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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED COMMISSION FILE NO. 0-23379
DECEMBER 31, 1999
I.C. ISAACS & COMPANY, INC.
(Exact name of registrant as specified in charter)
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DELAWARE 52-1377061
(State or other jurisdiction of (IRS employer
incorporation or organization) identification no.)
3840 BANK STREET, BALTIMORE, MARYLAND 21224-2522
(Address of principal executive office) (Zip code)
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Registrant's telephone number, including area code: (410) 342-8200
Securities Registered Pursuant to Section 12(b) of the Act:
NONE
Securities Registered Pursuant to Section 12(g) of the Act:
Title of Class:
COMMON STOCK, $.001 PAR VALUE PER SHARE
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes _X_ No ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K [X].
As of March 24, 2000, the aggregate market value of the outstanding shares
of the Registrant's Common Stock held by non-affiliates was approximately
$21,144,095 based on the average closing price of the Common Stock as reported
by the Nasdaq National Market on March 24, 2000. Determination of affiliate
status for this purpose is not a determination of affiliate status for any other
purpose.
As of March 24, 2000, 7,197,990 shares of Common Stock were outstanding.
DOCUMENT INCORPORATED BY REFERENCE
Specified portions of the definitive Proxy Statement for the 2000 Annual Meeting
of Stockholders of I.C. Isaacs & Company, Inc. to be held on June 8, 2000 are
incorporated by reference into Part III hereof.
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I.C. ISAACS & COMPANY, INC.
FORM 10-K
TABLE OF CONTENTS
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PART I
ITEM 1. BUSINESS.................................................... 1
ITEM 2. PROPERTIES.................................................. 15
ITEM 3. LEGAL PROCEEDINGS........................................... 15
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......... 15
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS......................................... 16
ITEM 6. SELECTED FINANCIAL DATA..................................... 17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................... 18
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................. 27
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.................................... 27
PART III
*ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY............. 28
*ITEM 11. EXECUTIVE COMPENSATION...................................... 28
*ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.................................................. 28
*ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............. 28
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM
8-K......................................................... 28
SIGNATURES......................................................................... 32
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* Incorporated by reference from the Registrant's definitive Proxy Statement
for the 2000 Annual Meeting of Stockholders to be held June 8, 2000. The
Proxy Statement will be filed not later than 120 days after the end of the
fiscal year covered by this Annual Report on Form 10-K.
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"I. C. Isaacs-Registered Trademark-" and "I.G. Design-Registered Trademark-"
are trademarks of the Company. The Company has filed a federal trademark
application for the mark "Urban Expedition (UBX)." All other trademarks or
service marks, including "Girbaud-Registered Trademark-" and "Marithe and
Francois Girbaud-Registered Trademark-" (collectively, "Girbaud"),
"BOSS-Registered Trademark-" and "Beverly Hills Polo Club-Registered Trademark-"
appearing in this Annual Report on Form 10-K are the property of their
respective owners and are not the property of the Company.
IMPORTANT INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
THIS ANNUAL REPORT ON FORM 10-K CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE
MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED, AND SECTION
21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. THOSE STATEMENTS INCLUDE
STATEMENTS REGARDING THE INTENT, BELIEF OR CURRENT EXPECTATIONS OF THE COMPANY
AND ITS MANAGEMENT, INCLUDING INDICATIONS REGARDING THE STRENGTH OF UPCOMING
COLLECTIONS, THE COMPANY'S BELIEF REGARDING THE PROMINENCE OF THE GIRBAUD BRAND
IN THE COMPANY'S FUTURE, AND THE COMPANY'S EXPECTATIONS FOR 2000, STATEMENTS
REGARDING ANTICIPATED AND/OR INTENDED COST SAVINGS AND ANTICIPATED WORKING
CAPITAL NEEDS. WORDS SUCH AS "BELIEVES," "ANTICIPATES," "EXPECTS," "INTENDS,"
"PLANS," AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD-LOOKING
STATEMENTS BUT ARE NOT THE EXCLUSIVE MEANS OF IDENTIFYING SUCH STATEMENTS. SUCH
STATEMENTS ARE FORWARD-LOOKING STATEMENTS WHICH ARE SUBJECT TO A VARIETY OF
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" IN THE COMPANY'S PROSPECTUS, WHICH INCLUDE, AMONG
OTHER THINGS (I) CHANGES IN THE MARKETPLACE FOR THE COMPANY'S PRODUCTS,
INCLUDING CUSTOMER 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 OR 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. EXISTING AND 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 UPDATE OR REVISE THE
INFORMATION CONTAINED IN THIS ANNUAL REPORT ON FORM 10-K, WHETHER AS A RESULT OF
NEW INFORMATION, FUTURE EVENTS OR CIRCUMSTANCES OR OTHERWISE.
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PART I
ITEM 1. BUSINESS
INTRODUCTION
I.C. Isaacs & Company, Inc. (together with its predecessors, subsidiaries
and affiliated companies, including I.C. Isaacs & Company L.P., the "Company")
is a designer, manufacturer and marketer of branded jeanswear and 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 collections of men's and women's jeanswear and sportswear under the
Girbaud designer brand in the United States and Puerto Rico, lines of sportswear
for young men and boys under the BOSS brand in the United States and Puerto Rico
and collections of sportswear for men and boys under the Beverly Hills Polo Club
brand in the United States, Puerto Rico and Europe. Recently, the Company
introduced a focused collection of sportswear under the Company-owned Urban
Expedition (UBX)-Registered Trademark- brand in the United States and Europe.
Through a focused strategy of providing fashionable, branded merchandise, the
Company has become a fashion source for youthful and contemporary consumers who
purchase jeanswear and sportswear through specialty and department stores. The
Company also offers women's pants and jeans under various other Company-owned
brand names as well as under third-party private labels for sale to major chain
stores and catalogs.
In November 1997, the Company acquired an exclusive license to manufacture
and market certain men's jeanswear and sportswear under the Girbaud brand in the
United States and Puerto Rico. In March 1998, the Company acquired an exclusive
license to manufacture and market certain women's jeanswear and sportswear under
the Girbaud brand in the United States and Puerto Rico. The Girbaud brand is an
internationally recognized designer label with a distinct European influence. By
targeting customers who desire contemporary, international fashion, the Girbaud
brand has enabled the Company to address another consumer segment with its
branded product portfolio. The Company has positioned the Girbaud line with a
broad assortment of products, styles and fabrications reflecting a contemporary
European look. The Company markets a full collection of men's jeanswear and
sportswear under the Girbaud brand, including a broad array of bottoms, tops,
outerwear and leather sportswear. In August 1998, the Company introduced a
women's sportswear collection under the Girbaud brand, which also includes a
wide assortment of bottoms, tops and outerwear. Net sales of Girbaud products
accounted for 32.9% and 4.1% of the Company's sales in 1999 and 1998,
respectively. Based on its performance in 1999, the Company believes that the
Girbaud brand has established itself as a dominant part of the Company's future.
The Company continues to manufacture and market certain sportswear under the
BOSS brand for sale at specified price points in the United States and Puerto
Rico, subject to a licensing agreement with the owner of the BOSS mark. The
Company has positioned the BOSS line to appeal to consumers who desire an urban,
fashion-forward look at value prices. The BOSS collection consists of jeans,
pants, tee shirts, sweatshirts, shorts, knit and woven shirts and outerwear. Net
sales of BOSS sportswear accounted for 32.5% and 73.4% of the Company's net
sales in 1999 and 1998, respectively.
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In addition, 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. With its Beverly Hills Polo Club brand, the Company
targets men and boys who desire updated traditional sportswear at competitive
prices. The Beverly Hills Polo Club collection combines contemporary design
details and innovative fabrics with classic American sportswear styling. The
Beverly Hills Polo Club collection includes jeans, pants, shorts, knit and woven
shirts and outerwear. The Company's Beverly Hills Polo Club line was introduced
in the spring of 1994. Net sales of Beverly Hills Polo Club sportswear accounted
for 17.3%, and 14.6% of the Company's net sales in 1999 and 1998, respectively.
In the third quarter of 1999, the Company launched a new Company-owned
brand, Urban Expedition (UBX)-Registered Trademark-. The Company has positioned
this line to appeal to men and boys who desire an upscale urban look. The
current line consists of a focused collection of denim jeans, shorts, jackets,
vests, printed woven shirts, tee shirts and sweaters. The Company began shipping
UBX products in the first quarter of 2000 and the products are now being sold to
more than 300 stores in the United States and 100 stores in Europe.
The Company also manufactures and markets a limited number of pants and
jeans styles for women under its own "I.C. Isaacs" brand name and under
third-party private labels for sale to major chain stores and catalogs. Net
sales of these labels accounted for 6.2% and 7.9% of the Company's net sales in
1999 and 1998, respectively.
PRODUCTS
The Company's jeanswear and sportswear collections under the Girbaud, 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. While each of these brands reflects a distinct image and style, they
are all targeted to consumers who are seeking quality, fashionable products at
competitive prices. The Company also manufactures and markets a focused
collection of sportswear under its UBX brand and limited number of styles of
women's pants and jeans under its "I.C. Isaacs" brand name as well as under
third-party private labels.
GIRBAUD PRODUCTS
Girbaud is an internationally recognized designer brand. The Company markets
innovative European-inspired men's and women's jeanswear and sportswear
collections under the Girbaud label. The Girbaud collections include full lines
of bottoms consisting of jeans and casual pants in a variety of fabrications,
including denim, stretch denim, cotton twill and nylon, cotton tee shirts, polo
shirts, knit and woven tops, sweaters, outerwear and leather sportswear.
Reflecting contemporary European design, each of these collections is
characterized by innovative styling and fabrication and is targeted to consumers
ages 16 to 50. Estimated retail prices range from $20 to $25 for tee shirts, $50
to $75 for tops and bottoms, $60 to $90 for sweaters and $80 to $200 for
outerwear and $150 to $300 for leather sportswear products.
BOSS PRODUCTS
The Company's BOSS products are designed to appeal to young men and boys who
want a fashion-forward look with an urban attitude at a competitive price. The
Company's BOSS products began as a line of 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 shorts and corduroy and twill
pants. Many of the BOSS jeans feature elements such as unique pocket treatments,
innovative trim and embroidered logos. The BOSS tops collection consists of a
range of products including cotton tee shirts, polo shirts, novelty knit tops
and fleece sweatshirts. Many of these products utilize unique combinations of
fabrications, as well as a broad array of appliqued logos and innovative prints
and graphics. The estimated retail prices range from $35 and $50 for jeans, $19
to $22 for tee shirts, $30 to $55 for tops and $50 to $100 for outerwear
products. The Company complements its BOSS young men's line with BOSS boys' and
youth lines, which
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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.
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. The Company has
merchandised the Beverly Hills Polo Club 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. The tops line is distinguished by innovative use of design, embroidery
and fabric detail. The collections also include more contemporary styles and an
array of novelty fabrics as well as product offerings such as printed woven
shirts and outerwear, including jackets and downfilled parkas. Estimated retail
prices range from $19 to $22 for tee shirts, $30 to $60 for tops and $60 to $120
for outerwear. While the primary focus of the Beverly Hills Polo Club line has
been on tops, the collection also includes a full line of bottoms consisting of
denim jeans, twill pants and corduroy casual pants. Estimated retail prices for
jeans and casual pants range from $40 to $55 per pair.
URBAN EXPEDITION (UBX) PRODUCTS
The UBX brand is positioned to appeal to consumers seeking an upscale urban
look. This focused line includes denim jeans, shorts, jackets, vests, printed
woven shirts, tee shirts and sweaters. Estimated retail prices range from $20 to
$25 for tee shirts, $20 to $60 for tops and $45 to $60 for jeans.
OTHER COMPANY-OWNED AND THIRD-PARTY PRIVATE LABEL PRODUCTS
The Company also produces a limited number of pants and jean styles for
women under its own I.C. Isaacs brands as well as under customers' private
labels for sale to major chain stores and catalogs. These brands focus on
pull-on elastic waist pants and jeans. 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. Estimated
retail prices range from $15 to $24.
CUSTOMERS AND SALES
The Company's products are sold in over 2,500 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 the distributor or sales representative
serves 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 began marketing men's sportswear under the Girbaud brand in
February 1998 and introduced a women's sportswear collection under the Girbaud
brand in the second quarter of 1998. The Company's Girbaud men's products are
being sold to more than 1,300 stores in the United States and Puerto Rico,
including major department stores such as Nordstroms, Bloomingdales, Macy's
East, Macy's West, Burdines, Saks, Inc., the May Company and Dayton Hudson, and
many prominent speciality stores such as The Atrium in New York, Fred Segal
Santa Monica, The Buckle, The Lark and Maurices. The
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Company's Girbaud women's line is now being sold to more than 600 stores. The
Company's Girbaud brand products are sold and marketed domestically under the
direction of an 11-person sales force headquartered in New York. To date, sales
of the Company's Girbaud products in Central and South America and the Caribbean
have been immaterial.
The Company's BOSS products are sold throughout the United States and Puerto
Rico in over 1,400 specialty stores and specialty store chains. Substantially
all of the Company's net revenues are attributable to domestic sales. 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 19 commissioned BOSS sales
representatives who work out of regional showrooms throughout the United States
and Puerto Rico.
The Company's Beverly Hills Polo Club sportswear is sold in the United
States, Puerto Rico and Europe to over 1,000 specialty stores, specialty store
chains and department stores, including J.C. Penney Company Inc. The Company's
Beverly Hills Polo Club products are sold and marketed under the direction of
its 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 17 Beverly
Hills Polo Club sales representatives.
The Company's Beverly Hills Polo Club sportswear is sold in six countries in
Europe primarily through wholesale distributors, all of whom buy products
directly from the Company. The Company currently has wholesale distribution
arrangements with distributors in Belgium, Greece, Norway, Portugal, Sweden 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. The
Company also utilizes sales representatives to sell directly to stores in Spain
and France. All of those direct sales are secured by a credit insurance company.
The Company has also established two franchise stores in Spain. To date, sales
of the Company's Beverly Hills Polo Club products in Europe have been
immaterial.
The Company began shipping its UBX brand in February 2000. The Company's UBX
products are being sold in more than 300 specialty stores in the United States
and more than 100 stores in Europe. The Company's UBX products are sold and
marketed under the direction of its national sales office hearquartered in New
York. In addition to executive selling based in New York and Dallas, the Company
has 9 commissioned sales representatives who work out of regional showrooms
throughout the United States. The Company's UBX line is sold in Europe primarily
through wholesale distributors, all of whom buy products directly from the
Company. The Company currently has wholesale distribution arrangements for sales
of its UBX brand with distributors in Austria, Belgium, Denmark, Finland,
Germany, The Netherlands, Norway, and Switzerland and has sales representatives
to sell directly to stores in Spain.
The Company's other Company-owned branded products and third-party private
label products are sold under the direction of the sales headquarters in New
York. The products are distributed to department stores such as Boscov's,
Hamericks and Sears Roebuck and Co.; mass merchandisers and discounters such as
Hills Department Store Company and Ames Department Stores, Inc.; and catalogs
such as National Wholesale Co., Inc., Bedford Fair and Arizona Mail Order
Company, Inc.
The Company's single largest customer in 1999 was J.C. Penney Company, Inc.,
which accounted for 14.2% of net sales. No other customer of the Company
accounted for 10.0% or more of net sales in 1999.
DESIGN AND MERCHANDISING
The Company's designers and merchandisers travel around the world 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, merchandisers and designers involved with the development of
Girbaud products are provided with the Girbaud collections from Europe twice a
year and collaborate with Marithe and Francois
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Girbaud and their staff in the development of the Company's Girbaud product
lines for sale in the United States. Merchandisers also 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. The Company currently has 18 people on
the design staff in New York City. Design expenditures incurred were
approximately $2.1 million in 1999. The Company estimates that design
expenditures in 2000 will be approximately the same.
ADVERTISING AND MARKETING
The Company prides itself on its ability to efficiently utilize its
advertising budget. Although the Company spent approximately $2.8 million or
3.3% of net sales on advertising in 1999, this is still a relatively modest
amount as compared with some of its competitors. In 1998 and 1999, the Company's
expenditures for advertising and marketing activities totaled $5.7 million and
$2.8 million, respectively.
The Company aggressively communicates and reinforces the brand and image of
its Girbaud, BOSS, Beverly Hills Polo Club and UBX 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 agencies and, in the case of Girbaud, with
Girbaud's European offices and Paris advertising agency. The Company's
advertising strategy is geared towards its youthful and contemporary consumers,
whose lifestyles are influenced by music, sports and fashion. The Company has
been advertising the BOSS brand since 1992, the Beverly Hills Polo Club brand
since 1994 and the Girbaud brand since 1998 and recently began advertising the
UBX brand. Its advertising campaigns have evolved from trade magazines to a wide
variety of media, including billboards, fashion magazines, radio and special
events.
The Company has a multifaceted marketing campaign for its Girbaud brand,
which includes print advertisement in magazines such as ELLE, VIBE, DETAILS,
MARIE CLAIRE, IN STYLE and INTERVIEW magazines. The campaign also includes
outdoor advertising, including buses, billboards, point of sale materials and
promotions, and celebrity wardrobing. As a first tier designer brand, Girbaud
also presents international runway shows as well as appearing in major trade
shows. Print advertisements for the Beverly Hills Polo Club and BOSS brands have
appeared in SOURCE, SLAM, SPORTSWEAR INTERNATIONAL, XXL and URBAN LATINO
magazines. Beverly Hills Polo Club is also advertising in the official yearbook
of the PGA Tour 2000.
Recognizing that point of sale brand presentation and images are highly
effective, the Company also provides an array of in-store signage, fixtures and
product videos for its Girbaud products. In addition, through the "Shop-in-Shop"
concept, the Company provides key department stores and specialty stores with
both fixturing and visuals to enhance brand recognition and to differentiate
Girbaud products from other branded apparel. The Girbaud "Shop-in-Shops" are
designed to create an environment that is consistent with the image of Girbaud
as a unique designer brand. Currently, approximately 30 stores are using the
"Shop-in-Shop" concept to showcase the Company's Girbaud products. The Company
plans to continue to expand the "Shop-in-Shop" program in 2000.
MANUFACTURING AND PRODUCT SOURCING
GENERAL
The Company believes that its flexible manufacturing and sourcing
capabilities enable it to effectively 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 1999, approximately 25.5% of the Company's
purchases of raw materials, labor and finished goods for its apparel were made
in Mexico; approximately 33.5% were made in Asia; approximately 23.8% were made
at third-party facilities in the United States; and the balance was made at the
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Company's facilities in the United States. Approximately 82.8% of the Company's
manufacturing and sourcing in 1999 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 it performs 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.
