-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FNAfVxf+mI02aM/rSE0cN7W9eCqniJ93HJo/HnWZeU/fT6Tdgnz8wDRAFVtC02gE Uon5+f0dmKwBbeTwqVqfcQ== 0001047469-98-012039.txt : 19980330 0001047469-98-012039.hdr.sgml : 19980330 ACCESSION NUMBER: 0001047469-98-012039 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980327 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: IC ISAACS & CO INC CENTRAL INDEX KEY: 0001041179 STANDARD INDUSTRIAL CLASSIFICATION: KNIT OUTERWEAR MILLS [2253] IRS NUMBER: 521377061 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-23379 FILM NUMBER: 98576135 BUSINESS ADDRESS: STREET 1: 3840 BANK ST CITY: BALTIMORE STATE: MD ZIP: 21224 BUSINESS PHONE: 4103428200 MAIL ADDRESS: STREET 1: 3840 BANK STREET CITY: BALTOMORE STATE: MD ZIP: 21224 10-K 1 FORM 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 COMMISSION FILE NO. 0-23379 DECEMBER 31, 1997 I.C. ISAACS & COMPANY, INC. (Exact name of registrant as specified in charter) DELAWARE 52-1377061 (State or other jurisdiction of (IRS employer incorporation or organization) identification no.) 3840 BANK STREET, BALTIMORE, MARYLAND 21224-2522 (Address of principal executive office) (Zip code)
Registrant's telephone number, including area code: (410) 342-8200 Securities Registered Pursuant to Section 12(b) of the Act: NONE Securities Registered Pursuant to Section 12(g) of the Act: Title of Class: COMMON STOCK, $.001 PAR VALUE PER SHARE Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes _X_ No ___ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K [ ]. As of March 26, 1998, the aggregate market value of the outstanding shares of the Registrant's Common Stock held by non-affiliates was approximately $39,483,738 based on the average closing price of the Common Stock as reported by the Nasdaq National Market on March 25, 1998. Determination of affiliate status for this purpose is not a determination of affiliate status for any other purpose. As of March 26, 1998, 8,320,000 shares of Common Stock were outstanding. DOCUMENT INCORPORATED BY REFERENCE Specified portions of the definitive Proxy Statement for the 1998 Annual Meeting of Stockholders of I.C. Isaacs & Company, Inc. are incorporated by reference into Part III hereof. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- I.C. ISAACS & COMPANY, INC. FORM 10-K TABLE OF CONTENTS
PAGE --------- PART I ITEM 1. BUSINESS................................................................................ 1 ITEM 2. PROPERTIES.............................................................................. 19 ITEM 3. LEGAL PROCEEDINGS....................................................................... 20 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..................................... 20 PART II ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.................. 21 ITEM 6. SELECTED FINANCIAL DATA................................................................. 22 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS... 24 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA............................................. 32 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.... 32 PART III *ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY......................................... 32 *ITEM 11. EXECUTIVE COMPENSATION.................................................................. 32 *ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.......................... 32 *ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.......................................... 32 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K........................ 32 SIGNATURES........................................................................................... 36
- ------------------------ * Incorporated by reference from the Registrant's definitive Proxy Statement for the 1998 Annual Meeting of Stockholders to be held June 16, 1998. 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. "BOSS-Registered Trademark-," "Lord Isaacs-Registered Trademark-," "I. C. Isaacs-Registered Trademark-," "Pizzazz-Registered Trademark-" and "I.G. Design-Registered Trademark-" are trademarks of the Company. All other trademarks or service marks, including "Girbaud-Registered Trademark-" and "Marithe and Francois Girbaud-Registered Trademark-" (collectively, "Girbaud") and "Beverly Hills Polo Club-Registered Trademark-" appearing in this 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 I.C. ISAACS AND ITS MANAGEMENT. FOR EXAMPLE, STATEMENTS REGARDING THE COMPANY'S ANTICIPATED GROWTH STRATEGIES, EXPECTATIONS FOR 1998, THE ANTICIPATED COSTS SAVINGS IN CONNECTION WITH THE CLOSING OF THE NEWTON, MISSISSIPPI FACILITY AND THE ESTIMATED CHARGE TO FIRST QUARTER 1998 EARNINGS ARE FORWARD-LOOKING STATEMENTS WHICH ARE SUBJECT TO A VARIETY OF RISKS AND UNCERTAINTIES, MANY OF WHICH ARE BEYOND THE COMPANY'S CONTROL, WHICH COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE CONTEMPLATED IN SUCH FORWARD-LOOKING STATEMENTS, INCLUDING IN PARTICULAR THE RISKS AND UNCERTAINTIES DESCRIBED UNDER "RISK FACTORS" IN THE COMPANY'S PROSPECTUS WHICH INCLUDE, AMONG OTHER THINGS (I) CHANGES IN THE MARKETPLACE FOR THE COMPANY'S PRODUCTS, INCLUDING CUSTOMER TASTES, (II) THE INTRODUCTION OF NEW PRODUCTS OR PRICING CHANGES BY THE COMPANY'S COMPETITORS, (III) CHANGES IN THE ECONOMY, AND (IV) TERMINATION OF ONE OR MORE OR ITS AGREEMENTS FOR USE OF THE BOSS, BEVERLY HILLS POLO CLUB AND GIRBAUD BRAND NAMES AND IMAGES IN THE MANUFACTURE AND SALE OF THE COMPANY'S PRODUCTS. EXISTING AND PROSPECTIVE INVESTORS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING STATEMENTS, WHICH SPEAK ONLY AS OF THE DATE HEREOF. THE COMPANY UNDERTAKES NO OBLIGATION TO UPDATE OR REVISE THE INFORMATION CONTAINED IN THIS ANNUAL REPORT ON FORM 10-K, WHETHER AS A RESULT OF NEW INFORMATION, FUTURE EVENTS OR CIRCUMSTANCES OR OTHERWISE. PART I ITEM 1. BUSINESS INTRODUCTION I.C. Isaacs & Company, Inc. (the "Company") is a designer, manufacturer and marketer of branded sportswear. Founded in 1913, the Company has assembled a portfolio of brands that addresses distinct fashion segments resulting in a diverse customer base. The Company offers full lines of sportswear for young men, women and boys under the BOSS brand in the United States and Puerto Rico and sportswear for men and women under the Beverly Hills Polo Club brand in the United States, Puerto Rico and Europe. In February 1998, the Company began offering collections of men's sportswear under the Girbaud brand in the United States and Puerto Rico. The Company intends to begin marketing women's sportswear under the Girbaud brand in the second quarter of 1998 for delivery during the 1998 holiday season. Through a focused strategy of providing fashionable, branded merchandise at value prices, the Company has emerged as a significant fashion source for youthful and contemporary consumers who purchase sportswear and outerwear through specialty and department stores. The Company also offers women's sportswear under various other Company-owned brand names as well as under third-party private labels. The Company manufactures and markets certain sportswear under the BOSS brand for sale at specified price points in the United States and Puerto Rico, subject to a concurrent use agreement. The Company has positioned the BOSS line to appeal to consumers who desire a fresh, urban, fashion-forward look. Through creative and innovative marketing, the Company has created powerful brand appeal for the BOSS line and has become an active influence in young men's fashion. The BOSS collection has been expanded from an initial line of denim products to a fully array of sportswear consisting of jeans, tee shirts, sweatshirts, shorts, knit and woven shirts and outerwear, many of which are characterized by innovative design, creative graphics and bold uses of color. The Company also markets a juniors' sportswear line under the BOSS brand for young women, which includes a full selection of denim products and active sportswear. Net sales of BOSS sportswear accounted for 74.6% and 72.6% of the Company's net sales in 1997 and 1996, respectively. The Company manufacturers and markets certain sportswear under the Beverly Hills Polo Club brand in the United States, Puerto Rico and Europe under an exclusive license. The Company targets men and women who desire updated traditional sportswear at competitive prices. To reach a broader demographic customer base, the Beverly Hills Polo Club collection combines contemporary design details and innovative fabrics with classic American sportswear styling. The Beverly Hills Polo Club collection consists primarily of cotton clothing, including jeans, pants, shorts, knit and woven shirts and outerwear targeting the active, image-conscious consumer. The Company's Beverly Hills Polo Club line was introduced in the spring of 1994. Net sales of Beverly Hills Polo Club sportswear accounted for 15.8% and 12.0% of the Company's net sales in 1997 and 1996, respectively. In November 1997, the Company acquired an exclusive license to manufacture and market certain men's sportswear under the Girbaud brand in the United States and Puerto Rico. In March 1998, the Company acquired an exclusive license to manufacture and market certain women's sportswear under the Girbaud brand in the United States and Puerto Rico. The Girbaud brand is an internationally recognized designer sportswear label with a distinct European influence. By targeting men who desire contemporary, international fashion, the Girbaud brand will enable the Company to address another consumer segment within its branded product portfolio. The Company intends to reposition the Girbaud line with a broader assortment of products, styles and fabrications reflecting a contemporary European look. In February 1998, the Company began marketing a fall collection of men's sportswear under the Girbaud brand including a broad array of bottoms, tops and outerwear. The Company plans to introduce a women's sportswear collection under the Girbaud brand in the second quarter of 1998 for delivery during the 1998 holiday season. 1 The Company also manufactures and markets women's sportswear under its own "I.C. Isaacs," "Lord Isaacs" and "Pizzazz" brand names and under third-party private labels. The Company intends to continue to manufacture and market this sportswear for the foreseeable future. COMPETITIVE STRENGTHS In the late 1980's, management made a decision to change the Company's marketing focus from a manufacturing-driven to a brand-driven strategy. As a result, the Company believes it has developed distinct competitive strengths which position it for continued success. The Company's key competitive strengths include: EMPHASIS ON BRAND IDENTITY. The Company believes that brand identity, as well as the image and lifestyle that a brand conveys, are important factors that influence retail purchasing decisions. The Company believes that the BOSS and Beverly Hills Polo Club brands have developed strong name recognition and consumer appeal. The Company has consistently positioned the BOSS line to be a fashion-forward brand with an urban attitude. The word "boss" conveys images of power and authority, and is commonly used by today's youth as an expression of excellence. Similarly, the Company believes that the Beverly Hills Polo Club brand name, together with the accompanying distinctive horse and rider logo, connotes a "classic American" upscale image with which retail consumers easily identify. In addition, Girbaud is an internationally recognized designer brand and is being positioned to appeal to contemporary consumers who desire high quality, European-influenced fashion. The combination of these brands enables the Company to offer a broad continuum of designs and products that are well-recognized by fashion-conscious consumers. COMBINATION OF FASHION AND VALUE. The Company is able to provide consumers with fashionable brand name sportswear at affordable prices. The BOSS and Beverly Hills Polo Club product lines both consistently provide exciting, fashion-forward products using fresh colors, striking graphic designs, unique fabrics, unusual trimmings and elaborate embroidery. The Company offers a wide array of traditional products such as jeans, tee shirts, polo shirts and sweatshirts that are updated with creative design details and innovative fabrics. The Company's manufacturing, sourcing and merchandising expertise enables it to provide its customers with fashion, image-oriented products at value prices. As a result, BOSS and Beverly Hills Polo Club products typically sell at retail prices below those of many well known designer brands. The Company anticipates that its Girbaud line of products will sell at retail prices below those of many other internationally recognized designer brands. CREATIVE AND INNOVATIVE MARKETING. The Company has built strong name recognition and brand image for its BOSS and Beverly Hills Polo Club products through a coordinated merchandising, advertising and promotion strategy. To reach its target customers who are image conscious and influenced by fashion, music and sports, the Company advertises its products using magazines such as VIBE, SOURCE, SLAM, SPORTSWEAR INTERNATIONAL, GQ AND POV, television shows and networks including Turner Network Television (TNT), Black Entertainment Television (BET), MTV: Music Television, Univision, Telemundo and various amateur and professional sporting events. The Company is also a sponsor of the Chicago Bulls, New York Knicks, New Jersey Nets, Atlanta Hawks, Detroit Pistons and Los Angeles Clippers professional basketball teams and promotes the image of its BOSS and Beverly Hills Polo Club products by providing celebrities with its branded clothing and featuring its products in television programs and movies. The Company influences the presentation of those brands and products at the retail level by providing in-store signage, video advertisements and the "Shop-in-Shop" concept. The "Shop-in-Shop" concept involves the retailer grouping of the Company's products in one designated area and complementing the presentation of the Company's products with signage and fixturing to enhance the visibility of the brand. The Company intends to market its Girbaud line of products following a similar strategy. FLEXIBLE MANUFACTURING AND SOURCING. The Company believes that its ability to source products from its United States facilities and third party foreign and domestic manufacturers provides it with significant manufacturing flexibility. The Company presently operates three manufacturing facilities in the United 2 States for the production of bottoms. See "ITEM 2. Properties." In addition, the Company