10-K 1 a2043878z10-k.txt 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-K Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31, 2000 Commission File No. 0-23379 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, $.0001 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. As of March 30, 2001, the aggregate market value of the outstanding shares of the Registrant's Common Stock held by non-affiliates was approximately $4,168,268 based on the average closing price of the Common Stock as reported by the Nasdaq National Market on March 30, 2001. Determination of affiliate status for this purpose is not a determination of affiliate status for any other purpose. As of March 30, 2001, 7,864,657 shares of Common Stock were outstanding. DOCUMENT INCORPORATED BY REFERENCE Specified portions of the definitive Proxy Statement for the 2001 Annual Meeting of Stockholders of I.C. Isaacs & Company, Inc. to be held on June 8, 2001 are incorporated by reference into Part III hereof. 1 I.C. ISAACS & COMPANY, INC. FORM 10-K TABLE OF CONTENTS
PAGE PART I ITEM 1. BUSINESS 4 ITEM 2. PROPERTIES 15 ITEM 3. LEGAL PROCEEDINGS 16 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 16 PART II ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS 17 ITEM 6. SELECTED FINANCIAL DATA 18 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 20 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 27 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE 28 PART III *ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY 28 *ITEM 11. EXECUTIVE COMPENSATION 28 *ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 28 *ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 28 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K 29 SIGNATURES 32
--------------- * Incorporated by reference from the Registrant's definitive Proxy Statement for the 2001 Annual Meeting of Stockholders to be held June 8, 2001. The Proxy Statement will be filed not later than 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K. 2 "I. C. Isaacs" and "I.G. Design" are trademarks of the Company. The Company has filed a federal trademark application for the mark "Urban Expedition (UBX)." All other trademarks or service marks, including "Girbaud" and "Marithe and Francois Girbaud" (collectively, "Girbaud"), "BOSS" and "Beverly Hills Polo Club" appearing in this Annual Report on Form 10-K are the property of their respective owners and are not the property of the Company. IMPORTANT INFORMATION REGARDING FORWARD-LOOKING STATEMENTS THIS ANNUAL REPORT ON FORM 10-K CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. THOSE STATEMENTS INCLUDE STATEMENTS REGARDING THE INTENT, BELIEF OR CURRENT EXPECTATIONS OF THE COMPANY AND ITS MANAGEMENT, INCLUDING THE COMPANY'S BELIEF REGARDING THE PROMINENCE OF THE GIRBAUD BRAND IN THE COMPANY'S FUTURE, THE COMPANY'S INTENT WITH RESPECT TO THE DISCONTINUANCE OF THE WOMEN'S COMPANY-OWNED AND PRIVATE LABEL LINES, AND THE REDUCTION IN THE USE OF INDEPENDENT CONTRACTORS IN MEXICO, THE COMPANY'S BELIEFS REGARDING THE EFFECTS OF THE TRANSFER OF SUCH PRODUCTION TO ASIA, THE COMPANY'S EXPECTATIONS FOR 2001 AND STATEMENTS REGARDING ANTICIPATED AND/OR INTENDED COST SAVINGS AND ANTICIPATED WORKING CAPITAL NEEDS. WORDS SUCH AS "BELIEVES," "ANTICIPATES," "EXPECTS," "INTENDS," "PLANS," AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS BUT ARE NOT THE EXCLUSIVE MEANS OF IDENTIFYING SUCH STATEMENTS. SUCH STATEMENTS ARE FORWARD-LOOKING STATEMENTS WHICH ARE SUBJECT TO A VARIETY OF RISKS AND UNCERTAINTIES, MANY OF WHICH ARE BEYOND THE COMPANY'S CONTROL, WHICH COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE CONTEMPLATED IN SUCH FORWARD-LOOKING STATEMENTS, INCLUDING IN PARTICULAR THE RISKS AND UNCERTAINTIES DESCRIBED UNDER "RISK FACTORS" IN THE COMPANY'S PROSPECTUS, WHICH INCLUDE, AMONG OTHER THINGS (i) CHANGES IN THE MARKETPLACE FOR THE COMPANY'S PRODUCTS, INCLUDING CUSTOMER TASTES, (ii) THE INTRODUCTION OF NEW PRODUCTS OR PRICING CHANGES BY THE COMPANY'S COMPETITORS, (iii) CHANGES IN THE ECONOMY, AND (iv) TERMINATION OF ONE OR MORE OF ITS AGREEMENTS FOR USE OF THE BEVERLY HILLS POLO CLUB AND GIRBAUD BRAND NAMES AND IMAGES IN THE MANUFACTURE AND SALE OF THE COMPANY'S PRODUCTS. EXISTING AND PROSPECTIVE INVESTORS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING STATEMENTS, WHICH SPEAK ONLY AS OF THE DATE HEREOF. THE COMPANY UNDERTAKES NO OBLIGATION TO UPDATE OR REVISE THE INFORMATION CONTAINED IN THIS ANNUAL REPORT ON FORM 10-K, WHETHER AS A RESULT OF NEW INFORMATION, FUTURE EVENTS OR CIRCUMSTANCES OR OTHERWISE. 3 PART I ITEM 1. BUSINESS INTRODUCTION I.C. Isaacs & Company, Inc. (together with its predecessors, subsidiaries and affiliated companies, including I.C. Isaacs & Company L.P., the "Company") is a designer and marketer of branded jeanswear and sportswear. Founded in 1913, the Company offers collections of men's and women's jeanswear and sportswear under various labels. The Company offers collections of men's and women's jeanswear and sportswear under the Girbaud designer brand in the United States and Puerto Rico and collections of sportswear for men and boys under the Beverly Hills Polo Club brand in the United States, Puerto Rico and Europe. In 2000, the Company entered into an agreement for the distribution of its Girbaud line in Canada. The Company also offers women's pants and jeans under various Company owned brand names as well as under third party private labels for sale to major chain stores and catalogs. In 1999, the Company introduced a collection of men's sportswear under the Company owned Urban Expedition (UBX) brand in the United States and Europe. During the past several years, the Company also offered collections of jeanswear and sportswear for young men and boys under the BOSS brand in the United States and Puerto Rico. In the fourth quarter of 2000 the Company began negotiations to terminate its rights under the license agreement for the design and marketing of the BOSS brand. In the fourth quarter of 2000, the Company decided that it intended to discontinue production of the women's Company-owned and private label lines. See and "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Notes 3 and 8 to the Consolidated Financial Statements. In November 1997, the Company acquired an exclusive license to manufacture and market certain men's jeanswear and sportswear under the Girbaud brand in the United States and Puerto Rico. In March 1998, the Company acquired an exclusive license to manufacture and market certain women's jeanswear and sportswear under the Girbaud brand in the United States and Puerto Rico. The Girbaud brand is an internationally recognized designer label with a distinct European influence. The Company has positioned the Girbaud line with a broad assortment of products, styles and fabrications reflecting a contemporary European look. The Company markets a full collection of men's jeanswear and sportswear under the Girbaud brand. In August 1998, the Company introduced a women's sportswear collection under the Girbaud brand, which also includes a wide array of products. In May 2000, the Company acquired an exclusive license to market certain men's and women's jeanswear and sportswear under the Girbaud brand in Canada and in December, 2000, it began to make shipments. To date, sales in Canada have been immaterial. Net sales of Girbaud products accounted for 69.6% and 32.9% of the Company's sales in 2000 and 1999, respectively. Based on its performance in 2000 and 1999, the Company believes that the Girbaud brand has established itself as the dominant part of the Company's future. The Company markets certain sportswear under the Beverly Hills Polo Club brand in the United States, Puerto Rico and Europe under an exclusive license. With its Beverly Hills Polo Club brand, the Company targets men and boys who desire updated traditional sportswear at competitive prices. The Company's Beverly Hills Polo Club line was introduced in the spring of 1994. Net sales of Beverly Hills Polo Club sportswear accounted for 13.4% and 17.3% of the Company's net sales in 2000 and 1999, respectively. The Company also markets a limited number of pants and jeans styles for women under its own "I.C. Isaacs" brand name and under third party private labels for sales to major chain stores and catalogs. Net sales of these labels accounted for 3.5% and 6.1% of the Company's net sales in 2000 and 1999, respectively. In the fourth quarter of 2000, the Company decided that it intended to discontinue production of the women's Company-owned and private label lines. 4 In 1999, the Company launched a Company owned brand of men's sportswear, Urban Expedition (UBX) in the United States and Europe. The Company began shipping UBX products in the first quarter of 2000. Net sales of UBX sportswear accounted for 2.2% of the Company's net sales in 2000. Until recently, the Company also manufactured and marketed certain sportswear under the BOSS brand for sale at specified price points in the United States and Puerto Rico, subject to a licensing agreement with Ambra, Inc. ("Ambra"). In October 2000, the Board of Directors authorized the appropriate officers of the Company to negotiate a termination of the licensing agreement for use of the BOSS trademark. In March, 2001, the Company and Ambra executed an agreement to terminate the Company's rights under the licensing agreement (the "License Rights Termination Agreement"). Under the terms of the License Rights Termination Agreement, the Company will have until October 31, 2001 to sell, or dispose of, existing BOSS inventory. Net sales of BOSS sportswear accounted for 11.3% and 43.7% of the Company's net sales in 2000 and 1999, respectively. PRODUCTS The Company's jeanswear and sportswear collections under the Girbaud, Beverly Hills Polo Club and UBX brands provide a broad range of product offerings for young men, women and boys, including a variety of tops, bottoms and outerwear. While each of these brands reflects a distinct image and style, they are all targeted to consumers who are seeking quality, fashionable products at competitive prices. GIRBAUD PRODUCTS Girbaud is an internationally recognized designer brand. The Company markets innovative European-inspired men's and women's jeanswear and sportswear collections under the Girbaud label. The Girbaud collections include full lines of bottoms consisting of jeans and casual pants in a variety of fabrications, including denim, stretch denim, cotton twill and nylon, cotton tee shirts, polo shirts, knit and woven tops, sweaters and outerwear. Reflecting contemporary European design, each of these collections is characterized by innovative styling and fabrication and is targeted to consumers ages 16 to 50. Estimated retail prices range from $20 to $25 for tee shirts, $50 to $75 for tops and bottoms, $60 to $90 for sweaters and $80 to $200 for outerwear. BEVERLY HILLS POLO CLUB PRODUCTS The Beverly Hills Polo Club sportswear products are positioned to be an updated traditional sportswear brand. The products combine contemporary design details and innovative fabric with classic American styling. The Beverly Hills Polo Club line includes a broad array of tops such as tee shirts, polo shirts, rugby shirts, denim shirts and sweatshirts made primarily in cotton fabrics such as pique, jersey and jersey fleece. The tops line is distinguished by innovative use of design, embroidery and fabric detail. Estimated retail prices range from $19 to $22 for tee shirts, $30 to $60 for tops and $60 to $120 for outerwear. The collection also includes a full line of bottoms including denim jeans, twill pants and corduroy casual pants as well as outerwear. Estimated retail prices for jeans and casual pants range from $40 to $55 per pair. URBAN EXPEDITION (UBX) PRODUCTS The UBX brand is positioned to appeal to consumers seeking an upscale urban look. This focused line includes denim jeans, shorts, jackets, vests, printed woven shirts, tee shirts and sweaters. Estimated retail prices range from $20 to $25 for tee shirts, $20 to $60 for tops and $45 to $60 for jeans. 5 OTHER COMPANY-OWNED AND THIRD-PARTY PRIVATE LABEL PRODUCTS The Company also produces a limited number of pants and jean styles for women under its own I.C. Isaacs brands as well as under customers' private labels for sale to major chain stores and catalogs. These brands focus on pull-on elastic waist pants and jeans. These pants are designed to appeal to more mature women looking for basic styling at value prices. The Company offers pants in a variety of fits, including missy, petite and large sizes. Estimated retail prices range from $15 to $24. In the fourth quarter of 2000, the Company decided that it intended to discontinue production of the women's Company-owned and private label lines. CUSTOMERS AND SALES The Company's products are sold in over 2,500 specialty stores, specialty store chains and department stores. The Company uses both sales representatives and distributors for the sale of its products. Sales representatives include employees of the Company as well as independent contractors. Each of the Company's distributors and non-employee sales representatives has an agreement with the Company pursuant to which the distributor or sales representative serves as the exclusive distributor or sales representative of specified products of the Company within a specified territory. The Company does not have long-term contracts with any of its customers. Instead, its customers purchase the Company's products pursuant to purchase orders and are under no obligation to continue to purchase the Company's products. The Company began marketing men's sportswear under the Girbaud brand in February 1998 and introduced a women's sportswear collection under the Girbaud brand in the second quarter of 1998. The Company's Girbaud men's products are being sold to more than 1,300 stores in the United States and Puerto Rico, including major department stores such as Bloomingdales, Macy's East, Macy's West, Burdines, Saks, Inc., the May Company and Dayton Hudson, and many prominent specialty stores such as The Atrium in New York, Fred Segal Santa Monica, The Buckle, The Lark and Maurices. The Company's Girbaud women's line is now being sold to more than 600 stores. The Company's Girbaud brand products are sold and marketed domestically under the direction of an 9-person sales force headquartered in New York. The Company's Girbaud brand products are sold in Canada pursuant to an exclusive distribution agreement with Western Glove Works. The Company began shipments to Canada in December, 2000. To date, sales in Canada have been immaterial. The Company's Beverly Hills Polo Club sportswear is sold in the United States, Puerto Rico and Europe to over 1,000 specialty stores, specialty store chains and department stores, including J.C. Penney Company, Inc. The Company's Beverly Hills Polo Club products are sold and marketed under the direction of its national sales offices in New York. In addition to executive selling based in New York and Dallas, the Company has a sales force consisting of 11 Beverly Hills Polo Club sales representatives. The Company's Beverly Hills Polo Club sportswear is sold in seven countries in Europe primarily through wholesale distributors, all of whom buy products directly from the Company. The Company currently has wholesale distribution arrangements with distributors in France, Germany, Greece, Norway, Sweden and Switzerland. Under these arrangements, the distributors purchase goods from the Company's Spanish subsidiary in United States dollars under irrevocable letters of credit or by prepayment, thereby minimizing the Company's credit risk. The Company also utilizes sales representatives to sell directly to stores in Spain. All of those direct sales are secured by a credit insurance company. The Company has also established two franchise stores in Spain. To date, sales of the Company's Beverly Hills Polo Club products in Europe have been immaterial. The Company began shipping its UBX brand in February 2000. The Company's UBX products are sold and marketed under the direction of its national sales office headquartered in New York. The Company's UBX line is sold in Europe primarily through wholesale distributors, all of whom buy products directly from the Company. The Company currently has wholesale distribution arrangements for sales of its UBX brand with distributors in Austria, Belgium, Denmark, Finland, Germany, The Netherlands, Norway, and Switzerland and has sales representatives to sell directly to stores in Spain. The Company-owned branded products and third-party private label products are sold under the direction of the sales headquarters in New York. The products are distributed to department stores such as Boscov's; mass merchandisers and discounters such as Ames Department Stores, Inc.; and catalogs such as Bedford Fair and Arizona Mail Order Company, Inc. None of the Company's customers accounted for 10% or more of sales in 2000. The Company's single largest customer in 1999 was J.C. Penney Company, Inc., which accounted for 14.2% of net sales. No other customer of the Company accounted for 10.0% or more of net sales in 1999. 6 DESIGN AND MERCHANDISING The Company's designers and merchandisers travel around the world to monitor emerging fashion trends and search for styling inspiration and fabrics. These sources, together with new styling and graphics developed by the Company's designers, serve as the primary creative influences for the Company's product lines. In addition, merchandisers and designers involved with the development of Girbaud products are provided with the Girbaud collections from Europe twice a year and collaborate with Marithe and Francois Girbaud and their staff in the development of the Company's Girbaud product lines for sale in the United States. Merchandisers also regularly meet with sales management to gain additional market insight and further refine the products to be consistent with the needs of each of the Company's markets. The Company's in-house design and product development is carried out by merchandising departments in New York. Many of the Company's products are developed using computer-aided design equipment, which allows designers to view and easily modify images of a new design. The Company currently has 18 people on the design staff in New York City. Design expenditures were approximately $2.1 million in 1999 and 2000. The Company estimates these expenses will decrease in 2001. ADVERTISING AND MARKETING The Company prides itself on its ability to efficiently utilize its advertising budget. Although the Company spent approximately $2.0 million or 2.1% of net sales on advertising in 2000, this is a relatively modest amount as compared with some of its competitors. In 1999, the Company's expenditures for advertising and marketing activities totaled $2.8 million. The Company aggressively communicates and reinforces the brand and image of its Girbaud and Beverly Hills Polo Club products through creative and innovative advertising and marketing efforts. The Company's advertising and marketing strategies are directed by its national sales offices and developed in collaboration with its advertising agencies and, in the case of Girbaud, with Girbaud's European offices and Paris advertising agency. The Company's advertising strategy is geared towards its youthful and contemporary consumers, whose lifestyles are influenced by music, sports and fashion. The Company has been advertising the Beverly Hills Polo Club brand since 1994 and the Girbaud brand since 1998. Its advertising campaigns have evolved from trade magazines to a wide variety of media, including billboards, fashion magazines, radio and special events. The Company has a multifaceted marketing campaign for its Girbaud brand, which includes print advertisement in magazines such as JANE, MARIE CLAIRE, SPIN, STUFF AND VIBE magazines. The campaign also includes outdoor advertising point of sale materials and promotions, and celebrity wardrobing. As a first tier designer brand, Girbaud also presents international runway shows as well as appearing in major trade shows. Recognizing that point of sale brand presentation and images are highly effective, the Company also provides an array of in-store signage, fixtures and product videos for its Girbaud products. In addition, through the "Shop-in-Shop" concept, the Company provides key department stores and specialty stores with both fixtures and visuals to enhance brand recognition and to differentiate Girbaud products from other branded