-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, IVmr8qf3XMQkUKlwvVGaOF13mE+GXUEi4ejJ1W61FnxbOoCvBRCjtnDkmlyG9psd JvAvu9HMSR3QYEV3MRNWyQ== 0000912057-00-016907.txt : 20000410 0000912057-00-016907.hdr.sgml : 20000410 ACCESSION NUMBER: 0000912057-00-016907 CONFORMED SUBMISSION TYPE: 10-K405/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000407 FILER: COMPANY DATA: COMPANY CONFORMED NAME: IC ISAACS & CO INC CENTRAL INDEX KEY: 0001041179 STANDARD INDUSTRIAL CLASSIFICATION: KNIT OUTERWEAR MILLS [2253] IRS NUMBER: 521377061 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405/A SEC ACT: SEC FILE NUMBER: 000-23379 FILM NUMBER: 596363 BUSINESS ADDRESS: STREET 1: 3840 BANK ST CITY: BALTIMORE STATE: MD ZIP: 21224 BUSINESS PHONE: 4103428200 MAIL ADDRESS: STREET 1: 3840 BANK STREET CITY: BALTOMORE STATE: MD ZIP: 21224 10-K405/A 1 FORM 10-K405/A - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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) 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)
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. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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 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 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.
I.C. ISAACS & COMPANY , INC. (REGISTRANT) By: /s/ ROBERT J. ARNOT ----------------------------------------- Robert J. Arnot CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER Date: April 4, 2000
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.
SIGNATURE TITLE DATE --------- ----- ---- 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
32 I.C. ISAACS & COMPANY, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE -------- 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
F-1 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 I.C. ISAACS & COMPANY, INC. CONSOLIDATED BALANCE SHEETS
DECEMBER 31, ------------------------- 1998 1999 ----------- ----------- 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 =========== ===========
See accompanying summary of accounting policies and notes to consolidated financial statements. F-3 I.C. ISAACS & COMPANY, INC. CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, ------------------------------------------- 1997 1998 1999 ------------ ------------- ------------ 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 ============ ============= ============
See accompanying summary of accounting policies and notes to consolidated financial statements. F-4 I.C. ISAACS & COMPANY, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
PREFERRED STOCK COMMON STOCK ADDITIONAL ------------------- -------------------- PAID-IN RETAINED TREASURY SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS STOCK TOTAL -------- -------- --------- -------- ----------- ------------ ----------- ----------- 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 === === ========= ==== =========== ============ =========== ===========
See accompanying summary of accounting policies and notes to consolidated financial statements. F-5 I.C. ISAACS & COMPANY, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, ------------------------ 1997 1998 1999 ----------- ------------ ------------ 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 =========== ============ ============
See accompanying summary of accounting policies and notes to consolidated financial statements. F-6 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 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 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 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 I.C. ISAACS & COMPANY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. INVENTORIES Inventories consist of the following:
DECEMBER 31, ------------------------- 1998 1999 ----------- ----------- 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 =========== ===========
2. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consists of the following:
ESTIMATED USEFUL 1998 1999 LIVES ----------- ----------- --------- 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 =========== =========== =========
3. LONG-TERM DEBT Long-term debt consists of the following:
DECEMBER 31, ------------------------ 1998 1999 ----------- ---------- 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 $ -- =========== ==========
- ------------------------ (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 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:
YEAR ENDED DECEMBER 31, ----------------------- 1998 1999 ---------- ---------- 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
- ------------------------ (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 I.C. ISAACS & COMPANY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 4. ACCRUED EXPENSES Accrued expenses consist of the following:
DECEMBER 31, ----------------------- 1998 1999 ---------- ---------- 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 ========== ==========
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:
YEARS ENDED DECEMBER 31, ------------------------------------- 1997 1998 1999 ----------- ---------- ---------- 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 =========== ========== =========
F-13 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:
DECEMBER 31, ------------------------ 1998 1999 ---------- ----------- 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.............................. $ -- $ -- ========== ===========
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:
YEAR ENDED DECEMBER 31, ------------ 1997 ------------ Current Federal................................................... $4,796,000 State..................................................... 1,021,000 ---------- 5,817,000 Deferred.................................................... (200,000) ---------- $5,617,000 ==========
A reconciliation between the statutory and effective tax rates (pro forma tax for 1997) is as follows:
YEARS ENDED DECEMBER 31, -------------------------------- 1997 1998 1999 -------- -------- -------- 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% ==== ===== =====
F-14 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 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:
NUMBER OF OPTION PRICE SHARES PER SHARE --------- ---------------- 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 ======== ================
A summary of stock options outstanding and exercisable as of December 31, 1999 is as follows:
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 - --------------------- ----------- ------------ -------- ----------- -------- $2.125....... 233,000 8.00 $2.125 -- $ -- $1.188 to $2.03..... 763,250 9.00 $ 1.36 70,000 $1.188 ======= ==== ====== ====== ======
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 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:
YEAR ENDED DECEMBER 31, --------------------------- 1998 1999 ------------ ------------ 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) ------------ ------------
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:
COMPUTER TRUCKS SHOWROOMS HARDWARE TOTAL -------- ---------- -------- ---------- 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 ======== ========== ======= ==========
Total rent expense is as follows:
YEAR ENDED DECEMBER 31, ------------------------------------ 1997 1998 1999 ---------- ---------- ---------- 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 ========== ========== ==========
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 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: 2000........................................................ $3,200,000 2001........................................................ $3,200,000 2002........................................................ $2,600,000 2003........................................................ $2,100,000
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 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: 2000........................................................ $2,000,000 2001........................................................ $2,500,000
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: 2000........................................................ $ 800,000 2001........................................................ $1,000,000
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 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: 2000........................................................ $661,000 2001........................................................ $736,000 --------
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 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 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:
YEARS ENDED DECEMBER 31, --------------------------------- 1997 1998 1999 --------- --------- --------- 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 ========= ========= =========
The following table sets forth the Plan's funded status and amounts recognized at December 31, 1997, 1998 and 1999:
YEARS ENDED DECEMBER 31, ------------------------------------- 1997 1998 1999 ---------- ----------- ---------- 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 ========== =========== ==========
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 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:
THREE MONTHS NINE MONTHS ENDED ENDED SEPTEMBER 30, SEPTEMBER 30, 1999 1999 ------------- ------------- 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) ========== ===========
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: 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
During 1997, the Company purchased a trademark totaling $11,250,000 by issuing a note payable. F-23 -----END PRIVACY-ENHANCED MESSAGE-----