma;
and the size of the letters shall be no less than one
fourth the size of the letters used for the word "BOSS"
on the exterior left breast.
(iv) The color of the stitching on the shirt bearing the word
"BOSS" on the left breast area and the phrase "I G Design" on
the sleeve must be the same and clearly contrast with the
color of the shirt fabric, e.g., black on white; red, blue or
green on yellow; but not combinations like dark blue on light
blue; dark gray on black; dark green on dark blue. Acceptable
and unacceptable exemplars are shown in Attachment 10 to this
Exhibit A.
b. All Other Traditional Styles. To the extent LICENSEE uses the
word "BOSS" by itself on the exterior left breast area of polo shirts with
non-button through plackets and traditional coloration and designs, the
phrase "BOSS by I G DESIGN" required by Section 2 of this Exhibit A shall be
located on the top half of the garment and shall be prominently visible.
This latter requirement is satisfied when the prominence, use and format of
the phrase "BOSS by I G Design" are similar to the exemplars shown in
Attachment 1 to this Exhibit A or satisfies the criteria set forth in Section
9.a.(iii) above.
c. Non-traditional Styles. To the extent LICENSEE uses the word
"BOSS" by itself on polo shirts other than those described in Sections 9-a.
and 9.b. of this Exhibit A, no additional rules shall apply.
d. Exemplars of acceptable shirts for each category described in
this Section 9.a., 9.b. and 9.c. are depicted in Attachment 11 hereto.
10. Prior to use, LICENSEE may submit to LICENSOR for approval
typestyles other than Microgramma for the word "BOSS", provided those
typestyles are less similar to the typestyles used by LICENSOR than the
Microgramma typestyle used by LICENSEE. LICENSEE shall not use any such
typestyle unless LICENSOR, in its sole reasonable discretion, has approved
such use in writing.
<PAGE>
ATTACHMENT 1
TO EXHIBIT A
o Exemplars of interior and exterior permanent/temporary labels, tags, etc.
with acceptable "BOSS by I G Design."
<PAGE>
BMA-1368 -- info tag [Graphic Logo]
THESE EXEMPLARS DO NOT SUPERSEDE
THE RATIO REQUIREMENTS AS OTHERWISE
PROVIDED BY THIS EXHIBIT A
<PAGE>
BMA-1241R -- [Graphic Logo]
THESE EXEMPLARS DO NOT SUPERSEDE
THE RATIO REQUIREMENTS AS OTHERWISE
PROVIDED BY THIS EXHIBIT A
<PAGE>
Jr. Hang Tag/BJ-537W
FRONT
[Graphic Logo]
22 DEG. ANGLE
6 TO 1 RATIO
THESE EXEMPLARS DO NOT SUPERSEDE
THE RATIO REQUIREMENTS AS OTHERWISE
PROVIDED BY THIS EXHIBIT A
<PAGE>
BMA-458 -- [Graphic Logo]
THESE EXEMPLARS DO NOT SUPERSEDE
THE RATIO REQUIREMENTS AS OTHERWISE
PROVIDED BY THIS EXHIBIT A
<PAGE>
Jr. Hang Tag/BJ-537
BACK
[Graphic Logo]
22 DEG. ANGLE
6 TO 1 RATIO
THESE EXEMPLARS DO NOT SUPERSEDE
THE RATIO REQUIREMENTS AS OTHERWISE
PROVIDED BY THIS EXHIBIT A
<PAGE>
[Graphic Logo]
BMA-1242
22 DEG. ANGLE
6 TO 1 RATIO
THESE EXEMPLARS DO NOT SUPERSEDE
THE RATIO REQUIREMENTS AS OTHERWISE
PROVIDED BY THIS EXHIBIT A
<PAGE>
[Graphic Logo] -- Shirt
<PAGE>
[Graphic Logo] -- Shirt
<PAGE>
[Graphic Logo] -- Shirt
<PAGE>
[Graphic Logo]
<PAGE>
[Graphic Logo]
<PAGE>
ATTACHMENT 2
TO EXHIBIT A
o Exemplars of acceptable graphic environments.