UNITED STATES AND MEXICO
The Company operates one manufacturing facility. In 1999, the Company
produced approximately 17.2% of its bottoms (slacks, jeans, shorts and skirts)
at this facility, which employs approximately 230 people.
The Company utilizes one contractor in the United States and three
contractors in Mexico. The majority of the Company's U.S. and Mexico production
is of bottoms and tee shirts. 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 the Company-operated
facility. 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 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, which is widely available.
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 27 different manufacturers in 7 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 1999. 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.
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 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. 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 percentage of the
Company's products produced in Asia has increased dramatically, and this trend
is likely to continue in the future.
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WAREHOUSING AND DISTRIBUTION
The Company services its United States customers utilizing a 70,000 square
foot Company-owned and operated distribution center in Milford, Delaware. The
Company has established 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. The Company also has a warehouse in Carthage, Mississippi.
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 the Company-operated facility, as well as by United
States and Mexican contractors, undergo continual audits by quality control
personnel during production. The quality control efforts of the Company-operated
facility are directed and coordinated by the Company's quality control staff
located in Mississippi. Frequent visits are made by the quality control staff to
all outside contractors to ensure compliance with the Company's quality
standards. Audits are also performed by quality control personnel at the
Milford, Delaware distribution center on all categories of incoming merchandise.
The Company employs a full-time staff of 6 persons dedicated to the quality
control efforts of its United States and Mexican production.
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.
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 the stores. As of
December 31, 1999, the Company had unfilled orders of approximately
$29.0 million, compared to approximately $27.0 million of such orders as of
December 31, 1998. The Company expects to fill substantially all of these orders
in 2000. 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. During 1999, increased demand for the Company's
Girbaud Products contributed to the improvement in backlog. 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.
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LICENSES AND OTHER RIGHTS AGREEMENTS
The Company's business is heavily dependent upon its use of the Girbaud,
BOSS and Beverly Hills Polo Club brand names and images, which are in turn
dependent upon the existence and continuation of certain licenses and other
rights agreements as described below.
GIRBAUD LICENSES
GIRBAUD DOMESTIC LICENSES
In November 1997, the Company entered into an exclusive license agreement
(the "Girbaud Men's Agreement") with Girbaud Design, Inc. and its affiliate
Wurzburg Holding S.A. ("Wurzburg") 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. In March 1998, the Girbaud
Men's Agreement was amended and restated to include active influenced sportswear
as a licensed product category and to name Latitude Licensing Corp. as the
licensor (the "Licensor"). Also in March 1998, the Company entered into an
exclusive license agreement (the "Girbaud Women's Agreement" and, together with
the Girbaud Men's Agreement, the "Girbaud Agreements") with the Licensor to
manufacture and market women's jeanswear, casualwear and outerwear, including
active influenced sportswear, under the Girbaud Marks in all channels of
distribution in the United States, including Puerto Rico and the U.S. Virgin
Islands. The Girbaud Agreements include the right to manufacture the licensed
products in a number of foreign countries, and both had initial terms of two
years. The Girbaud Agreements have been extended until December 31, 2002, upon
which date the Company will have the option to renew the agreements for an
additional five years. The Girbaud Agreements generally allow 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 material and manufacturing premises. The Girbaud Agreements provide
that they 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 agreements that remains uncured following certain specified grace
periods.
Under the Girbaud Men's 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 was subject to guaranteed minimum
annual royalty payments of $1.5 million in 1999, and is subject to guaranteed
minimum annual royalty payments of $2.0 million in 2000, $2.5 million in 2001
and $3.0 million each year from 2002 through 2007. On a monthly basis during the
term, the Company is obligated to pay 8.3% of the minimum guaranteed royalties
for that year. On a quarterly basis during the term, the Company is required to
pay the amount that the actual royalties exceed the total minimum guaranteed
royalties for that quarter. The Company is required to spend at least $500,000
in advertising men's Girbaud brand products each year through the term of the
Girbaud Men's Agreement.
Under the Girbaud Women's 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 was subject to guaranteed minimum
annual royalty payments of $700,000 in 1999, and is subject to guaranteed
minimum annual royalty payments of $800,000 in 2000, $1.0 million in 2001 and
$1.5 million each year from 2002 through 2007. On a monthly basis during the
term, the Company is obligated to pay the 8.3% of the minimum guaranteed
royalties for that year. On a yearly basis, the Company is required to pay the
amount that the actual royalties exceed the total minimum guaranteed royalties
for that year. The Company is required to spend at least $400,000 in advertising
women's Girbaud brand products in each year through the term of the Girbaud
Women's Agreement. In addition, over the term of the Girbaud Women's Agreement
the
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Company is required to contribute $190,000 per year to the Licensor's
advertising and promotional expenditures for the Girbaud brand.
The Girbaud Women's Agreement initially required the Company to open a
Girbaud flagship store for the sale of the Company's Girbaud men's and women's
lines and other Girbaud licensed merchandise in New York City by the end of
1998. In December 1998, the Girbaud Women's Agreement was amended to defer this
requirement for one year and to provide that the Company would spend an
additional $1.8 million on enhanced sales and marketing in 1999. In August,
1999, the Company issued 500,000 shares of restricted common stock to Latitude
Licensing Corp. in connection with an amendment of the Girbaud Women's Agreement
to further defer the obligation to open a Girbaud retail store. Under the new
agreement, if the Company has not signed a lease agreement for a Girbaud retail
store by July 31, 2002, it will become obligated to pay Latitude Licensing Corp.
an additional $500,000 in royalties.
In November 1998, the Company entered into amendments (the "Girbaud
Amendments") to the Girbaud Agreements allowing distribution through an approved
distributor in selected countries in Central and South America and the
Caribbean. The Girbaud Amendments are effective until November 12, 2001 or until
expiration of the Girbaud Agreements, whichever is earlier. In the event that
the Company does not achieve more than 75% of target sales levels in any Central
or South American or Caribbean country, its license to distribute Girbaud
products in that country will become non-exclusive effective starting the
following year. To date, sales to that region have been immaterial.
In January 2000, the Company entered into a global sourcing agreement with
G.I. Promotions to act as a non-exclusive sourcing agent to licensees of the
Marithe & Francois Girbaud trademark for the manufacture of Girbaud jeanswear
and sportswear. The global sourcing agreement extends until December 31, 2003
and provides that the Company shall net a facilitation fee of 5.0% of the total
FOB pricing for each order shipped to licensees under the agreement. Also in
January 2000, the Company entered into a license agreement with Wurzburg. The
license has a term of three years and provides that the Company shall pay
Wurzburg a royalty of 1.0% of the total FOB pricing for each order shipped to a
licensee under the global sourcing agreement.
BOSS TRADEMARK RIGHTS
In 1990, the Company obtained a license from Brookhurst, Inc. ("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. In 1997, pursuant
to a settlement of multiparty litigation, Isaacs acquired certain BOSS trademark
rights and related assets from Brookhurst. Also, in 1997 Isaacs sold its foreign
BOSS trademark rights and its rights under related agreements acquired from
Brookhurst to Ambra Inc. ("Ambra") and entered into a foreign rights
manufacturing agreement with Ambra (the "Foreign Rights Agreement"), pursuant to
which Isaacs obtained a license to manufacture apparel in certain foreign
countries for sale in the United States using the BOSS brand name and image.
Isaacs retained its ownership of domestic BOSS trademark rights subject to a
concurrent use agreement (the "Concurrent Use Agreement") with Hugo Boss AG
("Hugo Boss").
On October 22, 1999, Isaacs, Ambra and Hugo Boss entered into an agreement
to restructure the licensing arrangement for use of the BOSS trademark. Pursuant
to the agreement, (i) the Company transferred to Ambra substantially all of its
rights in the marks containing the term BOSS throughout the world, (ii) an
$11.25 million promissory note issued by the Company to Ambra in 1997 was
cancelled, (iii) the Company and Ambra agreed to enter into a restated and
amended license agreement (the "Boss License Agreement") granting the Company
the rights to use various trademarks including the word "BOSS" in the
manufacture and domestic sale of specified types of apparel, (iv) the Foreign
Rights Agreement, the Concurrent Use Agreement and an option on the part of
Ambra to purchase the Company's domestic BOSS trademark rights which was
originally entered into in November 1997 were all terminated, and (v) the
Company issued to Ambra on November 6, 1999 2.0 million shares of Preferred
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Stock having an estimated fair market value of $2.0 million and agreed to issue
to Ambra on April 30, 2000 an additional 1.3 million shares of Preferred Stock
having an estimated fair market value of $1.3 million and 666,667 shares of
Common Stock, which had an aggregate value of $1.0 million based on the market
price of $1.50 on the date the parties agreed to the transaction. Except with
respect to the initial term and the minimum annual royalties due Ambra by
Isaacs, Isaacs' rights under the BOSS License Agreement are substantially
similar to the rights the Company had previously had.
Under the BOSS License Agreement, the Company is permitted to manufacture,
distribute, market and sell, within specified wholesale price points, the
following categories of apparel for men, women and children under the BOSS brand
in a specified microgramma style (the "BOSS Logotype"): All sportswear and
activewear that is not specifically excluded, outerwear, sports hats, visors and
caps, swimwear, jogging suits, 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 Ambra. 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, sailing and any non-apparel items. The BOSS License 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 generally requires that the Company use the phrase "BOSS by
I.G. Design" on its BOSS products. Under the BOSS License 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.
Subject to the terms of the BOSS License 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 BOSS License
Agreement in the United States and Puerto Rico, Hugo Boss must sell such
products at or above specified wholesale price points, 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
BOSS License Agreement, as there was under the old 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.
The BOSS License Agreement extends through December 31, 2003 with renewal
periods, at the option of the Company, through December 31, 2007, whereas the
Foreign Rights Agreement extended through December 31, 2001 with renewal
periods, at the option of the Company, through December 31, 2007. The minimum
annual royalties payable by Isaacs under the BOSS License Agreement were
approximately $2.9 million in 1999 and are approximately $3.2 million in each of
2000 and 2001, approximately $2.6 million in 2002 and approximately $2.1 million
in 2003. The minimum annual royalties under the Foreign Rights Agreement were
12.5% on the first $32.0 million in sales attributable to apparel manufactured
in certain foreign countries ("Territory Net Sales") for a minimum of $4.0
million in each of 1999, 2000 and 2001, and, if renewed, 12.5% on the first $20
million in Territory Net Sales in 2002 for a minimum in that year of $2.5
million, and 12.5% on the first $16.0 million of Territory Net Sales in 2003 for
a minimum in that year of $2.0 million.
The BOSS License 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 manufacturers of the terms of the agreements. In addition to
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terminating the License 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 and/or demand the redemption of
the Preferred Stock issued and to be issued to Ambra pursuant to the recent
restructuring at a redemption price of $1.00 per share 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 any licensed products, (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 termination of the BOSS License
Agreement. 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.
BEVERLY HILLS POLO CLUB LICENSES
Beverly Hills Polo Club Domestic Licenses
Since 1993, the Company has had an exclusive wholesale licensing agreement
(the "BHPC Agreement") with BHPC Marketing, Inc. for the manufacture and
promotion of certain men'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 Agreement, the Company may sell up to 25.0% of its total volume 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 the license, 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 the 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 BHPC 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
and woven 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 BHPC Agreement has a
three year term expiring December 31, 2001 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 a three-year period commencing January 1, 2002 through
December 31, 2004.
The Company was subject to a guaranteed payment of $636,000 in 1999 and will
be subject to a guaranteed payment of an equal amount in 2000. Guaranteed
minimum annual royalties and guaranteed annual net shipments for the current
term and the renewal term are equal to 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 BHPC Agreement 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.
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During the term of the BHPC Agreement, 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 BHPC's Agreement 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.
In May 1998, the Company entered into an exclusive license (the "BHPC Boys'
Agreement") to manufacture and market boys' sportwear, including knit and woven
shirts, cotton and cotton mixed pants (excluding tailored pants), jeans, shorts,
swim shorts and sports outerwear, under the Beverly Hills Polo Club brand in the
United States and Puerto Rico. Under the terms of the BHPC Boys' Agreement, the
Company must pay the licensor of the BHPC Trademark royalties equal to 5.0% of
net shipments by the Company of licensed products. The Company was subject to
guaranteed minimum annual royalties of $50,000 in 1999 and will be subject to
minimum annual royalties of $75,000 and $100,000 in the years 2000 and 2001,
respectively. The BHPC Boys' Agreement has an initial term of three years, and
is renewable at the option of the Company, provided the Company is not in breach
thereof at the time the renewal notice is given, until December 31, 2004.
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, provided
certain exclusive rights to use the BHPC Trademark in all countries in Europe
for an initial term of three years ending December 31, 1999, with five
consecutive renewal terms, at the Company's option, provided the Company is not
in breach thereof at the time the renewal notice is given, ending December 31,
2007. The International Agreements are subject to substantially the same terms
and conditions as the BHPC Agreements described above.
The international retail agreement (the "Retail Agreement") granted 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 franchise
stores in Europe of the following categories of products: (i) men's apparel,
including denim sportswear, outerwear, woven 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 (excluding suits, ties, dress shirts, underwear, shoes, overcoats and
full length rainwear); (ii) women's apparel, including 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). Effective
November 1, 1999, the Retail Agreement was amended to eliminate women's apparel
as a licensed category. Under the Retail Agreement, the Company was required to
pay the licensor royalties (the "Initial Retail Royalties") equal to (i) 4.0% of
the wholesale purchases by the Company of Beverly Hills Polo Club products sold
to Beverly Hills Polo Club retail stores ("Wholesale Purchases") and (ii) 2.0%
of retail sales of licensed products by Beverly Hills Polo Club retail stores
and was subject to guaranteed minimum annual royalty payments of $30,000 in 1999
and guaranteed net shipment volumes of $0.8 million in 1999. By amendments dated
as of March 1, 1999 and September 1, 1999, the Retail Agreement (the "Retail
Amendment") was amended to provide as follows: (i) for the period beginning
March 1, 1999 and ending June 30, 2000, no royalties, guaranteed minimum annual
royalties or guaranteed net shipment volumes apply; (ii) for the period
beginning July 1, 2000 and ending December 31, 2000, the royalty rate shall be
3.0% of Wholesale Purchases and no guaranteed annual royalties shall apply;
(iii) for the period beginning
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January 1, 2001 and ending December 31, 2001, the royalty rate shall be 3.0% of
Wholesale Purchases and the guaranteed annual royalty shall be $60,000;
(iv) for the period beginning January 1, 2002 and ending December 31, 2003, the
royalty rate shall be 5.0% of Wholesale Purchases, the guaranteed annual royalty
shall be $120,000 and the Company shall be subject to the guaranteed net
shipment volumes in effect immediately prior to the amendment dated March 1,
1999. For the period beginning January 1, 2000 and ending December 31, 2001, the
Company is required to spend an amount equal to 4.0% of Wholesale Purchases in
advertising the BHPC line. During each of 2002 and 2003, the Company is required
to spend an amount equal to 2.0% of Wholesale Purchases in advertising the BHPC
line.
The international wholesale agreement (the "Wholesale Agreement") granted
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, including denim sportswear, outerwear, woven 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 (excluding suits, ties, dress shirts, underwear, shoes,
overcoats, and full length rainwear); and (ii) women's apparel, including
slacks, skirts, dresses, sweaters, outerwear, blouses and jeans. Effective
November 1, 1999, the Wholesale Agreement was amended to eliminate women's
apparel as a licensed category. Under the Wholesale Agreement, the Company was
required to pay the licensor royalties, (the "Initial Wholesale Royalties")
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 ("Net
Shipments") and was subject to guaranteed minimum annual royalty payments of
$120,000 in 1999 and guaranteed net shipment volume of $4.0 million in 1999. By
amendments dated as of March 1, 1999 and September 1, 1999, the Wholesale
Agreement was amended (the "Wholesale Amendment") to provide as follows:
(i) for the period beginning March 1, 1999 and ending June 30, 2000, the no
royalties, guaranteed minimum annual royalties or guaranteed net shipment
volumes apply; (ii) for the period beginning July 1, 2000 and ending
December 31, 2000, the royalty rate shall be 3.0% of Wholesale Purchases, no
guaranteed net shipment volumes shall apply and no guaranteed annual royalties
shall apply; (iii) for the period beginning January 1, 2001 and ending
December 31, 2001, the royalty rate shall be 3.0% of Wholesale Purchases, the
guaranteed annual royalty shall be $60,000 and the Company shall be subject to
the guaranteed net shipment volumes in effect immediately prior to the amendment
dated March 1, 1999. For the period beginning January 1, 2000 and ending
December 31, 2001, the Company is required to spend an amount equal to 4.0% of
Wholesale Purchases in advertising the BHPC line. During each of 2002 and 2003,
the Company is required to spend an amount equal to 2.0% of Wholesale Purchases
in advertising the BHPC line.
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 2,500 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
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 exposure to credit
losses. The Company currently employs six people in its credit department and
believes that managing its own credit gives it unique flexibility as to which
customers the Company should sell and how much business it should do with each.
The Company obtains and periodically updates information regarding the financial
condition and credit histories of customers. The Company's collection 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. 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. Timely contact with customers has been
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effective in reducing credit losses to an immaterial amount. In 1998, and 1999,
the Company's credit losses were $1.4 million and $1.7 million, respectively.
The Company's actual credit losses as a percentage of net sales was 1.2% and
2.0%, respectively.
COMPETITION
The apparel industry is highly competitive and fragmented and is subject to
rapidly changing consumer demands and preferences. The Company believes that its
continued 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 Girbaud, BOSS, Beverly Hills
Polo Club and UBX brands. The Company competes with numerous apparel brands and
distributors (including Calvin Klein, DKNY, Guess?, Mecca, Phat Farm, Polo
Jeans, Tommy Jeans, 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.
The Company continued to experience intense competition in 1999 from many
established and new competitors at both the specialty store and department store
channels of distribution. Under the License Agreement, the BHPC Agreements and
the Girbaud Agreements, 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.
MANAGEMENT INFORMATION SYSTEMS
The Company believes that advanced information processing is essential to
maintaining its competitive position. 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
programs allow 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, from inventory on hand, to
certain customers within 24 to 72 hours from the time of order receipt.
EMPLOYEES
The Company believes that its employees are one of its most valuable
resources. As of March 31, 2000, the Company had approximately 320 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.
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 waste, some of which are or may become regulated as
hazardous substances. The Company has not incurred any
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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.