apparel. The Girbaud "Shop-in-Shops" are designed to create an environment that is consistent with the image of Girbaud as a unique designer brand. Currently, approximately 53 stores are using the "Shop-in-Shop" concept to showcase the Company's Girbaud products. PRODUCT SOURCING GENERAL The Company believes that its sourcing capabilities enable it to effectively control the timing, quality and pricing of products while providing customers with increased value. During 2000, the Company used both domestic and foreign contractors for the production of its products. During 2000, approximately 20.9% of the Company's purchases of raw materials, labor and finished goods for its apparel were made in Mexico; approximately 45.5% were made in Asia; approximately 23.9% were made at third-party facilities in the United States; and the balance was made at the Company's facilities in the United States. Approximately 90.3% of the Company's manufacturing and sourcing in 2000 was done by 7 third parties, all through arrangements with independent contractors. Each of the Company's independent contractors and independent buying agents has an agreement with the Company pursuant to which it performs manufacturing or purchasing services for the Company on a non-exclusive basis. The Company evaluates its contractors frequently and believes that there are a number of manufacturers capable of producing products that meet the Company's quality standards. The Company has the ability to terminate its arrangements with any of its contractors at any time. 8 UNITED STATES AND MEXICO In the second quarter of 2000 the Company announced that it intended to close its last company-owned manufacturing facility in Raleigh, Mississippi. This closure, which occurred in the third quarter of 2000, resulted in a charge against earnings of $0.2 million in the second quarter. The production in this facility was transferred to third party independent contractor facilities in Mexico. In 2000, the Company produced approximately 9.7% of its bottoms (slacks, jeans, shorts and skirts) at this facility. In the fourth quarter of 2000, the Company decided to dramatically reduce the use of independent contractors' facilities in Mexico by the end of the second quarter of 2001. In 2000, the Company utilized independent contractors in Mexico for approximately 20.9% of total production. The production of these independent contractors in Mexico will be transferred to independent contractors in Asia. By moving most of this production to Asia, where the Company generally purchases the bottoms as finished goods, the Company believes it will obtain greater flexibility of quantities and styles ordered. This decision resulted in the termination of certain employees who will be paid severance in the first and second quarters of 2001. This severance resulted in a charge against earnings of $0.2 million in the fourth quarter of 2000. The Company uses a variety of contractors in the United States as needed for value added functions such as embroidery and screen printing of T-shirts. ASIA The majority of the Company's sportswear products are produced by approximately 21 different manufacturers in 6 countries in Asia. Virtually all of the Company's products other than pants and tee shirts are produced in Asia, but none of the Asian contractors engaged by the Company accounted for more than 10.0% of the Company's total production in 2000. The Company has well established relationships with many of its contractors, although it does not have written agreements with them. The Company retains independent buying agents in various countries in Asia to assist in selecting and overseeing independent manufacturers, sourcing fabric, trim and other materials and monitoring quotas. Independent buying agents also perform quality control functions on behalf of the Company, including inspecting materials and manufactured products prior to accepting delivery. The sourcing and merchandising staffs in the Company's New York offices oversee Asian fabric and product development, apparel manufacturing, price negotiation and quality control, as well as the research and development of new Asian sources of supply. The Company seeks to achieve the most efficient means for the timely delivery of its high quality products. With rare exceptions, the Company does not purchase fabrics but instead negotiates a finished garment price from its contractors. The contractor must then purchase the approved fabric as part of the package. All of the Company's products manufactured abroad are paid for in United States dollars. Accordingly, the Company does not engage in any currency hedging transactions. During the last several years, the percentage of the Company's products produced in Asia has increased dramatically, and will represent the majority of all products produced for the Company in 2001. WAREHOUSING AND DISTRIBUTION The Company services its United States customers utilizing a 70,000 square foot Company-owned and operated distribution center in Milford, Delaware. The Company has established a computerized "Warehouse Management System" with real-time internal tracking information and the ability to provide its customers with electronically transmitted "Advance Shipping Notices." The accuracy of shipments is increased by the ability to scan coded garments at the packing operation. This process also provides for computerized routing and customer invoicing. The vast majority of shipments are handled by UPS, common carriers or parcel post. The Company also has a warehouse in Carthage, Mississippi. The Company currently services its European customers through a contractual arrangement with a distribution center in Barcelona, Spain, where the Company maintains its European headquarters. 9 QUALITY CONTROL The Company's quality control program is designed to ensure that all of the Company's products meet its high quality standards. Frequent visits are made by the quality control staff to all outside contractors to ensure compliance with the Company's quality standards. Audits are also performed by quality control personnel at the Milford, Delaware distribution center on all categories of incoming merchandise. All garments produced for the Company in Asia must be produced in accordance with the Company's specifications. The Company's import quality control program is designed to ensure that all of the Company's products meet its high quality standards. The Company monitors the quality of fabrics prior to the production of garments and inspects prototypes of products before production runs are commenced. In many cases, the Company requires its agents or manufacturers to submit fabric to an independent outside laboratory for testing prior to production. The Company requires each agent to perform both in-line and final quality control checks during and after production before the garments leave the contractor. Personnel from the Company's New York office also visit Asia to conduct inspections. BACKLOG AND SEASONALITY The Company's business is impacted by the general seasonal trends that are characteristic of the apparel and retail industries. In the Company's segment of the apparel industry, sales are generally higher in the first and third quarters. The Company generally receives orders for its products three to five months prior to the time the products are delivered to the stores. As of December 31, 2000, the Company had unfilled orders of approximately $32.0 million, compared to approximately $29.0 million of such orders as of December 31, 1999. The Company expects to fill substantially all of these orders in 2001. The backlog of orders at any given time is affected by a number of factors, including seasonality, weather conditions, scheduling of manufacturing and shipment of products. During 2000, increased demand for the Company's Girbaud products resulted in the improvement in backlog. All such orders are subject to cancellation for various reasons such as late delivery. Accordingly, a comparison of backlogs of orders from period to period is not necessarily meaningful and may not be indicative of eventual actual shipments. LICENSES AND OTHER RIGHTS AGREEMENTS The Company's business is heavily dependent upon its use of the Girbaud brand name and image and, to a lesser extent, the Beverly Hills Polo Club brand names and images, which are in turn dependent upon the existence and continuation of certain licenses as described below. GIRBAUD LICENSES GIRBAUD DOMESTIC LICENSES In November 1997, the Company entered into an exclusive license agreement (the "Girbaud Men's Agreement") with Girbaud Design, Inc. and its affiliate Wurzburg Holding S.A. ("Wurzburg") to manufacture and market men's jeanswear, casualwear and outerwear under the Girbaud brand and certain related trademarks (the "Girbaud Marks") in all channels of distribution in the United States, including Puerto Rico and the U.S. Virgin Islands. In March 1998, the Girbaud Men's Agreement was amended and restated to include active influenced sportswear as a licensed product category and to name Latitude Licensing Corp. as the licensor (the "Licensor"). Also in March 1998, the Company entered into an exclusive license agreement (the "Girbaud Women's Agreement" and, together with the Girbaud Men's Agreement, the "Girbaud Agreements") with the Licensor to manufacture and market women's jeanswear, casualwear and outerwear, including active influenced sportswear, under the Girbaud Marks in all channels of distribution in the United States, including Puerto Rico and the U.S. Virgin Islands. The Girbaud Agreements include the right to manufacture the licensed products in a number of foreign countries, and both had initial terms of two years. The Girbaud Agreements have been extended until December 31, 2002, upon which date the Company will have the option to renew the agreements for an additional five years. The Girbaud Agreements generally allow the Company to use the Girbaud Marks on apparel designed by or for the Company or based on designs and styles previously associated with the Girbaud brand, subject to quality control by the Licensor over the final designs of the products, marketing and advertising material and manufacturing premises. The Girbaud Agreements provide that they may be terminated by the Licensor upon the occurrence of certain events, including, but not limited to, a breach by the Company of any obligation under the agreements that remains uncured following certain specified grace periods. 10 Under the Girbaud Men's Agreement the Company is required to make payments to the Licensor in an amount equal to 6.25% of the Company's net sales of regular licensed merchandise and 3.0% in the case of certain irregular and closeout licensed merchandise. The Company was subject to guaranteed minimum annual royalty payments of $2.0 million in 2000, and is subject to guaranteed minimum annual royalty payments of $2.5 million in 2001 and $3.0 million each year from 2002 through 2007. On a monthly basis during the term, the Company is obligated to pay 8.3% of the minimum guaranteed royalties for that year. On a quarterly basis during the term, the Company is required to pay the amount that the actual royalties exceed the total minimum guaranteed royalties for that quarter. The Company is required to spend at least $500,000 in advertising men's Girbaud brand products each year through the term of the Girbaud Men's Agreement. Under the Girbaud Women's Agreement the Company is required to make payments to the Licensor in an amount equal to 6.25% of the Company's net sales of regular licensed merchandise and 3.0% in the case of certain irregular and closeout licensed merchandise. The Company was subject to guaranteed minimum annual royalty payments of $800,000 in 2000, and is subject to guaranteed minimum annual royalty payments of $1.0 million in 2001 and $1.5 million each year from 2002 through 2007. On a monthly basis during the term, the Company is obligated to pay 8.3% of the minimum guaranteed royalties for that year. On a yearly basis, the Company is required to pay the amount that the actual royalties exceed the total minimum guaranteed royalties for that year. The Company is required to spend at least $400,000 in advertising women's Girbaud brand products in each year through the term of the Girbaud Women's Agreement. In addition, over the term of the Girbaud Women's Agreement the Company is required to contribute $190,000 per year to the Licensor's advertising and promotional expenditures for the Girbaud brand. The Girbaud Women's Agreement initially required the Company to open a Girbaud flagship store for the sale of the Company's Girbaud men's and women's lines and other Girbaud licensed merchandise in New York City by the end of 1998. In December 1998, the Girbaud Women's Agreement was amended to defer this requirement for one year and to provide that the Company would spend an additional $1.8 million on enhanced sales and marketing in 1999. In August, 1999, the Company issued 500,000 shares of restricted common stock to Latitude Licensing Corp. in connection with an amendment of the Girbaud Women's Agreement to further defer the obligation to open a Girbaud retail store. Under the new agreement, if the Company has not signed a lease agreement for a Girbaud retail store by July 31, 2002, it will become obligated to pay Latitude Licensing Corp. an additional $500,000 in royalties. In November 1998, the Company entered into amendments (the "Girbaud Amendments") to the Girbaud Agreements allowing distribution through an approved distributor in selected countries in Central and South America and the Caribbean. The Girbaud Amendments are effective until November 12, 2001 or until expiration of the Girbaud Agreements, whichever is earlier. In the event that the Company does not achieve more than 75% of target sales levels in any Central or South American or Caribbean country, its license to distribute Girbaud products in that country will become non-exclusive effective starting the following year. The Company did not achieve more than 75% or more of target sales levels in 1999 or 2000. To date, sales to the region have been immaterial. In May 2000, the Company entered into an exclusive distribution agreement for Girbaud men's and women's jeanswear and sportswear products in Canada. The Company will sell to Western Glove Works ("Distributor") Girbaud products produced in Mexico or the United States at cost plus 12.0%, which is less than its normal profit margins on sales of comparable products to the Company's retail customers. For products purchased by the Distributor from overseas, the Distributor will pay a distributor's fee equal to 6.75% of net sales to the Company. Under the agreement, the Distributor will pay a royalty fee equal to 6.25% of net sales to the Company, which will in turn pay the royalty to Latitude Licensing Corp. The initial term of the agreement expires on December 31, 2001. The Distributor may renew the agreement for six additional one-year terms. The minimum sales level for calendar 2001 is $1,600,000 (Canadian Dollars), which results in a minimum distribution fee payable to the Company of $48,000 (Canadian Dollars). There were no minimum sales levels or distribution fees for calendar year 2000. In January 2000, the Company entered into a global sourcing agreement with G.I. Promotions to act as a non-exclusive sourcing agent to licensees of the Marithe & Francois Girbaud trademark for the manufacture of Girbaud jeanswear and sportswear. The global sourcing agreement extends until December 31, 2003 and provides that the Company shall net a facilitation fee of 5.0% of the total FOB pricing for each order shipped to licensees under the agreement. Also in January 2000, the Company entered into a license agreement with Wurzburg. The license has a term of three years and provides that the Company shall pay Wurzburg a royalty of 1.0% of the total FOB pricing for each order shipped to a licensee under the global sourcing agreement. 11 BEVERLY HILLS POLO CLUB LICENSES BEVERLY HILLS POLO CLUB DOMESTIC LICENSES Since 1993, the Company has had an exclusive wholesale licensing agreement (the "BHPC Agreement") with BHPC Marketing, Inc. for the manufacture and promotion of certain men's sportswear bearing the registered trademark Beverly Hills Polo Club with an accompanying horse and rider design (the "BHPC Trademark") for sale to moderate or better department stores and specialty stores in the United States and its possessions, including Puerto Rico. Under the BHPC Agreement, the Company may sell up to 25.0% of its total volume to warehouse clubs. The licenses generally allow the Company to use the BHPC Trademark on sportswear designed by or for the Company, subject to a quality approval process for marketing and advertising materials, manufacturing premises and products bearing the trademark. Under the license, the Company is required to make payments to the licensor in an amount equal to 5.0% of the Company's net invoiced sales of licensed merchandise and to spend an amount equal to 1.0% of net invoiced sales of such merchandise in advertising for the licensed products. Under the license, the Company pays a monthly royalty equal to the greater of 8.3% of the guaranteed minimum annual royalty or the actual royalty earned by the licensor in the preceding month. Under the BHPC Agreement, the Company has been granted an exclusive license to use the BHPC Trademark in connection with menswear fashions made of materials other than silk in the following categories: denim sportswear, outerwear, knit and woven shirts, knit and woven casual pants and shorts, sweaters, basic and fashion fleece tops and bottoms, overalls and shortalls, knit tops (including tee shirts and polo shirts), swimwear and warm-ups. The BHPC Agreement has a three year term expiring December 31, 2001 and is renewable at the option of the Company, provided the Company is not in breach thereof at the time renewal notice is given, for a three-year period commencing January 1, 2002 through December 31, 2004. The Company was subject to a guaranteed payment of $636,000 in 2000 and is subject to a guaranteed payment of $586,000 in 2001. Guaranteed minimum annual royalties and guaranteed annual net shipments for the current term and the renewal term are equal to the greater of (i) 80.0% of the immediately preceding contract year's actual royalties and net shipments or (ii) the previous year's guaranteed minimum royalty and guaranteed net shipments. The BHPC Agreement may be terminated by the licensor upon the occurrence of certain events, including but not limited to the following: (i) a breach by the Company of any obligation under the agreement that remains uncured within 30 days following the receipt of written notice of such breach, (ii) the Company becomes insolvent, is the subject of a petition in bankruptcy or otherwise enters into any composition with its creditors, including reorganization, or (iii) the Company has committed three breaches of the agreement, in which case no right to cure the breach is afforded to the Company. During the term of the BHPC Agreement, the Company is prohibited from manufacturing or otherwise distributing any merchandise under a brand name which closely resembles the BHPC Trademark and from using on non-Beverly Hills Polo Club products any graphic, style or design which closely resembles any items supplied to the Company by the licensor. In addition, the rights of the Company under the BHPC Agreement are subject to the terms of a Settlement Agreement and Consent Judgment between the licensor and Polo Fashions, Inc., which imposes certain restrictions on the licensor's manner of use and advertising of the BHPC Trademark, including a prohibition on the use of the words "Polo" and "Polo Club" alone on any item of apparel. The Company believes that the BHPC Trademark, as licensed to the Company, complies with those restrictions. 