<PAGE>
[Graphic Logo]
<PAGE>
[Graphic Logo]
<PAGE>
[Graphic Logo]
<PAGE>
[Graphic Logo]
<PAGE>
[Graphic Logo]
<PAGE>
[Graphic Logo]
<PAGE>
[Graphic Logo]
<PAGE>
[Graphic Logo]
<PAGE>
[Graphic Logo]
<PAGE>
[Graphic Logo]
<PAGE>
[Graphic Logo]
<PAGE>
[Graphic Logo]
<PAGE>
[Graphic Logo]
<PAGE>
[Graphic Logo]
<PAGE>
[Graphic Logo] -- Jeans
<PAGE>
[Graphic Logo] -- Jeans
<PAGE>
[Graphic Logo] -- Jeans
<PAGE>
[Graphic Logo] -- Jeans
<PAGE>
[Graphic Logo] -- Jeans
<PAGE>
[Graphic Logo] -- Shirt
<PAGE>
[Graphic Logo]
<PAGE>
[Graphic Logo]
<PAGE>
[Graphic Logo] -- Shirt
<PAGE>
[Graphic Logo] -- Shirt
<PAGE>
[Graphic Logo]
<PAGE>
[Graphic Logo]
<PAGE>
[Graphic Logo]
<PAGE>
[Graphic Logo] -- Shirt
<PAGE>
[Graphic Logo]
<PAGE>
[Graphic Logo]
<PAGE>
[Graphic Logo] -- Shirt
<PAGE>
[Graphic Logo]
<PAGE>
[Graphic Logo]
<PAGE>
[Graphic Logo]
<PAGE>
[Graphic Logo]
<PAGE>
[Graphic Logo]
<PAGE>
[Graphic Logo]
<PAGE>
[Graphic Logo]
<PAGE>
[Graphic Logo]
<PAGE>
[Graphic Logo]
<PAGE>
[Graphic Logo]
<PAGE>
[Graphic Logo]
<PAGE>
[Graphic Logo]
<PAGE>
[Graphic Logo] -- Shirt
<PAGE>
[Graphic Logo]
<PAGE>
[Graphic Logo]
<PAGE>
[Graphic Logo]
<PAGE>
[Graphic Logo]
<PAGE>
[Graphic Logo] -- Jeans
<PAGE>
[Graphic Logo] -- Shirt
<PAGE>
[Graphic Logo]
<PAGE>
[Graphic Logo]
<PAGE>
[Graphic Logo]
<PAGE>
[Graphic Logo]
<PAGE>
[Graphic Logo]
<PAGE>
[Graphic Logo] -- Shirt
<PAGE>
[Graphic Logo] -- Shirt
<PAGE>
[Graphic Logo]
<PAGE>
[Graphic Logo]
<PAGE>
[Graphic Logo]
<PAGE>
ATTACHMENT 3
TO EXHIBIT A
o Exemplars of acceptable distorted letters.
<PAGE>
[Graphic Logo]
<PAGE>
[Graphic Logo]
<PAGE>
[Graphic Logo]
<PAGE>
[Graphic Logo]
<PAGE>
[Graphic Logo]
<PAGE>
[Graphic Logo]
<PAGE>
[Graphic Logo] -- Jeans
<PAGE>
[Graphic Logo] -- Jeans
<PAGE>
[Graphic Logo]
<PAGE>
[Graphic Logo]
<PAGE>
[Graphic Logo]
<PAGE>
[Graphic Logo]
<PAGE>
ATTACHMENT 4
TO EXHIBIT A
o Exemplars of 24(degree) slant.
<PAGE>
[Graphic Logo]
<PAGE>
ATTACHMENT 5
TO EXHIBIT A
o Exemplars of 22(degree) slant.
<PAGE>
[Graphic Logo]
<PAGE>
ATTACHMENT 6A
TO EXHIBIT A
o Exemplars of vertical alignment.
<PAGE>
[Graphic Logo] -- Shirt
<PAGE>
[Graphic Logo] -- Shirt
<PAGE>
[Graphic Logo] -- Jeans
<PAGE>
[Graphic Logo] -- Shirt
<PAGE>
[Graphic Logo] -- Shirt
<PAGE>
[Graphic Logo] -- Shirt
<PAGE>
[Graphic Logo] -- Shirt
<PAGE>
[Graphic Logo] -- Shirt
<PAGE>
[Graphic Logo] -- Jeans
<PAGE>
[Graphic Logo] -- Jeans
<PAGE>
[Graphic Logo] -- Shirt
<PAGE>
[Graphic Logo]
<PAGE>
[Graphic Logo] -- Jeans
<PAGE>
[Graphic Logo]
<PAGE>
ATTACHMENT 6B
TO EXHIBIT A
o Exemplars of 19(degree) slant.
<PAGE>
[Graphic Logo]
<PAGE>
ATTACHMENT 7A
TO EXHIBIT A
o Exemplars of acceptable vertical BOSS logos.
<PAGE>
[Graphic Logo] -- Shirt
<PAGE>
[Graphic Logo]
<PAGE>
[Graphic Logo]
<PAGE>
[Graphic Logo]
<PAGE>
[Graphic Logo]
<PAGE>
[Graphic Logo]
<PAGE>
[Graphic Logo]
<PAGE>
ATTACHMENT 7B
TO EXHIBIT A
o Exemplars of unacceptable vertical BOSS logos.