ITEM 2. PROPERTIES
Certain information concerning the Company's principal facilities is set
forth below:
<TABLE>
<CAPTION>
APPROXIMATE AREA
LEASED OR IN
LOCATION OWNED USE SQUARE FEET
- - -------- --------- --------------------------------- ----------------
<S> <C> <C> <C>
Baltimore, MD.................... Owned Administrative Headquarters and 40,000
Office Facilities
New York, NY..................... Leased Sales, Merchandising, Marketing 10,100
and Sourcing Headquarters
Barcelona, Spain................. Leased European Headquarters 2,000
Milford, DE...................... Owned Distribution Center 70,000
Carthage, MS..................... Leased Warehouse 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. See "ITEM 1. Business--Warehousing
and Distribution" and Note 8 of Notes to Consolidated Financial Statements for
further information.
In the second quarter of 1998, the Company closed its Newton, Mississippi
manufacturing facility. The production in this facility, the majority of which
was jeans, was transferred to a third party independent contractors' facilities
in Mexico. In the first quarter of 1999, the Company closed its Carthage,
Mississippi manufacturing facility and now uses the facility as a warehouse.
ITEM 3. LEGAL PROCEEDINGS
The Company and certain of its current and former officers and directors
have been named as defendants in three putative class actions filed in United
States District Court for the District of Maryland. The first of the actions was
filed on November 10, 1999 by Leo Bial and Robert W. Hampton. The three actions,
which have been consolidated with Mr. Bial as the first-named plaintiff, purport
to have been brought on behalf of all persons (other than the defendants and
their affiliates) who purchased the Company's stock between December 17, 1997
and November 11, 1998. The plaintiffs allege that the registration statement and
prospectus issued in connection with the Company's initial public offering,
completed in December 1997, contained materially false and misleading
statements, which artificially inflated the price of the Company's stock during
the class period. Specifically, the complaints allege violations of
Sections 11, 12(a)(2) and 15 of the Securities Act of 1933 and Sections 10(b)
and 20(a) of the Securities Act of 1934 and Rule 10b-5 promulgated thereunder.
The plaintiffs seek recision, damages, costs and expenses, including attorneys'
fees and experts' fees, and such other relief as may be just and proper. The
Company believes that the plaintiffs' allegations are without merit and intends
to defend the cases vigorously.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of 1999, there were no matters submitted to a vote
of the Company's stockholders.
15
<PAGE>
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The market for the Company's Common Stock is not an exchange but is
established by the National Association of Securities Dealers' Automated
Quotation System. As of March 24, 2000, the Company had approximately 36 holders
of record of the Company's Common Stock.
The Company's Common Stock trades on the Nasdaq National Market under the
Symbol "ISAC." The reported last sale price of the Common Stock on the Nasdaq
National Market on March 24, 2000 was $2.9375. The following table sets forth
for the periods indicated the high and low closing sale prices for the Common
Stock reported by the Nasdaq National Market:
<TABLE>
<CAPTION>
1999 1998
------------------- -------------------
<S> <C> <C> <C> <C>
QUARTER ENDED HIGH LOW HIGH LOW
- - -------------------------------------------------------- ------- ------- ------- -------
March 31................................................ $1.50 $1.25 $11.375 $6.875
June 30................................................. $1.125 $1.0938 $ 7.00 $2.50
September 30............................................ $1.375 $1.375 $ 3.375 $1.875
December 31............................................. $1.4688 $1.4375 $ 2.50 $1.0625
</TABLE>
Since November 1998, the Company's Common Stock has been closing at prices
between $1.000 and $2.9375. In order to maintain its listing on the Nasdaq
National Market, a stock must have a minimum bid price of $1.00. There can be no
assurances that the Company's Common Stock will maintain a minimum bid price of
$1.00 or more in the future or that it will not be delisted from the Nasdaq
National Market.
The Company anticipates that all earnings of the Company will be retained
for the foreseeable future for use in the operation of the Company's business.
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 facilities and other factors deemed relevant by the Board of
Directors.
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
could be issued with respect to awards granted under the Plan was 500,000. The
Board of Directors approved an increase in the shares of Common Stock that may
be issued with respect to awards granted under the Plan to an aggregate of
1.1 million shares, which increase was approved by the Company's stockholders at
the 1999 annual meeting of stockholders (the "Annual Meeting"). 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. Through December 31, 1999, the Company had granted
stock options under the Plan exercisable upon vesting for an aggregate of
996,250 stock options. The weighted average exercise price of such options is
$1.54 per share. Through December 31, 1999, none of those stock options had been
exercised. The issuance of such stock options was exempt from the registration
requirements of the Securities Act of 1933, as amended, pursuant to
Section 4(2) thereunder. The Company previously filed a Registration Statement
on Form S-8 (the "Form S-8") to register shares of Common Stock issuable
pursuant to awards granted under the Plan.
16
<PAGE>
On November 6, 1999, the Company issued 2.0 million shares of Series A
Convertible Preferred Stock, par value $.001, of the Company to Ambra. The
Preferred Shares, which are convertible, at the option of the holder, for a
60 day period beginning October 1, 2003 into a promissory note of the Company in
a principal amount of $1.00 multiplied by the total number of shares of
Preferred Shares being converted, with interest thereafter at an annual interest
rate of 12%, were issued in connection with the restructuring of the BOSS
License Agreement. The Preferred Shares were issued in a private placement
pursuant to Rule 506 of Regulation D promulgated under the Securities Act of
1933, as amended. The Preferred Shares were not offered in the form of a general
solicitation or advertisement, but rather to one party, Ambra, which is an
accredited investor and the licensor of the BOSS mark to the Company. The
Company made available to Ambra all materials and information relating to the
investment that were requested by Ambra. There were no cash proceeds from the
offering of the Preferred Shares.
ITEM 6. 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 operations data for the years ended December 31, 1997, 1998 and
1999 and the balance sheet data as of December 31, 1998 and 1999 are derived
from the consolidated financial statements of the Company which have been
audited by BDO Seidman, LLP, independent certified public accountants, included
elsewhere herein. The statement of operations data for the years ended
December 31, 1995 and 1996 and the balance sheet data as of December 31, 1995,
1996 and 1997 are derived from the consolidated financial statements of the
Company, which have been audited but are not contained herein. 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 herein.
17
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1995 1996 1997 1998 1999
-------- -------- -------- -------- --------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Net Sales................................. $ 93,271 $118,655 $161,446 $113,721 $ 84,525
Cost of sales............................. 68,530 84,421 109,694 90,661 61,694
-------- -------- -------- -------- --------
Gross Profit............................ 24,741 34,234 51,752 23,060 22,831
Selling expenses.......................... 8,927 11,898 16,236 16,983 12,799
License fees.............................. 3,174 4,817 7,577 6,020 7,002
Distribution and shipping expenses........ 2,379 2,669 4,307 3,900 2,863
General and administrative expenses....... 5,787 6,243 7,546 9,999 8,056
Provision for severance................... -- -- -- 526 750
Recovery of legal fees.................... -- (718) (117) -- --
-------- -------- -------- -------- --------
Operating income (loss)................. 4,474 9,325 16,203 (14,368) (8,639)
Interest, net............................. 1,247 1,365 2,372 1,455 1,628
Other income (expense).................... (3) 85 3 381 165
Minority interest......................... (33) (82) (135) -- --
-------- -------- -------- -------- --------
Income (loss) before income taxes......... 3,191 7,963 13,699 (15,442) (10,102)
Income tax (expense)/benefit.............. -- -- 1,349 (1,351) (110)
-------- -------- -------- -------- --------
Net income (loss)....................... $ 3,191 $ 7,963 $ 15,048 $(16,793) $(10,212)
Basic and diluted net income (loss) per
share (1)............................... $ 0.80 $ 1.99 $ 3.68 $ (2.15) $ (1.47)
Weighted average common shares
outstanding............................. 3,988 4,000 4,094 7,810 6,935
PRO FORMA STATEMENT OF INCOME DATA:
Income before income taxes................ 3,191 7,963 13,699
Income tax provision (2).................. (1,308) (3,265) (5,617)
-------- -------- --------
Net income.............................. $ 1,883 $ 4,698 $ 8,082
======== ======== ========
Basic and diluted net income per share.... $ 0.95 $ 1.62
======== ========
Weighted average common shares
outstanding............................. 4,930 5,001
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
----------------------------------------------------
1995 1996 1997 1998 1999
-------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital............................... $10,807 $16,274 $45,940 $31,577 $ 22,610
Total assets.................................. 31,764 37,257 73,443 59,046 40,435
Total debt.................................... 8,645 7,796 11,609 13,848 3,651
Redeemable Preferred Stock.................... -- -- -- -- 2,000
Stockholders' equity.......................... 14,645 19,393 52,496 37,313 27,751
</TABLE>
- - ------------------------
(1) Historical earnings per share does not reflect a provision for income taxes
as the Company had been taxed as an S corporation for the years ended
December 31, 1995, 1996 and the majority of 1997.
(2) Reflects pro forma provision for income taxes as if the Company had been
taxed as a C Corporation for the years ended December 31, 1995, 1996 and
1997.
18
<PAGE>
ITEM 7. 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 herein.
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 sportswear in the United States and
Puerto Rico. License rights were expanded to include Europe in 1996.
In November 1997, the Company acquired an exclusive license to manufacture
and market certain men's jeanswear and 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
has enabled the Company to address another consumer segment within its branded
product portfolio. The Company has positioned the Girbaud men's line with a
broad assortment of products, styles and fabrications reflecting a contemporary
European look. The Company began marketing a fall men's collection under the
Girbaud brand in February 1998. In March 1998, the Company entered into an
exclusive license agreement to manufacture and market certain women's jeanswear
and sportswear under the Girbaud brand in the United States and Puerto Rico. The
Company began marketing women's sportswear under the Girbaud brand in the second
quarter of 1998. The Company has positioned the Girbaud women's line with a
broad assortment of contemporary sportswear and jeanswear products. The Company
paid an initial license fee of $600,000. Under the Girbaud men's license
agreement, the Company is required to spend at least $500,000 in advertising for
the men's Girbaud brand in each year through the term of the agreement. Under
the Girbaud women's license agreement, the Company is required to spend at least
$400,000 in advertising for the women's Girbaud brand in each year through the
term of the agreement. In addition, the Company is required to contribute
$190,000 per year to the licensor's advertising and promotional expenditures for
the Girbaud brand. In December 1998, the Girbaud women's license agreement was
amended to provide that the Company would spend an additional $1.8 million in
sales and marketing of the brand in 1999. Minimum royalty payments began in the
first quarter of 1998. In November 1998, the Company entered into an exclusive
license agreement to manufacture and market certain men's and women's sportswear
under the Girbaud brand in selected countries in Central and South America and
in the Caribbean.
19
<PAGE>
In September 1999, the Company announced it was launching its new Urban
Expedition ("UBX") brand of sportswear for young men. The Company began a
roll-out of the brand beginning in February 2000 with shipments from the Spring
collection. The initial Spring 2000 line consists of a focused collection of
denim jeans, shorts, jackets, vests, printed woven shirts and tee shirts. Plans
for subsequent seasons include expanded collections of woven tops and bottoms in
novelty fabrics, knit tops and outerwear. The Company incurred only minimal
start-up expenses because the new UBX brand drew upon the Company's existing
design and production capabilities. There will be no license fees or royalties
since UBX is a Company-owned brand. Start-up costs will be primarily limited to
advertising and promotion of the new brand. See "ITEM 1. Business Licenses and
Other Rights Agreements."
The Company also manufactures and markets a limited number of pants and
jeans styles for women under its own "I.C. Isaacs" brand name and under
third-party private labels for sale to major chain stores and catalogs. The
Company intends to continue to manufacture and market these pants and jeans for
the foreseeable future. See "ITEM 1. Business-Licenses and Other Rights
Agreements."
Over the past several years, the Company has completed its strategic
repositioning from a manufacturing-driven company to a marketing and
brand-driven company. Through a strategy of providing fashionable, branded
merchandise, the Company has become a fashion influence for youthful and
contemporary consumers who purchase jeanswear and sportswear through specialty
and department stores. The Company's brand-driven market strategy is evidenced
by the increase of licensed, branded apparel as a percentage of the Company's
net sales. In 1999, the BOSS, Girbaud and Beverly Hills Polo Club brands
comprised 43.7%, 32.9% and 17.3% of net sales, respectively. Concurrently with
this strategy, the Company has also shifted its product mix from predominately
bottoms to a full array of sportswear, including tops and outerwear. The Company
has also expanded its branded lines to include sportswear for boys and youth.
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 Company significantly reduced expenses during 1999 and intends to
continue to agressively review all aspects of its operations to make additional
reductions that do not reduce its ability to generate profits in the future.
RESTRUCTURING OF THE BOSS LICENSE AGREEMENT
In November 1997, the Company, Ambra Inc. ("Ambra") and Hugo Boss AG ("Hugo
Boss") executed certain agreements including an agreement whereby the Company
borrowed $11.25 million from Ambra to finance the acquisition of certain BOSS
trademark rights. This obligation was evidenced by a note scheduled to mature on
December 31, 2007, which bore interest at 10% per annum, payable quarterly, with
principal payable in full upon maturity. As part of the same transaction, the
Company acquired certain BOSS trademark rights and related assets and sold its
foreign BOSS trademark rights and related assets to Ambra. The Company entered
into a foreign rights manufacturing agreement (the "Foreign Rights Agreement")
with Ambra, which allowed the Company to manufacture apparel in certain foreign
countries for sale in the United States using the BOSS brand and image in
exchange for annual royalty payments. The Company retained its ownership of its
domestic BOSS trademark rights subject to a concurrent use agreement with Hugo
Boss (the "Concurrent Use Agreement").
On October 22, 1999, the Company, Ambra and Hugo Boss entered into an
agreement to restructure the licensing arrangement for the use of the
BOSS-Registered Trademark- trademark. Pursuant to this agreement, the Company
transferred to Ambra substantially all of its rights in the marks containing the
term "BOSS" throughout the world and agreed to issue, on November 6, 1999,
2.0 million shares of a newly designated Series A Convertible Preferred Stock
having an estimated fair market value of $2.0 million in exchange for the
cancellation of the $11.25 million note. In the same agreement, the Company,
Ambra and Hugo Boss agreed to terminate the Foreign Rights Agreement, the
Concurrent Use Agreement and an option on the
20
<PAGE>
part of Ambra to purchase the Company's domestic BOSS trademark rights, which
was originally entered into in November 1997. The Company, Ambra and Hugo Boss
also agreed to enter into a license agreement granting the Company rights to use
various trademarks including the word "BOSS" in the manufacture and domestic
sale of specified types of apparel. Except for the initial term and the minimum
annual royalties, the Company's rights under the new license agreement are
substantially similar to those it previously had. As consideration, together
with the royalties discussed below, for the restructuring of the license
arrangement, the Company will issue to Ambra, on April 30, 2000, 1.3 million
shares of the same redeemable preferred stock having an estimated fair market
value of $1.3 million and 666,667 shares of common stock, which had an aggregate
value of $1.0 million based on the market price of $1.50 at the time the parties
entered into the transaction. The new license agreement extends through
December 31, 2003, with renewal options, at the option of the Company, through
December 31, 2007.
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Net Sales................................... 100.0% 100.0% 100.0%
Cost of sales............................... 67.9 79.7 73.0
------ ------ ------
Gross Profit................................ 32.1 20.3 27.0
------ ------ ------
Selling expenses............................ 10.1 14.9 15.1
License fees................................ 4.7 5.3 8.3
Distribution and shipping expenses.......... 2.7 3.4 3.4
General and administrative expenses......... 4.6 9.3 10.4
------ ------ ------
Operating income (loss)..................... 10.0% (12.6%) (10.2%)
====== ====== ======
</TABLE>
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
NET SALES.
Net sales decreased 25.7% to $84.5 million in 1999 from $113.7 million in
1998. The decline was primarily due to continued decreases in the BOSS and
Beverly Hills Polo Club men's lines offset by increases in both the men's and
women's Girbaud lines. Net sales of BOSS sportswear decreased $46.4 million or
55.6% to $37.0 million. Net sales of Beverly Hills Club sportswear decreased
$2.0 million or 12.0% to $14.6 million. Net sales of Girbaud men's sportswear
increased $18.2 million or 395.7% to $22.8 million. Net sales of Girbaud women's
sportswear increased $4.9 million to $5.0 million. The Company began shipping
the men's Girbaud product line in the second quarter of 1998 and the women's
Girbaud line in the fourth quarter of 1998. Net sales of Company-owned brands
and private label brands decreased 42.2% to $5.2 million in 1999. The Company
did not begin shipping its UBX line until February of 2000.
GROSS PROFIT.
Gross profit decreased 1.3% to $22.8 million in 1999 from $23.1 million in
1998. Gross profit as a percentage of net sales increased from 20.3% to 27.0%
over the same period. The overall gross profit in dollars remained roughly
consistent with the prior year even in a time of a major decline in sales. The
increase in gross profit as a percentage of net sales was primarily due to
increased sales of Girbaud jeanswear and sportswear at higher margins than those
realized on sales of BOSS and Beverly Hills Polo Club sportswear. In an effort
to continue to decrease inventory levels, a significant amount of sales were
made in 1999 to a mass retailer at gross profit margins significantly below the
margins on goods that are sold to department and specialty stores. This
adversely affected the overall gross margin. In addition, the
21
<PAGE>
Company had an inventory valuation allowance of $2.3 million at December 31,
1999 to properly reflect unsold inventory at its net realizable value. Such
inventory valuation allowance included Girbaud, BOSS and Beverly Hills Polo Club
products. The Company had an inventory valuation allowance of $5.5 million at
December 31, 1998. The Company monitors inventory levels, by product category,
weekly to help identify inventory shortages as well as excess inventory.
Personnel look at recent sales data and order backlog to help identify slow
moving inventory items. Further, sales managers continually discuss product
turnover and sales forecasts with sales personnel to aid in identifying product
shortages and overages. Based on the information available, the Company believes
the inventory valuation provisions were appropriate at December 31, 1998 and
1999, respectively.
SELLING, DISTRIBUTION, GENERAL AND ADMINISTRATIVE EXPENSES.
Selling, distribution, general and administrative ("SG&A") expenses
decreased 22.0% to $24.5 million in 1999 from $31.4 million in 1998. As a
percentage of net sales, SG&A expenses increased to 29.0% from 27.6% over the
same period due to lower net sales and a provision for severance offset somewhat
by decreases in advertising expenditures, lower selling expenses and lower
commissions to the Company's salespersons. Advertising expenditures declined
$2.9 million to $2.8 million as the Company reduced targeted advertising
campaigns for BOSS and Beverly Hills Polo Club. The Company's advertising
expenditures for the Girband brand approximated $1.5 million in 1999 and 1998.
