<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
AMENDMENT NO. 1
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)
<TABLE>
<S> <C>
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)
</TABLE>
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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<PAGE>
This Form 10-K/A Amendment No. 1 is filed to amend the Annual Report on Form
10-K filed by I.C. Isaacs & Company, Inc. effective March 30, 2000 to include
page F-2, which was inadvertently omitted from the original filing.
2
<PAGE>
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.
3
<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: April 4, 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 April 4, 2000
Robert J. Arnot (Principal Executive
Officer)
Vice President and Chief
/s/ EUGENE C. WIELEPSKI Financial Officer and
------------------------------------------- Director (Principal April 4, 2000
Eugene C. Wielepski Financial and Accounting
Officer)
/s/ DANIEL GLADSTONE
------------------------------------------- Director April 4, 2000
Daniel Gladstone
/s/ JON HECHLER
------------------------------------------- Director April 4, 2000
Jon Hechler
/s/ RONALD S. SCHMIDT
------------------------------------------- Director April 4, 2000
Ronald S. Schmidt
/s/ THOMAS P. ORMANDY
------------------------------------------- Director April 4, 2000
Thomas P. Ormandy
/s/ NEAL J. FOX
------------------------------------------- Director April 4, 2000
Neal J. Fox
------------------------------------------- Director April , 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>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
I.C. Isaacs & Company, Inc.
Baltimore, Maryland
We have audited the accompanying consolidated balance sheets of I.C.
Isaacs & Company, Inc. and subsidiaries as of December 31, 1998 and 1999 and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1999. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of I.C.
Isaacs & Company, Inc. and subsidiaries at December 31, 1998 and 1999 and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1999 in conformity with generally accepted
accounting principles.
BDO SEIDMAN, LLP
Washington, D.C.
March 3, 2000
F-2
<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>
I.C. ISAACS & COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. STOCK OPTIONS
In May 1997, the Company adopted the 1997 Omnibus Stock Plan (the "Plan").
Under the 1997 Omnibus Stock Plan, the Company may grant qualified and
nonqualified stock options, stock appreciation rights, restricted stock or
performance awards, payable in cash or shares of common stock, to selected
employees. The Company has reserved 1,100,000 shares of common stock for
issuance under the 1997 Omnibus Stock Plan. Options vest at the end of the
second year and expire 10 years from the date of grant and upon termination of
employment.
The following table relates to options activity in 1998 and 1999 under the
Plan:
<TABLE>
<CAPTION>
NUMBER OF OPTION PRICE
SHARES PER SHARE
--------- ----------------
<S> <C> <C>
Options outstanding at December 31, 1997......... -- $ --
Granted.......................................... 351,000 $ 2.125
Cancelled........................................ (5,000) $ 2.125
-------- ----------------
Options outstanding at December 31, 1998......... 346,000 $ 2.125
Granted.......................................... 763,250 $ 1.188 to $2.03
Cancelled........................................ (113,000) $ 2.125
-------- ----------------
Options outstanding at December 31, 1999......... 996,250 $1.188 to $2.125
======== ================
</TABLE>
A summary of stock options outstanding and exercisable as of December 31,
1999 is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ------------------------------------------------------------- ----------------------
WEIGHTED WEIGHTED WEIGHTED
RANGE OF AVERAGE AVERAGE AVERAGE
EXERCISE NUMBER REMAINING EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING LIFE (YEARS) PRICE EXERCISABLE PRICE
- --------------------- ----------- ------------ -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$2.125....... 233,000 8.00 $2.125 -- $ --
$1.188 to $2.03..... 763,250 9.00 $ 1.36 70,000 $1.188
======= ==== ====== ====== ======
</TABLE>
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock Based
Compensation" ("SFAS 123"), but applies the intrinsic value method set forth in
Accounting Principles Board Opinion No. 25. For stock options granted to
employees, the Company has estimated the fair value of each option granted using
the Black-Scholes option pricing model with the following assumptions: risk-free
interest rate of 5.01% and 6.08%, expected volatility of 40% and 90%, expected
option life of 5.5 and 4.5 years and no dividend payment expected. Using these
assumptions, the fair value of the stock options granted is $1.00 and $0.84 for
1998 and 1999, respectively. There were no adjustments made in calculating the
fair value to account for vesting provisions or for non-transferability or risk
of forfeiture. The weighted average remaining life for options outstanding at