<PAGE>
[Graphic Logo]
<PAGE>
ATTACHMENT 8
TO EXHIBIT A
o Exemplars of forbidden words.
AMERICAN BOSS
BOSS AMERICAN
BOSS OF AMERICA
BOSS AMERIKA
BOSS AMERICAS
BOSS GOAL
YUGO
HUGE
BALDISSARENE
GLOBAL
CONTINENTAL
EUROPE
BAVARIAN
BAVARIA
GERMANY
INTERNATIONAL
<PAGE>
ATTACHMENT 9
TO EXHIBIT A
o The BOSS Sport Patch
<PAGE>
[Graphic Logo]--Shirt
<PAGE>
[Graphic Logo]
<PAGE>
ATTACHMENT 10
TO EXHIBIT A
o Exemplars of acceptable coloration for "BOSS by I G Design" on polo
shirts.
<PAGE>
[Graphic Logo] -- Shirt
<PAGE>
[Graphic Logo] -- Shirt
<PAGE>
[Graphic Logo] -- Shirt
<PAGE>
[Graphic Logo] -- Shirt
<PAGE>
[Graphic Logo] -- Shirt
<PAGE>
[Graphic Logo] -- Shirt
<PAGE>
[Graphic Logo] -- Shirt
<PAGE>
[Graphic Logo] -- Shirt
<PAGE>
o Exemplar of unacceptable coloration for "BOSS by I G Design" on polo
shirts.
<PAGE>
[Graphic Logo]
<PAGE>
[Graphic Logo]
<PAGE>
[Graphic Logo]
<PAGE>
[Graphic Logo]
<PAGE>
[Graphic Logo]
<PAGE>
[Graphic Logo]
<PAGE>
[Graphic Logo]
<PAGE>
[Graphic Logo]
<PAGE>
[Graphic Logo]
<PAGE>
[Graphic Logo]
<PAGE>
[Graphic Logo]
<PAGE>
ATTACHMENT 11
TO EXHIBIT A
o Exemplar of acceptable shirts under Exhibit A, Section 9.a.
<PAGE>
[Graphic shirts]
<PAGE>
[Graphic Logo] -- Shirts
<PAGE>
[Graphic Logo] -- Shirts
<PAGE>
[Graphic shirts]
<PAGE>
[Graphic Logo] -- Shirts
<PAGE>
[Graphic Logo] -- Shirts
<PAGE>
o Exemplar of acceptable shirts under Exhibit A, Section 9.b.
<PAGE>
[Graphic Logo] -- Shirts
<PAGE>
[Graphic shirts]
<PAGE>
[Graphic Logo] -- Shirts
<PAGE>
[Graphic Logo] -- Shirts
<PAGE>
o Exemplar of acceptable shirts under Exhibit A, Section 9.c.
<PAGE>
[Graphic shirts]
<PAGE>
[Graphic Logo] -- Shirts
<PAGE>
[Graphic Logo] -- Shirts
<PAGE>
[Graphic shirts]
<PAGE>
[Graphic Logo] -- Shirts
<PAGE>
[Graphic Logo] -- Shirts
<PAGE>
[Graphic Logo] -- Shirts
<PAGE>
[Graphic Logo] -- Shirts
<PAGE>
EXHIBIT B
I. LICENSED PRODUCTS
A. Men's Apparel
1. Sportswear and Activewear. All sportswear and activewear clothing
other than the exclusions listed below. All fabrications may be used.
2. Outerwear. All jackets, coats, vests, capes and ponchos other than the
exclusions listed below. Such outerwear garments may be reversible,
lined, unlined, filled and/or fabric treated (waterproofed, coated,
etc.) and may have detachable sleeves, hoods and/or interlinings.
Lengths of such garments shall be 22" to 60". All fabrications may be
used except fur (except as trim) and leather (except as trim).
3. Headwear. All sports hats, visors and caps.
4. Swimwear. All types of swimwear.
5. Jogging Suits. All types of warm-ups and jogging suits of any
fabrication.
6. Belts. Belts bearing the Mark provided that such belts shall be sold
only as part of a Bottom and shall not be made out of leather.
B. Women's Apparel
1. Sportswear and Activewear. All sportswear and activewear clothing for
juniors, contemporary, misses and large sizes other than the
exclusions listed below. All fabrications may be used.
2. Outerwear. All jackets, coats, vests, capes and ponchos other than the
exclusions listed below. Such outerwear garments may be reversible,
lined, unlined, filled and/or fabric treated (waterproofed, coated,
etc.) and may have detachable sleeves, hoods and/or interlinings.