contracts for the manufacture of its products through third party foreign and domestic manufacturers. Currently, the Company utilizes approximately 50 factories in more than 10 countries including China, Hong Kong, Korea, Mexico, the Philippines, Taiwan and the United States. See "--Manufacturing and Product Sourcing." The Company achieves rapid delivery capability by producing jeans in its own manufacturing facilities and tee shirts at domestic contractors. In addition, the Company gains a significant cost advantage by utilizing factories in Mexico and Asia for the manufacture of innovative and labor intensive products that typically cannot be produced competitively in the United States. The Company does not have long-term contracts with any manufacturers, and most of the Company's manufacturers supply the Company on a non-exclusive basis pursuant to purchase orders. This combination of manufacturing and sourcing capabilities enhances the Company's production flexibility and capacity while effectively enabling it to control the timing, quality and pricing of its products. GROWTH STRATEGY The Company's growth strategy includes continued capitalization on its competitive strengths and the implementation of specific strategies for continued expansion. The Company's principal growth strategies are as follows: BROADEN PRODUCT OFFERINGS. The Company believes it can effectively broaden its product offerings through the expansion of products offered under existing brands as well as the possible addition of new brands. As the BOSS brand has developed, the Company has shifted its product mix from predominately bottoms to a broader collection of sportswear, driven by tops and outerwear. This evolution is consistent with many sportswear companies, which generally sell several tops for each pair of bottoms. Currently, the Company sells approximately the same number of units of tops as bottoms, but the Company believes this ratio could increase to three to four tops for each pair of bottoms sold. The continued evolution of the product mix provides significant growth opportunities for the Company's tops segment. The Company is growing its BOSS line by adding new product categories, such as polo shirts and swimwear, broadening its outerwear collection and expanding its boys', juniors' and youth lines. Similarly, the Beverly Hills Polo Club brand includes a number of product lines that are in the early stages of market penetration, such as outerwear, and a number of potential product line expansions, such as men's dress shirts. To further develop the Beverly Hills Polo Club brand, product offerings within the Beverly Hills Polo Club women's line are also being expanded, and the Company is reorganizing and increasing its women's sales force. The recent addition of the Girbaud brand adds a European-influenced designer sportswear brand to the Company's sportswear lines. The Company intends to offer a full array of men's and women's bottoms, knit and woven tops and outerwear under the Girbaud brand. ENHANCE MARKETING PROGRAMS. While the Company believes that its current marketing strategy is one of its primary competitive strengths, it intends to continue its efforts to increase net sales by enhancing consumer recognition of its brand names and images through expanded marketing efforts. The BOSS brand is currently advertised through a variety of media, including television and print, while the Beverly Hills Polo Club brand is primarily advertised though print media. As the Company continues to grow, it plans to use its increased financial resources to further support and expand the brand exposure for BOSS, Beverly Hills Polo Club and Girbaud through increased television and print advertising, and various forms of outdoor advertising such as billboards and signage on buses and at bus stops. To further differentiate its products at the retail level, the Company also plans to expand its point-of-sale advertising. Specifically, the Company intends to build upon its existing programs to provide signage and posters and to expand its presence in the stores by providing additional permanently identified free-standing fixtures and presentation services. The Company also plans to enhance the visibility of its products at the retail level through the "Shop-in-Shop" concept. The Company believes an expanded "Shop-in-Shop" program will further stimulate retailers to make longer term commitments to the Company's products and will encourage each store to carry a broader array of the Company's products each season. 3 EXPANDED CHANNELS OF DISTRIBUTION. As demand for its sportswear increases, the Company believes that it can continue to expand and penetrate various channels of distribution, primarily the department store channel. In recent years, the Company has expanded its distribution channels beyond the specialty stores and specialty store chains with its BOSS brand to begin significant distribution to department store customers. As a result, J.C. Penney Company, Inc. was the Company's largest customer in 1997 and 1996. Under the BOSS brand, the Company is also selling to other major department stores including The May Department Stores Company, Federated Department Stores, Inc. and Dayton Hudson Corporation. Further penetration of these accounts with the BOSS and Beverly Hills Polo Club product lines is a primary focus of the Company, and the recently introduced "Shop-in-Shop" concept should help facilitate this department store expansion. The Company intends to market the Girbaud line to specialty stores, specialty store chains and department stores. In addition, the Company will continue to increase the number of products distributed to specialty stores and specialty store chains. The Company already sells to over 4,000 specialty stores and specialty store chains and believes that this broad cross-section of active accounts distinguishes it from many of its competitors. Utilizing its 44 sales representatives and in-house credit department, the Company plans to expand the product categories that it sells to the specialty store channel of distribution. INCREASE EUROPEAN PRESENCE FOR BEVERLY HILLS POLO CLUB. The Company believes that it is well positioned to capitalize on the acceptance of the Beverly Hills Polo Club brand name by continuing to expand its European sportswear distribution. The classic American sportswear look conveyed by the Beverly Hills Polo Club line is popular with European youth, due in part to the proliferation of American entertainment, including music, movies, television programs and professional sports. The Company is expanding its wholesale and retail channels of distribution in Europe to meet this increasing demand. The Company currently has distributors in Belgium, Finland, France, Greece, Italy, Luxembourg, the Netherlands, Norway, Portugal, Switzerland and the United Kingdom. To meet the consumer demand for its Beverly Hills Polo Club sportswear, the Company has been moving to expand its network of wholesale distributors in Europe and is currently negotiating agreements to add distribution capabilities in Austria and Germany. Each of the Company's distributors has an agreement with the Company pursuant to which the distributor is the exclusive distributor of specified products of the Company within a specified territory. In addition, the Company has established two franchise stores in Spain, including a showcase store in Madrid. Discussions are currently underway for several additional franchise stores in Spain and elsewhere in Europe. PRODUCTS The Company's sportswear collections under the BOSS and Beverly Hills Polo Club brands provide a broad range of product offerings for young men, women and boys, including a variety of tops, bottoms and outerwear. In February 1998, the Company began marketing a fall collection of men's sportswear under the Girbaud brand, including a broad array of bottoms, tops and outerwear. The Company plans to introduce a women's sportswear collection under the Girbaud brand in the second quarter of 1998 for delivery during the 1998 holiday season. While these brands reflect a distinct image and style, each is targeted to consumers who are seeking high quality, fashionable products at competitive prices. The Company also manufactures and markets women's sportswear under its own "I.C. Isaacs," "Lord Isaacs" and "Pizzazz" brand names as well as under third-party private labels. Consistent with its focus on branded products, the Company discontinued its manufacture of men's private label apparel in the fourth quarter 4 of 1996. The following table sets forth, for the periods indicated, the Company's net sales categorized by brand and product category:
YEAR ENDED DECEMBER 31, --------------------------------- 1995 1996 1997 --------- ---------- ---------- (IN THOUSANDS) MEN'S(1) BOSS Bottoms............................................... $ 37,234 $ 44,667 $ 54,234 BOSS Tops.................................................. 15,882 29,284 48,094 BOSS Boys.................................................. 3,264 6,736 13,992 Men's BHPC................................................. 5,219 12,226 24,196 Men's Private Label........................................ 4,299 500 129 --------- ---------- ---------- Men's net sales.......................................... 65,898 93,413 140,645 --------- ---------- ---------- WOMEN'S(1) BOSS Juniors'.............................................. 5,424 5,413 4,098 Women's BHPC............................................... 1,833 2,043 1,338 Women's Other(2)........................................... 20,116 17,786 15,364 --------- ---------- ---------- Women's net sales........................................ 27,373 25,242 20,800 --------- ---------- ---------- Total net sales........................................ $ 93,271 $ 118,655 $ 161,445 --------- ---------- ---------- --------- ---------- ----------
- ------------------------ (1) The net sales totals incorporate product returns allocated in proportion to gross sales. (2) Includes Company-owned brands and third-party private labels. BOSS PRODUCTS The BOSS brand is a full sportswear line characterized by innovative fabrication, creative graphics and bold uses of color. BOSS products appeal to young men, young women and boys, who want a fresh, fashion-forward look with an urban attitude at a competitive price. As the line has expanded and matured, the demographics of BOSS customers have expanded beyond their urban base to include fashion-conscious young consumers across the United States. Over the past three years, the Company has placed increased emphasis on expansion of the top's segment, and it anticipates that this segment will continue to be the fastest growing category of products in the BOSS collection. BOTTOMS The Company's BOSS products began as a line of high-quality jeans and other denim casual wear. The bottoms line currently consists of a wide variety of denim jeans in a broad array of colors, designs and styles together with corduroy and twill pants. Many of the BOSS jeans feature elements such as unique pocket treatments, innovative trim and embroidered logos. The Company maintains its own washing facilities, which allow it to create a variety of washes for its denim products. The Company identified an underserved niche in the young men's market for fashion jeans at moderate price points as compared with many designer jeans, which retail for $60 and up per pair. The estimated retail price for the Company's jeans is between $35 and $50 per pair. In the spring of 1997, the Company expanded its product offerings by introducing a swimwear collection. Estimated retail prices for swimwear range from $30 to $40. TOPS AND OUTERWEAR The BOSS young men's line includes a variety of tops, tee shirts and outerwear. The BOSS tops collection consists of a range of products including cotton tee shirts, polo shirts, cotton pique shirts, novelty knit tops and fleece sweatshirts. These products utilize unique combinations of textured polyester fabrications, as well as a broad array of appliqued logos and innovative graphics. The styling of many of the BOSS tops is influenced by sports clothing and uniforms and conveys an energetic, youthful attitude. The 5 Company has expanded its outerwear line, which includes a variety of products including nylon jackets and downfilled parkas. The estimated retail prices range from $19 to $22 for tee shirts, $30 to $55 for tops and $50 to $100 for outerwear products. BOYS', YOUTH AND JUNIORS' (YOUNG WOMEN) The Company complements its BOSS young men's line with BOSS boys' and youth lines, which are targeted to appeal to boys ages 4 to 7 and youth ages 8 to 16. The BOSS boys' and youth product lines are substantially similar to the young men's line and include jeans, tee shirts, tops, sweatshirts and outerwear. Because the boys' market is more price conscious, some of the styles use less expensive fabrication and design detail. The boys' and youth lines typically sell at retail prices approximately 10% to 20% below the young men's line. The BOSS juniors' line is the female counterpart to the BOSS young men's line and is targeted to appeal to fashion-conscious girls and women ages 16 to 25. The BOSS juniors' collection maintains its own identity as contemporary sportswear with an urban attitude. The product line includes denim jeans, tee shirts, skirts, tops and jackets. Many of these styles are characterized by close-fitting designs utilizing textured fabrics and bold colors. The estimated retail prices for the juniors' line range from $15 to $20 for tee shirts, $25 to $50 for tops, $30 to $45 for jeans and $30 to $75 for outerwear. BEVERLY HILLS POLO CLUB PRODUCTS The Beverly Hills Polo Club sportswear products are positioned to be an updated traditional sportswear brand. The products combine contemporary design details and innovative fabric with classic American styling. With a broader demographic appeal than the BOSS brand, Beverly Hills Polo Club products are targeted to appeal to consumers 16 years and older. Today, the Beverly Hills Polo Club name and accompanying horse and rider logo symbolize quality, traditional sportswear at competitive prices. TOPS AND OUTERWEAR The Company has merchandised the Beverly Hills Polo Club men's line to place more emphasis on tops, including a full line of tee shirts, polo shirts, rugby shirts, denim shirts and sweatshirts made primarily in cotton fabrics such as pique, jersey and jersey fleece. While classic in styling, the tops line is distinguished by innovative use of design, embroidery and fabric detail. The collections also include more contemporary styles and a broader array of novelty fabrics as well as product offerings such as woven shirts and outerwear, including jackets and downfilled parkas. In 1998, the Company intends to introduce a new line of men's dress shirts. Estimated retail prices range from $19 to $22 for tee shirts, $30 to $60 for tops and $60 to $120 for outerwear. BOTTOMS While the primary focus of the Beverly Hills Polo Club men's line has been on tops, the collection also includes a full line of bottoms consisting of denim jeans, twill pants and corduroy casual pants. While somewhat more conservative in styling compared to the BOSS line, the Beverly Hills Polo Club bottoms line combines classic styling with unique trim, embroidery and pocket treatments. Estimated retail prices for jeans and casual pants range from $40 to $55 per pair. WOMEN'S The Company's Beverly Hills Polo Club women's sportswear line has a focus similar to that of the men's sportswear line. It targets active image-conscious women 16 years and older and combines classic American styling with distinctive design detail and fabrication. The product offerings include tee shirts, polo shirts, denim shirts, jeans and casual pants. The collection also includes many activewear items which utilize a variety of fabrics and graphic elements. Estimated retail prices range from $18 to $20 for tee shirts, $30 to $60 for tops and $40 to $55 for bottoms. 