12 In May 1998, the Company entered into an exclusive license (the "BHPC Boys' Agreement") to manufacture and market boys' sportswear, including knit and woven shirts, cotton and cotton mixed pants (excluding tailored pants), jeans, shorts, swim shorts and sports outerwear, under the Beverly Hills Polo Club brand in the United States and Puerto Rico. Under the terms of the BHPC Boys' Agreement, the Company must pay the licensor of the BHPC Trademark royalties equal to 5.0% of net shipments by the Company of licensed products. The Company was subject to guaranteed minimum annual royalties of $75,000 in 2000 and is subject to minimum annual royalties of $100,000 in the year 2001. The BHPC Boys' Agreement has an initial term of three years, and is renewable at the option of the Company, provided the Company is not in breach thereof at the time the renewal notice is given, until December 31, 2004. BEVERLY HILLS POLO CLUB INTERNATIONAL LICENSES On August 15, 1996, I.C. Issacs 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 trademark in Europe. The International Agreements, as amended, provide certain exclusive rights to use the Beverly Hills Polo Club trademark for men's sportswear in all countries in Europe for an initial term of three years ended 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 as the BHPC Agreements described above. The Agreements were amended July 31, 2000 to reduce certain royalty payments and increase the amount the Company is required to spend in advertising the BHPC line. For the period beginning January 1, 2000 and ending June 30, 2000, no guaranteed minimum annual royalties or guaranteed net shipment volumes applied; for the period beginning July 1, 2000 and ending December 31, 2000, the royalty rate was 3.0% of wholesale sales of BHPC products including purchases of BHPC products by Beverly Hills Polo Club retail stores in Europe ("Wholesale Purchases") and no guaranteed annual royalties applied; for the period beginning January 1, 2001 and ending December 31, 2001, the royalty rate is 3.0% of Wholesale Purchases, and the guaranteed annual royalty shall be $120,000; for the period beginning January 1, 2002 and ending December 31, 2004, the royalty rate shall be 3.0% of Wholesale Purchases, the guaranteed annual royalty shall be $120,000 and the Company shall be subject to the guaranteed net shipment volumes in effect immediately prior to the amendment dated March 1, 1999. For the period beginning January 1, 2000 and ending December 31, 2001, the Company is required to spend an amount equal to 4.0% of Wholesale Purchases in advertising the BHPC line. During each of 2002, 2003 and 2004, the Company is required to spend an amount equal to 4.0% of Wholesale Purchases in advertising the BHPC line. 13 BOSS Until March 15, 2001, the Company was permitted to manufacture, distribute, market and sell, within specific wholesale price points, certain categories of apparel for men, women and children under the BOSS brand pursuant to a license agreement with Ambra, Inc. ("Ambra") (the "BOSS License Agreement"). In March, 2001, the Company executed the License Rights Termination Agreement, which terminated its rights under the BOSS License Agreement. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Notes 3 and 8 to the Consolidated Financial Statements. The minimum royalty payments associated with the BOSS License Agreement were $2.9 million and $3.2 million in 1999 and 2000, respectively, and would have been $3.2 million, $2.6 million and $2.1 million in 2001, 2002 and 2003, respectively. CREDIT CONTROL The Company manages its own credit and collection functions and has never used a factoring service or outside credit insurance. The Company sells to approximately 2,500 accounts throughout the United States and Puerto Rico. All of the functions necessary to service this large volume of accounts are handled by the Company's in-house credit department in Baltimore, Maryland. The Company extends credit to its customers. Accordingly, the Company may have significant risk in collecting accounts receivable from its customers. The Company has credit policies and procedures which it uses to minimize exposure to credit losses. The Company currently employs five people in its credit department and believes that managing its own credit gives it unique flexibility as to which customers the Company should sell and how much business it should do with each. The Company obtains and periodically updates information regarding the financial condition and credit histories of customers. The Company's collection personnel evaluate this information and, if appropriate, establish a line of credit. Credit personnel track payment activity for each customer using customized computer software and directly contact customers with receivable balances outstanding beyond 30 days. If these collection efforts are unsuccessful, the Company may discontinue merchandise shipments until the outstanding balance is paid. Ultimately, the Company may engage an outside collection organization to collect past due accounts. Timely contact with customers has been effective in reducing credit losses to an immaterial amount. In 1999 and 2000, the Company's credit losses were $1.7 million and $0.9 million, respectively and actual credit losses as a percentage of net sales were 2.0% and 0.9%, respectively. COMPETITION The apparel industry is highly competitive and fragmented and is subject to rapidly changing consumer demands and preferences. The Company believes that its continued success depends in large part upon its ability to anticipate, gauge and respond to changing consumer demands and fashion trends in a timely manner and upon the continued appeal to consumers of the Girbaud, Beverly Hills Polo Club and UBX brands. The Company competes with numerous apparel brands and distributors (including Calvin Klein, DKNY, Guess?, MECCA, PHAT Farm, Polo Jeans, Tommy Jeans, and Nautica). Many of the Company's competitors have greater financial resources than the Company. Although the level and nature of competition differ among its product categories, the Company believes that it competes on the basis of its brand image, quality of design and value pricing. The Company continued to experience intense competition in 2000 from many established and new competitors at both the specialty store and department store channels of distribution. Under the BHPC Agreements and the Girbaud Agreements, certain third parties have retained the right to produce, distribute, advertise and sell, and to authorize others to produce, distribute, advertise and sell certain garments that are similar to some of the Company's products. Any such production, distribution, advertisement or sale of such 14 garments by such licensor or another authorized party could have a material adverse effect on the Company's financial condition or results of operations. MANAGEMENT INFORMATION SYSTEMS The Company believes that advanced information processing is essential to maintaining its competitive position. The Company's systems provide, among other things, comprehensive order processing, production, accounting and management information for the marketing, selling, manufacturing, retailing and distribution functions of the Company's business. The Company's software programs allow it to track, among other things, orders, manufacturing schedules, inventory and sales of its products. The programs include centralized management information systems, which provide the various operating departments with financial, sales, inventory and distribution related information. Via electronic data interchange, the Company is able to ship orders, from inventory on hand, to certain customers within 24 to 72 hours from the time of order receipt. EMPLOYEES The Company believes that its employees are one of its most valuable resources. As of March 31, 2001, the Company had approximately 150 full-time employees. The Company is not a party to any labor agreements, and none of its employees is represented by a labor union. The Company considers its relationship with its employees to be good and has not experienced any material interruption of its operations due to labor disputes. ENVIRONMENTAL MATTERS The Company is subject to federal, state and local laws, regulations and ordinances that (i) govern activities or operations that may have adverse environmental effects (such as emissions to air, discharges to water, and the generation, handling, storage and disposal of solid and hazardous wastes) or (ii) impose liability for the costs of clean up or other remediation of contaminated property, including damages from spills, disposals or other releases of hazardous substances or wastes, in certain circumstances without regard to fault. Certain of the Company's operations routinely involve the handling of chemicals and waste, some of which are or may become regulated as hazardous substances. The Company has not incurred any significant expenditures or liabilities for environmental matters. Although the Company believes that its environmental obligations will not have a material adverse effect on its financial condition or results of operations, environmental compliance matters are subject to inherent risks and uncertainties. ITEM 2. PROPERTIES Certain information concerning the Company's principal facilities is set forth below:
LEASED OR APPROXIMATE AREA IN LOCATION OWNED USE SQUARE FEET -------- ---------- --- ------------------- Baltimore, MD Owned Administrative Headquarters and Office Facilities 40,000 New York, NY Leased Sales, Merchandising, Marketing and Sourcing Headquarters 10,100 Barcelona, Spain Leased European Headquarters 2,000 Milford, DE Owned Distribution Center 70,000 Carthage, MS Leased Warehouse 110,000 Raleigh, MS Leased Warehouse 90,000
The Company also has regional sales offices, all of which are leased, in the following cities: Dallas, Texas; Miami, Florida; Los Angeles, California; Philadelphia, Pennsylvania; 15 and Santurce, Puerto Rico. The Company believes that its existing facilities are well maintained and in good operating condition. See "ITEM 1. Business--Warehousing and Distribution" and Note 8 of Notes to Consolidated Financial Statements for further information. In the first quarter of 1999, the Company closed its Carthage, Mississippi manufacturing facility and now uses the facility as a warehouse. In the third quarter of 2000, the Company closed its Raleigh, Mississippi manufacturing facility. The production in this facility, the majority of which was jeans, was transferred to third party independent contractors' facilities in Mexico. ITEM 3. LEGAL PROCEEDINGS The Company and certain of its current and former officers and directors have been named as defendants in three putative class actions filed in United States District Court for the District of Maryland. The first of the actions was filed on November 10, 1999 by Leo Bial and Robert W. Hampton. The three actions, which have been consolidated with Mr. Bial as the first-named plaintiff, purport to have been brought on behalf of all persons (other than the defendants and their affiliates) who purchased the Company's stock between December 17, 1997 and November 11, 1998. The plaintiffs allege that the registration statement and prospectus issued in connection with the Company's initial public offering, completed in December 1997, contained materially false and misleading statements, which artificially inflated the price of the Company's stock during the class period. Specifically, the complaints allege violations of Sections 11, 12(a)(2) and 15 of the Securities Act of 1933. The plaintiffs seek recision, damages, costs and expenses, including attorneys' fees and experts' fees, and such other relief as may be just and proper. The Company believes that the plaintiffs' allegations are without merit and intends to defend the cases vigorously. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS During the fourth quarter of 2000, there were no matters submitted to a vote of the Company's stockholders. 16 PART II ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The market for the Company's Common Stock is not an exchange but is established by the National Association of Securities Dealers' Automated Quotation System. As of March 30, 2001, the Company had approximately 1,000 holders of record of the Company's Common Stock. The Company's Common Stock trades on the Nasdaq National Market under the Symbol "ISAC." The reported last sale price of the Common Stock on the Nasdaq National Market on March 30, 2001 was $0.53. The following table sets forth for the periods indicated the high and low closing sale prices for the Common Stock reported by the Nasdaq National Market:
2000 1999 ------------------------------------------------- QUARTER ENDED HIGH LOW HIGH LOW ------------- ---- --- ---- --- March 31 $3.00 $1.3125 $1.50 $1.25 June 30 $3.00 $1.375 $1.125 $1.0938 September 30 $2.375 $1.25 $1.375 $1.375 December 31 $1.75 $0.375 $1.4688 $1.4375
Since November 1998, the Company's Common Stock has been closing at prices between $0.375 and $3.00. In order to maintain its listing on the Nasdaq National Market, a stock must have a minimum bid price of $1.00. There can be no assurances that the Company's Common Stock will maintain a minimum bid price of $1.00 or more in the future or that it will not be delisted from the Nasdaq National Market. On January 31, 2001, the Company was notified by Nasdaq that it had failed to comply with Nasdaq's National Market maintenance standards and if it failed to regain compliance on or before May 1, 2001, Nasdaq would initiate a delisting proceeding with respect to the Company's stock. The Company anticipates that all earnings of the Company will be retained for the foreseeable future for use in the operation of the Company's business. Any future determination as to the payment of dividends will be at the discretion of the Company's Board of Directors and will depend upon the Company's results of operations, financial condition, restrictions in the Company's credit facilities and other factors deemed relevant by the Board of Directors. On May 15, 1997, the Board of Directors of the Company and the Company's stockholders adopted the 1997 Omnibus Stock Plan (the "Plan"). The purpose of the Plan is to promote the long-term growth and profitability of the Company by providing key people with incentives to improve stockholder value and contribute to the growth and financial success of the Company, and by enabling the Company to attract, retain and reward the best-available persons for positions of substantial responsibility. The maximum number of shares of Common Stock that could be issued with respect to awards granted under the Plan was 500,000. The Board of Directors approved an increase in the shares of Common Stock that may be issued with respect to awards granted under the Plan to an aggregate of 1.1 million shares, which increase was approved by the Company's stockholders at the 1999 annual meeting of stockholders (the "Annual Meeting"). The Plan is administered by the Compensation Committee of the Board of Directors. Participation in the Plan will be open to all employees, officers, directors and consultants of the Company or any of its affiliates, as may be selected by the Compensation Committee from time to time. The Plan allows for stock options, stock appreciation rights, stock awards, phantom stock awards and performance awards to be granted. The Compensation Committee will determine the prices, vesting schedules, expiration dates and other material conditions upon which such awards may be exercised. Through December 31, 2000, the Company had granted stock options under the Plan exercisable upon vesting for an aggregate of 1,020,250 stock options. The weighted average exercise price of such options is $1.52 per share. Through December 31, 2000, none of those stock options had been exercised. The issuance of such stock options was exempt from the registration requirements of the Securities Act of 1933, as amended, pursuant to Section 4(2) thereunder. The 17 Company previously filed a Registration Statement on Form S-8 (the "Form S-8") to register shares of Common Stock issuable pursuant to awards granted under the Plan. In November 1999 and May 2000, the Company issued an aggregate of 3.3 million shares of Series A Convertible Preferred Stock, par value $.001, of the Company to Ambra. Except as set forth below, the Series A Convertible Preferred Stock has all of the same preferences, rights and voting powers as the common stock. The preferred stock is not entitled to vote on any matters to be voted upon by the stockholders of the Company, except that the holders of the preferred stock are entitled to vote as a separate class, and the vote of a majority of the outstanding shares of preferred stock is 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 has a liquidation preference of $1.00 per share plus any declared but unpaid dividends on the preferred stock. The Company may redeem, from March 15, 2001 to June 30, 2002, any or all of the preferred stock (i) at any time prior to July 1, 2002, at a redemption price of $1.00 per share (ii) at any time from July 1, 2002, through December 31, 2002, for the greater of $1.00 per share or an amount equal to the market value of the number of shares of common stock that the holder of the preferred stock would have held had the shares of preferred stock to be redeemed been converted into common stock immediately prior to such redemption. Upon the occurrence of an event of default under the $7.2 million note issued by the Company to Ambra in connection with the License Rights Termination Agreement, Ambra may demand a redemption of the preferred stock at a redemption price of $1.00 per share. The preferred stock is convertible by Ambra from January 1, 2003, through December 31, 2006, into (at Ambra's election), (i) a promissory note of the Company at an amount equal to the number of shares of preferred stock converted multiplied by $1.00, carrying interest at a rate of 12% per annum and payable over a term of 21 months or (ii) common stock of the Company at a 1:1 conversion ratio. For financial reporting purposes, the preferred stock will be considered redeemable preferred stock and will be classified outside of stockholders' equity. ITEM 6. SELECTED FINANCIAL DATA The selected financial data set forth below have been derived from the consolidated financial statements of the Company and the related notes thereto. The statement of operations data for the years ended December 31, 1998, 1999 and 2000 and the balance sheet data as of December 31, 1999 and 2000 are derived from the consolidated financial statements of the Company which have been audited by BDO Seidman, LLP, independent certified public accountants, included elsewhere herein. The statement of operations data for the years ended December 31, 1996 and 1997 and the balance sheet data as of December 31, 1996, 1997 and 1998 are derived from the consolidated financial statements of the Company, which have been audited but are not contained herein. The following selected financial data should be read in conjunction with the Company's consolidated financial statements and the related notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations," which are included elsewhere herein. 18
YEAR ENDED DECEMBER 31, ----------------------------------------------------------------------------------- 1996 1997 1998 1999 2000 -------------- -------------- ------------- ------------- -------------- STATEMENT OF INCOME DATA: (IN THOUSANDS EXCEPT PER SHARE DATA) Net sales $118,655 $161,446 $113,721 $84,525 $97,253 Cost of sales 84,421 109,694 90,661 61,694 68,161 -------------- -------------- ------------- ------------- -------------- Gross profit 34,234 51,752 23,060 22,831 29,092 Selling expenses 11,898 16,236 16,983 12,799 14,554 License fees 4,817 7,577 6,020 7,002 8,353 Distribution and shipping expenses 2,669 4,307 3,900 2,863 3,242 General and administrative expenses 6,243 7,546 9,999 8,056 7,786 Termination of license agreement -- -- -- -- 8,068 Provision for severance -- -- 526 750 385 Impairment of intangibles -- -- -- -- 743 Recovery of legal fees (718) (117) -- -- -- -------------- -------------- ------------- ------------- -------------- Operating income (loss) 9,325 16,203 (14,368) (8,639) (14,039) Interest, net 1,365 2,372 1,455 1,628 1,332 Other income (expense) 85 3 381 165 76 Minority interest (82) (135) -- -- -- -------------- -------------- ------------- ------------- -------------- Income (loss) before income taxes 7,963 13,699 (15,442) (10,102) (15,295) Income tax (provision)/benefit -- 1,349 (1,351) (110) 48 -------------- -------------- ------------- ------------- -------------- Net income (loss) $7,963 $15,048 $(16,793) $(10,212) $(15,247) Basic and diluted net income (loss) per share (1) $1.99 $3.68 $(2.15) $(1.47) $(2.00) Weighted average common shares outstanding 4,000 4,094 7,810 6,935 7,639 PRO FORMA STATEMENT OF INCOME DATA: Income before income taxes 7,963 13,699 Income tax provision (2) (3,265) (5,617) -------------- -------------- Net income $4,698 $8,082 ============== ============== Basic and diluted net income per share $0.95 $1.62 ============== ============== Weighted average common shares outstanding 4,930 5,001