The Company was required to spend $0.9 million in advertising as well as
$1.8 million on sales and marketing for the women's and men's Girbaud brands in
1999. To date, expenditures on the Company's Urban Expedition (UBX) line have
been immaterial. Distribution and shipping expenses decreased $1.0 million to
$2.9 due primarily to a reduction in personnel and wages at the Company's
Milford, Delaware distribution facility due to decreased merchandise shipments.
General and administrative expenses decreased $1.9 million to $8.1 million due
to reductions in personnel in the second half of 1999 coupled with a reduction
in bad debt expense and a decrease in amortization expense offset somewhat by
increases in outside professional fees. In the second quarter of 1999, the
Company's President and Chief Operating Officer resigned resulting in a
provision for severance of $0.8 million. In 1998, the Company recorded a
provision for severance associated with plant closures of $0.5 million.
LICENSE FEES.
License fees increased $1.0 million to $7.0 million in 1999 from
$6.0 million in 1998. As a percentage of net sales license fees increased from
5.3% to 8.3%. The increase in license fees as a percentage of net sales is
primarily due to increases in the minimum royalties for Girbaud and lower net
sales offset somewhat by reductions in the minimum royalties under the new BOSS
license agreement.
RESTATEMENT OF THIRD QUARTER NET INCOME
For the third and fourth quarter of 1999 and thereafter, the Company, after
a review of revised accounting and disclosure guidelines, and on the advice of
its independent accountants, has revised its method of accounting for the
restructuring of its licensing arrangements for the BOSS mark. Application of
the revised accounting policy resulted in a loss of approximately $0.5 million,
or ($0.08) per share, for the quarter ended September 30, 1999, as compared to
previously reported third-quarter income of $0.6 million, or $0.09 per share,
and increased the loss for the year ended December 31, 1999 by approximately
$1.15 million, or ($0.17) per share. Under the revised accounting treatment, the
third quarter gain of $156,250 and royalty expense reduction of $1,004,000 were
netted against the deferred royalty expense instead of being recognized as
income. The deferred royalty expense of $1.2 million is being amortized over the
initial term of the License Agreement, which is 39 months.
22
<PAGE>
OPERATING LOSS.
Operating loss decreased 40.3% to $8.6 million in 1999 from $14.4 million in
1998. The improvement was due to higher gross margins at reduced sales volumes
coupled with a reduction in operating expenses, as explained above.
INTEREST EXPENSE.
Interest expense increased $0.1 million to $1.6 million in 1999. The
increase in interest expense is primarily due to increased borrowings under the
Company's asset-based revolving line of credit, offset by the elimination, in
the third quarter, of interest expense on the $11.25 million note payable
associated with the purchase of the BOSS trademark in November 1997. The Company
repaid its asset-based revolving line of credit with the proceeds from its
initial public offering completed in December 1997. As a result, borrowings for
the first six months of 1998 were insignificant and the Company earned
$0.3 million in interest income from investing its excess cash in 1998. Interest
income earned in 1999 was insignificant.
INCOME TAXES.
The Company recorded income tax expense of $0.1 million in 1999 related to
state taxes. In 1998 the Company recorded an income tax benefit of $0.2 million
to recognize a tax benefit for the carryback of net operating losses to recover
income taxes paid during 1997. The Company wrote off a deferred tax asset of
$1.5 million during the fourth quarter of 1998 due to the uncertainty
surrounding the amount of taxable income to be generated in 1999.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
NET SALES.
Net sales decreased 29.6% to $113.7 million in 1998 from $161.4 million in
1997. The decrease was primarily due to increased competition coupled with a
softer retail market and compounded by the delay in the introduction of the fall
1998 Boss and Beverly Hills Polo Club men's lines. Net sales of BOSS sportswear
decreased $37.0 million or 30.7% to $83.4 million. Net sales of the BOSS tops
segment were $32.7 million in 1998 versus $48.1 million in 1997. Net sales of
Beverly Hills Polo Club sportswear decreased $8.9 million or 34.9% to
$16.6 million. The spring 1999 BOSS and Beverly Hills Polo Club collections were
presented on time. Net sales of Girbaud sportswear were $4.7 million in 1998.
The Company began to recognize revenue from shipments of Girbaud men's
sportswear in the second quarter of 1998 and from shipments of Girbaud
sportswear for women in the fourth quarter of 1998. The Company's sales of
Company-owned brands and private label brands decreased 41.8% to $9.0 million in
1998. In April 1998, the Company entered into an exclusive license agreement to
manufacture and market boys' sportswear under the Beverly Hills Polo Club brand
in the United States and Puerto Rico. In November 1998, the Company entered into
exclusive international license agreements to manufacture and market men's and
women's sportswear under the Girbaud brand in selected countries in Central and
South America and in the Caribbean.
GROSS PROFIT.
Gross profit decreased 55.4% to $23.1 million in 1998 from $51.8 million in
1997. Gross profit as a percentage of net sales decreased from 32.1% to 20.3%
over the same period. The decrease in gross profit was primarily due to the
reduction in net sales coupled with excess capacity at its manufacturing
facilities due to the reduction in customer orders. In addition, to reduce
inventory levels, a significant amount of sales were made in 1998 to a mass
retailer at gross profit margins significantly below the margins on goods that
are sold to specialty stores. This adversely affected the overall gross margin.
In addition, the Company had an inventory valuation allowance of $5.5 million at
December 31, 1998 to properly reflect unsold inventory at net realizable value.
The Company monitors inventory levels, by product category, weekly to
23
<PAGE>
help identify inventory shortages as well as excess inventory. Personnel look at
recent sales data and order backlog to help identify slow moving inventory
items. Further, the sales managers continually discuss product turnover and
sales forecasts with sales personnel to aid in identifying product shortages and
overages. Based on the information available, the Company believes the inventory
valuation provision was appropriate at December 31, 1998. The decline in gross
profit was offset somewhat by the continued shift of production of denim bottoms
from the United States to Mexico to take advantage of the lower labor and
overhead.
SELLING, DISTRIBUTION, GENERAL AND ADMINISTRATIVE EXPENSES.
Selling, distribution, general and administrative ("SG&A') expenses
increased 12.1% to $31.4 million in 1998 from $28.0 million in 1997. As a
percentage of net sales, SG&A expenses increased to 27.6% from 17.3% over the
same period due to lower net sales coupled with higher advertising expenditures
and costs of merchandise samples offset somewhat by lower commissions to the
Company's salespersons. Advertising expenditures increased $1.8 million to
$5.7 million as the Company continued to focus on enhancing the identity and
image of its brands through increased media exposure. The increase in
advertising was primarily due to advertising for the Girbaud brand in 1998.
Distribution and shipping expenses decreased $0.4 million because of a reduction
in overtime wages, due to decreased additional temporary labor at its warehouse
facility. General and administrative expenses increased $2.5 million to
$10.0 million due to amortization of the BOSS trademark, a one-time write-off of
goodwill, professional fees, directors and officers insurance and year 2000
consulting expenses of $1.1 million, $0.4 million, $0.4 million, $0.3 million
and $0.2 million, respectively, and $0.2 million and $0.3 million loss
provisions for estimated costs associated with closing the Newton, Mississippi
and Carthage, Mississippi manufacturing facilities. The loss provisions relate
primarily to severance pay for employees.
LICENSE FEES.
License fees decreased $1.6 million to $6.0 million in 1998 from
$7.6 million in 1997. As a percentage of net sales, license fees increased from
4.7% to 5.3%. The decrease in license fees was not in proportion to the decrease
in net sales due to the minimum royalties under the Girbaud men's license
agreement.
OPERATING INCOME (LOSS).
Operating income (loss) decreased 188.9% to ($14.4) million in 1998 from
$16.2 million in 1997. The decline was due to lower net sales and reduced gross
profit margin percentage and, to a lesser extent, an increase in operating
expenses, as explained above.
INTEREST EXPENSE.
Interest expense decreased $0.9 million to $1.5 million in 1998. The Company
repaid the outstanding balance of its asset-based revolving line of credit with
a portion of the proceeds from its initial public offering completed in
December 1997. Borrowings under the line of credit were insignificant in the
first six months of 1998, however the Company began to borrow under the line of
credit in the third and fourth quarters and incurred $0.2 million in interest
expense in 1998. In addition, the Company incurred interest expense of
$1.1 million related to the $11.25 million note payable associated with its
purchase of the BOSS trademark in November 1997. This expense of $1.1 million
was offset somewhat by interest income of $0.3 million earned on available cash.
The Company invests its excess cash in short-term investments.
INCOME TAXES.
The Company recorded an income tax benefit of $0.2 million in 1998 to
recognize a tax benefit for the carryback of net operating losses to recover
income taxes paid during 1997. The Company wrote off a deferred tax asset of
$1.5 million during the fourth quarter of 1998 due to the uncertainty
surrounding the
24
<PAGE>
amount of taxable income to be generated in 1999. Prior to its initial public
offering, the Company's earnings were not subject to federal, state and local
taxes because it elected to be treated as a Subchapter S Corporation. The
Company terminated its Subchapter S Corporation status in December 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company has relied primarily on internally generated funds, trade credit
and asset based borrowings to finance its operations. The Company's capital
requirements primarily result from working capital needed to support increases
in inventory and accounts receivable. The Company's working capital decreased
significantly during 1999 compared to 1998, primarily due to the 1999 net loss.
As of December 31, 1999, the Company had cash, including temporary investments,
of $1.2 million and working capital of $22.6 million compared to $1.3 million
and $31.6 million, respectively as of December 31, 1998.
OPERATING CASH FLOW.
Cash provided from operations totaled $0.4 million in 1999 compared to cash
used in operations of $9.3 million in 1998. Positive cash flow in 1999 is due to
significant decreases in accounts receivable and inventories, offset somewhat by
increases in accounts payable which more than offset the net loss. Cash used for
investing activities in 1999 totaled $0.5 million and was used for the purchase
of computer equipment to help ensure year 2000 compliance and for the purchase
of fixtures for the new Girbaud Shop-in-Shop stores of $0.8 million offset by
$0.3 million in proceeds from the sale of machinery and equipment from the
closing of two of the Company's manufacturing facilities in Mississippi. Cash
used in financing activities totaled $0.1 million resulting primarily from
increases in checks issued against future deposits, purchases of treasury stock
and payment of debt issuance costs offset by increased borrowings under the
Company's asset-based revolving line of credit.
Inventories decreased $4.9 million from December 31, 1998 to December 31,
1999, compared to a decrease of $0.8 million from December 31, 1997 to
December 31, 1998. The change in 1999 was due to the sale of excess BOSS and
Beverly Hills Polo Club inventory on hand at December 31, 1998. This inventory
was reduced to its net realizable value with a $5.5 million inventory valuation
allowance at December 31, 1998. During 1999, BOSS and Beverly Hills Polo Club
sales have continued to decline. At December 31, 1999, the Company had an
inventory valuation allowance of $2.3 million related to unsold inventory. Such
inventory valuation allowance included Girbaud, BOSS and Beverly Hills Polo Club
products.
Capital expenditures were $0.8 million in 1999 compared to $1.5 million in
1998. The Company's capital expenditures were primarily for the purchase of
computer equipment to help ensure year 2000 compliance and for the purchase of
fixtures for the new Girbaud Shop-in-Shop stores. The Company completed all of
its year 2000 compliance work and testing in 1999 and had no significant
problems related to the year 2000 rollover. The Company does not currently have
commitments for significant capital expenditures in 2000.
CREDIT FACILITIES.
The Company has an asset-based revolving line of credit (the "Facility")
with Congress Financial Corporation ("Congress"). As of December 31, 1999 the
Company has $3.6 million in outstanding borrowings under the Facility compared
to $2.4 million as of December 31, 1998. In March 1999, the Company amended the
Facility to extend the term of the Facility through December 31, 2000. The
amended Facility provides that the Company may borrow up to 80.0% of net
eligible accounts receivable and a portion of imported inventory, as defined in
the agreement. Borrowings under the Facility may not exceed $25.0 million
(including outstanding letters of credit which are limited to $8.0 million) and
bear interest at the lenders prime rate of interest plus 1.0%. Outstanding
letters of credits approximated $2.8 million at December 31, 1999. In connection
with amending the facility the Company will pay
25
<PAGE>
Congress a financing fee of $125,000, one half of which was paid at the time of
closing and the other half of which will be paid on June 30, 2000. The financing
fee is being amortized over 21 months. Under the terms of the Agreement, as
amended, the Company is required to maintain minimum levels of working capital
and tangible net worth. The Company was in violation of the net worth covenant
at December 31, 1999 and has obtained a waiver, through April 1, 2000, from
Congress. There can be no assurances that the Company will not be in violation
of the net worth covenant at April 1, 2000 or thereafter.
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 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. Timely contact with customers has been effective in reducing credit
losses. In 1998 and 1999, the Company's credit losses were $1.4 million and
$1.7 million, respectively. The Company's actual credit losses as a percentage
of net sales were 1.2% and 2.0%, respectively.
The Company believes that current levels of cash and cash equivalents
($1.2 million at December 31, 1999) together with cash from operations and funds
available under its Facility, will be sufficient to meet its capital
requirements for the next 12 months.
YEAR 2000 COMPLIANCE AND EXPENDITURES
In 1998, the Company determined that it needed to modify or replace portions
of its information technology systems, both hardware and software, so that they
would properly recognize and utilize dates beyond December 31, 1999 (the "year
2000 issue"). As a result, the Company developed a plan to review and, as
appropriate, modify and replace the software (and replace some hardware) in its
computer systems. The Company completed the conversion of its primary software
programs in November 1998 and testing occurred in the first quarter of 1999. The
total costs of the conversion and testing was approximately $0.5 million,
$0.2 million of which was incurred in 1998. The Company experienced no
significant problems with its information technology systems, nor with its
customers or major vendors related to the Year 2000 issue.
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. Historically, the Company has taken greater markdowns in the second
and fourth 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 December 31, 1999 the Company has unfilled orders of approximately
$29.0 million, compared to $27.0 million of such orders as of December 31, 1998.
The backlog or orders at any given time is affected by a number of factors,
including seasonality, weather conditions, scheduling of manufacturing and
shipment of products. As the time of the shipment of products may vary from year
to year, the results for any particular quarter may not be indicative of the
results for the full year.
INFLATION
The Company does not believe that the relatively moderate rates of inflation
experienced in the United States over the last year 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.
26
<PAGE>
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments"
("SFAS 133"). SFAS 133 established accounting and reporting standards for
derivative instruments and for hedging activities. SFAS 133 requires that an
entity recognize all derivatives as either assets or liabilities and measure
those instruments at fair market value. Under certain circumstances, a portion
of the derivative's gain or loss is initially reported as a component of other
comprehensive income and subsequently reclassified into income when the
transaction effects earnings. For a derivative not designated as a hedging
instrument, the gain or loss is recognized in income in the period of change.
SFAS 133 is effective for all fiscal quarters beginning after June 15, 2000 and
requires application prospectively. Presently, the Company does not use
derivative instruments either in hedging activities or as investments.
Accordingly, the Company believes that adoption of SFAS 133 will have no impact
on its financial position or results of operations.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's principal market risk results from changes in floating
interest rates on short-term debt. The Company does not use interest rate swap
agreements to mitigate the risk of adverse changes in the prime interest rate.
However, the impact of a 100 basis point change in interest rates affecting the
Company's short-term debt would not be material to the net loss, cash flow or
working capital. The Company does not hold long-term interest sensitive assets
and therefore is not exposed to interest rate fluctuations for its assets. The
Company does not hold or purchase any derivative financial instruments for
trading purposes.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the Company and the report of
independent certified public accountants thereon are set forth on pages F-1
through F-23 hereof.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
27
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The information appearing in the Company's Definitive Proxy Statement
prepared in connection with the 2000 Annual Meeting of Stockholders (the "Proxy
Statement") under the captions "Proposal 1: Election of Class 1 Directors" and
"Principal Executive Officers of the Company Who Are Not Also Directors" are
incorporated herein by reference. The Proxy Statement will be filed not later
than 120 days after the end of the fiscal year covered by this Annual Report on
Form 10-K.
All executive officers are designated annually by the Board of Directors and
serve at the pleasure of the Board.
ITEM 11. EXECUTIVE COMPENSATION
The information appearing in the Proxy Statement under the caption
"Executive Compensation" is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information appearing in the Proxy Statement under the caption "Security
Ownership of Certain Beneficial Owners and Management" is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information appearing in the Proxy Statement under the caption "Certain
Relationships and Related Transactions" is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)1. Financial Statements. The following financial statements, related
notes and the Report of Independent Auditors, are included in response to Item 8
hereof:
28
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Report of Independent Certified Public Accountants.......... F-2
Consolidated Balance Sheets at December 31, 1998 and 1999... F-3
Consolidated Statements of Operations for the years ended
December 31, 1997, 1998 and 1999.......................... F-4
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1997, 1998 and 1999.............. F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1998 and 1999.......................... F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
(a)2. Financial Statements Schedules. The following is a list of all financial
statement schedules filed herewith:
Schedule II--Valuation and Qualifying Accounts
Schedules other than those listed above have been omitted because they are
not required or are not applicable, or the required information has been
included in the Consolidated Financial Statements or the Notes thereto.
(a)3. Exhibits (numbered in accordance with Item 601 of Regulation S-K). See
accompanying Index to Exhibits. The following is a list of Exhibits filed
herewith:
<TABLE>
<C> <S>
10.67 Amendment to International Exclusive License Agreement dated
November 1, 1999 by and between I.C. Isaacs Europe, S.L. and
BHPC Marketing, Inc.
10.68 Amendment to International Exclusive License Agreements
dated September 1, 1999 by and between I.C. Isaacs Europe
S.L. and BHPC Marketing Inc.
10.69 Amendment No. 3 to Employment Agreement dated January 3,
1999 by and between I.C. Isaacs & Company L.P. and Robert J.
Arnot.
10.70 Amendment No. 3 to Employment Agreement dated January 3,
1999 by and between I.C. Isaacs & Company L.P. and Eugene C.
Wielepski.
10.71 Letter Agreement dated December 31, 1999 by and between I.C.
Isaacs & Company L.P. and G.I. Promotion.
10.72 License Agreement effective January 1, 2000 by and between
I.C. Isaacs & Company L.P. and Wurzburg Holding S.A.
23.01 Consent of BDO Seidman, LLP
27.01 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K:
On November 5, 1999, the Company filed a Current Report on Form 8-K to
announce that it had entered into an agreement with Hugo Boss AG and Ambra
pursuant to which, among other things, (i) Isaacs transferred to Ambra
substantially all of Isaacs' rights in and to the marks containing the term
"BOSS" throughout the world; (ii) the $11.25 million secured limited recourse
promissory note made by Isaacs to Ambra in 1997 was cancelled; (iii) Isaacs and
Ambra agreed to enter into the BOSS License Agreement; (iv) certain agreements
entered into by and among Isaacs, Hugo Boss and Ambra in 1997 were terminated;
(v) the Company agreed to issue to Ambra on November 6, 1999 2.0 million shares
of Preferred Stock and on April 30, 2000 an additional 1.3 million shares of
Preferred Stock and 666,667 shares of Common Stock of the Company.