6 GIRBAUD PRODUCTS The Girbaud brand is an internationally recognized designer sportswear label. The Company's collection of Girbaud products will include a full line of bottoms consisting of jeans and casual pants in a variety of fabrications including denim, stretch denim, cotton twill and nylon. The Girbaud tops collection will include cotton tee shirts, polo shirts, knit and woven tops, sweaters and outerwear. Reflecting European design, each of these collections will be characterized by innovative styling and fabrication and will be targeted to consumers ages 16 to 40. In February 1998, the Company began marketing a fall collection of men's sportswear under the Girbaud brand. 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 products. The Company plans to introduce a women's sportswear collection under the Girbaud brand in the second quarter of 1998 for delivery during the 1998 holiday season. COMPANY-OWNED AND THIRD-PARTY PRIVATE LABEL PRODUCTS The Company also produces sportswear for women under its own brands, including "I.C. Isaacs," "Lord Isaacs" and "Pizzazz," as well as under customers' private labels. These brands focus on pull-on elastic waist pants and belted trousers in cotton, bleached and stonewashed denim, blended polyester and rayon. These pants are designed to appeal to more mature women looking for basic styling at value prices. The Company offers pants in a variety of fits including missy, petite and large sizes. Color-coordinated tops and sweaters in cotton, acrylic, blended polyester rayon and ramie cottons complete the mix. Estimated retail prices range from $13 to $50 for bottoms and $20 to $60 for tops. CUSTOMERS AND SALES The Company's products are sold in over 4,000 specialty stores, specialty store chains and department stores. The Company uses both sales representatives and distributors for the sale of its products. Sales representatives includes employees of the Company as well as independent contractors. Each of the Company's distributors and non-employee sales representatives has an agreement with the Company pursuant to which they serve as the exclusive distributor or sales representative of specified products of the Company within a specified territory. The Company does not have long-term contracts with any of its customers. Instead, its customers purchase the Company's products pursuant to purchase orders and are under no obligation to continue to purchase the Company's products. The Company's BOSS products are sold throughout the United States and Puerto Rico in over 1,500 specialty stores and specialty store chains, such as Fine's and Miller's Outpost. The Company's newest level of distribution is to department stores, and its single largest customer in 1997 was J.C. Penney Company, Inc., which accounted for 14.0% of net sales. No other customer of the Company accounted for 10.0% or more of net sales in 1997. Other department store customers include Federated Department Stores, Inc., The May Department Stores Company and Dayton Hudson Corporation. The Company's BOSS products are sold and marketed under the direction of its national sales office headquartered in New York. In addition to executive selling based in New York and Dallas, the Company has 18 commissioned sales representatives who work out of regional showrooms throughout the United States and Puerto Rico. The Company considers its professional sales force to be one of its major assets and one of the principal reasons why it has been successful in establishing relationships with department stores and thousands of specialty stores and specialty store chains. The Company's Beverly Hills Polo Club sportswear is sold in the United States, Puerto Rico and Europe. Although the Company is only in its third year of distribution of Beverly Hills Polo Club sportswear, the products are sold to over 1,000 specialty stores, specialty store chains and department stores, such as J.C. Penney Company, Inc. and Maurice's. The Company's Beverly Hills Polo Club products are sold and marketed under the direction of its men's and women's national sales offices in New York. In addition to executive selling based in New York and Dallas, the Company has a sales force consisting of 14 sales representatives for its line of men's sportswear and 11 sales representatives for its line of women's sportswear. 7 The Company's Beverly Hills Polo Club sportswear has recently begun to be sold throughout Europe through wholesale distributors, all of whom buy products directly from the Company. The Company currently has wholesale distribution arrangements with distributors in Belgium, Finland, France, Greece, Italy, Luxembourg, the Netherlands, Norway, Portugal, Switzerland and the United Kingdom and is negotiating agreements with distributors in Austria and Germany. Under these arrangements, the distributors purchase goods from the Company's Spanish subsidiary in United States dollars under irrevocable letters of credit or by prepayment, thereby minimizing the Company's credit risk. In addition, the Company has established three franchise stores in Spain, including a showcase store in Madrid. Discussions are currently underway for several additional franchise stores in Spain and elsewhere in Europe. In February 1998, the Company began marketing a fall collection of men's sportswear under the Girbaud brand. The Company plans to introduce a women's sportswear collection under the Girbaud brand in the second quarter of 1998 for delivery during the 1998 holiday season. The Company's Girbaud brand products are sold and marketed under the direction of a newly created sales force to be headquartered in New York. The Company-owned branded products and third-party private label products are sold under the direction of the women's sales headquarters in New York and by 15 commissioned sales representatives throughout the United States. The products are distributed to department stores such as Dayton Hudson Corporation, Mercantile Stores Company, Inc. and Sears Roebuck and Co.; mass merchandisers and discounters such as Hills Department Store Company and Ames Department Stores, Inc.; catalogs such as National Wholesale Co., Inc. and Arizona Mail Order Company, Inc., and approximately 1,500 specialty stores nationwide. DESIGN AND MERCHANDISING The Company's designers and merchandisers travel around the world to monitor emerging fashion trends and search for styling inspiration and fabrics. These sources, together with new styling and graphics developed by the Company's designers, serve as the primary creative influences for the Company's product lines. In addition, designers and merchandisers regularly meet with sales management to gain additional market insight and further refine the products to be consistent with the needs of each of the Company's markets. The Company's in-house design and product development is carried out by merchandising departments in New York. Many of the Company's products are developed using computer-aided design equipment, which allows designers to view and easily modify images of a new design. From 1994 to 1997, the Company's design staff grew from 6 to 13 people. The Company currently has 18 people on the design staff in New York City and it expects an increase to 22 people by the end of 1998. Design expenditures incurred were approximately $1.9 million for 1997. The Company estimates that design expenditures will be approximately $2.2 million in 1998. ADVERTISING AND MARKETING The Company prides itself on its ability to efficiently utilize its advertising budget. Although the Company has increased its expenditures on advertising to approximately $3.9 million or 2.4% of net sales in 1997, this is still a relatively modest amount as compared with some of its competitors. In 1996 and 1997, the Company's expenditures for advertising and marketing activities totaled $2.5 million and $3.9 million, respectively. As the Company continues to grow, it plans to use its increased financial resources to further support and expand the brand exposure for each of its brands. The Company aggressively communicates and reinforces the brand and image of its BOSS and Beverly Hills Polo Club products through creative and innovative advertising and marketing efforts. The Company's advertising and marketing strategies are directed by its national sales offices and developed in collaboration with its advertising agency. The Company's advertising strategy is geared towards its youthful consumers whose lifestyles are influenced by music, sports and fashion. The Company has been advertising the BOSS brand since 1992 and the Beverly Hills Polo Club brand since 1994, and its advertising 8 campaigns have evolved from trade magazines to a wide variety of media, including billboards, television, fashion magazines and professional sports endorsements. Print advertisements for the BOSS brand appear regularly in VIBE, SOURCE, SLAM AND SPORTSWEAR INTERNATIONAL magazines, while television advertisements appear on various networks including Turner Network Television (TNT), Black Entertainment Television (BET), MTV: Music Television, Univision, the Madison Square Garden (MSG) Network and Telemundo. Advertisements for the BOSS brand also appear on a variety of outdoor advertising media, including billboards and bus stops. Print advertisements for the Beverly Hills Polo Club brand are targeted to appeal to a broader demographic base and appear in magazines such as GQ AND POV. Television advertisements for the Beverly Hills Polo Club brand have appeared on the Fox Sports Network, TNT and MSG. The Company's products can also be seen on some of today's most visible sports and music celebrities, whose attitude and image are captured by the BOSS and Beverly Hills Polo Club brands. In addition, the Company is a sponsor of selected professional basketball teams, including the Chicago Bulls, New York Knicks, New Jersey Nets, Atlanta Hawks, Detroit Pistons and Los Angeles Clippers. Recognizing that point of sale advertising is highly effective, the Company provides an array of in-store signage, fixtures and product videos for both BOSS and Beverly Hills Polo Club products. In addition, through the "Shop-in-Shop" concept, the Company seeks to enhance brand recognition and to differentiate its products from other branded apparel by creating an environment that is consistent with the image of its products. For example, J.C. Penney Company, Inc. currently has approximately 250 stores using the "Shop-in-Shop" concept to showcase BOSS young men's products and approximately 75 stores using the "Shop-in-Shop" concept to showcase Beverly Hills Polo Club men's merchandise. The Company plans to expand the "Shop-in-Shop" program to build longer term commitments with retailers and enable retailers to carry a broader array of the product lines each season. The Company intends to advertise and market its Girbaud line of products following a similar strategy including the use of a variety of print and television advertisements as well as the use of the "Shop-in-Shop" concept. MANUFACTURING AND PRODUCT SOURCING GENERAL The Company believes that its flexible manufacturing and sourcing capabilities enable it to effectively control the timing, quality and pricing of products while providing customers with increased value. The Company uses its own facilities as well as both domestic and foreign contractors for the production of its products. During 1997, approximately 15% of the Company's purchases of raw materials, labor and finished goods for its apparel were made in Mexico; approximately 30% were made in Asia; approximately 27% 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 72% of the Company's manufacturing and sourcing in 1997 was done by third parties, all through arrangements with independent contractors. Each of the Company's independent contractors and independent buying agents has an agreement with the Company pursuant to which they perform manufacturing or purchasing services for the Company on a non-exclusive basis. The Company evaluates its contractors frequently and believes that there are a number of manufacturers capable of producing products that meet the Company's quality standards. The Company represents all or a significant portion of many of its contractors' production and has the ability to terminate its arrangements with any of its contractors at any time. The Company is applying a similar manufacturing and product sourcing strategy with respect to its Girbaud line of products. UNITED STATES AND MEXICO The Company presently operates three manufacturing facilities in the United States and currently utilizes seven contractors in the United States and three in Mexico. The majority of the production in these facilities is of bottoms and tee shirts. The Company produces approximately 50% of its bottoms (slacks, jeans, shorts and skirts) in three Company-operated manufacturing facilities in Mississippi, which combine 9 to employ approximately 720 people. The Company's facilities utilize a level of automation that enables the Company to competitively price its products and maintain the flexibility necessary to meet its customers' changing demands. The Company intends to close its Newton, Mississippi, manufacturing plant during the second quarter of 1998. The majority of the production in this facility is of jeans. Some of this production will be transferred to third party independent contractor facilities in Mexico where the Company currently has jeans manufactured. The Company anticipates that a charge in the range of $0.2 million to $0.3 million will be made against earnings for the first quarter of 1998 as a result of closing the plant. The Company anticipates annual cost savings in the range of $0.3 million to $0.6 million after the transfer of production to Mexico as a result of lower labor and overhead costs. The Company safeguards its manufacturing capacity by utilizing contractors in both the United States and Mexico to produce the same product lines. The Company has established ongoing relationships with all of these contractors but is not bound by written agreements to continue to do business with any of them. The Company also uses a variety of contractors in both the United States and Mexico as needed for value added functions such as embroidery, screen printing and laundering. Seasonal fluctuations in production requirements are accommodated by adjusting contracted quantities, while maintaining more consistent levels of production in Company-operated facilities. All contractors in the United States and Mexico are selected and managed by the Company's manufacturing staff in Mississippi and Mexico. The Company uses a variety of raw materials, principally consisting of woven fabrics including denim, cotton, polyrayons and various trim items. While the Company must make commitments for a significant portion of its fabric purchases in advance of sales, the Company's risk is reduced because a substantial portion of the Company's products are sewn in basic denim which is widely available. ASIA In addition to the Company's domestic and Mexican pant and tee shirt production facilities, the balance of the Company's sportswear products is produced by approximately 50 different manufacturers in more than 10 countries. Virtually all of the Company's products other than pants and tee shirts are produced in Asia, but none of the Asian contractors engaged by the Company accounted for more than 10.0% of the Company's total production in 1997. 