Lengths of such garments shall be 22" to 60". All fabrications may be
used except fur (except as trim) and leather (except as trim).
3. Headwear. All sports hats, visors and caps.
4. Swimwear. All types of swimwear.
5. Jogging Suits. All types of warm-ups and jogging suits of any
fabrication.
<PAGE>
6. Belts. All belts bearing the Mark provided that such belts shall be
sold only as part of a Bottom and shall not be made out of leather.
7. Other. Women's knit garments to be worn on the upper torso that are
either snapped or fixed through the crotch and the top portion of
which may be a halter, shoulder strap, short sleeve or long sleeve.
C. Children's Apparel
1. Children's Sportswear and Activewear. All sportswear and activewear
clothing other than the exclusions listed below. All fabrications may
be used.
2. Outerwear. All jackets, coats, vests, capes and ponchos other than the
exclusions listed below. Such outerwear garments may be reversible,
lined, unlined, filled and/or fabric treated (waterproofed, coated,
etc.) and may have detachable sleeves, hoods and/or interlinings. All
fabrications may be used except fur (except as trim) and leather
(except as trim).
3. Headwear. All sports hats, visors and caps.
4. Swimwear. All types of swimwear.
5 Jogging Suits. All types of warm-ups and jogging suits of any
fabrication.
6. Belts. All belts bearing the Mark provided that such belts shall be
sold only as part of a Bottom and shall not be made out of leather.
D. Other
All apparel, including uniforms and work clothes, which is intended to
be worn solely and exclusively while persons are performing the normal
duties of their employment.
II. PRODUCTS BEARING A BOSS MARK THAT LICENSEE SHALL NOT MANUFACTURE
A. Notwithstanding the foregoing, the parties agree that Licensed Products
do not include any of the following men's, women's or children's apparel:
1. All styles of tailored clothing, furnishings and accessories,
including but not limited to tuxedos, gowns and evening wear, sportcoats,
blazers, jackets, suits, dress pants, career apparel including blouses,
skirts and dresses, raincoats, top coats, dress shirts, ties, dress vests,
hosiery (including but not limited to socks, stockings and hose), and
leather belts.
<PAGE>
2. All types of leather clothing (although leather trim may be used on
all products listed in Section 1);
3. All styles of shoes and other footwear.
4. Clothing designed and sold for the primary purpose of engaging in
golf, tennis, skiing, motor sports, windsurfing or sailing.
5. Except as described in Exhibit B Section I.B.7. above, bodywear,
including but not limited to underwear (including tee shirts intended to be
worn as underwear); loungewear and intimate apparel; and sleepwear and
robes.
B. Unless otherwise agreed to by the parties, Licensed Products shall not
include any non-apparel products of any kind.
<PAGE>
EXHIBIT C
OVERSEAS MANUFACTURING RIGHTS GRANTED
BAHRAIN OMAN
BANGLADESH PEOPLES REPUBLIC OF CHINA
BRAZIL PAKISTAN
CANADA PERU
COSTA RICA PHILIPPINES
DOMINICAN REPUBLIC QATAR
EGYPT REPUBLIC OF SOUTH KOREA
ECUADOR SAIPAN
HONG KONG SAUDI ARABIA
INDIA SINGAPORE
INDONESIA TAIWAN
MACAO THAILAND
MAURITIUS TURKEY
MEXICO VIETNAM
MONGOLIA
<PAGE>
EXHIBIT C1
APPLICATIONS PENDING* OR NOT FILED**
BOTSWANA* MADAGASCAR**
EL SALVADOR* NEPAL* *
GUATEMALA* REPUBLIC OF MALDIVES**
HONDURAS* SEYCHELLES*
JAMAICA* SRI LANKA*
LESOTHO** UNITED ARAB EMIRATES*
<PAGE>
EXHIBIT C2
SPECIAL CIRCUMSTANCES
COLOMBIA
MALAYSIA
SOUTH AFRICA
<PAGE>
EXHIBIT D
List of LICENSOR Agreements pursuant to Paragraph 2.h.
Concurrent Use Agreement between Hugo Boss and Reebok, dated April 1, 1997
Agreement between Hugo Boss and Levi Strauss, dated September 1, 1995
Concurrent Use Agreement between Hugo Boss and Phillips-Van Husen Corporation,
dated January 10, 1995
<PAGE>
EXHIBIT E
o Prohibited stitching designs.
<PAGE>
[PHOTOGRAPH OF JEANS]
[GRAPHIC OMITTED]
<PAGE>
EXHIBIT A
Int. Cl.: 25
Prior U.S. Cl.: 39
Reg. No. 1,139,254
United States Patent and Trademark Office Registered Sep. 2, 1980
- --------------------------------------------------------------------------------
TRADEMARK
Principal Register
[GRAPHIC OMITTED]
Levi Strauss & Co. (Delaware corporation) For: PANTS, JACKETS, DRESSES AND
Two Embarcadero Cir. SHORTS, in CLASS 25 (U.S. CL. 39).