AS OF DECEMBER 31, ------------------------------------------------------------------------------ 1996 1997 1998 1999 2000 ------------- ------------ ------------ ------------ --------------- BALANCE SHEET DATA: Working capital $16,274 $45,940 $31,577 $22,610 $16,777 Total assets 37,257 73,443 59,046 40,435 36,430 Total debt 7,796 11,609 13,848 3,651 14,813 Redeemable preferred stock -- -- -- 2,000 3,300 Stockholders' equity 19,393 52,496 37,313 27,751 13,503
----------- (1) Historical earnings per share does not reflect a provision for income taxes as the Company had been taxed as an S corporation for the years ended December 31, 1996 and the majority of 1997. (2) Reflects pro forma provision for income taxes as if the Company had been taxed as a C Corporation for the years ended December 31, 1996 and 1997. 19 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with the "Selected Financial Data" and the Company's consolidated financial statements and the related notes thereto, which are included elsewhere herein. OVERVIEW During its first 77 years, the Company became one of the leading manufacturers of pants, trousers and jeans in the United States. The Company was able to utilize its fabric sourcing and manufacturing expertise to build a well known franchise in the men's and women's bottoms segment of the apparel industry. In this period, the Company's marketing efforts were typically driven by its manufacturing capabilities, and branding was limited to Company-owned brands and third-party private labels. In the late 1980's, management made a decision to change the Company's marketing focus from a manufacturing-driven to a brand-driven strategy. This fundamental shift within the Company reflected senior management's belief that the American sportswear market would be dominated by recognized brands with clearly established images. Management also concluded that increasing market share would go to those companies that were market-driven and able to service their customers with diversified manufacturing and sourcing capabilities. Recognizing its strength in bottoms manufacturing, in 1990 the Company entered into a license agreement for the use of the BOSS brand name on men's denim apparel and on all types of juniors' sportswear for the young women's market. In the fall of 1993, the Company entered into license agreements for the use of the Beverly Hills Polo Club brand name on men's sportswear in the United States and Puerto Rico. License rights were expanded to include Europe in 1996. In November 1997, the Company acquired an exclusive license to manufacture and market certain men's jeanswear and sportswear under the Girbaud brand in the United States and Puerto Rico. The Girbaud brand is an internationally recognized designer sportswear label with a distinct European influence. The Company has positioned the Girbaud men's line with a broad assortment of products, styles and fabrications reflecting a contemporary European look. The Company began marketing a fall men's collection under the Girbaud brand in February 1998. In March 1998, the Company entered into an exclusive license agreement to manufacture and market certain women's jeanswear and sportswear under the Girbaud brand in the United States and Puerto Rico. The Company began marketing women's sportswear under the Girbaud brand in the second quarter of 1998. The Company has positioned the Girbaud women's line with a broad assortment of contemporary sportswear and jeanswear products. Under the Girbaud men's license agreement, the Company is required to spend at least $500,000 in advertising for the men's Girbaud brand in each year through the term of the agreement. Under the Girbaud women's license agreement, the Company is required to spend at least $400,000 in advertising for the women's Girbaud brand in each year through the term of the agreement. In addition, the Company is required to contribute $190,000 per year to the licensor's advertising and promotional expenditures for the Girbaud brand. In December 1998, the Girbaud women's license agreement was amended to provide that the Company would spend an additional $1.8 million in sales and marketing of the brand in 1999. Minimum royalty payments began in the first quarter of 1998. In May 2000, the Company entered into an exclusive distribution agreement for Girbaud men's and women's jeanswear and sportswear products in Canada. The Company will sell to Western Glove Works ("Distributor") Girbaud 20 products produced in Mexico or the Unites States at cost plus 12.0%, which is less than its normal profit margins on sales of comparable products to the Company's retail customers. For products purchased by the Distributor from overseas, the Distributor will pay a distributor's fee equal to 6.75% of net sales to the Company. Under the agreement, the Distributor will pay a royalty fee equal to 6.25% of net sales to the Company, which will in turn pay the royalty to Latitude Licensing Corp. The initial term of the agreement expires on December 31, 2001. The Distributor may renew the agreement for six additional one-year terms. The minimum sales level for calendar 2001 is $1,600,000 (Canadian Dollars), which results in a minimum distribution fee payable to the Company of $48,000 (Canadian Dollars). There are no minimum sales levels or distribution fees for calendar year 2000. The Company began shipments to Canada in December, 2000. To date, sales to Canada have been immaterial. In September 1999, the Company introduced a collection of men's sportswear under the Company-owned Urban Expedition ("UBX") brand in the United States and Europe. Sales of the Urban Expedition brand have been immaterial to date. The Company also manufactures and markets a limited number of pants and jeans styles for women under its own "I.C. Isaacs" brand name and under third-party private labels for sale to major chain stores and catalogs. In the fourth quarter of 2000, the Company decided that it intended to discontinue production of the women's Company-owned and private label lines. By the end of the 1990's, the Company had completed its strategic repositioning from a manufacturing-driven company to a marketing and brand-driven company. Through a strategy of providing fashionable, branded merchandise, the Company has become a fashion influence for youthful and contemporary consumers who purchase jeanswear and sportswear through specialty and department stores. The Company's brand-driven market strategy is evidenced by the increase of licensed, branded apparel as a percentage of the Company's net sales. In 2000, the Girbaud, Beverly Hills Polo Club and BOSS brands comprised 69.6%, 13.4% and 11.3% of net sales, respectively. Concurrently with this strategy, the Company has also shifted its product mix from predominately bottoms to a full array of sportswear, including tops and outerwear. In the fourth quarter of 2000, the Company decided to dramatically reduce the use of independent contractors' facilities in Mexico by the end of the second quarter of 2001. The reduced production of these independent contractors in Mexico will be transferred to independent contractors in Asia. By moving this production to Asia, whereby the Company generally purchases the item as a finished good, the Company believes it will obtain greater flexibility of quantities and styles ordered. The Company has also expanded its branded lines to include sportswear for boys and youth. The Company has terminated its rights under the license for use of the BOSS brand and intends to focus its efforts on its more profitable lines. Historically, the Company has recognized markdowns for specific unsold inventory in the second and fourth quarters. These specific markdowns are reflected in cost of sales and the related gross margins at the conclusion of the appropriate selling season. TERMINATION OF BOSS LICENSE AGREEMENT In October 1999, the Company, Ambra Inc. ("Ambra") and Hugo Boss A.G. ("Hugo Boss") entered into certain agreements including (i) a license agreement (the "BOSS License Agreement") granting the Company rights to manufacture and sell apparel using the BOSS brand name and (ii) an agreement pursuant to which the Company issued to Ambra aggregate of 3.3 million shares of Series A Convertible Preferred Stock, par value $.0001 per share, of the Company (the "Preferred Stock") and 666,667 shares of common stock, par value $.0001, of the Company. The BOSS License Agreement had an initial term through December 31, 2003 and carried minimum annual royalties of approximately $3.2 million in each of 2000 and 2001, $2.6 million in 2002 and $2.1 million in 2003. The Preferred Stock was redeemable at the option of the Company any time and from time to time and at the option of Ambra upon the occurrence of certain acceleration events under the BOSS License Agreement, in either case at a redemption price of $1.00 per share. Any and all unredeemed shares of Preferred Stock were convertible, at the option of the holder, for a 60 day period beginning October 1, 2003, into a promissory note of the Company in a principal amount equal to $1.00 multiplied by the total number of shares of Preferred Stock being converted, with interest thereafter at an annual interest rate of 12%, payable in four quarterly installments beginning January 1, 2004. In October 2000, the Board of Directors of the Company authorized the appropriate officers of the Company to negotiate a termination of the Boss License Agreement. In March 2001, the Company, Ambra and Hugo Boss executed an agreement to terminate the Company's rights under the BOSS License Agreement (the "License Rights Termination Agreement"). Pursuant to the License Rights Termination Agreement, (i) the Company issued to Ambra a subordinated secured promissory note (the "Note") of the Company in the principal amount of $7.2 million, with principal and interest at an annual rate of 8% payable in twenty-four (24) quarterly installments in the amount of (a) $205,500 each through December 31, 2001, (b) $420,000 each from March 31, 2002 through September 30, 2006 and (c) $407,085.57 on December 31, 2006; (ii) the Company's rights under the BOSS License Agreement (and the Company's obligation to pay any royalties thereunder) were terminated; (iii) the Company agreed to sell or dispose of existing BOSS inventory by October 31, 2001; and (iv) the Preferred Stock will be (a) redeemable by the Company until June 30, 2002 for $1.00 per share, (b) redeemable by the Company from July 1, 2002 through December 31, 2002 for the greater of $1.00 per share or an amount equal to the market value of the number of shares of common stock which the holder of the Preferred Stock would have held had the shares of Preferred Stock being redeemed been converted to common stock immediately prior to such redemption; (c) redeemable by Ambra at any time upon an event of default under the Note; and (d) convertible by Ambra from January 1, 2003 through December 31, 2006 into (at Ambra's election): (x) a subordinated secured promissory note of the Company in the amount equal to the number of shares of Preferred Stock converted multiplied by $1.00, carrying an interest rate of 12% per annum and payable over a term of twenty-one (21) months or (y) common stock of the Company at a 1:1 conversion ratio. The Company also executed a security agreement in favor of Ambra and agreed to grant a mortgage or deed of trust on the Company's real estate in Milford, Delaware and Baltimore, Maryland as security for the Company's obligations under the Note. 21 RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, ---------------------------------------- 1998 1999 2000 ----------- ----------- ----------- Net sales 100.0% 100.0% 100.0% Cost of sales 79.7 73.0 70.1 ----------- ----------- ----------- Gross profit 20.3 27.0 29.9 ----------- ----------- ----------- Selling expenses 14.9 15.1 15.0 License fees 5.3 8.3 8.6 Distribution and shipping expenses 3.4 3.4 3.3 General and administrative expenses 9.3 10.4 9.1 Termination of licensing agreement -- -- 8.3 ----------- ----------- ----------- Operating loss (12.6%) (10.2%) (14.4%) =========== =========== ===========
YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999 NET SALES. Net sales increased 15.1% to $97.3 million in 2000 from $84.5 million in 1999. The increase was primarily due to growth in both the men's and women's Girbaud lines offset by continued declines in the BOSS, Beverly Hills Polo Club and Company-owned and private label brands. Net sales of Girbaud men's sportswear increased $34.8 million or 152.6% to $57.6 million. Net sales of Girbaud women's sportswear increased $5.2 million or 104.0% to $10.2 million. The Company began shipping its UBX line in the first quarter of 2000 and shipped $2.1 million in 2000 of UBX. Net sales of BOSS sportswear decreased $26.0 million or 70.3% to $11.0 million. Net sales of Beverly Hills Club sportswear decreased $1.6 million or 11.0% to $13.0 million. Net sales of Company-owned brands and private label brands decreased $1.8 million or 34.6% to $3.4 million in 2000. Due to the termination of the BOSS license agreement, sales of BOSS sportswear will be insignificant in 2001. GROSS PROFIT. Gross profit increased 27.6% to $29.1 million in 2000 from $22.8 million in 1999. Gross profit as a percentage of net sales increased to 29.9% from 27.0% over the same period. The increase in gross profit as a percentage of net sales was primarily due to increased sales of Girbaud jeanswear and sportswear at higher margins than those realized on sales of BOSS and Beverly Hills Polo Club sportswear. In an effort to continue to decrease inventory levels and to generate cash, a significant amount of sales were made in 1999 and 2000 to a mass retailer at gross profit margins significantly below the margins on goods that are sold to department and specialty stores. This adversely affected the overall gross margin. In addition, the Company had an inventory valuation allowance of $1.0 million at December 31, 2000 to properly reflect unsold inventory at its net realizable value. Such inventory valuation allowance included Girbaud, BOSS and Beverly Hills Polo Club products. The Company had an inventory valuation allowance of $2.3 million at December 31, 1999. The Company monitors inventory levels, by product category, weekly to help identify inventory shortages as well as excess inventory. Personnel look at recent sales data and order backlog to help identify slow moving inventory items. Further, sales managers continually discuss product turnover and sales forecasts with sales personnel to aid in identifying product shortages and overages. Based on the information 22 available, the Company believes the inventory valuation provisions were appropriate at December 31, 1999 and 2000, respectively. SELLING, DISTRIBUTION, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, distribution, general and administrative ("SG&A") expenses increased 9.0% to $26.7 million in 2000 from $24.5 million in 1999. As a percentage of net sales, SG&A expenses decreased to 27.4% from 29.0% over the same period. The decrease in SG&A as a percentage of net sales in a period of increasing expense was due to the significant increase in net sales. Selling expenses increased 13.7% to $14.6 million from $12.8 million due to increased commissions to the Company's salespersons and increases in promotional costs. Distribution and shipping expenses increased from $2.9 million in 1999 to $3.2 million in 2000 due to increased personnel and wages at the Company's distribution facility to cover the increase in merchandise shipments. General and administrative expenses decreased 3.4% to $7.8 million due to the elimination, in October 1999, of amortization expense related to the BOSS trademark. Therefore, no amortization expense related to the trademark was recorded by the Company in 2000. The provision for severance decreased 48.7% in 2000 to $0.4 million. In 1999 the Company's Chief Operating Officer resigned resulting in a provision for severance of $0.8 million and in 2000 the Company recorded a provision for severance related to a plant closing which totaled $0.4 million. The Company recorded an impairment of intangibles for $0.7 million in 2000 related to the goodwill associated with the women's Company-owned and private label lines. LICENSE FEES. License fees increased $1.4 million to $8.4 million in 2000 from $7.0 million in 1999. As a percentage of net sales license fees increased from 8.3% to 8.6%. The increase in license fees as a percentage of net sales is primarily due to higher royalties for Girbaud offset somewhat by reductions in the minimum royalties under the BOSS license agreement that was in effect for all of 2000. TERMINATION OF LICENSE AGREEMENT. In connection with the termination of its rights under the BOSS License Agreement, the Company recorded a note payable of $7.2 million and wrote off the remaining deferred royalty expense of $0.7 million and other BOSS related assets of $0.2 million as a charge against earnings totaling $8.1 million in the fourth quarter of 2000. OPERATING LOSS. Operating loss increased 62.8% to $14.0 million in 2000 from $8.6 million in 1999. The decline in performance is due to the termination of the BOSS License Agreement offset by higher gross margins at increased sales volumes coupled with a reduction in operating expenses, as explained above. INTEREST EXPENSE. Interest expense decreased $0.3 million to $1.3 million in 2000. The decrease in interest expense is primarily due to the elimination of interest expense in the third quarter of 1999 on the $11.25 million note payable associated with the purchase of the BOSS trademark in November 1997, offset by increased borrowings under the Company's asset-based revolving line of credit. Interest income earned in 1999 and 2000 was insignificant. INCOME TAXES. The Company recorded an income tax benefit of $48,000 in 2000 related to an overaccrual of state taxes in 1999. The Company recorded income tax expense of $0.1 million in 1999 related to state taxes. 