29
<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
March 3, 2000 which is contained in Item 8 of this Form 10-K, include the audit
of the financial statement schedule listed in the accompanying index for each of
the three years in the period ended December 31, 1999. 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.
BDO Seidman, LLP
Washington, D.C.
March 3, 2000
30
<PAGE>
SCHEDULE II
I. C. ISAACS & COMPANY, INC.
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO
BEGINNING OF COSTS AND BALANCE AT
YEAR EXPENSES DEDUCTION END OF YEAR
------------ ----------- ------------ -----------
<S> <C> <C> <C> <C>
DESCRIPTION
Year ended December 31, 1997
Allowance for doubtful accounts.......... $ 660,000 $ 1,740,000 $ (1,215,000) $1,185,000
Reserve for sales returns and
discounts.............................. 809,000 10,646,000 (11,278,000) 177,000
Year ended December 31, 1998
Allowance for doubtful accounts.......... 1,185,000 1,595,000 (1,427,000) 1,353,000
Reserve for sales returns and
discounts.............................. 177,000 6,733,000 (6,814,000) 96,000
Year ended December 31, 1999
Allowance for doubtful accounts.......... 1,353,000 1,023,000 (1,651,000) 725,000
Reserve for sales returns and
discounts.............................. 96,000 4,278,000 (4,221,000) 153,000
========== =========== ============ ==========
</TABLE>
31
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
<TABLE>
<CAPTION>
I.C. ISAACS & COMPANY , INC.
(REGISTRANT)
<S> <C> <C>
By: /s/ ROBERT J. ARNOT
-----------------------------------------
Robert J. Arnot
CHAIRMAN OF THE BOARD
AND CHIEF EXECUTIVE OFFICER
Date: March 27, 2000
</TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
Chairman of the Board and
/s/ ROBERT J. ARNOT Chief Executive Officer,
------------------------------------------- President and Director March 27, 2000
Robert J. Arnot (Principal Executive
Officer)
Vice President and Chief
/s/ EUGENE C. WIELEPSKI Financial Officer and
------------------------------------------- Director (Principal March 27, 2000
Eugene C. Wielepski Financial and Accounting
Officer)
/s/ DANIEL GLADSTONE
------------------------------------------- Director March 27, 2000
Daniel Gladstone
/s/ JON HECHLER
------------------------------------------- Director March 27, 2000
Jon Hechler
/s/ RONALD S. SCHMIDT
------------------------------------------- Director March 24, 2000
Ronald S. Schmidt
/s/ THOMAS P. ORMANDY
------------------------------------------- Director March 24, 2000
Thomas P. Ormandy
/s/ NEAL J. FOX
------------------------------------------- Director March 27, 2000
Neal J. Fox
/s/ ANTHONY J. MARTERIE
------------------------------------------- Director March 24, 2000
Anthony J. Marterie
</TABLE>
32
<PAGE>
I.C. ISAACS & COMPANY, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Report of Independent Certified Public Accountants.......... F-2
Consolidated Balance Sheets at December 31, 1998 and 1999... F-3
Consolidated Statements of Operations for the years ended
December 31, 1997, 1998 and 1999.......................... F-4
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1997, 1998 and 1999.............. F-5
Consolidated Statements of Cash Flows for the years ended
December 31 1997, 1998 and 1999........................... F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
F-1
<PAGE>
I.C. ISAACS & COMPANY, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1998 1999
----------- -----------
<S> <C> <C>
ASSETS
Current
Cash, including temporary investments of $887,845 and
$512,000................................................ $ 1,345,595 $ 1,193,093
Accounts receivable, less allowance for doubtful
accounts of $1,353,000 and $725,000 (Note 3)............ 14,904,501 10,950,550
Inventories (Notes 1 and 3)............................... 23,121,971 18,201,323
Prepaid expenses and other................................ 882,355 293,524
Refundable income taxes................................... 1,799,450 356,265
----------- -----------
Total current assets........................................ 42,053,872 30,994,755
Property, plant and equipment, at cost, less accumulated
depreciation and amortization (Notes 2 and 3)............. 3,247,646 3,304,512
Trademark and licenses, less accumulated amortization of
$1,142,500 and $307,210 (Note 8).......................... 10,437,500 1,042,790
Goodwill, less accumulated amortization of $1,412,790 and
$1,660,650................................................ 1,239,310 991,450
Deferred royalty expense, less accumulated amortization of
$176,922 (Note 8)......................................... -- 1,059,463
Other assets (Note 9)....................................... 2,067,815 3,042,261
----------- -----------
$59,046,143 $40,435,231
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current
Checks issued against future deposits..................... $ 1,298,929 $ 294,089
Current maturities of long-term debt and revolving line of
credit (Note 3)......................................... 2,412,235 3,644,470
Current maturities of capital lease obligations (Note
3)...................................................... 179,864 6,258
Accounts payable.......................................... 4,301,707 1,923,458
Accrued expenses and other current liabilities (Note 4)... 2,074,305 2,380,476
Accrued compensation...................................... 209,773 135,790
----------- -----------
Total current liabilities................................... 10,476,813 8,384,541
----------- -----------
Long-term debt (Note 3)
Note payable.............................................. 11,250,000 --
Capital lease obligations................................. 6,258 --
----------- -----------
Total long-term debt........................................ 11,256,258 --
----------- -----------
Liability under licensing agreement (Notes 6 and 8)......... -- 2,300,000
Commitments and Contingencies (Notes 3, 8 and 9)
Redeemable preferred stock (Notes 6 and 8).................. -- 2,000,000
STOCKHOLDERS' EQUITY (Notes 6, 7 and 8)
Preferred stock; $.0001 par value; 5,000,000 shares
authorized, none outstanding............................ -- --
Common stock; $0001 par value; 50,000,000 shares
authorized; 8,344,699 shares issued; 6,782,200 and
7,197,990 shares outstanding............................ 834 834
Additional paid-in capital................................ 38,924,998 38,674,998
Retained earnings (deficit)............................... 1,597,270 (8,615,112)
Treasury stock, at cost (1,562,499 and 1,146,709
shares)................................................. (3,210,030) (2,310,030)
----------- -----------
Total stockholders' equity.................................. 37,313,072 27,750,690
----------- -----------
$59,046,143 $40,435,231
=========== ===========
</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
F-3
<PAGE>
I.C. ISAACS & COMPANY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------
1997 1998 1999
------------ ------------- ------------
<S> <C> <C> <C>
Net Sales.......................................... $161,445,362 $ 113,720,799 $ 84,525,372
Cost of Sales...................................... 109,693,828 90,660,582 61,694,122
------------ ------------- ------------
Gross profit....................................... 51,751,534 23,060,217 22,831,250
------------ ------------- ------------
Operating Expenses
Selling.......................................... 16,235,974 16,982,794 12,798,641
License fees (Note 8)............................ 7,577,482 6,020,196 7,001,902
Distribution and shipping........................ 4,306,566 3,899,917 2,863,502
General and administrative....................... 7,546,105 9,998,503 8,056,199
Provision for severance (Note 8)................. -- 526,326 750,000
Recovery of legal fees........................... (117,435) -- --
------------ ------------- ------------
Total operating expenses........................... 35,548,692 37,427,736 31,470,244
------------ ------------- ------------
Operating income (loss)............................ 16,202,842 (14,367,519) (8,638,994)
------------ ------------- ------------
Other Income (expense)
Interest, net of interest income of $16,045,
$252,392 and $27,339........................... (2,372,132) (1,454,748) (1,628,183)
Other, net....................................... 3,001 380,718 164,795
------------ ------------- ------------
Total other income (expense)....................... (2,369,131) (1,074,030) (1,463,388)
------------ ------------- ------------
Income (loss) before minority interest and income
taxes............................................ 13,833,711 (15,441,549) (10,102,382)
Minority interest.................................. (134,727) -- --
------------ ------------- ------------
Income (loss) before income taxes.................. 13,698,984 (15,441,549) (10,102,382)
Income tax benefit (provision) (Note 5)............ 1,349,000 (1,351,000) (110,000)
------------ ------------- ------------
Net income (loss).................................. $ 15,047,984 $ (16,792,549) $(10,212,382)
============ ============= ============
Basic and diluted net income (loss) per share...... $ 3.68 $ (2.15) $ (1.47)
Weighted average common shares outstanding......... 4,093,699 7,809,540 6,935,005
Pro forma financial information:
Income before income taxes, as presented......... $ 13,698,984
Pro forma provision for income taxes
(unaudited).................................... 5,617,000
------------ ------------- ------------
Pro forma net income (unaudited)................. $ 8,081,984
------------ ------------- ------------
Pro forma basic and diluted earnings per share
(unaudited).................................... $ 1.62
------------ ------------- ------------
Weighted average shares outstanding.............. 5,000,767
============ ============= ============
</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
F-4
<PAGE>
I.C. ISAACS & 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,
1996...................... -- -- 4,024,699 $402 $ 266,579 $ 19,140,464 $ (14,868) $19,392,577
Issuance of Common
Stock................... -- -- 3,800,000 380 33,853,611 -- -- 33,853,991
Net income................ -- -- -- -- -- 15,047,984 -- 15,047,984
Stockholder
distributions........... -- -- -- -- -- (15,798,629) -- (15,798,629)
--- --- --------- ---- ----------- ------------ ----------- -----------
Balance, at December 31,
1997...................... -- -- 7,824,699 782 34,120,190 18,389,819 (14,868) 52,495,923
Net loss.................. -- -- -- -- -- (16,792,549) -- (16,792,549)
Issuance of stock options
to non--employee
directors............... -- -- -- -- 30,000 -- -- 30,000
Purchase of treasury
stock................... -- -- -- -- -- -- (3,195,162) (3,195,162)
Issuance of common
stock................... -- -- 520,000 52 4,774,808 -- -- 4,774,860
--- --- --------- ---- ----------- ------------ ----------- -----------
Balance, at December 31,
1998...................... -- -- 8,344,699 834 38,924,998 1,597,270 (3,210,030) 37,313,072
Net loss.................. -- -- -- -- -- (10,212,382) -- (10,212,382)
Purchase of treasury
stock................... -- -- -- -- -- -- (100,000) (100,000)
Issuance of treasury
stock................... -- -- -- -- (250,000) -- 1,000,000 750,000
--- --- --------- ---- ----------- ------------ ----------- -----------
Balance, at December 31,
1999...................... -- -- 8,344,699 $834 $38,674,998 $ (8,615,112) $(2,310,030) $27,750,690
=== === ========= ==== =========== ============ =========== ===========
</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>
YEARS ENDED DECEMBER 31,
------------------------
1997 1998 1999
----------- ------------ ------------
<S> <C> <C> <C>
Operating Activities
Net income (loss)................................. $15,047,984 $(16,792,549) $(10,212,382)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities
Deferred income taxes........................... (1,505,000) 1,505,000 --
Provision for doubtful accounts................. 1,739,865 1,594,925 1,022,828
Write off of accounts receivable................ (1,214,865) (1,426,925) (1,650,828)
Provision for sales returns and discounts....... 10,646,418 6,733,208 4,277,845
Sales returns and discounts..................... (11,277,938) (6,814,537) (4,221,184)
Provision for overcharges....................... 166,150 -- --
Depreciation and amortization................... 1,123,460 2,640,279 2,150,841
(Gain) loss on sale of assets................... (26,928) (68,895) (288,788)
Minority interest............................... 134,727 -- --
Compensation expense on stock options........... -- 30,000 7,264
(Increase) decrease in assets
Accounts receivable........................... (6,496,717) 8,028,905 4,525,290
Inventories................................... (9,845,252) 814,255 4,920,648
Prepaid expenses and other.................... 194,219 190,081 588,830
Refundable income taxes....................... -- (1,799,450) 1,443,185
Other assets.................................. (854,567) (1,140,683) (965,513)
Increase (decrease) in liabilities
Accounts payable.............................. 589,178 (2,665,781) (2,378,249)
Accrued expenses and other current
liabilities................................. (164,913) 94,941 1,294,907
Accrued compensation.......................... 40,599 (25,536) (73,983)
Income taxes payable.......................... 156,000 (156,000) --
----------- ------------ ------------
Cash provided by (used in) operating activities..... (1,547,580) (9,258,762) 440,711
----------- ------------ ------------
Investing Activities
Proceeds from sale of assets...................... 38,174 188,067 288,788
Capital expenditures.............................. (1,104,832) (1,524,124) (767,032)
Acquisition of license............................ -- (600,000) --
----------- ------------ ------------
Cash used in investing activities................... (1,066,658) (1,936,057) (478,244)
----------- ------------ ------------
Financing Activities
Checks issued against future deposits............. (1,150,679) 1,298,929 (1,004,840)
Issuance of common stock.......................... 33,853,991 4,774,860 --
Purchase of treasury stock........................ -- (3,195,162) (100,000)
Stockholder distributions......................... (15,798,629) -- --
Principal payments on debt........................ (7,437,177) (172,515) (179,864)
Principal proceeds from debt...................... -- 2,412,235 1,232,235
Deferred financing costs.......................... (35,000) -- (62,500)
Purchase of minority interest..................... (335,000) -- --
----------- ------------ ------------
Cash provided by (used in) financing activities..... 9,097,506 5,118,347 (114,969)
----------- ------------ ------------
Increase (decrease) in cash and cash equivalents.... 6,483,268 (6,076,472) (152,502)
Cash and Cash Equivalents,
at beginning of year.............................. 938,799 7,422,067 1,345,595
----------- ------------ ------------
Cash and Cash Equivalents, at end of year........... $ 7,422,067 $ 1,345,595 $ 1,193,093
=========== ============ ============
</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"), I.C. Isaacs &
Company, L.P. (the "Partnership"), Isaacs Design, Inc. ("Design") and I.C.
Isaacs Far East Ltd. (collectively the "Company"). The Company established
Isaacs Europe in July 1996 as the exclusive licensee of Beverly Hills Polo Club
sportswear in Europe. Isaacs Europe and I.C. Isaacs Far East Ltd. did not have
any significant revenue or expenses in 1997, 1998 and 1999. All intercompany
balances and transactions have been eliminated. Additionally, ICI terminated its
Subchapter S corporation status on December 22, 1997, and became subject to
federal, state and local income taxes.
BUSINESS DESCRIPTION
The Company, which operates in one business segment, designs, manufactures
and markets branded jeanswear and sportswear. The Company offers collections of
jeanswear and sportswear for men and women under the Marithe and Francois
Girbaud-Registered Trademark- brand in the United States, Puerto Rico, U.S.
Virgin Islands and selected countries in Central and South America and the
Caribbean, for young men, women and boys under the BOSS-Registered Trademark-
brand in the United States and Puerto Rico, and for men and boys under the
Beverly Hills Polo Club-Registered Trademark- brand in the United States, Puerto
Rico and Europe. The Company also markets women's pants and jeans under various
other Company-owned brand names and under third-party private labels and
recently began a focused line of sportswear under its new Urban Expedition (UBX)
brand in the United States and Europe.
INITIAL PUBLIC OFFERING
Effective December 17, 1997, ICI sold 3,800,000 shares of its common stock
in an initial public offering. Net proceeds of the offering, after deducting
underwriting discounts and commissions and professional fees, approximated $33.9
million. Proceeds of the offering were used to retire the revolving line of
credit totaling approximately $19.5 million and to pay the final distribution to
stockholders of the Subchapter S corporation of $9.3 million. The remaining $5.1
million was used for general corporate purposes. On January 23, 1998, upon the
partial exercise of an over-allotment option, the Company sold an additional
520,000 shares of its common stock and received net proceeds of approximately
$4.8 million. The additional proceeds were used for general corporate purposes.
The final distribution to the stockholders represented a portion of the
cumulative undistributed S corporation earnings as of December 22, 1997
(termination date of S corporation status).
RISKS AND UNCERTAINTIES
The apparel industry is highly competitive. The Company competes primarily
with larger, well capitalized companies which have sought to increase market
share through massive consumer advertising and price reductions. The Company has
continued to experience increased competition from many established and new
competitors at both the department store and specialty store channels of
distribution. The Company continues to redesign its jeanswear and sportswear
lines in an effort to be competitive and compatible with changing consumer
tastes. Also, the Company has developed and implemented new marketing
initiatives to promote each of its brands, including "shop-in-shops" for its
Girbaud-Registered Trademark- brand. The risk to the Company is that such a
strategy may lead to continued pressure on 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
F-7
<PAGE>
I.C. ISAACS & COMPANY, INC.
SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
years, the Company has switched a majority 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 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.
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, 1997,
1998, and 1999 sales to one customer were $22,610,114, $29,840,195 and
$12,012,202. These amounts constitute 14.0%, 26.2% and 14.2% 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 have been less than 2.1%.
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 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. The Company analyzes the operating income of the women's
Company-owned and private label lines in relation to the goodwill amortization
on a quarterly basis for evidence of impairment. During the year ended December
31, 1998, management determined that the reduction in sales had significantly
impacted the operating income of the women's Company-owned and private label
lines and that an impairment of the goodwill associated with the lines occurred.
In response, for the year ended December 31, 1998
F-8
<PAGE>
I.C. ISAACS & COMPANY, INC.
SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
management recorded a one-time write down of $435,000 and reduced the life of
the goodwill from 40 years to 20 years. Effective October 1, 1998, the remaining
goodwill is being amortized over 63 months. Management will continue to analyze
the profitability of the women's Company-owned and private label lines on a
quarterly basis for any additional impairment.
TRADEMARK AND LICENSES
Included in trademark and licenses 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 trademark and licenses, with the cost
being amortized on a straight-line basis over the initial term of the trademark
or license. 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.
ASSET IMPAIRMENT
The Company periodically evaluates the carrying value of long-lived assets
when events and circumstances warrant such a review. The carrying value of a
long-lived asset is considered impaired when the anticipated undiscounted cash
flow from such asset is separately identifiable and is less than the carrying
value. In that event, a loss is recognized based on the amount by which the
carrying value exceeds the fair market value of the long-lived asset. Fair
market value is determined primarily using the anticipated cash flows discounted
at a rate commensurate with the risk involved.
REVENUE RECOGNITION
Sales are recognized upon shipment of products. Allowances for estimated
returns are provided when sales are recorded.
ADVERTISING COSTS
Advertising costs, included in selling expenses, are expensed as incurred
and were $3,867,371, $5,676,799 and $2,796,430 for the years ended December 31,
1997, 1998 and 1999, 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 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 the income tax basis 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.