San Francisco, Calif. 94106 First use 1873: in commerce 1873
Owner of U.S. Reg. No. 404 248
Reg. No. 169,399
Filed May 8, 1972
M.I. LEAHY, Primary Examiner
<PAGE>
EXHIBIT F
ROYALTY PAYMENTS
LICENSEE shall pay to LICENSOR a royalty as follows:
A. For years 1-4:
1. Base Royalty: For years 1-4 of this Agreement on the first $32,000,000
of Territory Net Sales: Twelve and One Half Percent (12.5%), provided, however,
that should LICENSEE prepay the Secured Limited Recourse Promissory Note between
the parties, base royalties on the remaining portion of the first $32,000,000
Territory Net Sales made after such prepayment shall be at sixteen percent
(16%).(1)
2. Additional Royalty: For all Territory Net Sales above $83,999,999, a
royalty based on the following percentages:
Territory Net Sales Level achieved by LICENSEE Additional Royalty Percentage
---------------------------------------------- -----------------------------
YEARS 1-4(2)
------------
$84,000,000-105,249,999 5%
$105,250,000-157,999,999 0%
$ 158,000,000 and up 4%
- ----------
(1) If the Effective Date of this Agreement is prior to January 1, 1998,
LICENSEE shall also pay a base royalty in accordance with this Exhibit prorated
by the number of days in 1997 this Agreement is in effect, such royalty payment
due on January 31, 1998.
(2) The additional royalty payment to LICENSOR for 1998 shall be
calculated by applying the royalty payment schedule to the sum of LICENSEE's
Territory Net Sales for the last quarter of calendar year 1997 and the full
calendar year 1998.
<PAGE>
B. For year 5:
1. Base Royalty: For year 5 of this Agreement on the first $20,000,000
of Territory Net Sales: Twelve and One Half Percent (12.5%); provided,
however, that should LICENSEE prepay the Secured Limited Recourse Promissory
Note between the parties, base royalties on the remaining portion of the
$20,000,000 of Territory Net Sales made after such prepayment shall be at
eighteen percent (18%).
2. Additional Royalty: For all Territory Net Sales above $52,999,999, a
royalty based on the following percentages:
Territory Net Sales Level achieved by LICENSEE Additional Royalty Percentage
---------------------------------------------- -----------------------------
YEAR 5
------
$ 53,000,000 - 105,999,999 5%
$106,000,000 - 136,999,999 0%
$137,000,000 and up 4%
<PAGE>
C. For year 6:
1. Base Royalty: For year 6 of this Agreement on the first $16,000,000 of
Territory Net Sales: Twelve and One Half Percent (12.5%); provided, however,
that should LICENSEE prepay the Secured Limited Recourse Promissory Note between
the parties, base royalties on the remaining portion of the $16,000,000
Territory Net Sales made after such prepayment shall be at nineteen and
one half percent (19.5%).
2. Additional Royalty: For all Territory Net Sales above $41,999,999, a
royalty based on the following percentages:
Territory Net Sales Level achieved by LICENSEE Additional Royalty Percentage
---------------------------------------------- -----------------------------
YEAR 6
------
$ 42,000,000 - 104,999,999 5%
$105,000,000 - 136,999,999 0%
$137,000,000 and up 4%
<PAGE>
D. For years 7-10:
1. Base Royalty: For years 7-10 of this Agreement on the first $l6,000,000
of Territory Net Sales: Twelve and One Half Percent (12.5%); provided, however,
that should LICENSEE prepay the Secured Limited Recourse Promissory Note between
the parties, base royalties on the remaining portion of the $16,000,000 of
Territory Net Sales made after such prepayment shall be at nineteen and one
half percent (19.5).