23 YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998 NET SALES. Net sales decreased 25.7% to $84.5 million in 1999 from $113.7 million in 1998. The decline was primarily due to continued decreases in the BOSS and Beverly Hills Polo Club men's lines offset by increases in both the men's and women's Girbaud lines. Net sales of BOSS sportswear decreased $46.4 million or 55.6% to $37.0 million. Net sales of Beverly Hills Club sportswear decreased $2.0 million or 12.0% to $14.6 million. Net sales of Girbaud men's sportswear increased $18.2 million or 395.7% to $22.8 million. Net sales of Girbaud women's sportswear increased $4.9 million to $5.0 million. The Company began shipping the men's Girbaud product line in the second quarter of 1998 and the women's Girbaud line in the fourth quarter of 1998. Net sales of Company-owned brands and private label brands decreased 42.2% to $5.2 million in 1999. The Company did not begin shipping its UBX line until February of 2000. GROSS PROFIT. Gross profit decreased 1.3% to $22.8 million in 1999 from $23.1 million in 1998. Gross profit as a percentage of net sales increased from 20.3% to 27.0% over the same period. The overall gross profit in dollars remained roughly consistent with the prior year even in a time of a major decline in sales. The increase in gross profit as a percentage of net sales was primarily due to increased sales of Girbaud jeanswear and sportswear at higher margins than those realized on sales of BOSS and Beverly Hills Polo Club sportswear. In an effort to continue to decrease inventory levels, a significant amount of sales were made in 1999 to a mass retailer at gross profit margins significantly below the margins on goods that are sold to department and specialty stores. This adversely affected the overall gross margin. In addition, the Company had an inventory valuation allowance of $2.3 million at December 31, 1999 to properly reflect unsold inventory at its net realizable value. Such inventory valuation allowance included Girbaud, BOSS and Beverly Hills Polo Club products. The Company had an inventory valuation allowance of $5.5 million at December 31, 1998. The Company monitors inventory levels, by product category, weekly to help identify inventory shortages as well as excess inventory. Personnel look at recent sales data and order backlog to help identify slow moving inventory items. Further, sales managers continually discuss product turnover and sales forecasts with sales personnel to aid in identifying product shortages and overages. Based on the information available, the Company believes the inventory valuation provisions were appropriate at December 31, 1998 and 1999, respectively. SELLING, DISTRIBUTION, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, distribution, general and administrative ("SG&A") expenses decreased 22.0% to $24.5 million in 1999 from $31.4 million in 1998. As a percentage of net sales, SG&A expenses increased to 29.0% from 27.6% over the same period due to lower net sales and a provision for severance offset somewhat by decreases in advertising expenditures, lower selling expenses and lower commissions to the Company's salespersons. Advertising expenditures declined $2.9 million to $2.8 million as the Company reduced targeted advertising campaigns for BOSS and Beverly Hills Polo Club. The Company's advertising expenditures for the Girbaud brand approximated $1.5 million in 1999 and 1998. The Company was required to spend $0.9 million in advertising as well as $1.8 million on sales and marketing for the women's and men's Girbaud brands in 1999. In 1999, expenditures on the Company's Urban Expedition (UBX) line were immaterial. Distribution and shipping expenses decreased $1.0 million to $2.9 due primarily to a reduction in personnel and wages at the Company's Milford, Delaware distribution facility due to decreased merchandise shipments. General and administrative expenses decreased $1.9 million to $8.1 million due to reductions in personnel in the second half of 1999 coupled with a reduction in bad debt expense and a decrease in amortization expense offset somewhat by increases in outside professional fees. In the second quarter of 1999, the Company's President and Chief Operating Officer resigned resulting in a provision for severance of $0.8 million. In 1998, the Company recorded a provision for severance associated with plant closures of $0.5 million. LICENSE FEES. License fees increased $1.0 million to $7.0 million in 1999 from $6.0 million in 1998. As a percentage of net sales license fees increased from 5.3% to 8.3%. The increase in license fees as a percentage of net sales is primarily due to 24 increases in the minimum royalties for Girbaud and lower net sales offset somewhat by reductions in the minimum royalties under the BOSS license agreement. OPERATING LOSS. Operating loss decreased 40.3% to $8.6 million in 1999 from $14.4 million in 1998. The improvement was due to higher gross margins at reduced sales volumes coupled with a reduction in operating expenses, as explained above. INTEREST EXPENSE. Interest expense increased $0.1 million to $1.6 million in 1999. The increase in interest expense is primarily due to increased borrowings under the Company's asset-based revolving line of credit, offset by the elimination, in the third quarter, of interest expense on the $11.25 million note payable associated with the purchase of the BOSS trademark in November 1997. The Company repaid its asset-based revolving line of credit with the proceeds from its initial public offering completed in December 1997. As a result, borrowings for the first six months of 1998 were insignificant and the Company earned $0.3 million in interest income from investing its excess cash in 1998. Interest income earned in 1999 was insignificant. INCOME TAXES. The Company recorded income tax expense of $0.1 million in 1999 related to state taxes. In 1998 the Company recorded an income tax benefit of $0.2 million to recognize a tax benefit for the carryback of net operating losses to recover income taxes paid during 1997. The Company wrote off a deferred tax asset of $1.5 million during the fourth quarter of 1998 due to the uncertainty surrounding the amount of taxable income to be generated in 1999. LIQUIDITY AND CAPITAL RESOURCES The Company has relied primarily on internally generated funds, trade credit and asset based borrowings to finance its operations. The Company's capital requirements primarily result from working capital needed to support increases in inventory and accounts receivable. The Company's working capital decreased significantly during 2000 compared to 1999, primarily due to the 2000 net loss. As of December 31, 2000, the Company had cash, including temporary investments, of $0.8 million and working capital of $16.8 million compared to $1.2 million and $22.6 million, respectively, as of December 31, 1999. In connection with the License Rights Termination Agreement, the Company eliminated the minimum royalty payments due Ambra in 2001 through 2003. These were, prior to the termination, $3.2 million, $2.6 million and $2.1 million that would otherwise have been in 2001, 2002 and 2003, respectively. Net of the principal and interest payments on the Note, the Company will save approximately $2.4 million, $0.9 million and $0.4 million in 2001, 2002 and 2003, respectively. OPERATING CASH FLOW. Cash used in operations totaled $4.2 million in 2000 compared to cash provided by operations of $0.4 million in 1999. Negative cash flow in 2000 is due to the increase in the net loss, a significant increase in accounts receivable related to increased sales and a decrease in accounts payable. These amounts were somewhat offset by non-cash expenses related to the License Rights Termination Agreement, depreciation and amortization, impairment of intangibles and a decrease in inventory. Cash used in investing activities during 2000 totaled $0.7 million and was used for the purchase of fixtures for the Girbaud Shop-in-Shop stores, show exhibits and computer equipment of $1.1 million offset by $0.4 million in proceeds from the sale of machinery and equipment from the closing of the Company's manufacturing facility in Raleigh, Mississippi. Cash used in financing activities totaled $4.5 million resulting primarily from proceeds from borrowings under the revolving line of credit and increases in checks issued against future deposits. Inventories decreased $3.9 million from December 31, 1999 to December 31, 2000, compared to a decrease of $4.9 million from December 31, 1998 to December 31, 1999. The decrease in 2000 was the result of a $2.6 million 25 reduction in BOSS inventory related to a decrease in quantities purchased to meet sales levels. The change in 1999 was due to the sale of excess BOSS and Beverly Hills Polo Club inventory on hand at December 31, 1998. During 2000, BOSS sales have continued to decline. At December 31, 2000, the Company had an inventory valuation allowance of $1.0 million related to unsold inventory compared to $2.3 million at December 31, 1999. Such inventory valuation allowance included Girbaud, Beverly Hills Polo Club and BOSS products. Capital expenditures were $1.1 million in 2000 compared to $0.8 million in 1999. The Company's capital expenditures were primarily for the purchase of fixtures for the Girbaud Shop-in-Shop stores, show exhibits and computer equipment of $1.1 million offset by $0.4 million in proceeds from the sale of machinery and equipment from the closing of the Company's manufacturing facility in Raleigh, Mississippi. The Company does not currently have commitments for significant capital expenditures in 2001. CREDIT FACILITIES The Company has an asset-based revolving line of credit (the "Agreement") with Congress Financial Corporation ("Congress"). As of December 31, 2000 the Company had $7.6 million in outstanding borrowings under the Agreement compared to $3.6 million as of December 31, 1999. In March 1999, the Company amended the Agreement to extend the term of the Agreement through December 31, 2000. In December 2000, the Agreement was further amended to extend the term through March 31, 2001. In March 2001, the Agreement was further amended to extend the term through December 31, 2002. The amended Agreement provides that the Company may borrow up to (i) 80.0% of net eligible accounts receivable and a portion of inventory, as defined in the agreement less (ii) a $1.0 million special availability reserve. Borrowings under the Agreement may not exceed $25.0 million (including outstanding letters of credit which are limited to $6.0 million from May 1 to September 30 of each year and $4.0 million for the remainder of each year) and bear interest at the lenders prime rate of interest plus 1.0%. Outstanding letters of credit approximated $2.1 million at December 31, 2000. In connection with the March 1999 amendment, the Company paid Congress a financing fee of $125,000, one half of which was paid at the time of closing and the other half of which was paid on June 30, 2000. The financing fee was amortized over 21 months. In connection with the March 2001 amendment, the Company will pay Congress a financing fee of $150,000, one half of which was paid at the time of closing and the other half of which shall be payable on September 1, 2001. 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 both of these covenants at December 31, 2000 and obtained a waiver from Congress. In connection with the amendment in March 2001, Congress reduced the minimum levels of working capital and tangible net worth, effective January 1, 2001. There can be no assurances that the Company will not be in violation of the net worth covenant during 2001 or thereafter. The Company extends credit to its customers. Accordingly, the Company may have significant risk in collecting accounts receivable from its customers. The Company has credit policies and procedures which it uses to minimize exposure to credit losses. The Company's collection personnel regularly contact customers with receivable balances outstanding beyond 30 days to expedite collection. If these collection efforts are unsuccessful, the Company may discontinue merchandise shipments until the outstanding balance is paid. Ultimately, the Company may engage an outside collection organization to collect past due accounts. Timely contact with customers has been effective in reducing credit losses. In 1999 and 2000, the Company's credit losses were $1.7 million and $0.9 million, respectively and the Company's actual credit losses as a percentage of net sales were 2.0% and 0.9%, respectively. The Company believes that current levels of cash and cash equivalents ($0.8 million at December 31, 2000) together with cash from operations and funds available under its Agreement, will be sufficient to meet its capital requirements for the next 12 months. BACKLOG AND SEASONALITY The Company's business is impacted by the general seasonal trends that are characteristic of the apparel and retail industries. In the Company's segment of the apparel industry, sales are generally higher in the first and third quarters. Historically, the Company has taken greater markdowns in the second and fourth quarters. The Company generally receives orders for its products three to five months prior to the time the products are delivered to stores. As of December 31, 2000 the Company has unfilled orders of approximately $32.0 million, compared to $29.0 million of such orders as of December 31, 1999. The backlog of orders at any given time is affected by a number of factors, including 26 seasonality, weather conditions, scheduling of manufacturing and shipment of products. As the time of the shipment of products may vary from year to year, the results for any particular quarter may not be indicative of the results for the full year. INFLATION The Company does not believe that the relatively moderate rates of inflation experienced in the United States over the last year have had a significant effect on its net sales or profitability. Although higher rates of inflation have been experienced in a number of foreign countries in which the Company's products are manufactured, the Company does not believe that they have had a material effect on the Company's net sales or profitability. RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments" ("SFAS 133"). SFAS 133 established accounting and reporting standards for derivative instruments and for hedging activities. SFAS 133 requires that an entity recognize all derivatives as either assets or liabilities and measure those instruments at fair market value. Under certain circumstances, a portion of the derivative's gain or loss is initially reported as a component of other comprehensive income and subsequently reclassified into income when the transaction effects earnings. For a derivative not designated as a hedging instrument, the gain or loss is recognized in income in the period of change. SFAS 133 is effective for fiscal quarters of years 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 adoption of SFAS 133 had no impact on its financial position or results of operations. In March 2000, the FASB issued interpretation No. 44 ("FIN 44"), "Accounting for Certain Transactions Involving Stock Compensation, an Interpretation of APB Opinion No. 25". FIN 44 clarifies the application of APB Opinion No. 25 for (a) the definition of employee for purposes of applying APB Opinion No. 25, (b) the criteria for determining whether a plan qualifies as a noncompensatory plan, (c) the accounting consequences of various modifications to the previously fixed stock option or award, and (d) the accounting for an exchange of stock compensation awards in a business combination. FIN 44 is effective July 2, 2000 but certain conclusions cover specific events that occur after either December 15, 1998 or January 12, 2000. The adoption of FIN 44 did not have an affect on the Company's financial statements. In December 1999, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin No. 101 which summarizes certain of the SEC staff's views in applying generally accepted accounting principles to revenue recognition in financial statements. The Company adopted Staff Accounting Bulletin No. 101 effective October 1, 2000. The adoption of this guidance did not have a material impact on the Company's results of operations or financial position, however, the guidance may impact the way in which the Company will account for future transactions. ITEM 7-A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company's principal market risk results from changes in floating interest rates on short-term debt. The Company does not use interest rate swap agreements to mitigate the risk of adverse changes in the prime interest rate. However, the impact of a 100 basis point change in interest rates affecting the Company's short-term debt would not be material to the net loss, cash flow or working capital. The Company does not hold long-term interest sensitive assets and therefore is not exposed to interest rate fluctuations for its assets. The Company does not hold or purchase any derivative financial instruments for trading purposes. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The consolidated financial statements of the Company and the report of independent certified public accountants thereon are set forth on pages 33 through 54 hereof. 27 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY The information appearing in the Company's Definitive Proxy Statement prepared in connection with the 2001 Annual Meeting of Stockholders (the "Proxy Statement") under the captions "Proposal 1 :Election of Class I Directors" and "Principal Executive Officers of the Company Who Are Not Also Directors" is incorporated herein by reference. The Proxy Statement will be filed not later than 120 days after the end of the fiscal year covered by this annual report on Form 10-K. ITEM 11. EXECUTIVE COMPENSATION The information appearing in the Proxy Statement under the caption "Executive Compensation" is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information appearing in the Proxy Statement under the caption "Security Ownership Of Certain Beneficial Owners and Management" is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information appearing in the Proxy Statement under the caption "Certain Relationships And Related Transactions" is incorporated herein by reference. 28 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a)1. Financial Statements. The following financial statements, related notes and the Report of Independent Auditors, are included in response to Item 8 hereof: INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE ---- Report of Independent Certified Public Accountants 33 Consolidated Balance Sheets at December 31, 1999 and 2000 34 Consolidated Statements of Operations for the years ended December 31, 1998, 1999 and 2000 35 Consolidated Statements of Stockholders' Equity for the years ended December 31, 1998, 1999 and 2000 36 Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1999 and 2000 37 Summary of Accounting Policies 38 Notes to Consolidated Financial Statements 42
(a)2. Financial Statements Schedules. The following is a list of all financial statements schedules filed herewith: Schedule II-Valuation and Qualifying Accounts Schedules other than those listed above have been omitted because they are not required or are not applicable, or the required information has been included in the Consolidated Financial Statements or the Notes thereto. (a)3. Exhibits (numbered in accordance with Item 601 of Regulation S-K). See accompanying Index to Exhibits. The following is a list of Exhibits filed herewith: 3.04 Certificate of Amendment to Certificate of Designation dated March 15, 2001 10.83 License Rights Termination Agreement dated March 15, 2001 by and between Ambra Inc., Hugo Boss AG, I.C. Isaacs & Company L.P. and I.C. Isaacs & Company, Inc. 10.84 Subordinated Secured Promissory Note dated March 15, 2001 10.85 Security Agreement dated March 15, 2001 by and between I.C. Isaacs & Company L.P and Ambra Inc. 10.86 Amendment No. 1 dated March 15, 2001 to Shareholders' Agreement by and between I.C. Isaacs & Company, Inc. and Ambra Inc. 10.87 Twenty-second Amendment to Financing Agreements dated March 15, 2001 23.01 Consent of BDO Seidman, LLP
(b) Reports on Form 8-K: None. 29 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULES I.C. Isaacs & Company, Inc. The audits referred to in our report to I.C. Isaacs & Company, Inc. dated March 2, 2001, except for Notes 3 and 8, which are as of March 29, 2001, which is contained in Item 8 of this Form 10-K, include the audit of the financial statement schedule listed in the accompanying index for the each of the three years in the period ended December 31, 2000. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statement schedule based on our audits. In our opinion, such schedule presents fairly, in all material respects, the information set forth therein. BDO SEIDMAN, LLP Washington, D.C. March 2, 2001, except for Notes 3 and 8, which are as of March 29, 2001 30 SCHEDULE II I. C. ISAACS & COMPANY, INC. VALUATION AND QUALIFYING ACCOUNTS
BALANCE CHARGED TO BEGINNING OF COSTS AND BALANCE AT END DESCRIPTION THE YEAR EXPENSES DEDUCTION OF YEAR ----------------- ----------------- ---------------- ---------------- Year Ended December 31, 1998 Allowance for doubtful accounts $ 1,185,000 $ 1,595,000 $ (1,427,000) $ 1,353,000 Reserve for sales returns and discounts 177,000 6,733,000 (6,814,000) 96,000 Year Ended December 31, 1999 Allowance for doubtful accounts 1,353,000 1,023,000 (1,651,000) 725,000 Reserve for sales returns and discounts 96,000 4,278,000 (4,221,000) 153,000 Year Ended December 31, 2000 Allowance for doubtful accounts 725,000 837,000 (932,000) 630,000 Reserve for sales returns and discounts 153,000 6,005,000 (5,928,000) 230,000 ================= ================ ================ =================
31 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: March 30, 2001 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 ---------- ----- ---- /s/ ROBERT J. ARNOT Chairman of the Board and Chief Executive Officer, March 30, 2001 -------------------- President and Director (Principal Executive Officer) Robert J. Arnot /s/ EUGENE C. WIELEPSKI Vice President and Chief Financial Officer and Director March 30, 2001 ----------------------- (Principal Financial and Accounting Officer) Eugene C. Wielepski /s/ DANIEL GLADSTONE Director March 30, 2001 ----------------------- Daniel Gladstone /s/ JON HECHLER Director March 30, 2001 ----------------------- Jon Hechler /s/ RONALD S. SCHMIDT Director March 30, 2001 ----------------------- Ronald S. Schmidt /s/ THOMAS P. ORMANDY Director March 30, 2001 ----------------------- Thomas P. Ormandy /s/ NEAL J. FOX Director March 30, 2001 ----------------------- Neal J. Fox /s/ ANTHONY J. MARTERIE Director March 30, 2001 ----------------------- Anthony J. Marterie