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 all aspects of Asian fabric and product development, apparel manufacturing, price negotiation and quality control, as well as the research and development of new Asian sources of supply. The Company seeks to achieve the most efficient means for the timely delivery of its high quality products. With rare exceptions, the Company does not purchase fabrics but instead negotiates a finished garment price from its contractors. The contractor must then purchase the approved fabric as part of the package. Orders are generally placed after the Company has received customer orders, and delivery of finished goods to customers generally occurs 90 to 150 days after placement of the order. All of the Company's products manufactured abroad are paid for in United States dollars. Accordingly, the Company does not engage in any currency hedging transactions. During the last several years, the volume of the Company's products produced in Asia has increased dramatically, and this trend is likely to continue in the future. WAREHOUSING AND DISTRIBUTION The Company has serviced its United States customers for the last 38 years utilizing a Company-owned and operated distribution center in Milford, Delaware. This primary facility has been expanded 10 during that time, resulting in its present size of approximately 70,000 square feet. Over the last few years, the Company has leased additional space in the Milford area to accommodate increased capacity requirements fueled by growth in sales. The Company is in the process of establishing a computerized "Warehouse Management System" with real-time internal tracking information and the ability to provide its customers with electronically transmitted "Advance Shipping Notices." The accuracy of shipments is increased by the ability to scan coded garments at the packing operation. This process also provides for computerized routing and customer invoicing. The vast majority of shipments are handled by UPS, common carriers or parcel post. The Company believes that its increased distribution requirements as a result of rapid growth can be better met by consolidating its warehousing and distribution functions into a new 150,000 square foot facility to be located in Milford, Delaware. Consolidating all the receiving, stocking, packing and shipping functions in one facility should result in improved management control and less redundancy in supervision and operational functions. The Company believes that its engineering plan for the new facility will provide the capacity to accommodate substantial growth and will reduce labor costs and improve response times. The Company believes that construction of this facility should begin in 1998 at an estimated cost of approximately $6.0 million to be financed through a mortgage loan. In order to ensure against the possibility of any disruption in the flow of goods to its customers, the Company plans to occupy the new facility in phases. The Company currently services its European customers through a contractual arrangement with a distribution center in Barcelona, Spain, where the Company maintains its European headquarters. QUALITY CONTROL The Company's quality control program is designed to ensure that all of the Company's products meet its high quality standards. The quality of piece goods is monitored prior to garments being produced, and prototypes of each product are inspected and approved before production runs are commenced. The goods produced by Company-operated facilities, as well as by United States and Mexican contractors, undergo continual audits by quality personnel during production. The quality control efforts of Company-operated facilities are directed and coordinated by the Company's Quality Control Manager located in Mississippi. Frequent visits are made by the Quality Control Manager and other support staff to all outside contractors to ensure compliance with the Company's rigorous quality standards. Audits are also performed by quality personnel at the Milford, Delaware distribution center on all categories of incoming merchandise. The Company employs a full-time staff of 43 persons dedicated to the quality control efforts of its United States and Mexican production. 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, 1997, the Company had unfilled orders of approximately $46.0 million, compared to approximately $68.0 million of such orders as of December 31, 1996. The Company expects to fill substantially all of these orders in 1998. The backlog of orders at any given time is affected by a number of factors, including seasonality, weather conditions, 11 scheduling of manufacturing and shipment of products. These factors, combined with continued sluggishness in the retail apparel market, principally at the specialty store level, resulted in customers buying goods closer to market needs and contributed to the decrease in backlog from December 31, 1996 to December 31, 1997. All such orders are subject to cancellation for causes such as late delivery. Accordingly, a comparison of backlogs of orders from period to period is not necessarily meaningful and may not be indicative of eventual actual shipments. LICENSES AND OTHER RIGHTS AGREEMENTS The Company's business is heavily dependent upon its use of the BOSS, Beverly Hills Polo Club and Girbaud brand names and images, which are in turn dependent upon the existence and continuation of certain licenses and other rights agreements as described below. BOSS TRADEMARK RIGHTS In 1990, the Company obtained a license from Brookhurst to use the registered trademark BOSS in the United States and Puerto Rico in connection with certain items of sportswear for men and women. Brookhurst and its predecessors had utilized the BOSS trademark since the late nineteenth century. In February 1993, the owner of the "HUGO BOSS" trademark filed suit against the licensor of the "BOSS" trademark in the United States and several licensees, including the Company. The complaint alleged trademark infringement related to use of the "BOSS" and "HUGO BOSS" trademarks. However, the complaint did not challenge the exclusive right of the Company to use the "BOSS" trademark in connection with the manufacture and sale of certain clothing as set forth in its exclusive license agreement. The Company executed certain agreements in November 1997 which resulted in the settlement (the "Settlement") of the BOSS trademark litigation. See "ITEM 3. Legal Proceedings." As part of the Settlement, the Company borrowed $11.25 million to finance the acquisition of certain BOSS trademark rights. This obligation is evidenced by a secured limited recourse promissory note which matures on December 31, 2007 (the "Note"). As part of the Settlement, Brookhurst (i) sold its BOSS trademark rights worldwide (excluding Mexico), goodwill and registrations to the Company, (ii) assigned its rights with respect to the BOSS trademark under certain agreements with third parties (the rights under (i) and (ii) above referred to collectively as the "BOSS Trademark Rights") to the Company and (iii) agreed to cease using the BOSS brand name and image (except for a limited sell-off of certain uniforms and samples bearing the BOSS mark). As part of the Settlement, the Company sold its foreign BOSS trademark rights and its rights under related agreements acquired from Brookhurst (the "BOSS Foreign Trademark Rights") to Ambra, Inc., a wholly-owned subsidiary of Hugo Boss AG ("Ambra"). Neither Hugo Boss nor Ambra is affiliated with Brookhurst or the Company. The Company also entered into a foreign manufacturing rights agreement with Ambra (the "Foreign Rights Agreement") under which the Company obtained a license to manufacture apparel in certain foreign countries for sale in the United States using the BOSS brand name and image. The Company retained its ownership of domestic BOSS Trademark Rights ("Domestic BOSS Trademark Rights") subject to a concurrent use agreement with Hugo Boss (the "Concurrent Use Agreement'). Subject to the terms of the Concurrent Use Agreement, Hugo Boss retained the right to manufacture and market sportswear and other products using the BOSS name. In the event Hugo Boss manufactures and markets sportswear products which the Company is permitted to manufacture and market under the Concurrent Use Agreement, Hugo Boss must sell such products at or above specified wholesale price points in the United States and Puerto Rico, which are generally higher than the price points of the Company. Although there is some degree of overlap in the wholesale price points of the Company and Hugo Boss under the Concurrent Use Agreement, the Company does not currently sell or intend to sell BOSS brand sportswear within those overlapping price points and does not anticipate any material adverse effect on the Company's financial condition or results of operations if Hugo Boss were to manufacture and market sportswear within those overlapping price points. 12 Under the agreements entered into in connection with the Settlement, the Company's BOSS rights were expanded to allow broader product offerings and additional Company control over styling, advertising and distribution. In addition to the categories of apparel which the Company was permitted to manufacture, distribute, market and sell under its previous license agreement with Brookhurst, under the Settlement, the Company acquired the right to manufacture, distribute, market and sell, within specified wholesale price points, the following categories of apparel under the BOSS brand in a specified microgramma style (the "BOSS Logotype"): swimwear, jogging suits, polo shirts and belts (as parts of garments). The Company may use the BOSS trademark in forms other than the BOSS Logotype with the prior approval of the other parties to the agreements. The Company is prohibited from using the BOSS brand name or image on footwear, formal and tailored clothing, leather clothing, body wear, underwear, intimate apparel, loungewear, sleepwear and robes, clothing designed for the primary purpose of engaging in skiing, tennis, motor sports, windsurfing and any non-apparel items. The Concurrent Use Agreement sets forth specific parameters governing the use by the Company of the BOSS Logotype with respect to advertising, wholesale pricing points and the size, location, appearance, style and coloring of the trademark on different product categories and advertising, and generally requires that the Company use the phrase "BOSS by I.G. Design" on its BOSS products. No material adverse effect on the Company's financial condition or results of operations is expected as a result of the Concurrent Use Agreement. Under the Foreign Rights Agreement, the Company continues to have the right to manufacture BOSS apparel in foreign countries, including those in which the Company is currently manufacturing BOSS apparel and several additional countries. No significant changes are anticipated with respect to the Company's foreign manufacturing activities and therefore no material adverse effect on the Company's financial condition or results of operations is expected. The Foreign Rights Agreement will terminate on December 31, 2001, but may be extended, at the Company's option, through December 31, 2007. Under the Foreign Rights Agreement, the Company will pay annual royalties of 12.5%: (i) on the first $32.0 million of net sales attributable to apparel manufactured in those foreign countries in which the Company currently manufactures or will manufacture BOSS products ("Territory Net Sales") for each of the first four years of the agreement; (ii) on the first $20.0 million in Territory Net Sales for year five of the agreement; and (iii) on the first $16.0 million of Territory Net Sales in years six through ten of the agreement. The base royalties on such amounts of Territory Net Sales would increase to as much as 19.5% upon any prepayment of the Note. For the first four years of the agreement, an aggregate additional royalty of 5.0% is payable annually on Territory Net Sales from $84.0 million to approximately $105.3 million and an aggregate additional royalty of 4.0% is payable annually on Territory Net Sales of $158.0 million and up. Additional royalties in years five through ten of the agreement increase for certain corresponding sales levels. The Company is required (i) to generate minimum annual Territory Net Sales of at least $32.0 million for each of the first four years of the agreement, $20.0 million for the fifth year of the agreement and $16.0 million for each of years six through ten of the agreement and (ii) to pay annual royalties on such sales based on the percentages described above. The Company's Territory Net Sales for any given year under the agreement must equal at least 95.0% of total net sales attributable to BOSS apparel manufactured worldwide. To the extent that the Company does not achieve the required Territory Net Sales, the Company will have the right, in order to avoid termination of the agreement, to pay royalties as if such Territory Net Sales had been achieved. In the event that the Company's cumulative payment of royalties under the Foreign Rights Agreement and interest paid under the Note exceed: (i) $16.0 million paid at any time during the first four years of the agreement, (ii) $6.5 million paid at any time during years five through seven of the agreement, (iii) $6.0 million paid at any time during years eight through ten of the agreement, or (iv) $26.0 million paid at any time during the entire term of the agreement, the requirement to generate minimum annual Territory Net Sales, as described above, terminates and the Company shall continue to pay royalties based on the percentages described above. The Foreign Rights Agreement may be terminated by the licensor upon the occurrence of certain events, including, but not limited to (i) a material breach by the Company after expiration of the applicable grace period, (ii) certain events of bankruptcy, insolvency or assignment for the benefit of all creditors 13 relating to the Company or the appointment of a receiver or trustee for the Company (a "Bankruptcy Event"), (iii) certain specified changes in the control of the ownership of the Company and (iv) certain uncured breaches by the Company's foreign manufacturers of the terms of the agreements. In addition to terminating the agreement, the licensor may require the Company to pay on an accelerated basis all royalties due under certain sales assumptions through the then current term of the agreement upon the occurrence of certain events, including, but not limited to (i) the failure of the Company to pay royalties when due or to meet certain minimum sales requirements, (ii) the failure of the Company to manufacture products in certain foreign countries, (iii) the sale of the licensed products outside the United States, (iv) certain attempts by the Company to create or establish trademark rights in the word BOSS in its own name anywhere outside of the United States, (v) the willful and material breach of the agreement and (vi) the occurrence of a Bankruptcy Event. The Company's rights to use the BOSS name will terminate upon exercise of the Option (as hereinafter defined) or upon earlier termination of any of the other agreements. Any termination of the Company's rights to use the BOSS name would have a material adverse effect on the Company's financial condition and results of operations. Ambra holds an option dated November 5, 1997 to purchase the Domestic BOSS Trademark Rights from the Company (the "Option") for an amount equal to the original principal amount of the Note at any time between November 5, 2006 and December 31, 2007 or earlier upon (i) certain breaches of the Concurrent Use Agreement, (ii) an event of default under the Note or (iii) termination for any reason of the Foreign Rights Agreement. BEVERLY HILLS POLO CLUB LICENSES Beverly Hills Polo Club Domestic Licenses Since 1993, the Company has had exclusive wholesale licensing agreements (collectively, the "BHPC Agreements") with BHPC Marketing, Inc. for the manufacture and promotion of certain men's and women's sportswear bearing the registered trademark Beverly Hills Polo Club with an accompanying horse and rider design (the "BHPC Trademark") for sale to moderate or better department stores and specialty stores in the United States and its possessions, including Puerto Rico. Under the BHPC Agreements, the Company may sell up to 25.0% of its total volume for each of the men's and women's categories to warehouse clubs. The licenses generally allow the Company to use the BHPC Trademark on sportswear designed by or for the Company, subject to a quality approval process for marketing and advertising materials, manufacturing premises and products bearing the trademark. Under each of these licenses, as amended through April 1997, the Company is required to make payments to the licensor in an amount equal to 5.0% of the Company's net invoiced sales of licensed merchandise and to spend an amount equal to 1.0% of net invoiced sales of such merchandise in advertising for the licensed products. Under each license, the Company pays a monthly royalty equal to the greater of 8.3% of the guaranteed minimum annual royalty or the actual royalty earned by the licensor in the preceding month. Under the Beverly Hills Polo Club men's agreement (the "Men's Agreement") the Company has been granted an exclusive license to use the BHPC Trademark in connection with menswear fashions made of materials other than silk in the following categories: denim sportswear, outerwear, knit, woven and dress shirts, knit and woven casual pants and shorts, sweaters, basic and fashion fleece tops and bottoms, overalls and shortalls, knit tops (including tee shirts and polo shirts), swimwear and warm-ups. The Men's Agreement has an initial term expiring December 31, 1998 and is renewable at the option of the Company, provided the Company is not in breach thereof at the time renewal notice is given, for two consecutive three-year periods commencing January 1, 1999 through December 31, 2004. The Company's payment of royalties under the Men's Agreement is subject to a guaranteed minimum royalty of $400,000 for the contract year ending December 31, 1998. Guaranteed minimum annual royalty payments of $300,000 and $350,000, which were required for the contract years ending December 31, 1996 and December 31, 1997, respectively, were exceeded by the Company. Notwithstanding its term, the Men's Agreement may be terminated by the licensor in the event the Company fails to make net shipments of products for the contract year ending December 31, 1998 in the amount of $8.0 million. Guaranteed 14 minimum annual royalties and guaranteed annual net shipments for each of the renewal terms will be the greater of (i) 80.0% of the immediately preceding contract year's actual royalties and net shipments or (ii) the previous year's guaranteed minimum royalty and guaranteed net shipments. The Beverly Hills Polo Club women's agreement (the "Women's Agreement") grants the Company the right to use the BHPC Trademark in connection with women's, missy, junior, petite and large size coordinated sportswear, sweaters, sweater dresses, sweater suits, basic fleeced tops and bottoms, basic tee shirts, basic polo shirts, warm ups in knit and woven fabrics and women's tennis and golf-related shorts sets, skort sets and pant sets in knit and woven fabrics. The Women's Agreement has an initial term expiring December 31, 1998 and is renewable at the option of the Company, provided the Company is not in breach thereof at the time renewal notice is given, for two consecutive three-year periods commencing January 1, 1999 through December 31, 2004. The Company's payment of royalties under the Women's Agreement is subject to a guaranteed minimum annual royalty of $150,000 for the contract year ending December 31, 1998. A guaranteed minimum annual royalty payment of $100,000, which was required for the contract year ending December 31, 1997, was exceeded by the Company. No guaranteed minimum annual royalty payment was required for the contract year ending December 31, 1996. Notwithstanding the term of the Women's Agreement, the women's license may be terminated by the licensor in the event the Company fails to make net shipments of products for the contract year ending December 31, 1998 in the amount of $3.0 million. Guaranteed minimum annual royalties and guaranteed annual net shipments for each of the renewal terms will be the greater of (i) 80.0% of the immediately preceding contract year's actual royalties and net shipments or (ii) the previous year's guaranteed minimum royalty and guaranteed net shipments. Each of the Men's and the Women's Agreements may be terminated by the licensor upon the occurrence of certain events, including but not limited to the following: (i) a breach by the Company of any obligation under the agreement that remains uncured within 30 days following the receipt of written notice of such breach, (ii) the Company becomes insolvent, is the subject of a petition in bankruptcy or otherwise enters into any composition with its creditors, including reorganization, or (iii) the Company has committed three breaches of the agreement, in which case no right to cure the breach is afforded to the Company. During the term of the Beverly Hills Polo Club domestic Men's and Women's Agreements, the Company is prohibited from manufacturing or otherwise distributing any merchandise under a brand name which closely resembles the BHPC Trademark and from using on non-Beverly Hills Polo Club products any graphic, style or design which closely resembles any items supplied to the Company by the licensor. In addition, the rights of the Company under the Men's and Women's Agreements are subject to the terms of a Settlement Agreement and Consent Judgment between the licensor and Polo Fashions, Inc., which imposes certain restrictions on the licensor's manner of use and advertising of the BHPC Trademark, including a prohibition on the use of the words "Polo" and "Polo Club" alone on any item of apparel The Company believes that the BHPC Trademark, as licensed to the Company, complies with those restrictions. Beverly Hills Polo Club International Licenses On August 15, 1996, I.C. Isaacs Europe, S.L., a Spanish limited corporation and wholly-owned subsidiary of the Company, entered into retail and wholesale license agreements (collectively, the "International Agreements") for use of the BHPC Trademark in Europe. The International Agreements, as amended through April 28, 1997, provide certain exclusive rights to use the BHPC Trademark in all countries in Europe for an initial term of three years ending December 31, 1999, renewable at the Company's option through two consecutive three-year extensions ending December 31, 2004. The International Agreements are subject to substantially the same terms and conditions as the BHPC Agreements described above. The international retail agreement (the "Retail Agreement") grants the Company the right to use the BHPC Trademark in connection with the manufacture and sale through authorized Beverly Hills Polo Club retail stores and franchise stores in Europe of the following categories of products: (i) men's pants, woven 15 shirts, knit shirts, jeans, shorts, sweaters and outerwear (excluding dress shirts and suits); (ii) women's slacks, skirts, dresses, sweaters, outerwear, blouses and jeans; and (iii) all other products licensed by the Beverly Hills Polo Club licensor to other third parties (which must be purchased by the Company from the authorized third-party licensees). The Retail Agreement excludes dress shirts and suits. Under the Retail Agreement, the Company is required to pay the licensor royalties equal to (i) 4.0% of the wholesale purchases by the Company of Beverly Hills Polo Club products sold to Beverly Hills Polo Club retail stores and (ii) 2.0% of retail sales of licensed products by Beverly Hills Polo Club retail stores. The Company is subject to guaranteed minimum annual royalty payments of $40,000 in 1998 and $64,000 in 1999 and guaranteed net shipment volumes of $0.5 million in 1998 and $0.8 million in 1999. The Retail Agreement is subject to applicable franchising laws in Europe and, as a result, the licensor may terminate the agreement if the Company is unable to obtain any necessary governmental approval or to make any necessary governmental filings within four months from the date of the first franchise agreement. The international wholesale agreement (the "Wholesale Agreement") grants the Company the right to use the BHPC Trademark in connection with the manufacture and sale at wholesale, for distribution to department stores and specialty stores in Europe, of the following categories of products: (i) men's apparel (excluding suits, ties, underwear, shoes and full length rainwear); and (ii) women's apparel (excluding hosiery, intimate apparel, business suits, underwear, accessories, shoes and full length rainwear). Under the Wholesale Agreement, the Company is required to pay the licensor a royalty equal to 6.0% of net shipments by the Company of licensed products directly to authorized Beverly Hills Polo Club distributors or to retail stores. The Wholesale Agreement imposes guaranteed minimum annual royalty payments of $120,000 in 1998 and $240,000 in 1999 and guaranteed net shipment volumes of $2.0 million in 1998 and $4.0 million in 1999. GIRBAUD 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. 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") 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. Both Agreements include the right to manufacture the licensed products in a number of foreign countries and both have initial terms of two years and may be extended at the option of the Company for up to a total of ten years. The 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. Both 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 Agreement that remains uncured following certain specified grace periods. Under the Girbaud Men's Agreement the Company is required to make payments to the Licensor in an amount equal to 6.25% of the Company's net sales of regular licensed merchandise and 3.0% in the case of certain irregular and closeout licensed merchandise. The Company is subject to guaranteed minimum annual royalty payments of $1.2 million in 1998, $1.5 million in 1999, $2.0 million in 2000, $2.5 million in 2001 and $3.0 million each year from 2002 through 2007. On a quarterly basis during the term, commencing with the first quarter of 1998, the Company is obligated to pay the greater of (i) actual royalties earned by the Licensor under the license or (ii) 8.3% of the minimum guaranteed royalties for 16 that year. The Company is required to spend at least $350,000 in advertising men's Girbaud brand products in 1998 and $500,000 each year thereafter while the Girbaud Men's Agreement is in effect. Under the Girbaud Women's Agreement the Company paid a one-time license acquisition fee in the amount of $600,000 and is required to make payments to the Licensor in an amount equal to 6.25% of the Company's net sales of regular licensed merchandise and 3.0% in the case of certain irregular and closeout licensed merchandise. The Company is subject to guaranteed minimum annual royalty payments of $700,000 in 1999, $800,000 in 2000, $1.0 million in 2001 and $1.5 million each year from 2002 through 2007. On a quarterly basis during the term, commencing with the first quarter of 1999, the Company is obligated to pay the greater of (i) actual royalties earned by the Licensor under the license or (ii) 8.3% of the minimum guaranteed royalties for that year. The Company is required to spend at least $550,000 in advertising women's Girbaud brand products in 1998 and $400,000 each year thereafter while the Girbaud Women's Agreement is in effect. 