2. Additional Royalty: For all Territory Net Sales above $41,999,999, a
royalty based on the following percentages:
Territory Net Sales Level achieved by LICENSEE Additional Royalty
---------------------------------------------- ------------------
YEARS 7-10
----------
$ 42,000,000 - 105,249,999 5%
$105,250,000 - 136,999,999 3%
$137,000,000 and up 4%
<PAGE>
EXHIBIT F1
Minimum Territory Net Sales
Contract Year Minimum Territory Net Sales
1998 $ 32,000,000
1999 $ 32,000,000
2000 $ 32,000,000
2001 $ 32,000,000
Optional Term (1st Extension)
2002 $ 20,000,000
2003 $ 16,000,000
2004 $ 16,000,000
Optional Term (2nd Extension)
2005 $ 16,000,000
2006 $ 16,000,000
2007 $ 16,000,000
<PAGE>
EXHIBIT F2
CALCULATION OF ANNUAL ROYALTY PAYMENT
CONTRACT YEAR
Territory Net Sales Total Net Sales
TRADEMARKED PRODUCTS
1. Number of Orders Booked
(see attached breakdown)
2. Invoiced Amounts
Less:
3. Sales taxes, cash discounts,
returns and allowances
4. Shipping
5. Bad debts (up to 0.5% of the amount
shown on line 2)
6. Net Sales
ROYALTY PAYMENT DUE
Remittance Enclosed:
Check No. ___________________
THE UNDERSIGNED, being the ____________________ of I.C. Isaacs & Company
L.P., hereby certifies pursuant to Section _____ of the Agreement dated
__________, 1997, by and between ___________ and I.C. Isaacs & Company L.P.,
that the information continued in the attached Verification of Licensed Products
Sold is true and correct in all material respects as of the date hereof.
SIGNED:
-------------------------
NAME:
-------------------------
Title:
-------------------------
Date:
-------------------------
<PAGE>
For the period: January 1 to December 31.
- --------------------------------------------------------------------------------
ANNUAL
ITEM QUANTITY SOLD SALES FIGURE (#)
- --------------------------------------------------------------------------------
Pants, including Men _____________________ _____________________
slacks & trousers Women _____________________ _____________________
Children _____________________ _____________________
- --------------------------------------------------------------------------------
Jeans without belts Men _____________________ _____________________
Women _____________________ _____________________
Children _____________________ _____________________
- --------------------------------------------------------------------------------
Jeans with belts Men _____________________ _____________________
Women _____________________ _____________________
Children _____________________ _____________________
- --------------------------------------------------------------------------------
Shorts, including Men _____________________ _____________________
shortalls Women _____________________ _____________________
Children _____________________ _____________________
- --------------------------------------------------------------------------------
Jean Shorts Men _____________________ _____________________
Women _____________________ _____________________
Children _____________________ _____________________
- --------------------------------------------------------------------------------
Sweatpants Men _____________________ _____________________
Women _____________________ _____________________
Children _____________________ _____________________
- --------------------------------------------------------------------------------
Overalls Men _____________________ _____________________
Women _____________________ _____________________
Children _____________________ _____________________
- --------------------------------------------------------------------------------
T-Shirts Men _____________________ _____________________
Women _____________________ _____________________
Children _____________________ _____________________
- --------------------------------------------------------------------------------
Polo Shirts Men _____________________ _____________________
Women _____________________ _____________________
Children _____________________ _____________________
- --------------------------------------------------------------------------------
Tanktops Men _____________________ _____________________
Women _____________________ _____________________
Children _____________________ _____________________
- --------------------------------------------------------------------------------
Sweatshirts Men _____________________ _____________________
Women _____________________ _____________________
Children _____________________ _____________________
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
All other shirts, Men _____________________ _____________________
including knit and Women _____________________ _____________________
woven sportshirts, Children _____________________ _____________________
tunics, smocks,
beach cover-ups and
pullover style shirts
- --------------------------------------------------------------------------------
Sweaters, including Men _____________________ _____________________
pullover style Women _____________________ _____________________
Children _____________________ _____________________
- --------------------------------------------------------------------------------
Warm-up sets and Men _____________________ _____________________
Jogging Suits Women _____________________ _____________________
Children _____________________ _____________________
- --------------------------------------------------------------------------------
Jumpsuits Men _____________________ _____________________
Women _____________________ _____________________
Children _____________________ _____________________
- --------------------------------------------------------------------------------
Jackets, including Men _____________________ _____________________
blousons and parkas Women _____________________ _____________________
Children _____________________ _____________________
- --------------------------------------------------------------------------------
Denim Jackets Men _____________________ _____________________
Women _____________________ _____________________
Children _____________________ _____________________
- --------------------------------------------------------------------------------
Vests Men _____________________ _____________________
Women _____________________ _____________________
Children _____________________ _____________________
- --------------------------------------------------------------------------------
Coats, including Men _____________________ _____________________
short coats Women _____________________ _____________________
Children _____________________ _____________________
- --------------------------------------------------------------------------------
Rainwear Men _____________________ _____________________
Women _____________________ _____________________
Children _____________________ _____________________
- --------------------------------------------------------------------------------
Swimwear, Men _____________________ _____________________
including swimtanks Women _____________________ _____________________
and bathing suits Children _____________________ _____________________
- --------------------------------------------------------------------------------
Sports hats, Men _____________________ _____________________
including caps Women _____________________ _____________________
Children _____________________ _____________________
- --------------------------------------------------------------------------------
Sports visors, Men _____________________ _____________________
including sports Women _____________________ _____________________
headbands Children _____________________ _____________________
- --------------------------------------------------------------------------------
<PAGE>
EXHIBIT G
Customs Letter
TO WHOM IT MAY CONCERN:
I.C. Isaacs & Company L.P. trading as "Boss by I G Design," markets and
distributes "BOSS" branded clothing in the United States of America pursuant to
its trademark rights in the USA. Ambra Inc., a wholly-owned subsidiary of Hugo
Boss AG, has authorized I.C. Isaacs & Company L.P. pursuant to a Manufacturing
Rights Agreement dated as of ____________ to manufacture "BOSS" branded
sportswear in ________________ for export to the USA only. Therefore, shipments
of such "BOSS" branded clothing from ________________ co-signed to I.C. Isaacs &
Company L.P. for ultimate shipment to the USA are under authority from Ambra
and Hugo Boss AG.