32 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, 1999 and 2000 and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2000. 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 auditing standards generally accepted in the United States of America. 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, 1999 and 2000 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2000 in conformity with accounting principles generally accepted in the United States of America. BDO SEIDMAN, LLP Washington, D.C. March 2, 2001, except for Notes 3 and 8, which are as of March 29, 2001 33 I.C. ISAACS & COMPANY, INC. CONSOLIDATED BALANCE SHEETS
DECEMBER 31, -------------------------------------- 1999 2000 ---- ---- ASSETS Current Cash, including temporary investments of $512,000 and $203,000 $ 1,193,093 $ 847,644 Accounts receivable, less allowance for doubtful accounts of $725,000 and $630,000 (Note 3) 10,950,550 13,618,127 Inventories (Notes 1 and 3) 18,201,323 14,307,339 Prepaid expenses and other 293,524 446,644 Refundable income taxes 356,265 342,822 ----------------- ------------------ Total current assets 30,994,755 29,562,576 Property, plant and equipment, at cost, less accumulated depreciation and amortization (Notes 2) 3,304,512 3,156,967 Trademark and licenses, less accumulated amortization of $307,210 and $636,514 (Note 8) 1,042,790 713,486 Goodwill, less accumulated amortization of $1,660,650 and $2,652,100 991,450 -- Deferred royalty expense, less accumulated amortization of $88,287 and $1,147,750 (Note 8) 1,059,463 -- Other assets (Note 9) 3,042,261 2,996,715 ----------------- ------------------ $ 40,435,231 $ 36,429,744 ================= ================== LIABILITIES AND STOCKHOLDERS' EQUITY Current Checks issued against future deposits $ 294,089 $ 845,344 Current maturities of long-term debt and revolving line of credit (Note 3) 3,644,470 7,972,022 Current maturities of capital lease obligations (Note 3) 6,258 -- Accounts payable 1,923,458 1,135,007 Accrued expenses and other current liabilities (Note 4) 2,380,476 2,733,703 Accrued compensation 135,790 99,221 ----------------- ------------------ Total current liabilities 8,384,541 12,785,297 ------------------ ------------------ Long-term debt (Note 3) -- 6,841,087 Liability under licensing agreement (Notes 6 and 8) 2,300,000 -- Redeemable preferred stock (Notes 6 and 8) 2,000,000 3,300,000 Commitments and contingencies (Notes 3, 8 and 9) 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 and 9,011,366 shares issued; 7,197,990 and 7,864,657 shares outstanding 834 901 Additional paid-in capital 38,674,998 39,674,931 Accumulated deficit (8,615,112) (23,862,442) Treasury stock, at cost (1,146,709 shares) (2,310,030) (2,310,030) ----------------- ------------------ Total stockholders' equity 27,750,690 13,503,360 ----------------- ------------------ $ 40,435,231 $ 36,429,744 ================= ==================
See accompanying summary of accounting policies and notes to consolidated financial statements. 34 I.C. ISAACS & COMPANY, INC. CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, ------------------------------------------------------------- 1998 1999 2000 ------------------- ------------------ ------------------ Net sales $ 113,720,799 $ 84,525,372 $ 97,253,569 Cost of sales 90,660,582 61,694,122 68,161,225 ------------------- ------------------- ------------------ Gross profit 23,060,217 22,831,250 29,092,344 ------------------- ------------------- ------------------ Operating Expenses Selling 16,982,794 12,798,641 14,554,006 License fees (Note 8) 6,020,196 7,001,902 8,352,827 Distribution and shipping 3,899,917 2,863,502 3,241,894 General and administrative 9,998,503 8,056,199 7,786,057 Termination of license agreement (Note 8) -- -- 8,067,908 Provision for severance (Note 8) 526,326 750,000 385,314 Impairment of intangibles (Note 8) -- -- 743,590 ------------------- ------------------- ------------------ Total operating expenses 37,427,736 31,470,244 43,131,596 ------------------- ------------------- ------------------ Operating loss (14,367,519) (8,638,994) (14,039,252) ------------------- ------------------- ------------------ Other income (expense) Interest, net of interest income of $252,392, $27,339 and $18,668 (1,454,748) (1,628,183) (1,332,328) Other, net 380,718 164,795 76,250 ------------------- ------------------- ------------------ Total other expense (1,074,030) (1,463,388) (1,256,078) ------------------- ------------------- ------------------ Loss before income taxes (15,441,549) (10,102,382) (15,295,330) Income tax (provision) benefit (Note 5) (1,351,000) (110,000) 48,000 ------------------- ------------------- ------------------ Net loss $(16,792,549) $(10,212,382) $(15,247,330) =================== =================== ================== Basic and diluted net loss per share $(2.15) $(1.47) $(2.00) Weighted average common shares outstanding 7,809,540 6,935,005 7,638,792
See accompanying summary of accounting policies and notes to consolidated financial statements. 35 I.C. ISAACS & COMPANY, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
PREFERRED STOCK COMMON STOCK ADDITIONAL -------------------- ---------------------- PAID-IN SHARES AMOUNT SHARES AMOUNT CAPITAL --------- --------- ---------- --------- --------------- Balance, at December 31, 1997 -- -- 7,824,699 $782 $ 34,120,190 Net loss -- -- -- -- -- Issuance of stock options to non-employee directors -- -- -- -- 30,000 Purchase of treasury stock -- -- -- -- -- Issuance of common stock -- -- 520,000 52 4,774,808 ------- -------- --------- ------- ------------ Balance, at December 31, 1998 -- -- 8,344,699 834 38,924,998 Net loss -- -- -- -- -- Purchase of treasury stock -- -- -- -- -- Issuance of treasury stock -- -- -- -- (250,000) ------- -------- --------- ------- ------------ Balance, at December 31, 1999 -- -- 8,344,699 834 38,674,998 Net loss -- -- -- -- -- Issuance of common stock -- -- 666,667 67 999,933 ------- -------- --------- ------- ------------ Balance, at December 31, 2000 -- -- 9,011,366 $901 $ 39,674,931 ======== ======== ========= ======= ============
ACCUMULATED TREASURY DEFICIT STOCK TOTAL -------------- ------------ ------------ Balance, at December 31, 1997 $ 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 Purchase of treasury stock -- (3,195,162) (3,195,162) Issuance of common stock -- -- 4,774,860 ------------ ----------- ------------ Balance, at December 31, 1998 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 -- 1,000,000 750,000 ------------ ----------- ------------ Balance, at December 31, 1999 (8,615,112) (2,310,030) 27,750,690 Net loss (15,247,330) -- (15,247,330) Issuance of common stock -- -- 1,000,000 ------------ ----------- ------------ Balance, at December 31, 2000 $(23,862,442) $(2,310,030) $ 13,503,360 ============ =========== ============
See accompanying summary of accounting policies and notes to consolidated financial statements. 36 I.C. ISAACS & COMPANY, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, ------------------------------------------------------ 1998 1999 2000 ---------------- ---------------- -------------- Operating Activities Net loss $(16,792,549) $(10,212,382) $(15,247,330) Adjustments to reconcile net loss to net cash provided by (used in) operating activities Deferred income taxes 1,505,000 -- -- Provision for doubtful accounts 1,594,925 1,022,828 837,275 Write off of accounts receivable (1,426,925) (1,650,828) (932,275) Provision for sales returns and discounts 6,733,208 4,277,845 6,004,743 Sales returns and discounts (6,814,537) (4,221,184) (5,927,743) Depreciation and amortization 2,640,279 2,150,841 1,770,751 Impairment of intangibles -- -- 743,590 Gain on sale of assets (68,895) (288,788) (135,364) Termination of license agreement -- -- 8,067,908 Compensation expense on stock options 30,000 7,264 10,500 (Increase) decrease in assets Accounts receivable 8,028,905 4,525,290 (2,649,577) Inventories 814,255 4,920,648 3,893,984 Prepaid expenses and other 190,081 588,830 (98,904) Refundable income taxes (1,799,450) 1,443,185 13,443 Other assets (1,140,683) (965,513) (25,887) Increase (decrease) in liabilities Accounts payable (2,665,781) (2,378,249) (788,451) Accrued expenses and other current liabilities 94,941 1,294,907 342,727 Accrued compensation (25,536) (73,983) (36,569) Income taxes payable (156,000) -- -- ------------ ------------ ------------ Cash provided by (used in) operating activities (9,258,762) 440,711 (4,157,179) ------------ ------------ ------------ Investing Activities Proceeds from sale of assets 188,067 288,788 366,402 Capital expenditures (1,524,124) (767,032) (1,068,308) Acquisition of license (600,000) -- -- ------------ ------------ ------------ Cash used in investing activities (1,936,057) (478,244) (701,906) ------------ ------------ ------------ Financing Activities Checks issued against future deposits 1,298,929 (1,004,840) 551,255 Issuance of common stock 4,774,860 -- -- Purchase of treasury stock (3,195,162) (100,000) -- Principal payments on debt (172,515) (179,864) (6,258) Principal proceeds from debt 2,412,235 1,232,235 3,968,639 Deferred financing costs -- (62,500) -- ------------ ------------ ------------ Cash provided by (used in) financing activities 5,118,347 (114,969) 4,513,636 ------------ ------------ ------------ Decrease in cash and cash equivalents (6,076,472) (152,502) (345,449) Cash and Cash Equivalents, at beginning of year 7,422,067 1,345,595 1,193,093 ------------ ------------ ------------ Cash and Cash Equivalents, at end of year $ 1,345,595 $ 1,193,093 $ 847,644 ============ ============ ============
See accompanying summary of accounting policies and notes to consolidated financial statements. 37 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 1998, 1999 and 2000. All intercompany balances and transactions have been eliminated. BUSINESS DESCRIPTION The Company, which operates in one business segment, designs and markets branded jeanswear and sportswear. The Company offers collections of jeanswear and sportswear for men and women under the Marithe and Francois Girbaud(R) brand in the United States, Puerto Rico and Canada and for men and boys under the Beverly Hills Polo Club(R) brand in the United States, Puerto Rico and Europe. The Company also offered collections of jeanswear and sportswear for young men and boys under the BOSS brand in the United States and Puerto Rico. In the fourth quarter of 2000, the Company terminated the licensing agreement for use of the BOSS trademark and will discontinue the manufacture and sale of this apparel. (See Note 8). The Company also marketed women's pants and jeans under various other Company-owned brand names and under third-party private labels. In the fourth quarter of 2000, the Company decided that it intended to discontinue production of the women's Company-owned and private label lines. In 1999, the Company began a focused line of sportswear under its new Urban Expedition (UBX) brand in the United States and Europe. Sales of this sportswear were insignificant in 2000. RISKS AND UNCERTAINTIES The apparel industry is highly competitive. The Company competes with many companies, including larger, well capitalized companies which have sought to increase market share through massive consumer advertising and price reductions. The Company continues 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 brand. A 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 lower prices. Over the last several years, the Company also switched its production to contractors outside the United States to reduce costs. In 2000, the Company closed its last manufacturing facility in the United States and decided it intended to dramatically reduce the use of independent contractor's facilities in Mexico. In 2001, the Company will begin importing most of its inventory as finished goods from contractors in Asia. This shift in purchasing will require the Company to estimate sales and issue purchase orders for inventory well in advance of receiving firm orders from its customers. A risk to the Company is that its estimates may differ from actual orders. If this happens, the Company may miss sales because it did not order enough, or it may have to sell excess inventory at reduced prices. 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. 38 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, 1998, 1999 and 2000 sales to one customer were $29,840,195, $12,012,202 and $5,528,436. These amounts constitute 26.2%, 14.2% and 5.7% 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 were 1.3%, 2.0% and 1.0% for the years ended December 31, 1998, 1999 and 2000, respectively. 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, plant 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 management recorded a 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 was being amortized over 63 months. In the fourth quarter of 2000, the Company decided that it intended to discontinue production of the women's Company-owned and private label lines. Accordingly, management determined the goodwill associated with these lines had been impaired and recorded a write down of $743,590 in the quarter ended December 31, 2000. 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. 39 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 $5,676,799, $2,796,430 and $1,993,754 for the years ended December 31, 1998, 1999 and 2000, 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. 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, 1999 and 2000 because the impact of dilutive securities is anti-dilutive. There were outstanding employee stock options of 346,000, 996,250 and 1,020,250 at December 31, 1998, 1999 and 2000, respectively. These stock options were excluded from the computation of earnings per share for their inclusion would have been anti-dilutive. 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 40 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 fiscal quarters of years 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 adoption of SFAS 133 had no impact on the financial position or results of operations. In March 2000, the FASB issued interpretation No. 44 ("FIN 44"), "Accounting for Certain Transactions Involving Stock Compensation, an Interpretation of APB Opinion No. 25". FIN 44 clarifies the application of APB Opinion No. 25 for (a) the definition of employee for purposes of applying APB Opinion No. 25, (b) the criteria for determining whether a plan qualifies as a noncompensatory plan, (c) the accounting consequences of various modifications to the previously fixed stock option or award, and (d) the accounting for an exchange of stock compensation awards in a business combination. FIN 44 is effective July 2, 2000 but certain conclusions cover specific events that occur after either December 15, 1998 or January 12, 2000. The adoption of FIN 44 did not have an affect on the Company's financial statements. In December 1999, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin No. 101 which summarizes certain of the SEC staff's views in applying generally accepted accounting principles to revenue recognition in financial statements. The Company adopted Staff Accounting Bulletin No. 101 effective October 1, 2000. The adoption of this guidance did not have a material impact on the Company's results of operations or financial position, however, the guidance may impact the way in which the Company will account for future transactions. 41 I.C. ISAACS & COMPANY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. INVENTORIES Inventories consist of the following:
DECEMBER 31, ------------------------------------ 1999 2000 ----------------- ----------------- Raw materials $ 1,876,222 $ 2,139,305 Work-in-process 1,009,124 534,867 Finished goods 15,315,977 11,633,167 ----------------- ----------------- $ 18,201,323 $ 14,307,339 ================= =================
2. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consists of the following:
DECEMBER 31, ESTIMATED -------------------------------------- USEFUL 1999 2000 LIVES ----------------- ----------------- --------- Land $ 714,304 $ 714,304 Buildings and improvements 4,141,434 4,144,261 18 years Machinery, equipment and fixtures 8,587,328 7,142,227 5-7 years Other 1,581,596 1,563,678 various ----------------- ----------------- 15,024,662 13,564,470 Less accumulated depreciation and amortization 11,720,150 10,407,503 ----------------- ----------------- $ 3,304,512 $ 3,156,967 ================= =================
3. LONG-TERM DEBT Long-term debt consists of the following:
DECEMBER 31, ----------------------------------------- 1999 2000 ------------------ ------------------- Revolving line of credit (a) $ 3,644,470 $ 7,613,109 Notes payable (b) -- 7,200,000 Capital lease obligations 6,258 -- ------------------ ---------------- Total 3,650,728 14,813,109 Less current maturities of long-term debt and revolving line of credit 3,644,470 7,972,022 Less current maturities of capital lease obligations 6,258 -- ------------------ ---------------- $ -- $ 6,841,087 ================== ================
42 3. LONG-TERM DEBT (CONTINUED) (a) The Company has an asset-based revolving line of credit (the "Agreement") with Congress Financial Corporation ("Congress"). As of December 31, 1999 and 2000 the Company had $3,644,470 and $7,613,109, respectively, in outstanding borrowings under its revolving line of credit. In March 1999, the Company amended the Agreement to extend the term through December 31, 2000. In December 2000, the Agreement was further amended to extend the term through March 31, 2001. In March 2001, the Agreement was further amended to extend the term through December 31, 2002. The amended Agreement provides that the Company may borrow up to 80.0% of net eligible accounts receivable and a portion of 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 $6.0 million from May 1 to September 30 of each year and $4.0 million for the remainder of each year, and bear interest at the lender's prime rate of interest plus 1.0% (effectively 10.5% at December 31, 2000). In connection with amending the Agreement in March 1999, the Company paid Congress a financing fee of $125,000, one half of which was paid at the time of closing and the other half of which was paid on June 30, 2000. The financing fee was amortized over 21 months, ending December 31, 2000. Outstanding letters of credit approximated $2.1 million at December 31, 2000. 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 both of these covenants at December 31, 2000 and has obtained a waiver through March 31, 2001. In connection with the amendment in March 2001, Congress reduced the minimum levels of working capital and tangible net worth. Average short-term borrowings and the related interest rates are as follows:
YEAR ENDED DECEMBER 31, ------------------------------------ 1999 2000 ----------------- ---------------- Borrowings under revolving line of credit $ 3,644,470 $ 7,613,109 Weighted average interest rate 8.35% 10.63% Maximum month-end balance during year $ 7,066,667 $15,356,405 Average month-end balance during year $ 4,529,241 $10,263,820
(b) Subsequent to December 31, 2000, the Company, in connection with the termination of the BOSS license agreement, issued a $7,200,000 note payable to Ambra, Inc. ("Ambra") as consideration for termination. The note bears interest at 8.0% with interest and principal payable quarterly through December 31, 2006. The note is subordinated to the asset-based line of credit and is collateralized by a second security interest in all of the Company's assets. The termination expense and this note payable were recorded as of December 31, 2000 as further discussed in Note 8. At December 31, 2000, long-term debt maturities are as follows: 2001 $ 7,972,022 2002 1,160,134 2003 1,257,135 2004 1,361,202 2005 1,476,059 Thereafter 1,586,557 ---------------- $14,813,109 ================
43 4. ACCRUED EXPENSES Accrued expenses consist of the following:
DECEMBER 31, ------------------------------------ 1999 2000 ----------------- ---------------- Royalties $ 816,069 $ 1,267,150 Selling bonuses 84,000 408,551 Accrued professional fees 100,000 100,000 Severance benefits 525,004 335,318 Payroll tax withholdings 136,216 152,288 Customer credit balances 233,011 300,137 Property taxes 106,812 92,019 Compensation expense 7,263 17,763 Deferred fees 62,500 -- Machine rentals 105,942 -- Income taxes payable 110,000 -- Other 93,659 60,477 ----------------- ---------------- $ 2,380,476 $ 2,733,703 ================= ================
5. INCOME TAXES The income tax provision (benefit) consists of the following:
YEAR ENDED DECEMBER 31, --------------------------------------------------- 1998 1999 2000 --------------- --------------- --------------- Current Federal $(128,000) $ -- $ -- State and local (26,000) 110,000 (48,000) --------------- --------------- --------------- (154,000) 110,000 (48,000) Deferred -- -- -- Valuation allowance 1,505,000 -- -- --------------- --------------- --------------- $1,351,000 $ 110,000 $ (48,000) =============== =============== ===============
44 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. The Company has net operating loss carry forwards for income tax reporting purposes of approximately $29,400,000, which will begin to expire in 2013. Significant items comprising the Company's deferred tax assets and liabilities are as follows:
DECEMBER 31, ----------------------------------- 1999 2000 ---------------- ---------------- Net operating loss carry forwards $ 10,223,000 $ 12,647,000 Termination of license agreement -- 3,096,000 Depreciation and amortization 332,000 443,000 Allowance for doubtful accounts 312,000 307,000 Inventory valuation 222,000 162,000 Accrued severance -- 69,000 Contribution carryovers -- 12,000 Other 16,000 21,000 ---------------- ---------------- 11,105,000 16,757,000 ---------------- ---------------- Deferred royalty expense (457,000) (39,000) ---------------- ---------------- Valuation allowance (10,648,000) (16,718,000) ---------------- ---------------- Net deferred tax asset $ -- $ -- ================ ================
A reconciliation between the statutory and effective tax rates is as follows:
YEAR ENDED DECEMBER 31, ------------------------------------------- 1998 1999 2000 ---------- ------------ ------------ Federal statutory rate (35.0)% (35.0)% (35.0)% State and local taxes, net of federal benefit (5.0) (4.0) (4.0) Nondeductible entertainment expense -- 0.5 1.0 Nondeductible goodwill amortization 3.5 2.7 13.7 Change in valuation allowance 10.0 -- -- Net operating losses not currently available 35.3 37.0 23.6 ---------- ------------ ------------ 8.8% 1.2% (0.7)% ========== ============ ============
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 of its common stock. From inception of the stock repurchase program through December 31, 2000, 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 women's license agreement. In November 1999, the Company issued 2,000,000 shares of restricted Series A Redeemable Convertible Preferred Stock having an estimated fair market value of $2,000,000 in connection with a restructuring of the licensing arrangement for the use of the BOSS trademark. Also in connection with such restructuring, in May 2000, the Company issued an additional 1,300,000 restricted shares of the same series of redeemable convertible preferred stock having an estimated fair market value of $1,300,000 and 666,667 shares of restricted common stock, 45 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 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 May 2000 have all of the same preferences, rights and voting powers as the common stock. The preferred stock is not entitled to vote on any matters to be voted upon by the stockholders' of the Company, except that the holders of the preferred stock are entitled to vote as a separate class, and the vote of a majority of the outstanding shares of preferred stock is 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 has a liquidation preference of $1.00 per share plus any declared but unpaid dividends on the preferred stock. The Company may redeem, from March 15, 2001 to June 30, 2002, any or all of the preferred stock at a redemption price of $1.00 per share. From July 1, 2002 to December 31, 2002, the Company may redeem any or all of the preferred stock at the greater of a redemption price of $1.00 per share or the current market price of the common stock. From January 1, 2003 to December 31, 2006, any unredeemed preferred stock may be converted, at the sole discretion of Ambra, into either a promissory note from the Company or an equal number of shares of common stock. If converted into a promissory note, the note will bear interest at 12.0% and is payable in two consecutive quarterly payments of interest, followed by four quarterly payments of principal and interest. Ambra may redeem the preferred stock at any time upon a default under the note issued in connection with the termination of the BOSS license agreement (See Note 8). For financial reporting purposes, the preferred stock will be considered redeemable preferred stock and will be classified outside of stockholders' equity. 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, 1999 and 2000 under the Plan:
WEIGHTED AVERAGE NUMBER OF EXERCISE 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 $1.358 Cancelled (113,000) $2.125 --------------- ------------------------ Options outstanding at December 31, 1999 996,250 $1.537 Granted 45,000 $1.320 Cancelled (21,000) $1.976 --------------- ------------------------ Options outstanding at December 31, 2000 1,020,250 $1.519 =============== ======================== Options exercisable at December 31, 2000 945,250 $1.468 =============== ========================
46 A summary of stock options outstanding and exercisable as of December 31, 2000 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 -------- ----------- ------------ -------- ----------- -------- $1.06 to $2.125 1,020,250 7.83 $1.519 945,250 $1.468 ====================== ============== ============== ============== =============== ==============
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%, 6.08% and 6.70%, expected volatility of 40%, 90% and 65%, expected option life of 5.5, 4.5 and 2.0 years and no dividend payment expected for 1998, 1999 and 2000, respectively. Using these assumptions, the fair value of the stock options granted is $1.00, $0.84 and $0.51 for 1998, 1999 and 2000, 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, 2000 is 7.83 years. If the Company had elected to recognize compensation expense based 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 2000 --------------------- -------------------- -------------------- Net loss: As reported $(16,792,549) $(10,212,382) $(15,247,330) Pro forma (17,108,549) (10,630,632) (15,654,757) Basic and diluted loss per common share: As reported $(2.15) $(1.47) $(2.00) Pro forma (2.19) (1.53) (2.05) --------------------- -------------------- --------------------
8. COMMITMENTS AND CONTINGENCIES The Company rents real and personal property under leases expiring at various dates through 2004. 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, 2000 are summarized as follows:
COMPUTER & TRUCKS & SHOWROOMS & OFFICE MACHINERY OFFICE SPACE EQUIPMENT TOTAL ---------------- ---------------- ---------------- ---------------- 2001 $ 51,960 $ 706,729 $ 148,065 $ 906,754 2002 27,095 391,888 135,370 554,353 2003 9,970 263,539 16,152 289,661 2004 -- -- 13,460 13,460 ---------------- ---------------- ---------------- ---------------- $ 89,025 $ 1,362,156 $ 313,047 $ 1,764,228 ================ ================ ================ ================
47 Total rent expense is as follows:
YEAR ENDED DECEMBER 31, -------------------------------------------------------- 1998 1999 2000 ---------------- ---------------- ---------------- Minimum rentals $ 796,367 $ 512,421 $ 556,875 Other lease costs 750,274 820,135 594,234 ---------------- ---------------- ---------------- $ 1,546,641 $ 1,332,556 $ 1,151,109 ================ ================ ================
In November 1997, the Company, Ambra and Hugo Boss AG ("Hugo Boss") executed certain agreements including an agreement whereby the Company borrowed $11,250,000 from Ambra to finance the acquisition of certain BOSS(R) 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 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 apparel in certain foreign countries for sale in the United States using the BOSS(R) brand and image in exchange for an annual royalty payment. The Company retained ownership of its domestic BOSS(R) 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 trademark. Pursuant to this agreement, the Company transferred to Ambra substantially all of its rights in the marks containing the term "BOSS" throughout the world and agreed to issue, on November 6, 1999, 2,000,000 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 trademark rights, which was originally entered into in November 1997. The Company, Ambra and Hugo Boss also agreed to enter into a license agreement granting the Company rights to use various trademarks including the word "BOSS" in the manufacture and domestic sale of specified types of apparel. Except for the initial term and the minimum annual royalties, the Company's rights under the new license agreement are substantially similar to those it previously had. As consideration, together with the royalties discussed below, for the new license agreement, the Company issued to Ambra, in May, 2000, 1,300,000 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 license agreement extended through December 31, 2003, with renewal options, at the option of the Company, through December 31, 2007. In October 2000, the Board of Directors authorized the appropriate officers of the Company to negotiate a termination of the license agreement for the use of the BOSS trademark (the "License Agreement"). In March 2001, the Company, Ambra and Hugo Boss executed an agreement to terminate the License Agreement. Pursuant to the agreement, the Company issued to Ambra a note payable in the amount of $7,200,000. In connection with the termination of the BOSS license agreement, the Company recorded the note payable and wrote off the remaining deferred royalty expense of $706,315 and other BOSS related assets of $161,593 as a charge against earnings totaling $8,067,908 in the fourth quarter of 2000. The note bears interest at 8.0% with interest and principal payable quarterly through December 31, 2006. The Company intends to immediately cease development and production of new BOSS collections and will have through October 31, 2001 to sell and or dispose of existing BOSS inventory. In connection with this agreement, the $3,300,000 of Series A Convertible Preferred Stock held by Ambra may be redeemed for cash by the Company through December 31, 2002; thereafter it may be converted into a promissory note from the Company or common stock at the sole discretion of Ambra (See Note 6). 48 Total license fees on BOSS sportswear sales amounted to $3,746,315, $2,910,013 and $3,240,000 for the years ended December 31, 1998, 1999 and 2000, respectively. The percentage of BOSS sportswear sales to total sales was 74.1%, 43.7% and 11.3% for the years ended December 31, 1998, 1999 and 2000, respectively. In November 1997, and as further amended in March 1998, November 1998 and June 2000, 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 brand and certain related trademarks in the United States, Puerto Rico, the U.S. Virgin Islands and Canada. 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 equal to 6.25% of net sales or regular licensed merchandise and 3.0% of certain irregular and closeout licensed merchandise. Payments are subject to guaranteed minimum annual royalties as follows: 2001 $2,500,000 2002 $3,000,000
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 is required to spend at least $500,000 in advertising men's Girbaud(R) brand products in each year through the term of the Girbaud(R) men's agreement. 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(R) 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 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: 2001 $1,000,000 2002 $1,500,000
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 is required to spend at least $400,000 in advertising women's Girbaud(R) brand products in each year through the term of the Girbaud(R) women's agreement. 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(R) brand. In December 1998, the Girbaud(R) 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(R) retail store in New York City. 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(R) 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(R) retail store by July 31, 2002 it will become obligated to pay Latitude Licensing Corp. an additional $500,000 in royalties. Total license fees on Girbaud sportswear sales amounted to $1,200,000, $2,356,669 and $4,328,764 for the years ended December 31, 1998, 1999 and 2000, respectively. 49 The percentage of Girbaud sportswear sales to total sales was 4.1%, 32.9% and 69.6% for the years ended December 31, 1998, 1999 and 2000, respectively. In January 2000, the Company entered into a global sourcing agreement with G.I. Promotions to act as a non-exclusive sourcing agent to licensees of the Marithe & Francois Girbaud trademark for the manufacture of Girbaud(R) 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 this 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 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 2000, the Company entered into an exclusive distribution agreement for Girbaud men's and women's jeanswear and sportswear products in Canada. The Company will sell to Western Glove Works ("Distributor") Girbaud products produced in Mexico or the United States at cost plus 12.0%, which is less than its normal profit margins on sales of comparable products to the Company's retail customers. For products purchased by the Distributor from overseas, the Distributor will pay a distributor's fee equal to 6.75% of net sales to the Company. Under the agreement, the Distributor will pay a royalty fee equal to 6.25% of net sales to the Company, which will in turn pay the royalty to Latitude Licensing Corp. The initial term of the agreement expires on December 31, 2001. The Distributor may renew the agreement for six additional one-year terms. The minimum sales level for calendar 2001 is $1,600,000 (Canadian Dollars), which results in a minimum distribution fee payable to the Company of $48,000 (Canadian Dollars). There were no minimum sales levels or distribution fees for calendar year 2000. Since 1993, the Company has had an exclusive wholesale licensing arrangement with BHPC Marketing, Inc. for the manufacture and promotion of certain men's sportswear bearing the registered trademark Beverly Hills Polo Club. The BHPC men's agreement has a three year term expiring December 31, 2001 with renewal options for a total of nine years. Under the men's agreement the Company is required to make payments to the licensor in an amount equal to 5.0% of net invoiced sales of licensed products and to spend an amount equal to 1.0% of net invoiced sales of such merchandise in advertising for the licensed products. Payments are subject to a guaranteed minimum annual royalty of $586,000 in 2001. 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 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 nine years. Under the boy's agreement the Company was required to make payments to the licensor in an amount equal to 5.0% of net sales in 1999 and is subject to a guaranteed minimum annual royalty of $100,000 in 2001. Total license fees on Beverly Hills Polo Club sportswear sales amounted to $1,073,989, $803,281 and $774,546 for the years ended December 31, 1998, 1999 and 2000 respectively. The percentage of Beverly Hills Polo Club sportswear sales to total sales was 14.6%, 17.3% and 13.4% for the years ended December 31, 1998, 1999 and 2000, respectively. 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 trademark in Europe. The International Agreements, as amended, provide certain exclusive rights to use the Beverly Hills Polo Club trademark for men's sportswear 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. This Agreement was amended July 31, 2000 to reduce certain royalty payments and increased the amount the Company is required to spend in advertising the BHPC line. For the period beginning January 1, 2000 and ending June 30, 2000, no guaranteed minimum annual royalties or guaranteed net shipment volumes applied; for the period beginning July 1, 2000 and ending December 31, 2000, the royalty rate was 3.0% of wholesale sales of BHPC products including purchases of 50 BHPC products by Beverly Hills Polo Club retail stores in Europe ("Wholesale Purchases") and no guaranteed annual royalties applied; 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 $120,000; for the period beginning January 1, 2002 and ending December 31, 2004, the royalty rate shall be 3.0% of Wholesale Purchases, the guaranteed annual royalty shall be $120,000 and the Company shall be subject to the guaranteed net shipment volumes in effect immediately prior to the amendment dated March 1, 1999. For the period beginning January 1, 2000 and ending December 31, 2001, the Company is required to spend an amount equal to 4.0% of Wholesale Purchases in advertising the BHPC line. During each of 2002, 2003 and 2004, the Company is required to spend an amount equal to 4.0% 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 in the first quarter of 1998. The production in this facility, the majority of which was jeans, was transferred to third party independent contractor 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. The actual expenses incurred were not significantly different than the reserve provided by the Company in the fourth quarter of 1998. 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. In the second quarter of 2000, the Company announced that it intended to close its last company-owned manufacturing facility located in Raleigh, Mississippi. This closure, which occurred in the third quarter of 2000, resulted in a charge against earnings of $0.2 million in the second quarter. The production in this facility was transferred to third party independent contractor facilities in Mexico and Asia. The actual expenses incurred were not significantly different than the reserve provided by the Company in the second quarter of 2000. In the fourth quarter of 2000 the Company decided it intended to dramatically reduce the use of using independent contractors' facilities in Mexico. This decision resulted in the termination of certain employees who will be paid severance in the first and second quarters of 2001. This severance resulted in a charge against earnings of $0.2 million in the fourth quarter of 2000. 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 alleged that the registration statement and prospectus used 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. The plaintiffs seek rescission, damages, costs and expenses, including attorneys' fees and 51 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, 2000. Pension expense for 1998, 1999 and 2000 was approximately $616,000, $390,000 and $409,000 respectively, and includes the following components:
YEARS ENDED DECEMBER 31, ------------------------------------------------------- 1998 1999 2000 ---------------- ---------------- ---------------- Service cost of current period $ 267,000 $ 207,000 $ 148,000 Interest on the above service cost 20,000 15,000 11,000 ---------------- ---------------- ---------------- 287,000 222,000 159,000 Interest on the projected benefit obligation 712,000 609,000 541,000 Expected return on plan assets (630,000) (646,000) (577,000) Amortization of prior service cost 42,000 42,000 42,000 Amortization of transition amount 31,000 31,000 31,000 Amortization of loss 174,000 132,000 213,000 ---------------- ---------------- ---------------- Pension cost $ 616,000 $ 390,000 $ 409,000 ================ ================ ================
The following table sets forth the Plan's funded status and amounts recognized at December 31, 1998, 1999 and 2000:
YEARS ENDED DECEMBER 31, -------------------------------------------------------- 1998 1999 2000 ---------------- ---------------- ---------------- Vested benefits $ 8,653,000 $ 7,819,000 $ 6,323,000 Nonvested benefits 103,000 110,000 116,000 ---------------- ---------------- ---------------- Accumulated benefit obligation 8,756,000 7,929,000 6,439,000 Effect of anticipated future compensation levels and other events 1,655,000 963,000 707,000 ---------------- ---------------- ---------------- Projected benefit obligation 10,411,000 8,892,000 7,146,000 ---------------- ---------------- ---------------- Fair value of assets held in the plan 9,245,000 9,260,000 7,297,000 ---------------- ---------------- ---------------- (Excess)/deficit of projected benefit obligation over plan assets (1,166,000) 368,000 151,000 Unrecognized net loss from past experience different from that assumed 2,519,000 1,868,000 2,569,000 Unrecognized prior service cost 299,000 257,000 154,000 Unamortized liability at transition 62,000 31,000 -- ---------------- ---------------- ---------------- Net prepaid periodic pension cost $ 1,714,000 $ 2,524,000 $ 2,874,000 ================ ================ ================