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. CREDIT CONTROL The Company manages its own credit and collection functions and has never used a factoring service or outside credit insurance. The Company sells to approximately 4,100 accounts throughout the United States and Puerto Rico. All of the functions necessary to service this large volume of accounts are handled by the Company's in-house credit department in Baltimore, Maryland. The Company currently employs eight people in its credit department and believes that managing its own credit gives it unique flexibility as to which customers the Company 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. Credit personnel evaluate this information and, if appropriate, establish a line of credit. Credit personnel track payment activity for each customer using customized computer software and directly contact customers with receivable balances outstanding beyond 30 days. Under certain circumstances, the Company may discontinue merchandise shipments until the outstanding balance is paid. Ultimately, the Company may determine to engage an outside collection organization to collect past due accounts. The Company believes this provides a selling advantage over those competitors who factor their receivables. In 1997, the Company's credit losses were $1.2 million and the Company's actual credit losses as a percentage of net sales were less than three-quarters of one percent. COMPETITION The apparel industry is highly competitive and fragmented and is subject to rapidly changing consumer demands and preferences. The Company believes that its success depends in large part upon its ability to anticipate, gauge and respond to changing consumer demands and fashion trends in a timely manner and upon the continued appeal to consumers of the BOSS, Beverly Hills Polo Club and Girbaud brands. The Company competes with numerous apparel brands and distributors (including Calvin Klein, DKNY, Fila, FUBU, Guess?, Tommy Hilfiger, JNCO and Nautica). Many of the Company's competitors have greater financial resources than the Company. Although the level and nature of competition differ among its product categories, the Company believes that it competes on the basis of its brand image, quality of design and value pricing. In addition, under the Concurrent Use Agreement, the BHPC Agreements and the Girbaud Agreement, certain third parties have retained the right to produce, distribute, advertise and sell, and to authorize others to produce, distribute, advertise and sell certain garments that are similar to some of the Company's products, including, in the case of the BOSS brand, similar garments using the BOSS name at generally higher wholesale price points. Any such production, distribution, advertisement or sale of such garments by such licensor or another authorized party could have a material adverse effect on the Company's financial condition or results of operations. 17 MANAGEMENT INFORMATION SYSTEMS The Company believes that advanced information processing is essential to maintaining its competitive position. The Company is currently upgrading systems to be year 2000 compliant and to allow areas of the business to be more pro-active to customer requirements, to improve internal communication flow, to increase process efficiency and to support management decisions. The Company's systems provide, among other things, comprehensive order processing, production, accounting and management information for the marketing, selling, manufacturing, retailing and distribution functions of the Company's business. The Company's software program allows it to track, among other things, orders, manufacturing schedules, inventory and sales of its products. The program includes centralized management information systems, which provide the various operating departments with financial, sales, inventory and distribution related information. Via electronic data interchange, the Company is able to ship orders to certain customers within 24 to 72 hours from the time of order receipt. EMPLOYEES The Company believes that its employees are one of its most valuable resources. As of December 31, 1997, the Company had approximately 930 full-time employees. The Company is not a party to any labor agreements, and none of its employees is represented by a labor union. The Company considers its relationship with its employees to be good and has not experienced any material interruption of its operations due to labor disputes. 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. 18 ITEM 2. PROPERTIES Certain information concerning the Company's principal facilities is set forth below:
APPROXIMATE AREA LEASED OR IN LOCATION OWNED USE SQUARE FEET - ----------------------------------------- ----------- ----------------------------------------- ---------------- Baltimore, MD............................ Owned Administrative Headquarters and Office 40,000 Facilities New York, NY............................. Leased Sales, Merchandising, Marketing and 9,725 Sourcing Headquarters New York, NY............................. Leased Sales, Marketing and Sourcing 4,300 Headquarters Barcelona, Spain......................... Leased European Headquarters 2,000 Milford, DE.............................. Owned Distribution Center 70,000 Newton, MS............................... Leased Manufacturing Plant 101,000 Carthage, MS............................. Leased Manufacturing Plant 110,000 Raleigh, MS.............................. Leased Manufacturing Plant 90,000
The Company also has regional sales offices, all of which are leased, in the following cities: Atlanta, Georgia; Dallas, Texas; Miami, Florida; Seattle, Washington; Los Angeles, California; Philadelphia, Pennsylvania; Boston, Massachusetts; Minneapolis, Minnesota; Charlotte, North Carolina; and Santurce, Puerto Rico. The Company believes that its existing facilities are well maintained and in good operating condition. The Company also believes that its increased distribution requirements can be better met by consolidating its warehousing and distribution functions into a new 150,000 square foot facility to be located in Milford, Delaware. See "ITEM 1. Business--Warehousing and Distribution" and Note 7 of Notes to Consolidated Financial Statements for further information. The Company intends to close its Newton, Mississippi, manufacturing plant during the second quarter of 1998. The majority of the production in this facility is of jeans. Some of this production will be transferred to third party independent contractor facilities in Mexico where the Company currently has jeans manufactured. The Company anticipates that a charge in the range of $0.2 million to $0.3 million will be made against earnings for the first quarter of 1998 as a result of closing the plant. The Company anticipates annual cost savings in the range of $0.3 million to $0.6 million after the transfer of production to Mexico as a result of lower labor and overhead costs. The Girbaud Women's Agreement requires the Company to open a Girbaud flagship store in Manhattan, New York City, with a target selling space of no less than approximately 7,800 square feet. The Company intends to open the store in the SoHo neighborhood of New York City by the end of 1998. The store will offer both sportswear manufactured under the Girbaud Men's Agreement and the Girbaud Women's Agreement as well as products from the Girbaud European collections. 19 ITEM 3. LEGAL PROCEEDINGS In November 1997, the Company entered into a Settlement of litigation involving use of the BOSS trademark. The original complaint was filed in the United States District Court for the Southern District of New York on February 11, 1993 by Hugo Boss Fashions, Inc., International Fashions Apparel Corporation and Hugo Boss and sought injunctive relief and compensatory damages for misappropriation, infringement of trademark rights, unfair competition, dilution, use of name with intent to deceive, violations under the Lanham Act, breach of contract and tortious interference with contractual relations. The original complaint named Brookhurst, Boss Sportswear (USA), Inc. and the Company as defendants and was subsequently amended to add Boss Golf Company, Inc. The defendants filed a counterclaim against the plaintiffs alleging trademark infringement and related matters arising out of the plaintiffs' use of the BOSS trademark. In November 1997, the parties entered into the Settlement pursuant to which the Company will continue to be able to use the BOSS brand name and image in connection with the manufacture of BOSS brand apparel in the United States and certain foreign countries, subject to the terms of the Concurrent Use Agreement, for distribution in the United States and Puerto Rico. Although its insurance carrier paid approximately $650,000 pursuant to the Settlement, the Company did not admit any liability and such payment was made based on the cost of litigation rather than any assessment of the Company's potential liability in the suit. From time to time the Company is a party to various claims, complaints and other legal actions that have arisen in the ordinary course of business. The Company is not presently aware of any such legal proceedings which, in the aggregate, it believes would have a material adverse effect on the Company's financial condition or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS During the fourth quarter of 1997, there were no matters submitted to a vote of the Company's stockholders except as follows: (1) On December 18, 1997, the Company's stockholders acted by unanimous written consent to approve the issuance of shares of Common Stock in the Company's initial public offering. (2) On December 22, 1997, the Company's stockholders acted by unanimous written consent to approve the revocation of the Company's S election in connection with the Company's initial public offering. 20 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. At December 31, 1997 there were approximately 50 holders of record of the Company's Common Stock. The Company's Common Stock began trading on the Nasdaq National Market System under the Symbol "ISAC" effective December 18, 1997. Prior to that date, there was no public market for the Common Stock. The reported last sale price of the Common Stock on the Nasdaq National Market on March 25, 1998 was $7 1/32. The following table sets forth for the periods indicated the high and low sale prices for the Common Stock reported by the Nasdaq National Market:
1997 HIGH LOW - --------------------------------------------------------------------------- --------- --------- Fourth Quarter (from December 18, 1997).................................... $ 10 3/16 $ 10.00
From January 1, 1993 until its initial public offering, the Company elected to be treated for federal and state income tax purposes as an S corporation. As a result, the Company's stockholders, rather than the Company, have been taxed directly on the earnings of the Company for federal and certain state income tax purposes, whether or not such earnings were distributed. In 1997, the Company made cash distributions to its stockholders in the amount of $15.8 million, which were to be used to fund the stockholders' tax obligations as a result of the Company's status as an S corporation. One day prior to the consummation of the transactions related to the Company's initial public offering, the Company's S Corporation status was terminated (the "S Termination Date"). On the S Termination Date the Company declared a dividend distribution to the stockholders of record of the Company, including certain officers and directors of the Company, in the aggregate amount of approximately $9.3 million, which represented a portion of the earned but undistributed S corporation earnings of the Company prior to its initial public offering (the "S Corporation Distribution"). The Company does not anticipate any subsequent distribution of the remaining earned but undistributed S corporation earnings of the Company. Only stockholders of record as of the S Termination Date participated in the S Corporation Distribution. The S Corporation Distribution was paid on the date of consummation of the transactions relating to the initial public offering. 