If you wish confirmation of this information, please contact Gert Juergen
Frisch, General Counsel, at Hugo Boss AG, (phone) 49-7123-942598/(fax)
49-7123-942018, or __________________, agent for Hugo Boss AG, in
__________________.
By:
-----------------------------
-----------------------------
Officer of General Partner
ATTENTION: ONLY THE ORIGINAL; EXECUTED VERSION OF THIS LETTER IS VALID, NO
COPIES ARE ACCEPTABLE, AND THE ORIGINAL IS VALID FOR ONLY ONE YEAR FROM THE DATE
OF THIS LETTER.
<PAGE>
EXHIBIT H
NON-EXPEDITED ADR PROCEDURES
In the event a dispute arises requiring non-expedited NDR procedures, the
following procedures shall be followed:
1. The parties shall attempt to resolve disputes arising under this
Agreement informally and in the normal course of business, by means of
negotiations between employees of the companies responsible for the parties'
day-to-day relationship.
2. In the event that either party believes that normal business
negotiations have not or are not likely to lead to a timely resolution, either
party may at any time without regard to Section 1 above initiate ADR proceedings
by notifying the other in writing via facsimile of a demand for ADR proceedings,
with a succinct statement of the matters at issue. Notice shall comply with the
requirements of Section 19 of this Agreement.
3. Upon receipt of such notification, both parties shall make arrangements
for an executive to confer, either in person or, if both agree, by telephone, in
an effort to negotiate a resolution of the dispute.
a. The executives will confer within five (5) business days of the
notification, and will work for at least ten (10) additional days to
try to reach a negotiated settlement.
b. By written agreement of both parties, the time period for
negotiation may be extended. The time period for negotiation will
automatically be extended until one party declares an impasse.
4. If the executive negotiations described in Section 3 of this Exhibit F
fail to resolve the matter, then either party may thereafter notify the other
party in writing via facsimile that if agreement is not reached, mediation or
arbitration will be required. The notifying party shall state whether it elects
mediation or arbitration. If mediation is elected, the notified party may within
two (2) business days elect instead to proceed directly to arbitration, and will
so notify the notifying party. If the notified party takes no action, the matter
will proceed to mediation. If arbitration is elected by either party, the matter
will proceed directly to arbitration. In the case of arbitration, the party
selecting the location and choice of rules of the arbitration as specified under
Section 26.a. of this Agreement shall, within ten (10) business days of the
election to arbitrate, notify the other party of the selections of location and
choice of rules made.
5. In the event of mediation, the parties agree that Jonathan Marks of
J.A.M.S./ENDISPUTE or his designee shall select a mediator within five (5)
business days. If Mr.
<PAGE>
Marks or his designee is unable to select a mediator, the parties shall within
ten (10) business days select a mediator based on candidates provided by the
Washington, D.C. office of J.A.M.S./ENDISPUTE or if J.A.M.S./ENDISPUTE is
unavailable, the American Arbitration Association.
a. Within two (2) business days of the mediator's selection, the
mediator will confer in a joint conference call with representatives
of the parties to discuss the issues in dispute and any further
preparation needed prior to holding a mediation session. The parties
shall defer to the mediator's recommendation about appropriate
procedures.
b. The parties shall attempt to resolve the dispute through mediation
for at least twenty (20) business days from the date of the
mediator's initial joint telephone conference.
c. The time period for mediation shall be extended automatically past
the initial twenty (20) business days until one party declares in
writing an impasse and demands arbitration. If an impasse is
declared by either party, the matter shall proceed to arbitration.
<PAGE>
EXHIBIT H1
EXPEDITED ADR PROCEDURES
In the event a dispute arises requiring expedited ADR Procedures, the
following procedures will be followed:
1. The parties will attempt to resolve disputes arising under this
Agreement informally and in the normal course of business, by means of
negotiations between employees of the companies responsible for the parties'
day-to-day relationship.