F-9
<PAGE>
I.C. ISAACS & COMPANY, INC.
SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
EARNINGS PER SHARE
Earnings per share is based on the weighted average number of shares of
common stock and dilutive common stock equivalents outstanding. Basic earnings
per share includes no dilution and is computed by dividing income available to
common shareholders 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. Basic and diluted
earnings per share are the same during 1998 and 1999 because the impact of
dilutive securities is anti-dilutive. During 1997 there were no dilutive common
stock equivalents outstanding.
Pro forma earnings per share for the year ended December 31, 1997 are based
on pro forma net income and the weighted average number of shares of common
stock outstanding (4,000,000) adjusted to include the number of shares (930,000)
sold by the Company which would be necessary to fund the distribution of $9.3
million of previously earned but undistributed Subchapter S Corporation earnings
prior to the initial public offering and 7,800,00 shares for the period
subsequent to the initial public offering.
Supplementary pro forma earnings per share for the year ended December 31,
1997 was $1.17. Supplementary earnings per share for the year ended December 31,
1997 is based on the weighted average number of shares of common stock used in
the calculation of pro forma net income per share increased by 1,950,000 shares
related to the repayment of the term loan and credit facility for the period
prior to the initial public offering and 7,800,000 shares for the period
subsequent to the initial public offering.
COMPREHENSIVE INCOME
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. The Company adopted SFAS 130 during the first
quarter of 1998 and has no items of comprehensive income to report.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments"
("SFAS 133"). SFAS 133 establishes accounting and reporting standards for
derivative instruments and for hedging activities. SFAS 133 requires that an
entity recognize all derivatives as either assets or liabilities and measure
those instruments at fair market value. Under certain circumstances, a portion
of the derivative's gain or loss is initially reported as a component of other
comprehensive income and subsequently reclassified into income when the
transaction affects earnings. For a derivative not designated as a hedging
instrument, the gain or loss is recognized in income in the period of change.
SFAS 133 is effective for all fiscal quarters beginning after June 15, 2000 and
requires application prospectively. Presently, the Company does not use
derivative instruments either in hedging activities or as investments.
Accordingly, the Company believes that adoption of SFAS 133 will have no impact
on its financial position or results of operations.
F-10
<PAGE>
I.C. ISAACS & COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1998 1999
----------- -----------
<S> <C> <C>
Raw materials...................................... $ 4,790,634 $ 1,876,222
Work-in-process.................................... 1,531,424 1,009,124
Finished goods..................................... 16,799,913 15,315,977
----------- -----------
$23,121,971 $18,201,323
=========== ===========
</TABLE>
2. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL
1998 1999 LIVES
----------- ----------- ---------
<S> <C> <C> <C>
Land..................................... $ 731,004 $ 714,304
Buildings and improvements............... 5,439,734 4,141,434 18 years
Machinery, equipment and fixtures........ 9,086,270 8,587,328 5-7 years
Other.................................... 1,351,454 1,581,596 various
----------- ----------- ---------
16,608,462 15,024,662
Less accumulated depreciation and
amortization........................... 13,360,816 11,720,150
----------- ----------- ---------
$ 3,247,646 $ 3,304,512
=========== =========== =========
</TABLE>
3. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1998 1999
----------- ----------
<S> <C> <C>
Revolving line of credit (a)........................ $ 2,412,235 $3,644,470
Notes payable (b)................................... 11,250,000 --
Capital lease obligations........................... 186,122 6,258
----------- ----------
Total............................................... 13,848,357 3,650,728
Less current maturities of long-term debt and
revolving line of credit.......................... 2,412,235 3,644,470
Less current maturities of capital lease
obligations....................................... 179,864 6,258
----------- ----------
$11,256,258 $ --
=========== ==========
</TABLE>
- - ------------------------
(a) The Company has an asset-based revolving line of credit (the "Agreement")
with Congress Financial Corporation ("Congress"). As of December 31, 1998
and 1999 the Company had $2,412,235 and $3,644,470, respectively, in
outstanding borrowings under its revolving line of credit.
F-11
<PAGE>
I.C. ISAACS & COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. LONG-TERM DEBT (CONTINUED)
In March 1999, the Company amended the Agreement to extend the term through
December 31, 2000. The amended Agreement provides that the Company may borrow up
to 80.0% of net eligible accounts receivable and a portion of imported
inventory, as defined in the Agreement. Borrowings under the Agreement may not
exceed $25.0 million including outstanding letters of credit which are limited
to $8.0 million, and bear interest at the lender's prime rate of interest plus
1.0% (effectively 9.5% at December 31, 1999). In connection with amending the
Agreement the Company will pay Congress a financing fee of $125,000, one half of
which was paid at the time of closing and the other half of which will be paid
on June 30, 2000. The financing fee is being amortized over 21 months.
Outstanding letters of credit approximated $2.8 million at December 31, 1999.
Under the terms of the Agreement, as amended, the Company is required to
maintain minimum levels of working capital and tangible net worth. The Company
was in violation of the net worth covenant at December 31, 1999 and has obtained
a waiver, through April 1, 2000, from Congress.
Average short-term borrowings and the related interest rates are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1998 1999
---------- ----------
<S> <C> <C>
Borrowings under revolving line of credit............ $2,412,235 $3,644,470
Weighted average interest rate....................... 8.5% 8.35%
Maximum month-end balance during year................ $6,316,535 $7,066,667
Average month-end balance during year................ $2,035,144 $4,529,241
</TABLE>
- - ------------------------
(b) In November 1997, the Company purchased certain BOSS trademark rights from
Brookhurst, Inc. and issued a $11,250,000 secured limited recourse
promissory note to finance this acquisition. The note bore interest at 10%,
payable quarterly; principal was payable in full on December 31, 2007. The
note was collateralized by the domestic BOSS trademark rights.
In October 1999, the Company executed an agreement to restructure the
licensing arrangement for use of the BOSS-Registered Trademark- trademark.
As part of this restructuring, the Company transferred the
BOSS-Registered Trademark- trademark and issued 2.0 million shares of Series
A Convertible Preferred Stock having an estimated fair market value of $2.0
million in exchange for cancellation of the $11.25 million note payable. See
Notes 6 and 8 for further discussion.
F-12
<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,
-----------------------
1998 1999
---------- ----------
<S> <C> <C>
Royalties............................................ $ 912,657 $ 816,069
Accrued professional fees............................ 150,000 100,000
Payable to salesmen.................................. 2,519 751
Severance benefits................................... 300,000 525,004
Payroll tax withholdings............................. 111,725 136,216
Customer credit balances............................. 226,479 233,011
Property taxes....................................... -- 106,812
Accrued interest..................................... 189,816 --
Franchise taxes payable.............................. 96,000 --
Compensation expense................................. -- 7,263
Deferred fees........................................ -- 62,500
Machine rentals...................................... 31,878 105,942
Income taxes payable................................. -- 110,000
Other................................................ 53,231 176,908
---------- ----------
$2,074,305 $2,380,476
========== ==========
</TABLE>
5. INCOME TAXES
Concurrently with completing its initial public offering, ICI terminated its
subchapter S corporation status. Therefore, for the period ended December 22,
1997 (the day prior to completing the offering) no provision had been made in
the accompanying financial statements for federal and state income taxes since
such taxes were the liability of the stockholders. In connection with the
offering, ICI became subject to federal and state income taxes.
In conjunction with becoming subject to federal and state income taxes, ICI
recorded a deferred tax asset and a corresponding tax benefit of approximately
$1.5 million in 1997 in accordance with SFAS 109.
The income tax provision (benefit) consists of the following:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------
1997 1998 1999
----------- ---------- ----------
<S> <C> <C> <C>
Current
Federal................................ $ 128,000 $ (128,000) $ --
State and local........................ 28,000 (26,000) 110,000
----------- ---------- ---------
156,000 (154,000) 110,000
Deferred................................. (1,505,000) -- --
Valuation allowance...................... -- 1,505,000 --
----------- ---------- ---------
$(1,349,000) $1,351,000 $ 110,000
=========== ========== =========
</TABLE>
F-13
<PAGE>
I.C. ISAACS & COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. INCOME TAXES (CONTINUED)
Deferred income taxes reflect the net effects of temporary differences
between the carrying amounts of assets and liabilities for financial and income
tax reporting purposes. Significant items comprising ICI's deferred tax asset
are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1998 1999
---------- -----------
<S> <C> <C>
Net operating loss carry forwards................... $5,632,000 $10,223,000
Depreciation and amortization....................... 554,000 332,000
Allowance for doubtful accounts..................... 560,000 312,000
Inventory valuation................................. 217,000 222,000
Other............................................... 13,000 16,000
---------- -----------
6,976,000 11,105,000
---------- -----------
Deferred royalty expense............................ -- (457,000)
---------- -----------
Valuation allowance................................. (6,976,000) (10,648,000)
---------- -----------
Net deferred tax asset.............................. $ -- $ --
========== ===========
</TABLE>
The pro forma provision for income taxes represents the income tax provision
that would have been reported had ICI been subject to federal and state income
taxes for the entire period. The pro forma estimated effective tax rate was
41.0%.
The pro forma income tax provision consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------
1997
------------
<S> <C>
Current
Federal................................................... $4,796,000
State..................................................... 1,021,000
----------
5,817,000
Deferred.................................................... (200,000)
----------
$5,617,000
==========
</TABLE>
A reconciliation between the statutory and effective tax rates (pro forma
tax for 1997) is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Federal statutory rate............................. 35.0% (35.0)% (35.0)%
State and local taxes, net of federal benefit...... 5.0 (5.0) (4.0)
Nondeductible entertainment expense................ 0.5 -- 0.5
Nondeductible goodwill amortization................ 0.5 3.5 2.7
Change in valuation allowance...................... -- 10.0 --
Net operating losses not currently available....... -- 35.3 37.0
---- ----- -----
41.0% 8.8% 1.2%
==== ===== =====
</TABLE>
F-14
<PAGE>
I.C. ISAACS & COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. STOCKHOLDERS' EQUITY
In June 1998, the Company's Board of Directors authorized a stock repurchase
program. Under this program the Company may repurchase up to $4,000,000 million
of its common stock. From inception through December 31, 1999, the Company
purchased 1,622,011 shares at a cost of $3,295,162. In August 1999, the Company
issued 500,000 shares of restricted common stock out of its treasury shares, in
connection with an amendment of the Girbaud-Registered Trademark- women's
license agreement. In November 1999, the Company issued 2,000,000 million shares
of restricted Series A Convertible Preferred Stock having an estimated fair
market value of $2.0 million in connection with a restructuring of the licensing
arrangement for the use of the BOSS-Registered Trademark- trademark. Also in
connection with such restructuring, the Company agreed to issue on April 30,
2000 an additional 1,300,000 million restricted shares of the same series of
convertible preferred stock having an estimated fair market value of
$1.3 million and 666,667 shares of restricted common stock, which had an
aggregate value of $1.0 million based on the market price of $1.50 at the time
the parties agreed to the transaction. The common stock issued in connection
with the licensing arrangement is subject to certain piggyback registration
rights and, beginning December 15, 2000, certain demand registration rights.
Except as set forth below, the Series A Convertible Preferred Stock issued
by the Company in November 1999 and to be issued in April 2000 will have all of
the same preferences, rights and voting powers as the common stock. The
preferred stock shall not be entitled to vote on any matters to be voted upon by
the stockholders' of the Company, except that the holders of the preferred stock
will be entitled to vote as a separate class, and the vote of a majority of the
outstanding shares of preferred stock will be required for the creation of an
equity security senior to the preferred stock or the amendment of the
certificate of incorporation or by-laws of the Company to the detriment of the
holders of the preferred stock. The preferred stock shall have a liquidation
preference of $1.00 per share plus any declared but unpaid dividends on the
preferred stock. The Company, at any time, may redeem any or all of the
preferred stock at a redemption price of $1.00 per share. Upon the occurrence of
certain acceleration events, as defined in its license agreement with the
Company, the licensor of the BOSS-Registered Trademark- trademark may demand
redemption of the preferred stock at a redemption price equal to $1.00 per
share. Any or all of the unredeemed shares of preferred stock will be
convertible, at the option of the holder, for a 60 day period beginning October
31, 2003 into a promissory note of the Company in a principal amount equal to
$1.00 multiplied by the total number of preferred shares being converted.
Interest will accrue at an annual rate of 12%, with principal and interest
payable in four quarterly installments beginning January 1, 2004. For financial
reporting purposes, the preferred stock will be considered redeemable preferred
stock and will be classified outside of stockholders' equity.
F-15
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- - ----------- -----------
<C> <S>
*3.01 Amended and Restated Certificate of Incorporation
*3.02 Amended and Restated By-Laws
TRIANGLE TRIANGLE TRIANGLE.303 Certificate of Designation dated November 5, 1999.
*4.01 Specimen Common Stock Certificate
*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
Registrant and Gerald W. Lear
*10.04 Employment Agreement dated as of May 15, 1997 between
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
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- - ----------- -----------
<C> <S>
*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
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- - ----------- -----------
<C> <S>
*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(a) Girbaud Trademark License and Technical Assistance Agreement
dated January 15, 1998
**10.26(b) Girbaud Trademark License and Technical Assistance Agreement
for Women's Collection dated March 4, 1998
**10.26(c) Cancellation Agreement dated March 4, 1998
*10.27(a) Defined Benefit Pension Plan
*10.27(b) First Amendment to Defined Benefit Pension Plan
**10.28 Beverly Hills Polo Club Letter Agreement dated March 18,
1998
**10.29 Beverly Hills Polo Club Letter Agreement dated February 27,
1998
**10.30 Beverly Hills Polo Club Letter Agreement dated February 27,
1998
***10.31 Beverly Hills Polo Club Exclusive Domestic License Agreement
(Boys) dated April 24, 1998
****10.32 Amendment No. 1 dated June 18, 1998 to Trademark License and
Technical Assistance Agreement for Women's Collections
dated January 15, 1998 by and between I.C. Isaacs & Co.,
L.P. and Latitude Licensing Corp.
****10.33 Fourteenth Amendment to Financing Agreements dated July 31,
1997
****10.34 Fifteenth Amendment to Financing Agreements dated May 1,
1998
*****10.35 Amendment by and between BHPC Marketing, Inc. and I.C.
Isaacs & Company, L.P. dated October 21, 1998 relating to
the Exclusive Domestic License Agreement dated December
14, 1995
*****10.36 Letter Agreement by and between BHPC Marketing, Inc. and
I.C. Isaacs & Company, L.P. dated October 21, 1998
relating to the Exclusive Domestic License Agreement for
Women's BHPC Sportswear dated June 1, 1993
TRIANGLE 10.37 Amended and Restated Omnibus Stock Plan
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- - ----------- -----------
<C> <S>
TRIANGLE 10.38 Amendment by and between BHPC Marketing, Inc. and I.C.
Isaacs Europe, S.L. dated November 12, 1998 relating to
the International Exclusive License Agreement (Wholesale)
dated August 15, 1996
TRIANGLE 10.39 Amendment by and between BHPC Marketing, Inc. and I.C.
Isaacs Europe, S.L. dated November 12, 1998 relating to
the International Exclusive License Agreement (Retail)
dated August 15, 1996
TRIANGLE ++10.40 Amendment No. 1 dated November 12, 1998 to Trademark License
and Technical Assistance Agreement for Men's Collections
dated January 15, 1998 by and between I.C. Isaacs & Co.,
L.P. and Latitude Licensing Corp.
TRIANGLE ++10.41 Amendment No. 2 dated November 12, 1998 to Trademark License
and Technical Assistance Agreement for Women's Collections
dated January 15, 1998 by and between I.C. Isaacs & Co.,
L.P. and Latitude Licensing Corp.
TRIANGLE 10.42 Executive Employment Agreement by and between I.C. Isaacs &
Company, Inc. and Daniel Gladstone dated January 21, 1999
*****10.43 Amendment No. 1 to Employment Agreement by and between I.C.
Isaacs & Company, Inc. and Robert J. Arnot dated August
27, 1998
*****10.44 Amendment No. 1 to Employment Agreement by and between I.C.
Isaacs & Company, Inc. and Gerald W. Lear dated August 27,
1998
*****10.45 Amendment No. 1 to Employment Agreement by and between I.C.
Isaacs & Company, Inc. and Eugene C. Wielepski dated
August 27, 1998
*****10.46 Amendment No. 1 to Employment Agreement by and between I.C.
Isaacs & Company, Inc. and Thomas Ormandy dated August 27,
1998
*****10.47 Consulting Agreement by and between I.C. Isaacs & Company
and Gary Brashers dated August 27, 1998
TRIANGLE 10.48 Amendment No. 2 to Employment Agreement by and between I.C.
Isaacs & Company, Inc. and Robert J. Arnot dated February
11, 1999
TRIANGLE 10.49 Amendment No. 2 to Employment Agreement by and between I.C.
Isaacs & Company, Inc. and Gerald W. Lear dated February
11, 1999
TRIANGLE 10.50 Amendment No. 2 to Employment Agreement by and between I.C.
Isaacs & Company, Inc. and Eugene C. Wielepski dated
February 11, 1999
TRIANGLE 10.51 Amendment No. 2 to Employment Agreement by and between I.C.
Isaacs & Company, Inc. and Thomas Ormandy dated February
11, 1999
TRIANGLE 10.52 Amendment No. 1 to Consulting Agreement by and between I.C.
Isaacs & Company and Gary Brashers dated February 11, 1999
TRIANGLE 10.53 Sixteenth Amendment to Financing Agreements dated March 26,
1999
TRIANGLE 10.54 Amendment by and between BHPC Marketing, Inc. dated
March 1, 1999 relating to the International Exclusive
License Agreement (Wholesale) dated August 15, 1996
TRIANGLE 10.55 Amendment by and between BHPC Marketing, Inc. dated
March 1, 1999 relating to the International Exclusive
License Agreement (Retail) dated August 15, 1996
TRIANGLE 10.56 Amendment No. 1 dated March 4, 1998 to Trademark License and
Technical Assistance Agreement for Men's Collections by
and between the Company and Latitude Licensing Corp.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- - ----------- -----------
<C> <S>
TRIANGLE ++10.57 Amendment No. 3 dated December 23, 1998 to Trademark License
and Technical Assistance Agreement for Women's Collections
by and between the Company and Latitude Licensing Corp.
TRIANGLE TRIANGLE.1058 Severance and Redemption Agreement dated June 30, 1999 by
and between the Company and Gerald W. Lear.
TRIANGLE TRIANGLE.1059 Second Amended and Restated Shareholders' Agreement dated
June 30, 1999.