December 31, 1999 is eight years. If the Company had elected to recognize
compensation expense based
F-16
<PAGE>
I.C. ISAACS & COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. STOCK OPTIONS (CONTINUED)
on the fair value at the grant dates, consistent with the method prescribed by
SFAS No. 123, net loss per share would have been changed to the pro forma amount
indicated below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1998 1999
------------ ------------
<S> <C> <C>
Net loss:
As reported.................................... $(16,792,549) $(10,212,382)
Pro forma...................................... (17,108,549) (10,630,632)
Basic and diluted loss per share:
As reported.................................... $ (2.15) $ (1.47)
Pro forma...................................... (2.19) (1.53)
------------ ------------
</TABLE>
8. COMMITMENTS AND CONTINGENCIES
The Company rents real and personal property under leases expiring at
various dates through 2007. Certain of the leases stipulate payment of real
estate taxes and other occupancy expenses. Minimum annual rental commitments
under noncancellable operating leases in effect at December 31, 1999 are
summarized as follows:
<TABLE>
<CAPTION>
COMPUTER
TRUCKS SHOWROOMS HARDWARE TOTAL
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
2000.............................. $ 95,788 $ 438,863 $22,224 $ 556,875
2001.............................. 61,739 489,395 5,556 556,690
2002.............................. 39,864 318,556 -- 358,420
2003.............................. 39,864 263,539 -- 303,403
2004.............................. 39,864 -- -- 39,864
Thereafter........................ 80,398 -- -- 80,398
-------- ---------- ------- ----------
$357,517 $1,510,353 $27,780 $1,895,650
======== ========== ======= ==========
</TABLE>
Total rent expense is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1997 1998 1999
---------- ---------- ----------
<S> <C> <C> <C>
Minimum rentals.......................... $ 855,347 $ 796,367 $ 512,421
Other lease costs........................ 463,934 750,274 820,135
---------- ---------- ----------
$1,319,281 $1,546,641 $1,332,556
========== ========== ==========
</TABLE>
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-Registered Trademark- 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 sold its foreign BOSS-Registered Trademark-
trademark rights and related assets to Ambra and entered into a foreign rights
manufacturing agreement (the "Foreign Rights Agreement") with Ambra, which
allowed the Company to manufacture
F-17
<PAGE>
I.C. ISAACS & COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. COMMITMENTS AND CONTINGENCIES (CONTINUED)
apparel in certain foreign countries for sale in the United States using the
BOSS-Registered Trademark- brand and image in exchange for an annual royalty
payment. The Company retained ownership of its domestic
BOSS-Registered Trademark- 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-Registered Trademark-" throughout the world and agreed to issue, on
November 6, 1999, 2,000,000 shares of a newly designated Series A Convertible
Preferred Stock having an estimated fair market value of $2,000,000 in exchange
for the cancellation of the $11,250,000 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 part of Ambra to purchase the
Company's domestic BOSS-Registered Trademark- 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-Registered Trademark-" 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 new license
agreement, the Company will issue to Ambra, on April 30, 2000, 1,300,0000 shares
of the same series of convertible preferred stock having an estimated fair
market value of $1,300,000 and 666,667 shares of common stock, which had an
aggregate value of $1,000,000 based on the market price of $1.50 at the time the
parties agreed to the transaction. The new license agreement extends through
December 31, 2003, with renewal options, at the option of the Company, through
December 31, 2007. The minimum annual royalties under the new license agreement
are as follows:
<TABLE>
<S> <C>
2000........................................................ $3,200,000
2001........................................................ $3,200,000
2002........................................................ $2,600,000
2003........................................................ $2,100,000
</TABLE>
Total license fees amounted to $6,448,204, $3,746,315 and $2,910,013 for
1997, 1998 and 1999, respectively.
The percentage of BOSS-Registered Trademark- sportswear sales to total sales
was 74.6%, 74.1% and 44.4% for the years ended December 31, 1997, 1998 and 1999,
respectively.
In November 1997 and as further amended in March and November 1998, the
Company entered into an exclusive license agreement with Latitude Licensing
Corp. to manufacture and market men's jeanswear, casual wear, outerwear and
active influenced sportswear under the Girbaud-Registered Trademark- brand and
certain related trademarks in the United States, Puerto Rico and the U.S. Virgin
Islands. The initial term of the agreement extended through December 31, 1999.