52 With respect to the above table, the weighted average discount rate used to measure the projected benefit obligation was 7.5% for 1998, 1999 and 2000; 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. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during the year for interest amounted to $1,689,005, $1,804,098 and $1,093,284 for 1998, 1999 and 2000, respectively. Cash paid for income taxes was $1,799,450 in 1998. Non-cash effect of restructuring BOSS trademark and licensing arrangement:
1999 2000 ------------------ ------------------ Transfer of BOSS(R) trademark $9,093,750 -- Exchange of note payable $11,250,000 -- Issuance of redeemable preferred stock $2,000,000 $1,300,000 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 women's license agreement $750,000 -- Issuance of common stock in settlement of BOSS liability -- $1,000,000
11. QUARTERLY FINANCIAL DATA (UNAUDITED) Summarized quarterly financial data for 2000 and 1999 is as follows:
Quarter ---------------------------------------------------------------------------------------------------------------------------- 2000 First Second Third Fourth ------------------------------------------------------------------ ------------------ ------------------- ------------------ Net sales $ 24,676,050 $ 23,602,928 $ 31,873,854 $ 17,100,737 Gross profit 8,270,502 6,020,781 10,790,956 4,010,105 Net income (loss) 117,383 (2,822,351) 1,413,442 (13,955,804) Basic and diluted earnings (loss) per share 0.02 (0.37) 0.18 (1.77) ================================================================== ================== =================== ================== Quarter -------------------------------------------------------------------------------------------------------------------------------- 1999 First Second Third Fourth ------------------------------------------------------------------ ------------------ ------------------- ------------------ Net sales $ 22,527,838 $ 20,756,858 $ 24,884,949 $ 16,355,727 Gross profit 6,668,429 6,108,381 7,885,468 2,168,972 Net (loss) (2,852,340) (2,192,156) (548,198) (4,619,688) Basic and diluted (loss) per share (0.42) (0.32) (0.08) (0.66) =================================================================== ================== =================== ==================
(1) Earnings per share calculations for each of the quarters are based on the weighted average shares outstanding for each period. The sum of the quarters may not necessarily be equal to the full year earnings per share amounts. 53 During the fourth quarter of 2000, the Company began negotiations to terminate the BOSS license agreement and recorded a charge against earnings of $8,067,908, which had the effect of increasing the net loss by $8,067,908 or $1.06 per share. 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. 54 EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION ----------- ------------------------------------------------------------ *3.01 Amended and Restated Certificate of Incorporation *3.02 Amended and Restated By-Laws TRIANGLE TRIANGLE TRIANGLE 3.03 Certificate of Designation dated November 5, 1999. 3.04 Certificate of Amendment to Certificate of Designation dated March 15, 2001 *4.01 Specimen Common Stock Certificate *10.01(a) Form of Amended and Restated Shareholders' Agreement *10.01(b) Form of Amendment No. 1 to Amended and Restated Shareholders' Agreement *10.02 Employment Agreement dated as of May 15, 1997, between the Registrant and Robert J. Arnot *10.03 Employment Agreement dated as of May 15, 1997, between Registrant and Gerald W. Lear *10.04 Employment Agreement dated as of May 15, 1997 between Registrant and Gary B. Brashers *10.05 Employment Agreement dated as of May 15, 1997, between the Registrant and Eugene C. Wielepski *10.06 Employment Agreement dated as of May 15, 1997, between the Registrant and Thomas Ormandy *10.07 1997 Omnibus Stock Plan *10.08(a) Accounts Financing Agreement dated June 16, 1992 *10.08(b) Covenant Supplement to Accounts Financing Agreement dated June 16, 1992 *10.08(c) Inventory and Equipment Security Agreement Supplement to Accounts Financing Agreement dated June 16, 1992 *10.08(d) Trade Financing Agreement Supplement to Accounts Financing Agreement (Security Agreement) dated June 16, 1992 *10.08(e) Amendment to Financing Agreements dated October 30, 1992 *10.08(f) Second Amendment to Financing Agreements dated January 4, 1993 *10.08(g) Third Amendment to Financing Agreements dated March 10, 1993 *10.08(h) Fourth Amendment to Financing Agreements dated May 1, 1993 *10.08(i) Fifth Amendment to Financing Agreements dated January 1, 1994 *10.08(j) Sixth Amendment to Financing Agreements dated September 1, 1993 *10.08(k) Seventh Amendment to Financing Agreements dated August, 1994
EXHIBIT NO. DESCRIPTION ----------- ------------------------------------------------------------ *10.08(l) Eighth Amendment to Financing Agreements dated December 31, 1994 *10.08(m) Ninth Amendment to Financing Agreements dated April, 1995 *10.08(n) Tenth Amendment to Financing Agreements dated June 23, 1995 *10.08(o) Eleventh Amendment to Financing Agreements dated January 1, 1996 *10.08(p) Twelfth Amendment to Financing Agreements dated June 25, 1996 *10.08(q) Thirteenth Amendment to Financing Agreements dated August, 1996 *10.08(r) Term Promissory Note dated June, 1996 *10.08(s) Trademark Collateral Assignment and Security Agreement dated June 16, 1992 *10.09 Form of Indemnification Agreement *10.10(a) BOSS Worldwide Rights Acquisition Agreement dated September 30, 1997 *10.10(b) Promissory Note dated November 5, 1997 *10.10(c) Guaranty of Promissory Note dated November 5, 1997 *10.10(d) Trademark Assignment dated November 5, 1997 *10.10(e) Trademark Assignment dated November 5, 1997 *10.10(f) Trademark Assignment dated November 5, 1997 *10.10(g) Trademark Assignment dated November 5, 1997 *10.10(h) Assignment and Assumption Agreement dated November 5, 1997 *10.10(i) Escrow Agreement dated November 5, 1997 *10.10(j) Collateral Assignment of Trademarks dated November 5, 1997 *10.10(k) Termination of License Agreement dated November 5, 1997 *10.10(l) Logo Typeface *10.10(m) Certain Provisions in Settlement Agreement *10.11(a) Foreign BOSS Rights Acquisition Agreement dated September 30, 1997 *10.11(b) Trademark Assignment dated November 5, 1997 *10.11(c) Assignment and Assumption Agreement dated November 5, 1997 +*10.11(d) Concurrent Use Agreement dated November 5, 1997 +*10.11(e) Foreign Manufacturing Rights Agreement dated November 5, 1997 *10.11(f) Option Agreement dated November 5, 1997 *10.11(g) Secured Limited Recourse Promissory Note dated November 5, 1997
EXHIBIT NO. DESCRIPTION ----------- ------------------------------------------------------------ *10.11(h) Note Assumption Agreement dated November 5, 1997 *10.11(i) Guaranty of Promissory Note dated November 5, 1997 *10.11(j) Agreement Regarding Consent to Release and Waiver of Brookhurst Note Claims dated November 5, 1997 *10.11(k) Certain Provisions in Settlement Agreement *10.11(l) Indemnification Agreement dated November 5, 1997 *10.12 Uniforms License Agreement dated November 5, 1997 *10.13 Trademark License Agreement Relating to BOSS Golf and Other Marks dated November 5, 1997 *10.14 Beverly Hills Polo Club Exclusive Domestic License Agreement dated December 14, 1995 *10.15 Beverly Hills Polo Club Amendment to Exclusive License Agreement (Men's) dated June 3, 1997 *10.16 Beverly Hills Polo Club Exclusive Domestic License Agreement dated June 1, 1993 *10.17 Beverly Hills Polo Club Assignment of Licenses (Women's) dated August 31, 1993 *10.18 Beverly Hills Polo Club Amendment (Women's) dated September 1, 1993 *10.19 Beverly Hills Polo Club Amendment to Exclusive License Agreement (Women's) dated June 3, 1997 *10.20 Beverly Hills Polo Club Amendment to Exclusive License Agreement (Men's dated July 29, 1997 *10.21 Beverly Hills Polo Club International Exclusive License Agreement (Wholesale) dated August 15, 1996 *10.22 Beverly Hills Polo Club Amendment to Exclusive License Agreement (Wholesale) dated June 3, 1997 *10.23 Beverly Hills Polo Club International Exclusive License Agreement (Retail) dated August 15, 1996 *10.24 Beverly Hills Polo Club Amendment to International Exclusive License Agreement (Retail) dated June 3, 1997 *10.25 Beverly Hills Polo Club Amendment to Exclusive License Agreement dated July 29, 1997 **10.26(a) Girbaud Trademark License and Technical Assistance Agreement dated January 15, 1998 **10.26(b) Girbaud Trademark License and Technical Assistance Agreement for Women's Collection dated March 4, 1998 **10.26(c) Cancellation Agreement dated March 4, 1998 *10.27(a) Defined Benefit Pension Plan *10.27(b) First Amendment to Defined Benefit Pension Plan **10.28 Beverly Hills Polo Club Letter Agreement dated March 18, 1998
EXHIBIT NO. DESCRIPTION ----------- ------------------------------------------------------------ **10.29 Beverly Hills Polo Club Letter Agreement dated February 27, 1998 **10.30 Beverly Hills Polo Club Letter Agreement dated February 27, 1998 ***10.31 Beverly Hills Polo Club Exclusive Domestic License Agreement (Boys) dated April 24, 1998 ****10.32 Amendment No. 1 dated June 18, 1998 to Trademark License and Technical Assistance Agreement for Women's Collections dated January 15, 1998 by and between I.C. Isaacs & Co., L.P. and Latitude Licensing Corp. ****10.33 Fourteenth Amendment to Financing Agreements dated July 31, 1997 ****10.34 Fifteenth Amendment to Financing Agreements dated May 1, 1998 *****10.35 Amendment by and between BHPC Marketing, Inc. and I.C. Isaacs & Company, L.P. dated October 21, 1998 relating to the Exclusive Domestic License Agreement dated December 14, 1995 *****10.36 Letter Agreement by and between BHPC Marketing, Inc. and I.C. Isaacs & Company, L.P. dated October 21, 1998 relating to the Exclusive Domestic License Agreement for Women's BHPC Sportswear dated June 1, 1993 TRIANGLE 10.37 Amended and Restated Omnibus Stock Plan TRIANGLE 10.38 Amendment by and between BHPC Marketing, Inc. and I.C. Isaacs Europe, S.L. dated November 12, 1998 relating to the International Exclusive License Agreement (Wholesale) dated August 15, 1996 TRIANGLE 10.39 Amendment by and between BHPC Marketing, Inc. and I.C. Isaacs Europe, S.L. dated November 12, 1998 relating to the International Exclusive License Agreement (Retail) dated August 15, 1996 TRIANGLE ++10.40 Amendment No. 1 dated November 12, 1998 to Trademark License and Technical Assistance Agreement for Men's Collections dated January 15, 1998 by and between I.C. Isaacs & Co., L.P. and Latitude Licensing Corp. TRIANGLE ++10.41 Amendment No. 2 dated November 12, 1998 to Trademark License and Technical Assistance Agreement for Women's Collections dated January 15, 1998 by and between I.C. Isaacs & Co., L.P. and Latitude Licensing Corp. TRIANGLE 10.42 Executive Employment Agreement by and between I.C. Isaacs & Company, Inc. and Daniel Gladstone dated January 21, 1999 *****10.43 Amendment No. 1 to Employment Agreement by and between I.C. Isaacs & Company, Inc. and Robert J. Arnot dated August 27, 1998 *****10.44 Amendment No. 1 to Employment Agreement by and between I.C. Isaacs & Company, Inc. and Gerald W. Lear dated August 27, 1998 *****10.45 Amendment No. 1 to Employment Agreement by and between I.C. Isaacs & Company, Inc. and Eugene C. Wielepski dated August 27, 1998
EXHIBIT NO. DESCRIPTION ----------- ------------------------------------------------------------ *****10.46 Amendment No. 1 to Employment Agreement by and between I.C. Isaacs & Company, Inc. and Thomas Ormandy dated August 27, 1998 *****10.47 Consulting Agreement by and between I.C. Isaacs & Company and Gary Brashers dated August 27, 1998 TRIANGLE 10.48 Amendment No. 2 to Employment Agreement by and between I.C. Isaacs & Company, Inc. and Robert J. Arnot dated February 11, 1999 TRIANGLE 10.49 Amendment No. 2 to Employment Agreement by and between I.C. Isaacs & Company, Inc. and Gerald W. Lear dated February 11, 1999 TRIANGLE 10.50 Amendment No. 2 to Employment Agreement by and between I.C. Isaacs & Company, Inc. and Eugene C. Wielepski dated February 11, 1999 TRIANGLE 10.51 Amendment No. 2 to Employment Agreement by and between I.C. Isaacs & Company, Inc. and Thomas Ormandy dated February 11, 1999 TRIANGLE 10.52 Amendment No. 1 to Consulting Agreement by and between I.C. Isaacs & Company and Gary Brashers dated February 11, 1999 TRIANGLE 10.53 Sixteenth Amendment to Financing Agreements dated March 26, 1999 TRIANGLE 10.54 Amendment by and between BHPC Marketing, Inc. dated March 1, 1999 relating to the International Exclusive License Agreement (Wholesale) dated August 15, 1996 TRIANGLE 10.55 Amendment by and between BHPC Marketing, Inc. dated March 1, 1999 relating to the International Exclusive License Agreement (Retail) dated August 15, 1996 TRIANGLE 10.56 Amendment No. 1 dated March 4, 1998 to Trademark License and Technical Assistance Agreement for Men's Collections by and between the Company and Latitude Licensing Corp. TRIANGLE ++10.57 Amendment No. 3 dated December 23, 1998 to Trademark License and Technical Assistance Agreement for Women's Collections by and between the Company and Latitude Licensing Corp. TRIANGLE TRIANGLE.10.58 Severance and Redemption Agreement dated June 30, 1999 by and between the Company and Gerald W. Lear. TRIANGLE TRIANGLE.10.59 Second Amended and Restated Shareholders' Agreement dated June 30, 1999. TRIANGLE TRIANGLE.10.60 Amendment No. 4 to the Trademark License and Technical Assistance Agreement Covering Women's Products dated August 2, 1999. TRIANGLE TRIANGLE.10.61 Shareholders' Agreement dated August 9, 1999. TRIANGLE TRIANGLE TRIANGLE.10.62 Agreement dated October 22, 1999 by and among I.C. Isaacs & Company, Inc., I.C. Isaacs & Company L.P., Ambra Inc. and Hugo Boss AG. TRIANGLE TRIANGLE TRIANGLE.10.63 Restated and Amended License Rights Agreement dated October 22, 1999 by and among Ambra Inc., Hugo Boss AG and I.C. Isaacs & Company L.P.
EXHIBIT NO. DESCRIPTION ----------- ------------------------------------------------------------ TRIANGLE TRIANGLE TRIANGLE.10.64 Shareholders' Agreement dated November 5, 1999 by and between I.C. Isaacs & Company, Inc. and Ambra Inc. TRIANGLE TRIANGLE TRIANGLE.10.65 Bill of Sale and Assignment of Trademark Rights dated October 22, 1999 by and between I.C. Isaacs & Company L.P. and Ambra Inc. TRIANGLE TRIANGLE TRIANGLE.10.66 Assumption of Assumed Agreements dated October 22, 1999 by and between I.C. Isaacs & Company L.P. and Ambra Inc. TRIANGLE TRIANGLE TRIANGLE TRIANGLE.10.67 Amendment to International Exclusive License Agreement dated November 1, 1999 by and between I.C. Isaacs Europe, S.L. and BHPC Marketing, Inc. TRIANGLE TRIANGLE TRIANGLE TRIANGLE.10.68 Amendment to International Exclusive License Agreements dated September 1, 1999 by and between I.C. Isaacs Europe, S.L. and BHPC Marketing, Inc. TRIANGLE TRIANGLE TRIANGLE TRIANGLE.10.69 Amendment No. 3 to Employment Agreement dated January 3, 1999 by and between I.C. Isaacs & Company L.P. and Robert J. Arnot. TRIANGLE TRIANGLE TRIANGLE TRIANGLE.10.70 Amendment No. 3 to Employment Agreement dated January 3, 1999 by and between I.C. Isaacs & Company L.P. and Eugene C. Wielepski. TRIANGLE TRIANGLE TRIANGLE TRIANGLE.10.71 Letter Agreement dated December 31, 1999 by and between I.C. Isaacs & Company L.P. and G.I. Promotion. TRIANGLE TRIANGLE TRIANGLE TRIANGLE.10.72 License Agreement effective January 1, 2000 by and between I.C. Isaacs & Company L.P. and Wurzburg Holding S.A. TRIANGLE TRIANGLE TRIANGLE TRIANGLE TRIANGLE.10.73 Girbaud Distribution Agreement Canada dated as of May 15, 2000, between Western Glove Works and I.C Isaacs and Company L.P. TRIANGLE TRIANGLE TRIANGLE TRIANGLE TRIANGLE.10.74 Amendment No. 1 dated as of May 15, 2000, to Girbaud Distribution Agreement Canada dated as of May 15, 2000, between Western Glove Works and I.C. Isaacs and Company L.P. TRIANGLE TRIANGLE TRIANGLE TRIANGLE TRIANGLE.10.75 Amendment No. 2 dated June 21, 2000, to Trademark License and Technical Assistance Agreement Covering Men's Products dated January 15, 1998, by and between Latitude Licensing Corp. and I.C. Isaacs & Company L.P. TRIANGLE TRIANGLE TRIANGLE TRIANGLE TRIANGLE.10.76 Amendment No. 5 dated June 21, 2000, to Trademark License and Technical Assistance Agreement Covering Women's Products dated January 15, 1998, by and between Latitude Licensing Corp. and I.C. Isaacs & Company L.P. TRIANGLE TRIANGLE TRIANGLE TRIANGLE TRIANGLE.10.77 Amendment by and between BHPC Marketing, Inc., and I.C Isaacs Europe, S.L. dated July 31, 2000, relating to the International Exclusive License Agreements (Wholesale and Retail) dated August 15, 1996 TRIANGLE TRIANGLE TRIANGLE TRIANGLE TRIANGLE TRIANGLE.10.78 Amendment No. 2, dated as of August 25, 2000, to Consulting Agreement by and between I.C. Isaacs & Company, Inc. and Gary Brashers. TRIANGLE TRIANGLE TRIANGLE TRIANGLE TRIANGLE TRIANGLE.10.79 Eighteenth Amendment to Financing Agreement, dated as of May 30, 2000. TRIANGLE TRIANGLE TRIANGLE TRIANGLE TRIANGLE TRIANGLE.10.80 Nineteenth Amendment to Financing Agreement, dated June 23, 2000.
EXHIBIT NO. DESCRIPTION ----------- ------------------------------------------------------------ TRIANGLE TRIANGLE TRIANGLE TRIANGLE TRIANGLE TRIANGLE.10.81 Twentieth Amendment to Financing Agreement, dated as of November 7, 2000. TRIANGLE TRIANGLE TRIANGLE TRIANGLE TRIANGLE TRIANGLE.10.82 Letter Agreement dated August 9, 2000, by and between I.C. Isaacs & Company LP and Congress Financial Corporation relating to Covenant Supplement to the Accounts Financing Agreement. 10.83 License Rights Termination Agreement dated March 15, 2001 by and between Ambra Inc., Hugo Boss AG, I.C. Isaacs & Company L.P. and I.C. Isaacs & Company, Inc. 10.84 Subordinated Secured Promissory Note dated March 15, 2001 10.85 Security Agreement dated March 15, 2001 by and between I.C. Isaacs & Company, Inc. and Ambra Inc. 10.86 Amendment No. 1 dated March 15, 2001 to Shareholders' Agreement by and between I.C. Isaacs & Company, Inc. and Ambra Inc. 10.87 Twenty-second Amendment to Financing Agreements dated March 15, 2001 *21.01 List of Subsidiaries 23.01 Consent of BDO Seidman, LLP 27.01 Financial Data Schedule
------------------------ * Previously filed with the Company's Registration Statement on Form S-1 (SEC File No. 333-37155). ** Previously filed with the Company's Annual Report on Form 10-K for the Year Ended December 31, 1997 (SEC File No. 0-23379). *** Previously filed with the Company's Quarterly Report on Form 10-Q for the Quarter Ended March 31, 1998 (SEC File No. 0-23379). **** Previously filed with the Company's Quarterly Report on Form 10-Q for the Quarter Ended June 30, 1998 (SEC File No. 0-23379). ***** Previously filed with the Company's Quarterly Report on Form 10-Q for the Quarter Ended September 30, 1998 (SEC File No. 0-23379). ******Previously filed with the Company's Current Report on Form 8-K dated August 27, 1998 (SEC File No. 0-23379). TRIANGLE Previously filed with the Company's Annual Report on Form 10-K for the Year Ended December 31, 1998 (SEC File No. 0-23379). TRIANGLE TRIANGLE Previously filed with the Company's Quarterly Report on Form 10-Q for the Quarter Ended June 30, 1999 (SEC File No. 0-23379). TRIANGLE TRIANGLE TRIANGLE Previously filed with the Company's Quarterly Report on Form 10-Q for the Quarter Ended September 30, 1999 (SEC File No. 0-23379). TRIANGLE TRIANGLE TRIANGLE TRIANGLE. Previously filed with the Company's Annual Report on Form 10-K for the Year Ended December 31, 1999 (SEC File No. 0-23379). TRIANGLE TRIANGLE TRIANGLE TRIANGLE TRIANGLE. Previously filed with the Company's Quarterly Report on Form 10-Q for the Quarter Ended June 30, 2000 (SEC File No. 0-23379). TRIANGLE TRIANGLE TRIANGLE TRIANGLE TRIANGLE TRIANGLE. Previously filed with the Company's Quarterly Report on Form 10-Q for the Quarter Ended September 30, 1999 (SEC File No. 0-23379). + Certain portions of this exhibit have been omitted pursuant to an order granting confidential treatment and have been filed separately with the Securities and Exchange Commission. ++ Certain portions of this exhibit have been omitted pursuant to a request for an order granting confidential treatment and have been filed separately with the Securities and Exchange Commission.