TRIANGLE TRIANGLE.1060 Amendment No. 4 to the Trademark License and Technical
Assistance Agreement Covering Women's Products dated
August 2, 1999.
TRIANGLE TRIANGLE.1061 Shareholders' Agreement dated August 9, 1999.
TRIANGLE TRIANGLE TRIANGLE.1062 Agreement dated October 22, 1999 by and among I.C. Isaacs &
Company, Inc., I.C. Isaacs & Company L.P., Ambra Inc. and
Hugo Boss AG.
TRIANGLE TRIANGLE TRIANGLE.1063 Restated and Amended License Rights Agreement dated October
22, 1999 by and among Ambra Inc., Hugo Boss AG and I.C.
Isaacs & Company L.P.
TRIANGLE TRIANGLE TRIANGLE.1064 Shareholders' Agreement dated November 5, 1999 by and
between I.C. Isaacs & Company, Inc. and Ambra Inc.
TRIANGLE TRIANGLE TRIANGLE.1065 Bill of Sale and Assignment of Trademark Rights dated
October 22, 1999 by and between I.C. Isaacs & Company L.P.
and Ambra Inc.
TRIANGLE TRIANGLE TRIANGLE.1066 Assumption of Assumed Agreements dated October 22, 1999 by
and between I.C. Isaacs & Company L.P. and Ambra Inc.
10.67 Amendment to International Exclusive License Agreement dated
November 1, 1999 by and between I.C. Isaacs Europe, S.L.
and BHPC Marketing, Inc.
10.68 Amendment to International Exclusive License Agreements
dated September 1, 1999 by and between I.C. Isaacs Europe,
S.L. and BHPC Marketing, Inc.
10.69 Amendment No. 3 to Employment Agreement dated January 3,
1999 by and between I.C. Isaacs & Company L.P. and Robert
J. Arnot.
10.70 Amendment No. 3 to Employment Agreement dated January 3,
1999 by and between I.C. Isaacs & Company L.P. and Eugene
C. Wielepski.
10.71 Letter Agreement dated December 31, 1999 by and between I.C.
Isaacs & Company L.P. and G.I. Promotion.
10.72 License Agreement effective January 1, 2000 by and between
I.C. Isaacs & Company L.P. and Wurzburg Holding S.A.
*21.01 List of Subsidiaries
23.01 Consent of BDO Seidman, LLP
27.01 Financial Data Schedule
</TABLE>
- - ------------------------
* Previously filed with the Company's Registration Statement on Form S-1
(SEC File No. 333-37155).
** Previously filed with the Company's Annual Report on Form 10-K for the
Year Ended December 31, 1997 (SEC File No. 0-23379).
*** Previously filed with the Company's Quarterly Report on Form 10-Q for the
Quarter Ended March 31, 1998 (SEC File No. 0-23379).
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- - ----------- -----------
<C> <S>
</TABLE>
**** Previously filed with the Company's Quarterly Report on Form 10-Q for the
Quarter Ended June 30, 1998 (SEC File No. 0-23379).
***** Previously filed with the Company's Quarterly Report on Form 10-Q for the
Quarter Ended September 30, 1998 (SEC File No. 0-23379).
****** Previously filed with the Company's Current Report on Form 8-K dated
August 27, 1998 (SEC File No. 0-23379).
TRIANGLE Previously filed with the Company's Annual Report on Form 10-K for
the Year Ended December 31, 1998 (SEC File No. 0-23379).
TRIANGLE TRIANGLE Previously filed with the Company's Quarterly Report on Form
10-Q for the Quarter Ended June 30, 1999 (SEC File No.
0-23379).
TRIANGLE TRIANGLE TRIANGLE Previously filed with the Company's Quarterly
Report on Form 10-Q for the Quarter Ended
September 30, 1999 (SEC File No. 0-23379).
+ Certain portions of this exhibit have been omitted pursuant to an order
granting confidential treatment and have been filed separately with the
Securities and Exchange Commission.
++ Certain portions of this exhibit have been omitted pursuant to a request for
an order granting confidential treatment and have been filed separately with
the Securities and Exchange Commission.
<PAGE>
Exhibit 10.67
AMENDMENT TO INTERNATIONAL EXCLUSIVE LICENSE AGREEMENT
This Amendment is made and entered into by and between BHPC Marketing, Inc.
("LICENSOR") AND I.C. Isaacs Europe, S.L. ("LICENSEE") and is dated as of
November 1, 1999. This Amendment amends and modifies that certain International
Exclusive License Agreements between LICENSOR and LICENSEE, dated August 15,
1996 (the "Agreements").
(I)
The promises, covenants, agreements and declarations made and set forth herein
are intended to and shall have the same force and effect as if set forth at
length in the body of the Agreements. To the extent that the provisions of this
Amendment are inconsistent with the terms and conditions of the Agreements, the
terms set forth herein shall control.
(II)
1. Effective as of November 1, 1999, the License Agreement Detail
Schedules for both Wholesale Sales and Sales to BEVERLY HILLS POLO CLUB
Retail Stores are hereby changed as follows:
Item 2. DEFINITION OF LICENSED PRODUCT (BY CATEGORY):
The following is hereby deleted:
"Women's apparel including slacks, skirts, dresses, sweaters,
outerwear, blouses and jeans
(III)
LICENSOR AND LICENSEE acknowledge and agree that the Agreement, as amended by
this Amendment, remains in full force and effect and represents the entire
agreement of the parties with respect to the matters contained herein.
IN WITNESS WHEREOF, the parties hereto agree that this Amendment shall take
effect as of the date and year first written above.
LICENSOR: LICENSEE:
BHPC MARKETING, INC. I.C. ISAACS EUROPE, S.L.
BY: /s/ Don Garrison BY: /s/ Robert Arnot
--------------------------- -----------------------------
Don Garrison Robert Arnot
Vice President Chairman/C.E.O./President
DATE: DATE: 1/7/2000
------------------------- ----------------------------
BY: /s/ Robert Tomlinson
---------------------------
Robert Tomlinson
Treasurer/Director
DATE: 12/6/99
--------------------
<PAGE>
EXHIBIT 10.68
AMENDMENT TO INTERNATIONAL EXCLUSIVE LICENSE AGREEMENT
This Amendment is made and entered into by and between BHPC Marketing, Inc.
("LICENSOR") and I.C. Isaacs Europe, S.L. ("LICENSEE") and is dated as of
September 1, 1999. This Amendment amends and modifies that certain
International Exclusive License Agreements between LICENSOR and LICENSEE,
dated August 15, 1996 (the "Agreements").
(I)
The promises, covenants, agreements and declarations made and set forth
herein are intended to and shall have the same force and effect as if set
forth at length in the body of the Agreements. To the extent that the
provisions of this Amendment are inconsistent with the terms and conditions
of the Agreements, the terms set forth herein shall control.
(II)
1. Effective as of September 1, 1999, the License Agreement Detail
Schedules for both Wholesale Sales and Sales to BEVERLY HILLS POLO
CLUB Retail Stores are hereby changed as follows:
<TABLE>
<CAPTION>
"Item 4. Renewal Term: From To
------------- ---- --
<S> <C> <C> <C>
First Renewal Period (if any) January 1, 2000 December 31, 2000
Second Renewal Period (if any) January 1, 2001 December 31, 2001
Third Renewal Period (if any) January 1, 2002 December 31, 2003
Fourth Renewal Period (if any) January 1, 2004 December 31, 2005
Fifth Renewal Period (if any) January 1, 2006 December 31, 2007
</TABLE>
"Item 6. Royalty Rate:
-------------
First Renewal Term (if any): Royalty Rate shall be Zero Percent (0%)
and Advertising Royalty Rate is Four Percent (4%) of Wholesale Sales of
LICENSEE's products including purchases of LICENSEE's products by
BEVERLY HILLS POLO CLUB-Registration Mark- Retail Stores located within
the LICENSEE's defined Territory for the period of January 1, 2000
through June 30, 2000. Royalty Rate shall be Three Percent (3%) and
Advertising Royalty Rate is Four Percent (4%) of Wholesale Sales of
LICENSEE's products including purchases of LICENSEE's products by
BEVERLY HILLS POLO CLUB Retail Stores located within the LICENSEE's
Defined Territory for the period of July 1, 2000 through December 31,
2000.
Second Renewal Period (if any): Royalty Rate shall be Three Percent
(3%) and Advertising Royalty Rate is Four Percent (4%) of Wholesale
Sales of LICENSEE's products including purchases of LICENSEE's products
by BEVERLY HILLS POLO CLUB Retail Stores located within the LICENSEE's
Defined Territory.
Third, Fourth and Fifth Renewal Period(s) (if any): Royalty Rate shall
be Five Percent (5%) and Advertising Royalty Rate is Two Percent (2%)
of Wholesale Sales of LICENSEE's products including Purchases of
LICENSEE's products by BEVERLY HILLS POLO CLUB Retail Stores located
within the LICENSEE's Defined Territory.
No Royalty shall be paid by LICENSEE to LICENSOR on sales of Licensed
Product (with prior written approval of LICENSOR) directly to other
BEVERLY HILLS POLO CLUB LICENSEEs."
Page One of Two
<PAGE>
AMENDMENT TO INTERNATIONAL EXCLUSIVE LICENSE AGREEMENT
This Amendment is made and entered into by and between BHPC Marketing, Inc.
("LICENSOR") and I.C. Isaacs Europe, S.L. ("LICENSEE") and is dated as of
November 1, 1999. This Amendment amends and modifies that certain
International Exclusive License Agreements between LICENSOR and LICENSEE,
dated August 15, 1996 (the "Agreements").
(I)
The promises, covenants, agreements and declarations made and set forth
herein are intended to and shall have the same force and effect as if set
forth at length in the body of the Agreements. To the extent that the
provisions of this Amendment are inconsistent with the terms and conditions
of the Agreements, the terms set forth herein shall control.
(II)
1. Effective as of November 1, 1999, the License Agreement Detail
Schedules for both Wholesale Sales and Sales to BEVERLY HILLS POLO
CLUB Retail Stores are hereby changed as follows:
Item 2. Definition of Licensed Product (by category):
---------------------------------------------
The following is hereby deleted:
"Women's apparel including slacks, skirts, dresses, sweaters,
outerwear, blouses and jeans."
(III)
LICENSOR AND LICENSEE acknowledge and agree that the Agreement, as amended by
this Amendment, remains in full force and effect and represents the entire
agreement of the parties with respect to the matters contained herein.
IN WITNESS WHEREOF, the parties hereto agree that this Amendment shall take
effect as of the date and year first written above.
LICENSOR: LICENSEE:
BHPC MARKETING, INC. I.C. ISAACS EUROPE, S.L.
BY: /s/ Don Garrison BY: /s/ Robert Arnot
-------------------------- ------------------------------
Don Garrison Robert Arnot
Vice President Chairman/C.E.O./President
DATE: DATE: 1/7/2000
------------------------ ---------------------------
BY: /s/ Roger Tomlinson
--------------------------
Roger Tomlinson
Treasurer/Director
DATE: 12/6/99
------------------------
<PAGE>
Exhibit 10.69
AMENDMENT NO. 3 TO
EMPLOYMENT AGREEMENT
BY AND BETWEEN
I.C. ISAACS & COMPANY L.P.
AND
ROBERT J. ARNOT
THIS AMENDMENT NO. 3, dated as of January 3, 2000, is made a
part of that certain EXECUTIVE EMPLOYMENT AGREEMENT, dated as of May 15, 1997,
by and between I. C. Isaacs & Company L.P. (the "Company") and Robert J. Arnot
(the "Executive"), as amended by Amendment No. 1 dated as of August 27, 1998 and
Amendment No. 2 dated as of February 11, 1999, (collectively, the "Agreement").
It is intended by the parties that the terms of this Amendment No. 3, to the
extent that they are more specific than the terms contained in the Agreement, or
to the extent that they should conflict with the terms contained in the
Agreement, shall supersede the terms of the Agreement. Section numbers utilized
in this Amendment No. 3 correspond, where applicable, to section numbers used in
the Agreement.
W I T N E S S E T H:
Accordingly, in consideration of the mutual covenants and
representations contained herein and the mutual benefits derived herefrom, the
parties hereto agree as follows:
1. Paragraph 2 is hereby restated in its entirety as follows:
2. TERM. This Agreement shall begin May 15, 1997 and shall
continue until May 15, 2002 (the "Employment Period"). Thereafter, this
Agreement shall renew automatically from Employment Year to Employment
Year, subject to the right of either party to terminate this Agreement
as of the end of any Employment Year upon sixty (60) days' prior
written notice to the other party. An "Employment Year" begins each May
15 and ends on the following May 15.
2. Paragraph 6 A is hereby restated in its entirety as follows:
6. DUTIES.
A. During the term of this Agreement, the Executive shall
serve as Chairman of the Board, Chief Executive Officer and President,
have such powers and shall perform such duties as are incident and
customary to his office, including those described in the Company's
By-laws (as amended from time to time), and shall perform such
additional executive and administrative duties and functions
commensurate with such positions as from time to time shall be assigned
to him by the Board of Directors of the Company. The Executive shall
-1-
<PAGE>
perform such additional duties and functions without separate
compensation, unless otherwise authorized by the Board of Directors of
the Company.
3. Paragraph 3 is hereby restated in its entirety as follows:
3. BASE SALARY. The Executive's base salary for each
Employment Year under this Agreement (May 15, 1997 through May 15,
2002) shall be at the rate of Three Hundred Fifty Thousand Dollars
($350,000) per annum. Such base salary shall be increased to Four
Hundred Thousand Dollars ($400,000) per annum for the remaining term of
this Agreement after the Company achieves positive net earnings in two
consecutive fiscal quarters. Such base salary may also be increased
based on periodic reviews by the Compensation Committee of the Board of
Directors. The Executive's base salary shall be paid throughout the
year, in accordance with normal payroll practices of the Company.
IN WITNESS WHEREOF, the parties have executed and delivered this
Amendment No. 3 on the date first above written.
I.C. ISAACS & COMPANY L.P.
By: I.C. ISAACS & COMPANY, INC.
its general partner
By: /s/ Eugene C. Wielepski
-----------------------------------
Eugene C. Wielepski, Vice President
EXECUTIVE
/s/ Robert J. Arnot
--------------------------------------
Robert J. Arnot
<PAGE>
Exhibit 10.70
AMENDMENT NO. 3 TO
EMPLOYMENT AGREEMENT
BY AND BETWEEN
I.C. ISAACS & COMPANY L.P.
AND
EUGENE C. WIELEPSKI
THIS AMENDMENT NO. 3, dated as of January 3, 2000, is made a part of
that certain EXECUTIVE EMPLOYMENT AGREEMENT, dated as of May 15, 1997, by and
between I. C. Isaacs & Company L.P. (the "Company") and Eugene C. Wielepski (the
"Executive"), as amended by Amendment No. 1 dated as of August 27, 1998 and
Amendment No. 2 dated as of February 11, 1999, (collectively, the "Agreement").
It is intended by the parties that the terms of this Amendment No. 3, to the
extent that they are more specific than the terms contained in the Agreement, or
to the extent that they should conflict with the terms contained in the
Agreement, shall supersede the terms of the Agreement. Section numbers utilized
in this Amendment No. 3 correspond, where applicable, to section numbers used in
the Agreement.
W I T N E S S E T H:
Accordingly, in consideration of the mutual covenants and
representations contained herein and the mutual benefits derived herefrom, the
parties hereto agree as follows:
1. Paragraph 2 is hereby restated in its entirety as follows:
2. TERM. This Agreement shall begin May 15, 1997 and shall
continue until May 15, 2001 (the "Employment Period"). Thereafter, this
Agreement shall renew automatically from Employment Year to Employment
Year, subject to the right of either party to terminate this Agreement
as of the end of any Employment Year upon sixty (60) days' prior
written notice to the other party. An "Employment Year" begins each May
15 and ends on the following May 15.
2. Paragraph 6 A is hereby restated in its entirety as follows:
6. DUTIES.
A. During the term of this Agreement, the Executive shall serve
as Vice President and Chief Financial Officer, have such powers and
shall perform such duties as are incident and customary to his office,
including those described in the Company's By-laws (as amended from
time to time), and shall perform such additional executive and
administrative duties and functions commensurate with such positions as
from time to time shall be assigned to him by the Board of Directors of
the Company. The Executive shall perform such additional duties and
functions without
<PAGE>
separate compensation, unless otherwise authorized by the Board of
Directors of the Company.
3. Paragraph 3 is hereby restated in its entirety as follows:
3. BASE SALARY. The Executive's base salary for each
Employment Year under this Agreement (May 15, 1997 through May 15,
2001) shall be at the rate of One Hundred Seventy-Five Thousand Dollars
($175,000) per annum. Such base salary shall be increased to Two
Hundred Thousand Dollars ($200,000) per annum for the remaining term of
this Agreement after the Company achieves positive net earnings in two
consecutive fiscal quarters. Such base salary may also be increased
based on periodic reviews by the Compensation Committee of the Board of
Directors. The Executive's base salary shall be paid throughout the
year, in accordance with normal payroll practices of the Company.
IN WITNESS WHEREOF, the parties have executed and delivered this
Amendment No. 3 on the date first above written.
I.C. ISAACS & COMPANY L.P.
By: I.C. ISAACS & COMPANY, INC.
its general partner
By: /s/ Robert J. Arnot
------------------------------------
Robert J. Arnot, President
EXECUTIVE
By: /s/ Eugene C. Wielepski
------------------------------------
Eugene C. Wielepski
- 2 -
<PAGE>
Exhibit 10.71
December 31, 1999
G.I. Promotion
Via Salvini 5
Milan Italy 20122
Re: GLOBAL SOURCING ARRANGEMENT
Gentlemen:
This letter summarizes the understandings between G.I. Promotions
("GIP"), and I.C. Isaacs & Company, L.P. ("Isaacs") with respect to
certain global sourcing activities of Isaacs involving the production
of garments branded with Marithe + Francois Girbaud ("GIRBAUD")
trademarks for sale by GIRBAUD licensees other than Isaacs.
1. GIP, because of the personality of its founders, its designers, its
original trademark policy and the quality of its techniques, has
acquired worldwide fame and prestige in the fashion design industry and
has crystallized a growing and faithful clientele.
2. Moreover, GIP has the rights to use certain drawings and models for
fashion apparel, particularly those for products distributed under the
name "MARITHE + FRANCOIS GIRBAUD" and related trademarks (the
"Trademark").
3. Isaacs has significant garment production and sourcing experience as
a result of its longstanding manufacturing activities in Asia, the
Middle East, Mexico, Europe and the United States, including with
respect to GIRBAUD-branded apparel which it manufactures for
distribution in the United States, Puerto Rico and certain Central and
South American countries.