The agreement has been extended through December 31, 2002, upon which date the
Company will have the option to renew the agreement for an additional five
years. Under the agreement, the Company is required to make payments to the
licensor in an amount
F-18
<PAGE>
I.C. ISAACS & COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. COMMITMENTS AND CONTINGENCIES (CONTINUED)
equal to 6.25% of net sales of regular licensed merchandise and 3.0% of certain
irregular and closeout licensed merchandise. Payments are subject to guaranteed
minimum annual royalties as follows:
<TABLE>
<S> <C>
2000........................................................ $2,000,000
2001........................................................ $2,500,000
</TABLE>
Beginning with the first quarter of 1998, the Company became obligated to
pay the greater of actual royalties earned or the minimum guaranteed royalties
for that year. The Company was required to spend at least $350,000 in
advertising for the men's Girbaud-Registered Trademark- brand in 1998 and is
required to spend at least $500,000 each year thereafter while the agreement is
in effect.
In March 1998, the Company entered into an exclusive license agreement with
Latitude Licensing Corp. to manufacture and market women's jeanswear, casual
wear and active influenced sportswear under the Girbaud-Registered Trademark-
brand and certain related trademarks in the United States, Puerto Rico and the
U.S. Virgin Islands. The initial term of the agreement extended through
December 31, 1999. The agreement has been extended through December 31, 2002,
upon which date the Company will have the option to renew the agreement for an
additional five years. In 1998, the Company paid an initial license fee of
$600,000. Under the agreement, the Company is required to make payments to the
licensor in an amount equal to 6.25% of net sales of regular licensed
merchandise and 3.0% of certain irregular and closeout licensed merchandise.
Payments are subject to guaranteed minimum annual royalties as follows:
<TABLE>
<S> <C>
2000........................................................ $ 800,000
2001........................................................ $1,000,000
</TABLE>
Beginning with the first quarter of 1999, the Company was obligated to pay
the greater of actual royalties earned or the minimum guaranteed royalties for
that year. The Company was required to spend at least $550,000 in advertising
for the women's Girbaud-Registered Trademark- brand in 1998 and is required to
spend at least $400,000 each year thereafter while the agreement is in effect.
In addition, while the agreement is in effect the Company is required to pay
$190,000 per year to the licensor for advertising and promotional expenditures
related to the Girbaud-Registered Trademark- brand. In December 1998, the
Girbaud-Registered Trademark- women's license agreement was amended to provide
that the Company would spend an additional $1.8 million on sales and marketing
in 1999 in conjunction with a one year deferral of the requirement that the
Company open a Girbaud retail store in New York City. Total license fees were
$1,200,000 and $2,356,669 for the years ended December 31, 1998 and 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
license agreement. The market value of the shares issued, as of the date of
issuance, was $750,000 and, together with the initial license fee of $600,000,
is being amortized over the remaining life of the agreement. Under the amended
license 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 January 2000, the Company entered into a global sourcing agreement with
G.I. Promotions to act a as a non-exclusive sourcing agent to licensees of the
Marithe & Francoise 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 Holding
S.A. ("Wurzburg"). The license has a term of three years and
F-19
<PAGE>
I.C. ISAACS & COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. COMMITMENTS AND CONTINGENCIES (CONTINUED)
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.
In May 1998, the Company entered into a license agreement with BHPC
Marketing, Inc., to manufacture and market boys knitted and woven shirts, cotton
pants, jeanswear, shorts, swimwear and outerwear under the Beverly Hills Polo
Club-Registered Trademark- brand in the United States and Puerto Rico. The
initial term of the agreement is three years, commencing January 1, 1999, with
renewal options for a total of six years. Under the agreement the Company is
required to make payments to the licensor in an amount equal to 5.0% of net
sales and was subject to a guaranteed annual minimum royalty of $50,000 in 1999.