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 may be issued with respect to awards granted under the Plan is 500,000. The Plan is administered by the Compensation Committee of the Board of Directors. Participation in the Plan will be open to all employees, officers, directors and consultants of the Company or any of its affiliates, as may be selected by the Compensation Committee from time to time. The Plan allows for stock options, stock appreciation rights, stock awards, phantom stock awards and performance awards to be granted. The Compensation Committee will determine the prices, vesting schedules, expiration dates 21 and other material conditions upon which such awards may be exercised. To date, no stock options or other awards have been granted under the Plan. The Company's Registration Statement on Form S-1 (File No. 333-37155), filed in order to accomplish its initial public offering of its Common Stock (including shares issued upon the partial exercise of the underwriters' over-allotment option, the "Offering"), was declared effective by the Securities and Exchange Commission on December 17, 1997 and closed on December 23, 1997. The over-allotment option was partially exercised on January 22, 1998 for 520,000 shares of Common Stock. The managing underwriter for the Offering was The Robinson-Humphrey Company, LLC. The aggregate amount registered in the Offering, including the full over-allotment option, totaled 4,370,000 shares. The aggregate price of the Offering amount registered totaled $43.7 million at the initial public offering price of $10.00 per share. A total of 4,320,000 shares were sold in the Offering representing an aggregate offering price of $43.2 million at the initial public offering price of $10.00 per share. The net proceeds received by the Company from the Offering were approximately $38.7 million, at the initial public offering price of $10.00 per share and after deducting the underwriting discount and offering expenses paid by the Company. The Company used such net proceeds as follows: (i) to repay $19.5 million of the Company's outstanding borrowings under its credit facilities; and (ii) to pay the S Corporation Distribution of $9.3 million. The remaining proceeds will be used for general corporate and working capital purposes. Pending application of the remaining net proceeds from the Offering as described above, the Company has invested the net proceeds in short-term, interest bearing instruments or other investment grade securities. The aggregate expenses paid by the Company in the Offering, including aggregate underwriting discounts and commissions of $3.0 million, were approximately $4.5 million. Each of the three following transactions was exempt from the registration requirements of the Securities Act of 1933, as amended (the "Securities Act"), in reliance on Section 3(a)(9) and/or Section 4(2) of the Securities Act on the basis that such transaction was solely with existing security holders and/or did not involve a public offering. No underwriters were involved in connection with any of the following transactions: (1) On January 17, 1997, the Company issued 24,699 shares of Common Stock to Thomas P. Ormandy, an executive officer of the Company, for $39,485 cash. (2) On September 2, 1997, the Company issued 5,746 shares of Common Stock to existing stockholders of the Company in consideration of the cancellation of stock certificates that had been issued at a time when the Company did not have a sufficient number of authorized shares of Common Stock. (3) Immediately prior to the consummation of the Offering the Company effected a 246.9898-for-1 stock split pursuant to which it issued an aggregate of 4.0 million shares of Common Stock to the Company's existing stockholders. 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 income data for the years ended December 31, 1995, 1996 and 1997 and the balance sheet data as of December 31, 1996 and 1997 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 income data for the years ended December 31, 1993 and 1994 and the balance sheet data as of December 31, 1993, 1994 and 1995 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. 22
YEAR ENDED DECEMBER 31, ------------------------------------------------------- 1993 1994 1995 1996 1997 --------- --------- --------- ---------- ---------- (IN THOUSANDS EXCEPT PER SHARE DATA) STATEMENT OF INCOME DATA: Net sales......................................................... $ 72,414 $ 85,298 $ 93,271 $ 118,655 $ 161,446 Cost of sales..................................................... 54,880 62,216 68,530 84,421 109,694 --------- --------- --------- ---------- ---------- Gross profit.................................................... 17,534 23,082 24,741 34,234 51,752 Selling expenses.................................................. 6,853 7,462 8,927 11,898 16,236 License fees...................................................... 2,182 3,012 3,174 4,817 7,577 Distribution and shipping expenses................................ 4,276 2,046 2,379 2,669 4,307 General and administrative expenses............................... 1,903 5,813 5,787 6,243 7,546 Recovery of legal fees............................................ -- -- -- (718) (117) --------- --------- --------- ---------- ---------- Operating income................................................ 2,320 4,749 4,474 9,325 16,203 Interest, net..................................................... 1,260 1,191 1,247 1,365 2,372 Other income (expense) (1)........................................ 1,215 1,235 (3) 85 3 Minority interest................................................. -- (53) (33) (82) (135) --------- --------- --------- ---------- ---------- Income before extraordinary item and income taxes................. 2,275 4,740 3,191 7,963 13,699 Extraordinary item (2)............................................ -- 389 -- -- -- --------- --------- --------- ---------- ---------- Income before income taxes........................................ 2,275 5,129 3,191 7,963 13,699 Income tax benefit................................................ -- -- -- -- 1,349 --------- --------- --------- ---------- ---------- Net income...................................................... $ 2,275 $ 5,129 $ 3,191 $ 7,963 $ 15,048 --------- --------- --------- ---------- ---------- --------- --------- --------- ---------- ---------- Basic and diluted net income per share (3)........................ $ 0.57 $ 1.29 $ 0.80 $ 1.99 $ 3.68 --------- --------- --------- ---------- ---------- --------- --------- --------- ---------- ---------- Weighted average common shares outstanding........................ 4,000 3,988 3,988 4,000 4,094 PRO FORMA STATEMENT OF INCOME DATA: Income before income taxes........................................ 2,275 5,129 3,191 7,963 13,699 Income tax provision (4).......................................... 933 2,103 1,308 3,265 5,617 --------- --------- --------- ---------- ---------- Net income...................................................... $ 1,342 $ 3,026 $ 1,883 $ 4,698 $ 8,082 --------- --------- --------- ---------- ---------- --------- --------- --------- ---------- ---------- Basic and diluted net income per share............................ $ 0.95 $ 1.62 ---------- ---------- ---------- ---------- Weighted average common shares outstanding........................ 4,930 5,001
AS OF DECEMBER 31, ----------------------------------------------------- 1993 1994 1995 1996 1997 --------- --------- --------- --------- --------- (IN THOUSANDS) BALANCE SHEET DATA: Working capital............................................. $ 6,787 $ 10,035 $ 10,807 $ 16,274 $ 46,636 Total assets................................................ 27,201 30,103 31,764 37,257 73,443 Total debt.................................................. 9,405 8,798 8,645 7,796 11,609 Stockholders' equity........................................ 10,824 14,428 14,645 19,393 52,496
- ------------------------ (1) Includes income from settlement of license disputes of $1.5 million and $1.2 million in 1993 and 1994, respectively. (2) In connection with the early extinguishment of certain debt, the Company recorded an extraordinary gain of $0.4 million in 1994. (3) 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, 1993, 1994, 1995, 1996 and the majority of 1997. (4) Reflects pro forma provision for income taxes as if the Company had been taxed as a C corporation for the years ended December 31, 1993, 1994, 1995, 1996 and 1997. 23 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with the "Selected Financial Data" and the Company's consolidated financial statements and the related notes thereto, which are included elsewhere herein. OVERVIEW During its first 77 years, the Company became one of the leading manufacturers of pants, trousers and jeans in the United States. The Company was able to utilize its fabric sourcing and manufacturing expertise to build a well known franchise in the men's and women's bottoms segment of the apparel industry. In this period, the Company's marketing efforts were typically driven by its manufacturing capabilities, and branding was limited to Company-owned brands and third-party private labels. In the late 1980's, management made a decision to change the Company's marketing focus from a manufacturing-driven to a brand-driven strategy. This fundamental shift within the Company reflected senior management's belief that the American sportswear market would be dominated by recognized brands with clearly established images. Management also concluded that increasing market share would go to those companies that were market-driven and able to service their customers with diversified manufacturing and sourcing capabilities. Recognizing its strength in bottoms manufacturing, in 1990 the Company entered into a license agreement for the exclusive use of the BOSS brand name on men's denim apparel and on all types of juniors sportswear for the young women's market. In 1994, the Company expanded its license agreement to include use of the BOSS brand name on men's, women's, boys' and youth sportswear in the United States and Puerto Rico. In 1997, the Company's rights to manufacture and market BOSS sportswear were further expanded to allow broader product offerings and significant Company control over styling, advertising and distribution. In the fall of 1993, the Company entered into license agreements for the use of the Beverly Hills Polo Club brand name on men's and women's sportswear in the United States and Puerto Rico. License rights were expanded to include Europe in 1996 and to include men's dress shirts in 1997. In November 1997, the Company acquired an exclusive license to manufacture and market certain men's sportswear under the Girbaud brand in the United States and Puerto Rico. Over the last ten years, the Girbaud brand was manufactured and marketed in the United States under license by VF Corp. The Girbaud brand is an internationally recognized designer sportswear label with a distinct European influence. By targeting men who desire contemporary international fashion, the Girbaud brand will enable the Company to address another consumer segment within its branded product portfolio. The Company is positioning the Girbaud men's line with a broader 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. The Company anticipates that it will incur approximately $600,000 in startup costs related to the implementation of the Girbaud brand, including, but not limited to, expenditures for additional office and showroom space and costs related to adding merchandising and sales personnel. In March 1998, the Company entered into an exclusive license agreement to manufacture and market certain women's sportswear under the Girbaud brand in the United States and Puerto Rico. The Company intends to begin marketing women's sportswear under the Girbaud brand in the second quarter of 1998 for delivery during the 1998 holiday season. The Company intends to reposition the Girbaud women's line with a broader assortment of products, styles and fabrications. The Company paid an initial license fee of $600,000. Also, in 1998 the Company is required to spend at least $550,000 in advertising for the women's Girbaud brand and at least $350,000 in advertising for the men's Girbaud brand. In addition, the Company is required to contribute $190,000 per year to the licensor's advertising and promotional expenditures for the Girbaud brand. Minimum royalty payments begin in the first quarter of 1998. See "ITEM 1. Business--Licenses and Other Rights Agreements." 24 The Company also manufactures and markets women's sportswear under its own "I.C. Isaacs," "Lord Isaacs" and "Pizzazz" brand names and under third-party private labels. The Company intends to continue to manufacture and market this sportswear for the foreseeable future. See "ITEM 1. Business--Licenses and Other Rights Agreements." Over the past three years, the Company has completed its strategic repositioning from a manufacturing-driven company to a marketing and brand-driven company. Through a focused strategy of providing fashionable, branded merchandise at value prices, the Company has emerged as a significant fashion influence for youthful and contemporary consumers who purchase sportswear through specialty and department stores. The Company's brand-driven market strategy is evidenced by the increase of licensed, branded apparel as a percentage of the Company's net sales. In 1997, the BOSS and Beverly Hills Polo Club brands comprised 74.6% and 15.8% 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. As a result, net sales of the BOSS tops and outerwear lines have nearly tripled since 1995 to approximately $48 million in 1997. The Company has also expanded its branded lines to include sportswear for boys, youth and juniors. Historically, the Company has recognized markdowns for specific unsold inventory in the second and fourth quarters. These specific markdowns are reflected in cost of sales and the related gross margins at the conclusion of the appropriate selling season. The following table sets forth, for the periods indicated, the Company's net sales categorized by brand and product category:
YEAR ENDED DECEMBER 31, --------------------------------- 1995 1996 1997 --------- ---------- ---------- (IN THOUSANDS) MEN'S(1) BOSS Bottoms......................................................... $ 37,234 $ 44,667 $ 54,234 BOSS Tops............................................................ 15,882 29,284 48,094 BOSS BOYS'........................................................... 3,264 6,736 13,992 Men's BHPC........................................................... 5,219 12,226 24,196 Men's Private Label.................................................. 4,299 500 129 --------- ---------- ---------- Men's net sales.................................................... 65,898 93,413 140,645 --------- ---------- ---------- WOMEN'S(1) BOSS Juniors'........................................................ 5,424 5,413 4,098 Women's BHPC......................................................... 1,833 2,043 1,338 Women's Other(2)..................................................... 20,116 17,786 15,364 --------- ---------- ---------- Women's net sales.................................................. 27,373 25,242 20,800 --------- ---------- ---------- Total net sales.................................................... $ 93,271 $ 118,655 $ 161,445 --------- ---------- ---------- --------- ---------- ----------
- ------------------------ (1) The net sales totals incorporate product returns allocated in proportion to gross sales. (2) Includes Company-owned brands and third-party private labels. 25 RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, the percentage relationship to net sales of certain items in the Company's consolidated statements of income for the periods shown below:
YEAR ENDED DECEMBER 31, ----------------------------------- 1995 1996(1) 1997(1) --------- ----------- ----------- Net sales.................................................................... 100.0% 100.0% 100.0% Cost of sales................................................................ 73.5 71.1 67.9 --------- ----- ----- Gross profit................................................................. 26.5 28.9 32.1 Selling expenses............................................................. 9.5 10.0 10.1 License fees................................................................. 3.4 4.1 4.7 Distribution and shipping expenses........................................... 2.6 2.2 2.7 General and administrative expenses.......................................... 6.2 4.7 4.6 --------- ----- ----- Operating income............................................................. 4.8% 7.9% 10.0% --------- ----- ----- --------- ----- -----