4. We understand that GIP wishes Isaacs to make its sourcing and
product development expertise available to third parties who have a
Jeans and Casual license from GIP or a GIP affiliate to manufacture and
distribute GIRBAUD-branded garments. Isaacs is pleased to make
available such assistance to GIRBAUD-brand licensees. This assistance
may include:
- consultation and coordination regarding product development
- exchange of technical specifications (design, fabrication, trim, fit
and fabric)
- identification of manufacturing sources and agents o negotiation of
product pricing and delivery
- access to product samples and arranging for production of selling
samples
- assistance in quality control
This assistance may be provided by Isaacs directly or through
an affiliate or an agent of Isaacs. Isaacs' assistance applies only to
garment designs which are a part of Isaacs' GIRBAUD product line unless
otherwise agreed to by Isaacs on a case-by-case basis.
5. With respect to the activities described in this Agreement and
independently of their corporate name, Isaacs or an Isaacs affiliate
designated by Isaacs (such as I.C. Isaacs Far East Ltd.) shall trade
under the name "GIRBAUD Global Sourcing" in the form of letterhead
reasonably approved by GIP.
6. GIP and/or its affiliates will make reasonable efforts to encourage
GIRBAUD licensees to take advantage of the product sourcing assistance
available through Isaacs.
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Isaacs agrees to cooperate with GIP and its affiliates in promoting the
availability of such assistance. The parties will have a meeting at
least every six months while this arrangement is in effect to discuss
the activities undertaken under this arrangement and exchange views on
ways of enhancing the services available to licensees hereunder. GIP or
its affiliates will provide periodic technical and product development
assistance in Hong Kong or another mutually agreed site at least twice
each year.
7. Isaacs will be responsible for coordination of product production
with each manufacturer under this arrangement and will provide the
global sourcing assistance on a fee basis based on each
production/manufacturing arrangement established by or on behalf of
Isaacs by an agency for a GIRBAUD licensee. Isaacs will transmit to the
licensee the pricing per product units requested and the available
delivery schedule, and will obtain manufacturers' confirmation of each
order. Purchase orders will be issued directly by a licensee to the
manufacturer or agent. Licensees will be responsible for opening any
required letters of credit or other evidence of payment availability.
8. In each case, a licensee's product pricing, as quoted to the
licensee by Isaacs, will include a "facilitation fee" in the amount of
Seven Percent (7%) of the total FOB pricing for each order shipped to a
licensee. The manufacturer or agent will be responsible for collecting
from licensees amounts due for products including the facilitation fee,
and for remitting the facilitation fee to Isaacs or its designee. As
its fee, Isaacs or its designee will be entitled to Five Percent (5%)
of the total FOB pricing for each order shipped to a licensee under
this arrangement. GIP or its designee will be entitled to Two Percent
(2%) of the total FOB pricing for each order shipped to a licensee
under this arrangement.
9. Calculation of fees payable to GIP under this arrangement will be on
a net basis, based on amounts actually collected by Isaacs or an
affiliate and exclusive of taxes and other governmental levies. Isaacs
will provide within 30 days after the end of each calendar quarter a
statement of the activities undertaken under this global sourcing
arrangement such report to be duly verified and signed by a company
officer, including a documented description of the amount and FOB
pricing of all products. GIP may audit once each calendar year on a
confidential basis the records of Isaacs and its affiliates with
respect to the payments made under this arrangement to ensure their
accuracy.
10. The product sourcing services described above do not include
on-going supervision with respect to the production of the garments,
design services, garment quality inspections, or product
export/forwarding handling. As requested, Isaacs will arrange for an
agent, or an outside service, to provide these services on a
case-by-case basis at the expense of the licensee.
11. Unless otherwise agreed to by Isaacs in writing on a case-by case
basis, each licensee is responsible directly for the costs associated
with any agent engaged for the purpose of conducting garment inspection
and other day-to-day activities with respect to the product
manufacturing process in any country and for the payment to the product
source(s) of all production costs and product prices, including charges
for production of selling samples. Isaacs will not be extending credit
to licensees and will act only as an independent service contractor
with respect to each licensee to whom it provides product sourcing
assistance.
12. Both parties understand that there is no guarantee that Isaacs'
product sourcing assistance will result in all cases in securing
manufacturers for products or in receiving competitive pricing for such
products by the manufacturer. Neither party will make any warranties or
guarantees to licensees with respect to the product sourcing services
and all express and implied warranties, by law or otherwise, are
disclaimed hereby. The parties agree that they will not seek any
consequential, indirect or incidental damages against each other for
any matter arising under this arrangement.
13. Isaacs may in its discretion decline to render sourcing assistance
to a GIRBAUD licensee in the event (i) legal, political or financial
conditions reasonably suggest that such activities may expose Isaacs or
GIP or their respective affiliates to liability, (ii) the
2
<PAGE>
licensee imitates the product designs provided by Isaacs or otherwise
violates the intellectual properly rights of GIP, (iii) has delinquent
accounts with the manufacturers or an unacceptable payment history, or
(iv) the licensee otherwise acts in a manner that would, in Isaacs'
reasonable opinion, damage the reputation or business relationships of
GIP or Isaacs.
14. The parties agree that information relating to Isaacs'
manufacturing, supply and production sources, including supplier
information, delivery strategies, cost components, production plans and
the terms of this undertaking between the parties are confidential
information of Isaacs and its affiliates. As such, the parties will not
disclose such information or any part thereof to the licensees or any
other party. Licensees will not be permitted to place orders directly
with Isaacs' manufacturers, agents and suppliers other than through the
processes contemplated hereunder.
15. Any knowledge which Isaacs should acquire of the know-how of GIP
and its designers, of its fabric creations, of the treatment and
assembling which constitute trade secrets shall not be used by Isaacs
outside the scope of this Agreement, or for the benefit of a third
party (other than Isaacs' agents and third manufacturer with respect to
the activities contemplated hereunder) without the prior express
written authorization of GIP.
16. The term of the undertakings described in this letter will commence
on the date of GIP's acceptance of this letter and will end on December
31, 2003 unless sooner terminated as a result of the early termination
of thc license agreement between Isaacs and Latitude Licensing, Inc.
(the `License Agreement"), or otherwise by agreement of the parties.
This agreement may be renewed by either party for a period of two years
if that party is not in breach of this Agreement at the time and the
License Agreement has not been terminated.
17. This Agreement may be terminated with immediate effect, by either
party, by written notice sent to the other party, Certified Mail Return
Receipt Requested, this without any legal or other formalities in case
of any default by the other party of any of the obligations under this
agreement that has remained without cure for thirty (30) days, at the
latest, after notification to the defaulting party, via Certified Mail
Return Receipt Requested.
18. Upon the termination of this Agreement for any reason or its
expiration, Isaacs agrees to forward to GIP via Certified Mail Return
Receipt Requested a detailed and complete report of pending activities
under this Agreement; and a detailed report of pending orders as of
that date. Upon termination, Isaacs may see to completion the
production of products which are subject to accepted orders from
licensees as of the effective date of termination.
19. This Agreement has been executed by G.I. Promotion in consideration
of the implication and expertise of Bob Arnot in the sourcing
activities.
20. This Agreement is controlled and shall be interpreted in accordance
with the laws of the State of New York, excluding its conflict of laws
provisions.
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<PAGE>
We are looking forward to a productive relationship as described above.
Sincerely,
By: /s/ Robert J. Arnot
-----------------------------------------------
Robert Arnot, Chairman/CEO
I.C. Isaacs & Company, Inc., as general partner
Of I.C. Isaacs & Company, L.P.
Agreed to:
By: /s/ Olivier Bachellerie
-----------------------------------------------
G.I. Promotion
Title: President
-----------------------------------------------
Date: 28 Decembre 1999
-----------------------------------------------
5
<PAGE>
LICENSE AGREEMENT
AGREEMENT effective on January 1, 2000 by and between WURZBURG HOLDING
SA, a company organized and existing under the laws of Luxembourg, having its
headquarters at 134 Boulevard de la Perusse, L-2330 Luxembourg (hereinafter
the "Licensor").
and
I.C. ISAACS & COMPANY L.P., a Delaware limited partnership having its
offices at 350 - 5th Avenue, Suite 1029, New York, NY 10118 (hereinafter the
"Licensee").
WHEREAS, GI PROMOTION and I.C. ISAACS & COMPANY L.P. are entering today
into a letter agreement for the provision by Isaacs and its affiliates of
certain manufacturing and product sourcing services to licensees
("licensees") of the "MARITHE + FRANCOIS GIRBAUD" trademarks (the "Sourcing
Agreement").
1. GRANT
Licensor hereby grants to Licensee, for the term of this Agreement a
license in connection with the efforts of Licensor, directly or through its
affiliates and agents to produce or arrange for the production of products to
be shipped to licensees within the Territory as hereinafter defined:
(a) To use and display the use of the words "MARITHE + FRANCOIS
GIRBAUD" and related trademarks owned by Licensor (the "Trademark");
(b) To use Licensor's know-how and trade secrets in connection with the
services to be provided by Licensee directly or through its affiliates and
agents with respect to the Products.
(c) Under the assumed name ""GIRBAUD Global Sourcing" to operate its
business or that of an affiliate (including I.C. Isaacs Far East Ltd.) as it
relates to the Sourcing Agreement.
2. TERRITORY
The License herein granted shall be limited to the countries where
authorized MARITHE + FRANCOIS GIRBAUD licensees are located (the
"Territory"). In the event the Sourcing Agreement is extended by the parties
in accordance with its terms, this Agreement shall be similarly extended.
1
<PAGE>
3. USE OF THE TRADEMARK
Licensee shall use the Trademark as specified in this Agreement, only
with respect to the services to be provided by Licensee or its affiliates and
agents with respect to products to be sold exclusively to authorized MARITHE
+ FRANCOIS GIRBAUD licensees and in countries where such licensees are
located.
4. TERM
This Agreement shall commence and become effective on January 1, 2000
and shall expire three (3) years thereafter unless sooner terminated as
hereinafter provided.
5. ROYALTIES
5.1 As compensation for the rights granted in this Agreement, during
the term hereof, Licensee shall pay to Licensor Royalties in an amount of one
percent (1%) of the FOB price invoiced by Licensee or third party
manufacturers and agents to the purchasers of the MARITHE + FRANCOIS GIRBAUD
products pursuant to the Sourcing Agreement.
5.2 Licensee shall pay to Licensor the Royalties within 30 days of the
end of each calendar quarter. Calculation of payments shall be in accordance
with the provisions of the Sourcing Agreement.
6. THE TRADEMARK
6.1 Licensee acknowledges that Licensor is the sole and rightful holder
of all rights, title and interest in the Trademark and shall not claim any
title to or right to use the Trademark or any variation thereof except as
expressly set forth in and pursuant to this Agreement. The use of the
Trademark as specified in this Agreement shall be for the benefit of
Licensor, and shall not vest in Licensee any title to or right or presumptive
right to expand or continue such use. Licensor reserves all rights to the
Trademark except as specifically granted herein to Licensee and may exercise
such rights at any time. Licensee shall not question, attack, contest or
otherwise impugn the validity of the Trademark, its registration(s),
Licensor's proprietary rights therein nor Licensor's rights in the designs to
be provided pursuant to the terms hereof including, but not limited to, any
action brought seeking to enforce the terms of this Agreement.
6.2 Licensee shall cooperate fully and in good faith with Licensor for
the purpose of securing, preserving and protecting Licensor's rights in and
to the Trademark. Licensor shall execute deliver and/or file any and all
documents and do all other acts and things which Licensee reasonably requests
to make fully effective or to implement the provisions of this Agreement
relating to the ownership of registration of the Trademark.
7. QUALITY CONTROL INSPECTION
In order to preserve and enhance the quality and goodwill attaching to
the Trademark, Licensor or its designated representative may, upon reasonable
notice and
2
<PAGE>
during normal business hours, inspect a reasonable quantity of samples of
items bearing the Trademark manufactured and/or distributed by Licensee or
its affiliates and agents pursuant to the Sourcing Agreement. Licensor
reserves the right to inspect the production facilities of Licensee at
reasonable times upon reasonable notice.
8. PROTECTION OF THE TRADEMARK
Licensee shall promptly notify Licensor, in writing, of any
infringement, threatened infringement, or otherwise unauthorized use or
threatened use of the Trademark, or confusingly similar trademark or
tradenames, whether in connection with the Products or otherwise, of which it
may have knowledge or suspicion. In the event of an infringement, threatened
infringement, or otherwise unauthorized use of the Trademark, or confusingly
similar trademark or tradenames, Licensee shall take such immediate action as
may reasonably be necessary to protect the Trademark and the rights of the
Licensor therein, until Licensor is in a position to take whatever action is
required and Licensor shall respond promptly to any notification by Licensee
or a matter within this section and shall promptly determine how it wishes to
proceed in the matter. Licensor shall, in its discretion and in reasonable
on-going consultation with Licensee, decide what action shall be taken,
including any application for injunctive relief, and shall designate counsel
reasonably acceptable to Licensee for such purpose. Licensee shall pay one
half of the cost and expense incurred in the legal defense or settlement of
such action and, in the event of an award or other payment of monetary
damages, the proceeds thereof shall be shared pro-rata to the expenses and
costs paid by the parties. For purposes of clarification, this agreement of
Licensee to pay certain costs and expenses relates only to actions necessary
as a result of the activities contemplated under the Sourcing Agreement and
not to Licensor's general policing and enforcement of its trademark rights.
Licensee shall abide by regulations, laws and practices in force or use in
the Territory in order to safeguard Licensor's rights to the Trademark.
9. TERMINATION
9.1 This Agreement shall be automatically terminated without any action
necessary, if for any reason, the Sourcing Agreement is terminated.
9.2 This Agreement may be terminated with immediate effect, by either party
by written notice sent to the other party, Certified Mail, Return Receipt
Requested, this without any legal or other formalities in case of any default
by the other party of any of the obligations under this Agreement that has
remained without effect for thirty (30) days, at the latest, after
notification to the defaulting party, via Certified Mail, Return Receipt
Requested.
9.3 Upon any termination hereof, Licensee and its affiliates and agents will
be able to complete the fulfillment and processing of accepted orders by
licensees for products bearing Trademarks and to complete product production
efforts thereunder.
3
<PAGE>
10. GOVERNING LAW AND JURISDICTION
This Agreement shall be construed, and interpreted in accordance with
and as governed by the laws of Luxembourg without regard to the conflict of
laws provisions thereof. All matters in controversy shall be adjudicated
before the appropriate courts of Luxembourg.
11. RELATIONSHIP
Nothing herein shall create or be deemed to create any agency,
partnership, joint venture or other similar relationship between the parties
hereto. Licensee shall not represent itself as the legal representative,
agent or partner of Licensor and, shall have no right to create or assume any
obligations express or implied, on behalf of Licensor. Nothing herein is
intended to affect, expand, limit, or amend any rights and obligations
existing under the License Agreements between License and Latitude Licensing,
Inc.
12. REVERSION OF RIGHTS AND TERRITORIES
Upon the expiration or earlier termination of this Agreement, all rights
with respect to the Trademark, and Territory shall immediately revert to
Licensor subject to Section 9.3 above.
13. INDEMNIFICATION
Licensee does hereby indemnify and hold harmless Licensor from and
against any and all losses, liability, damages and expenses (including
reasonable attorneys' fees and expenses) which it may incur or be obligated
to pay as a result of or in defending any action, claim or proceeding by an
unaffiliated third-party against Licensor, for or by reason of any acts or
omissions committed or suffered by Licensee or its employees (but not by
third party manufacturers or agents) in connection with Licensee's
performance of this Agreement.
WURZBURG HOLDING SA I.C. ISAACS & COMPANY L.P.
By: /s/ Rene Faltz By: I.C. Isaacs & Company, Inc.
------------------------
Name: Rene Faltz
Title: Director
By: /s/ Robert J. Arnot
-------------------------
Name: Robert J. Arnot
Title: General Partner
By: /s/ Yves Schmit
-----------------------
Name: Yves Schmit
Title: Director
4
<PAGE>
Exhibit 23.01
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
I.C. Isaacs & Company, Inc.
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (333-63871) of our report dated March 3, 2000 relating
to the consolidated financial statements and schedule of I.C. Isaacs &
Company, Inc. appearing in the Company's Annual Report on Form 10-K for the
year ended December 31, 1999.
BDO Seidman, LLP
Washington, D.C.
March , 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This Schedule contains summary financial information extracted from the
Consolidated Balance Sheets of I.C. Isaacs Company Inc and subsidiaries as of
December 31, 1998 and 1999 and the consolidated statements of operations for
each of the years in the three year period ending December 31, 1999.
</LEGEND>
<S> <C> <C> <C>
<PERIOD-TYPE> YEAR YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1998 DEC-31-1999
<PERIOD-END> DEC-31-1997 DEC-31-1998 DEC-31-1999
<CASH> 0 1,345,595 1,193,093
<SECURITIES> 0 0 0
<RECEIVABLES> 0 16,257,501 11,675,550
<ALLOWANCES> 0 (1,353,000) (725,000)
<INVENTORY> 0 23,121,971 18,201,323
<CURRENT-ASSETS> 0 42,053,872 30,994,755
<PP&E> 0 16,608,462 15,024,662
<DEPRECIATION> 0 (13,360,816) (11,720,150)
<TOTAL-ASSETS> 0 59,046,143 40,435,231
<CURRENT-LIABILITIES> 0 10,476,813 8,384,541
<BONDS> 0 0 0
0 0 2,000,000
0 0 0
<COMMON> 0 834 834
<OTHER-SE> 0 37,312,238 27,749,856
<TOTAL-LIABILITY-AND-EQUITY> 0 59,046,143 40,435,231
<SALES> 161,445,362 113,720,799 84,525,372
<TOTAL-REVENUES> 161,445,362 113,720,799 84,525,372
<CGS> 109,693,828 90,660,582 61,694,122
<TOTAL-COSTS> 35,548,692 37,427,736 31,470,244
<OTHER-EXPENSES> (19,046) (663,110) (192,134)
<LOSS-PROVISION> 1,739,865 1,594,925 1,022,828
<INTEREST-EXPENSE> 2,388,177 1,707,140 1,655,522
<INCOME-PRETAX> 13,698,984 (15,441,549) (10,102,382)
<INCOME-TAX> (1,349,000) 1,351,000 110,000
<INCOME-CONTINUING> 15,047,984 (16,792,549) (10,212,382)
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 15,047,984 (16,792,549) (10,212,382)
<EPS-BASIC> 3.68 (2.15) (1.47)
<EPS-DILUTED> 3.68 (2.15) (1.47)
</TABLE>