Total license fees were $1,129,278, $1,073,989 and $803,281 for 1997, 1998 and
1999, respectively. Payments are subject to guaranteed minimum annual royalties
as follows:
<TABLE>
<S> <C>
2000........................................................ $661,000
2001........................................................ $736,000
--------
</TABLE>
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
Beverly Hills Polo Club-Registered Trademark- trademark in Europe. The
International Agreements, as amended, provide certain exclusive rights to use
the Beverly Hills Polo Club-Registered Trademark- trademark in all countries in
Europe for an initial term of three years ending December 31, 1999, renewable at
the Company's option, provided the Company is not in breach thereof at the time
the renewal notice is given, through five consecutive extensions ending December
31, 2007. The International Agreements are subject to substantially the same
terms and conditions as the Beverly Hills Polo Club-Registered Trademark-
Agreements described above. Effective March 1, 1999, BHPC Marketing, Inc.
amended the International Agreements to eliminate all royalties through December
31, 1999. For the period beginning January 1, 2000 and ending June 30, 2000, no
royalties, guaranteed minimum annual royalties or guaranteed net shipment
volumes apply; for the period beginning July 1, 2000 and ending December 31,
2000, the royalty rate shall be 3.0% of wholesale purchases by the Company of
Beverly Hills Polo Club products sold to Beverly Hills Polo Club stores
("Wholesale Purchases") and no guaranteed annual royalties shall apply; for the
period beginning 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; 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.
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 Company is party to employment agreements with four executive officers
as well as a consulting agreement which provide for specified levels of
compensation and certain other benefits. The agreements also provide for
severance payments from the termination date through the expiration date under
certain circumstances.
In the second quarter of 1998, the Company closed its Newton, Mississippi
manufacturing facility. This closure resulted in a charge of $0.2 million
against earnings for the period ended September 30, 1998. The production in this
facility, the majority of which was jeans, was transferred to a third party
F-20
<PAGE>
I.C. ISAACS & COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. COMMITMENTS AND CONTINGENCIES (CONTINUED)
independent contractors facilities in Mexico. The actual expenses incurred were
not significantly different than the reserve provided by the Company in the
first quarter.
In November 1998, the Company announced that it intended to close its
Carthage, Mississippi manufacturing facility. This closure, which occurred in
the first quarter of 1999, resulted in a charge of $0.3 million against earnings
in the fourth quarter of 1998. The production in this facility, the majority of
which was ladies pants and jeans under the Company's private labels, was
transferred to the remaining Company-owned plant in Raleigh, Mississippi, as
well as to independent contractors in Mexico.
In June 1999, the Company's President and Chief Operating Officer resigned.
As part of this action, the Company will pay a total of $700,000 over the next
two years. The Company also transferred a life insurance policy with a cash
surrender value of $50,000 to the former President and Chief Operating Officer.
Also in connection with this resignation, the Company purchased 84,211 shares of
common stock of the Company held by this individual at the market price of $1.19
per share, for a total of $100,000. This individual's options vested immediately
upon his resignation and are exercisable up to the tenth anniversary of the
grant date.
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.
9. RETIREMENT PLAN
The Company sponsors a defined benefit pension plan that covers
substantially all employees with more than one year of service. The Company's
policy is to fund pension costs accrued. Contributions to the plan reflect
benefits attributed to employees' service to date, as well as service expected
to be earned in the future. The benefits are based on the number of years of
service and the employee's compensation during the three consecutive complete
years of service prior to or including the year of termination of employment.
Plan assets consist primarily of common stocks, fixed income securities and
cash. The latest available actuarial valuation is as of December 31, 1999.