2. Either party may at any time request that the parties make arrangements
for an executive from each side not directly involved in the underlying dispute
to confer, either by telephone or in person, in an effort to negotiate a
resolution of the dispute.
3. Although the parties recognize that resolution of disputes through
direct negotiation under Sections 1 and 2 of this Exhibit F1 are to be
preferred, in the event that either party believes that normal business
negotiations are not likely to lead to a timely resolution, either party may at
any time without regard to Sections 1 and 2 of this Exhibit h1 initiate
expedited ADR proceedings by notifying the other party in writing via facsimile
of a demand for expedited ADR proceedings, with a succinct statement of the
matters at issue, and by sending the notification and statement to the
Washington, D.C. office of J.A.M.S./ENDISPUTE. Notice will comply with the
requirements of Section 19 of this Agreement.
4. The expedited ADR proceedings will consist of an expedited arbitration
unless both parties agree in writing that they wish to pursue mediation, either
as a preliminary to arbitration or in parallel to the arbitration proceedings.
If the parties agree to pursue mediation, Jonathan Marks or another mediator
agreed to by the parties will serve as mediator, and follow such procedures as
the mediator and the parties agree to.
5. Unless the parties agree in writing to an alternative approach (as to
accommodate mediation or to fit the specifics of a particular dispute), the
parties will proceed as follows:
a. Within one (1) business day (a business day consists of a day,
excluding Saturdays, Sundays and all holidays generally recognized in either the
United States or the Federal Republic of Germany) of receipt of the demand for
expedited ADR proceedings, J.A.M.S./ENDISPUTE will inform the parties by
facsimile of the name of the arbitrator who will handle the case.
<PAGE>
b. The matter will be heard and decided by one of the following
members of the J.A.M.S./ENDISPUTE panel of neutrals: The Honorable Kathleen
Roberts; The Honorable Robert Tarleton; The Honorable Curtis Emery Von Kann. In
the event that one of the three pre-identified neutrals ceases to be a member of
the J.A.M.S./ENDISPUTE panel of neutrals, J.A.M.S./ENDISPUTE will provide
additional names of potential arbitrators and the parties will agree on a
replacement; if the parties cannot agree, J.A.M.S./ENDISPUTE may appoint a
replacement.
c. On the fifth (5th) business day after J.A.M.S./ENDISPUTE has
notified the parties of the arbitrator, the arbitrator will hold a preliminary
telephone conference during which the parties will describe the dispute and
discuss the procedure for resolving the dispute, including, for example, the
need for and content of pre-hearing submissions. To the extent that the parties
cannot agree on procedures, the arbitrator will orally inform the parties at the
close of the telephone hearing of his procedural decisions. He will confirm
those decisions in writing no later than the following business day.
d. On the sixth (6th) business day after the preliminary telephone
conference, unless both parties agree to shorten the time or to extend the time,
the arbitrator will hold an in-person hearing to receive evidence and consider
arguments relating to the matter; provided, however, that if the parties cannot
agree to extend the time and the arbitrator concludes that in the interest of
justice the time should be extended, the arbitrator may do so.
(1) The hearing will be conducted at a time decided by the
arbitrator, in either New York City or Washington, the
location to be decided by the arbitrator.
(2) The arbitrator will not be bound by the rules of evidence.
(3) The arbitrator will allow each side to present written and
oral evidence as they deem appropriate, except that the
arbitrator may set time limits to ensure that the hearing is
completed within one (1) working day.
(4) The arbitrator will declare the record closed at the end of
the hearing, except that the arbitrator may defer the closing
of the record for up to two (2) business days in order to
allow the parties to make post-hearing submissions.
(5) The arbitrator will hand down a binding award within one (1)
business day of the close of the record. The award will be
accompanied by a statement of reasons. "Statements of reasons"
from prior expedited arbitrations may be used by parties to
later arbitrations to support their positions.
e. Except as specifically set out herein, the arbitrator will have sole
discretion to determine procedures for the arbitration.
<PAGE>
Exhibit 23.01
CONSENT OF INDEPENDENT CERTIFIED
PUBLIC ACCOUNTANTS
To the Board of Directors
I.C. Isaacs & Company, Inc.
We hereby consent to the use in the Prospectus constituting a part of this
Registration Statement on Form S-1 of our reports dated October 31, 1997
relating to the consolidated financial statements and schedule of I.C. Isaacs &
Company, Inc.
We also consent to the reference to our firm under the caption "Experts" in
the Prospectus.
/s/ BDO Seidman, LLP
Washington, D.C.
December 12, 1997