F-21
<PAGE>
I.C. ISAACS & COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. RETIREMENT PLAN (CONTINUED)
Pension expense for 1997, 1998 and 1999 was approximately $373,000, $616,000
and $390,000 respectively, and includes the following components:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------
1997 1998 1999
--------- --------- ---------
<S> <C> <C> <C>
Service cost of current period.............. $ 211,000 $ 267,000 $ 207,000
Interest on the above service cost.......... 17,000 20,000 15,000
--------- --------- ---------
228,000 287,000 222,000
Interest on the projected benefit
obligation................................ 618,000 712,000 609,000
Expected return on plan assets.............. (566,000) (630,000) (646,000)
Amortization of prior service cost.......... 42,000 42,000 42,000
Amortization of transition amount........... 31,000 31,000 31,000
Amortization of loss........................ 20,000 174,000 132,000
--------- --------- ---------
Pension cost................................ $ 373,000 $ 616,000 $ 390,000
========= ========= =========
</TABLE>
The following table sets forth the Plan's funded status and amounts
recognized at December 31, 1997, 1998 and 1999:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------
1997 1998 1999
---------- ----------- ----------
<S> <C> <C> <C>
Vested benefits......................................... $7,500,000 $ 8,653,000 $7,819,000
Nonvested benefits...................................... 43,000 103,000 110,000
---------- ----------- ----------
Accumulated benefit obligation.......................... 7,543,000 8,756,000 7,929,000
Effect of anticipated future compensation levels and
other events.......................................... 983,000 1,655,000 963,000
---------- ----------- ----------
Projected benefit obligation............................ 8,526,000 10,411,000 8,892,000
---------- ----------- ----------
Fair value of assets held in the plan................... 7,852,000 9,245,000 9,260,000
---------- ----------- ----------
(Excess)/deficit of projected benefit obligation over
plan assets........................................... (674,000) (1,166,000) 368,000
Unrecognized net loss from past experience different
from that assumed..................................... 935,000 2,519,000 1,868,000
Unrecognized prior service cost......................... 342,000 299,000 257,000
Unamortized liability at transition..................... 93,000 62,000 31,000
---------- ----------- ----------
Net prepaid periodic pension cost....................... $ 696,000 $ 1,714,000 $2,524,000
========== =========== ==========
</TABLE>
With respect to the above table, the weighted average discount rate used to
measure the projected benefit obligation was 8.0% for 1997 and 7.5% for 1998 and
1999; the rate of increase in future compensation levels is 3%; and the expected
long-term rate of return on assets is 8%. The net prepaid periodic pension cost
is included in other assets in the accompanying consolidated balance sheets.
10. FOURTH QUARTER ADJUSTMENTS
During the fourth quarter ended December 31, 1999, the Company increased the
inventory valuation reserve by $1,000,000, which had the effect of increasing
the net loss by $1,000,000 or $0.14 per share.
F-22
<PAGE>
I.C. ISAACS & COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. FOURTH QUARTER ADJUSTMENTS (CONTINUED)
During the fourth quarter ended December 31, 1998, the Company increased the
inventory valuation reserve by $2,500,000 and the valuation allowance related to
the deferred tax asset by $1,505,000 which had the effect of increasing the net
loss by $4,005,000 or $0.58 per share. During the fourth quarter ended December
31, 1997, the Company increased the allowance for doubtful accounts by $400,000,
which had the effect of reducing pro forma net income by $236,000 or $0.05 per
share.
11. RESTATEMENT OF THIRD QUARTER RESULTS
For the third 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 trademark (see
Note 8). 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 approximately $1,236,000 is being amortized over the initial
term of the License Agreement, which is 39 months. Application of the revised
accounting policy resulted in the following as of September 30, 1999:
<TABLE>
<CAPTION>
THREE
MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 1999
------------- -------------
<S> <C> <C>
Income (loss) as originally reported............... $ 604,052 $(4,440,444)
Effect of restatement.............................. (1,152,250) (1,152,250)
---------- -----------
Restated net loss.................................. $ (548,198) $(5,592,694)
========== ===========
Earnings (loss) per share as originally reported... $ 0.09 $ (0.65)
Effect of restatement.............................. (0.17) (0.17)
---------- -----------
Restated loss per common share..................... $ (0.08) $ (0.82)
========== ===========
</TABLE>
12. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for interest amounted to $2,213,776, $1,689,005
and $1,804,098 for 1997, 1998 and 1999, respectively. Cash paid for income taxes
was $1,799,450 in 1998.
Non-cash effect of restructuring BOSS-Registered Trademark- trademark and
licensing arrangement:
<TABLE>
<S> <C>
Transfer of BOSS-Registered Trademark- trademark............ $ 9,093,750
Exchange of note payable.................................... $11,250,000
Issuance of redeemable preferred stock...................... $ 2,000,000
Liability to issue preferred and common stock............... $ 2,300,000
Reduction of accrued royalties.............................. $ 996,000
Issuance of treasury stock in connection with an amendment
of the Girbaud-Registered Trademark- women's license
agreement................................................. $ 750,000
</TABLE>
During 1997, the Company purchased a trademark totaling $11,250,000 by
issuing a note payable.
F-23