- ------------------------ (1) General and administrative expenses have been reduced to reflect the receipt in 1996 and 1997 of approximately $0.7 million and $0.1 million, respectively, related to an agreement with the Company's insurance carrier to reimburse it for legal fees associated with litigation billed in prior years. YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996 NET SALES. Net sales increased 36.0% to $161.4 million in 1997 from $118.7 million in 1996. Substantially all of this increase was due to higher volume shipments of BOSS and Beverly Hills Polo Club sportswear. Net sales of BOSS sportswear increased $34.3 million or 39.8% to $120.4 million primarily driven by strong growth in the men's tops, boys' and youth segments. Net sales of the BOSS tops segment were $48.1 million in 1997 versus $29.3 million in 1996. Net sales of Beverly Hills Polo Club sportswear increased $11.3 million or 79.0% to $25.6 million over the same period, primarily driven by strong growth in the men's business. The increases in net sales were partially offset by weaker than expected performance in the fourth quarter of 1997 principally attributable to sluggishness in the retail apparel market, primarily at the specialty store level. The Company has noted that in recent periods apparel retailers have been buying goods closer to market needs which may negatively affect results in the first half of 1998. International sales were insignificant in 1997. GROSS PROFIT. Gross Profit increased 51.5% to $51.8 million in 1997 from $34.2 million in 1996. Gross profit as a percentage of net sales increased to 32.1% in 1997 from 28.9% in 1996. The increase in gross profit was due in part to the expansion of the BOSS tops product line, which typically carries a higher gross margin than the bottoms product line. In addition, the tops line had improved gross margins due to reduced costs on imported tops resulting from volume purchase discounts. Also, the continued shift of production of denim bottoms from the United States to Mexico and the accompanying decrease in labor and overhead costs contributed to the improved gross margin. The Company's improved gross margin was also a result of increased sales of products at full margin, particularly in the first quarter, offset somewhat by markdowns taken in the second quarter related to unsold spring and summer goods. SELLING, DISTRIBUTION, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, distribution, general and administrative ("SG&A") expenses increased 39.3% to $28.0 million in 1997 from $20.1 million in 1996. As a percentage of net sales, SG&A expenses increased to 17.4% from 16.9% in 1996 as the Company continued to increase investment in its organizational structure and personnel to support growth and expanded advertising. Selling expenses increased $4.3 million to $16.2 million in 1997 as a result of higher commissions to the Company's salespersons and higher advertising expenditures which increased $1.4 million to $3.9 million as the Company continued to focus on enhancing the identity and image of its 26 brands through increased media exposure. Distribution and shipping expenses increased $1.6 million to $4.3 million due to higher unit shipments and increased overtime costs. The Company opted to incur additional overtime wages rather than adding personnel to process the increase in unit shipments. General and administrative expenses increased $1.3 million to $7.5 million due to salary increases for existing employees and salaries and costs associated with the hiring of new management and administrative personnel. LICENSE FEES. License fees increased $2.8 million to $7.6 million in 1997 from $4.8 million in 1996. As a percentage of net sales, license fees increased to 4.7% from 4.1%. This increase was due to greater sales growth of non-denim branded products, which have higher royalty rates than other branded products. The Company believes that its license fees will increase as the percentage of net sales of branded products increases. OPERATING INCOME. Operating income increased 74.2% to $16.2 million or 10.0% of net sales in 1997, from $9.3 million or 7.9% of net sales in 1996. This increase resulted primarily from the increase in net sales and gross profit margins. INTEREST EXPENSE. Interest expense increased $1.0 million to $2.4 million in 1997 due to an increase in working capital borrowing requirements. In 1997 the average debt balance was $17.1 million, with an average effective interest rate of 9.5%. In 1996, the average debt balance was $9.8 million with an average effective interest rate of 9.25%. INCOME TAXES. The Company recorded a net income tax benefit of $1.3 million in the fourth quarter of 1997. Prior to its initial public offering, the Company's earnings were not subject to federal, state and local income taxes. In connection with its initial public offering, the Company became subject to such taxes, and as a result, recorded a deferred tax asset and a corresponding tax benefit of approximately $1.5 million in conjunction with termination of its Subchapter S Corporation status in December 1997. This income tax benefit was offset somewhat by a current provision for income taxes of $0.2 million which was recorded for the period December 23, 1997 to December 31, 1997. The Company expects an effective tax rate of approximately 41% in 1998. YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995 NET SALES. Net sales increased 27.2% to $118.7 million in 1996 from $93.3 million in 1995. Substantially all of the increase in net sales was due to greater unit volume shipments of both the BOSS and Beverly Hills Polo Club sportswear lines. Net sales of BOSS sportswear increased 39.3% to $86.1 million in 1996 from $61.8 million in 1995. The volume increase in BOSS sportswear was primarily driven by strong growth in the tops segment, continued strength of the jeans segment and, to a lesser extent, growth in the boys' and youth segments. Net sales of BOSS tops and outerwear nearly doubled from $15.9 million in 1995 to $29.3 million in 1996, as a result of the Company's continued product expansion and increased consumer acceptance and demand. The BOSS bottoms segment also showed strong growth, as net sales increased 20.2% in 1996 to $44.7 million. Net sales of Beverly Hills Polo Club sportswear increased 101.4% to $14.3 million during the same period primarily driven by strong growth in the men's segment. This success was due in part to increased acceptance of the product after its first full year of sales and the ongoing reconfiguration of the Company's Beverly Hills Polo Club sales force to more effectively market to specialty store customers. These increases in net sales were partially offset by a decline in sales of the Company's men's private label collection and women's Company-owned and private label collections as the Company continued to place more emphasis on branded labels. The Company discontinued the men's private label collection in 1996 due to unsatisfactory gross margins relative to BOSS and Beverly Hills Polo Club sportswear. The Company did not incur any material costs in connection with the discontinuation. International sales were insignificant in 1996. 27 GROSS PROFIT. Gross profit increased 38.5% to $34.2 million in 1996 from $24.7 million in 1995. Gross profit as a percentage of net sales increased to 28.9% in 1996 from 26.5% in 1995. The increase in gross margin was primarily due to the expansion of the BOSS tops product line as a percentage of total net sales. The tops line had a higher gross margin due to reduced costs on imported tops resulting from volume purchase discounts. Also, the continued shift of production of denim bottoms from the United Sates to Mexico and accompanying decrease in labor and overhead costs contributed to the improved gross margin. SELLING, DISTRIBUTION, GENERAL AND ADMINISTRATIVE EXPENSES. SG&A expenses increased 17.5% to $20.1 million in 1996 from $17.1 million in 1995. As a percentage of net sales SG&A expenses decreased to 16.9% in 1996 from 18.3% in 1995. This improvement reflects overall declines in SG&A expenses resulting from cost containment efforts in certain expense areas and expense leverage associated with the Company's growth. Selling expense increased $3.0 million to $11.9 million over the same period, as a result of higher commissions to the Company's salespersons and higher advertising expenditures which increased $1.0 million to $2.5 million as the Company initiated an advertising campaign to promote the BOSS brand. Distribution and shipping expenses increased $0.3 million to $2.7 million due to higher unit shipments and overtime wages for employees at the Company's distribution center. The Company opted to incur additional overtime wages rather than adding personnel to process the increase in unit shipments. General and administrative expenses increased $0.4 million to $6.2 million during the same period primarily due to higher data processing expenses. LICENSE FEES. License fees increased $1.6 million to $4.8 million in 1996 from $3.2 million in 1995. As a percentage of net sales, license fees increased to 4.1% from 3.4%. License fees increased at a rate in excess of the growth in net sales due to the increase in sales of non-denim branded products. OPERATING INCOME. Operating income increased 106.7% to $9.3 million or 7.9% of net sales in 1996, from $4.5 million or 4.8% of net sales in 1995. This increase primarily resulted from the increase in net sales and gross profit margins as well as the receipt of approximately $0.7 million related to an agreement with the Company's insurance carrier to reimburse it for legal fees associated with litigation billed in prior years. INTEREST EXPENSE. Interest expense increased to $1.4 million in 1996 from $1.2 million in 1995 due to an increase in working capital borrowing requirements which was partially offset by a reduction in borrowing costs. For 1996, the average outstanding short-term debt balance was $9.8 million, with an average effective interest rate of 9.25%. For 1995, the average balance was $8.5 million, with an average effective interest rate of 9.88%. LIQUIDITY AND CAPITAL RESOURCES The Company has relied primarily on internally generated funds, trade credit and asset-based borrowings to finance its operations and expansion. The Company's capital requirements primarily result from working capital needed to support increases in inventory and accounts receivable. OPERATING CASH FLOW Cash used by operations totaled $1.5 million in 1997 due to a significant increase in accounts receivable and inventory which resulted from higher sales of BOSS and Beverly Hills Polo Club sportswear. This was partially offset by slightly higher levels of accounts payable and significantly improved operating results. Cash used for investing activities totaled $1.1 million for 1997 and was used primarily for the purchase of machinery for the Company's factories. Cash provided by financing activities totaled $9.1 million for 1997. Upon completion of it's initial public offering, the Company received net proceeds of $33.9 million. This was used to retire the revolving line of credit and term loan totaling approximately $19.5 million and to fund the final distribution to the stockholders of the Subchapter S corporation of $9.3 million. 28 Accounts receivable and inventories increased $6.5 million and $9.8 million, respectively, from December 31, 1996 to December 31, 1997 due to higher sales of BOSS and Beverly Hills Polo Club sportswear and higher levels of finished goods. The increase in accounts receivable was greater than the increase in sales due to lower than expected cash collections beginning in May and periodically through December 1997. Also, the increase in the finished goods inventories was greater than the increase in sales due to growth in imported merchandise for which the Company pays via letters of credit prior to delivery in the United Sates. The Company manages its inventory levels by scheduling production and purchases of imported inventory to meet firm purchase orders. Capital expenditures were $1.1 million for the year ended December 31, 1997 and $0.7 million in both 1996 and 1995. The Company's capital expenditures were comprised primarily of purchases of computer equipment and sewing machinery for its domestic factories. The Company anticipates that capital expenditures will be approximately $7.0 to $8.0 million in 1998, primarily related to the construction of a new 150,000 square foot distribution center in Milford, Delaware to be financed through a mortgage loan. Also, the Company expects to spend approximately $0.5 million to upgrade its computer software to ensure year 2000 compliance. The Company expects conversion of its primary software programs to be completed in November 1998 with testing to follow in early 1999. Recently, the Company purchased new versions of two secondary software programs which have been updated for year 2000 compliance. There is one remaining secondary software program in which a decision to upgrade or outsource the processing entirely needs to be made. Management will make this decision 1998. The Company does not currently have commitments for any other material capital expenditures in 1998. However, as part of the Company's expanded relationship with Girbaud, by the end of 1998 the Company intends to open a Girbaud flagship store in Manhattan, New York City, with a target selling space of no less than approximately 7,800 square feet. The Company intends to lease the required space for the store. At this time the Company cannot determine the amount of capital expenditures that may be required to appropriately fixture the store or, if it ultimately decided to do so, to construct the store. See "ITEM 2. Properties." A significant portion of the Company's fixed assets are located at its manufacturing facilities in Mississippi. In February 1998, the Company announced that it intends to close its Newton, Mississippi manufacturing facility. This closure will occur during the second quarter of 1998, resulting in a charge in the range of $0.2 million to $0.3 million against earnings in the first quarter of 1998. The production in this facility, the majority of which is jeans, will be transferred to third party independent contractors facilities in Mexico where the Company currently has jeans manufactured. The Company anticipates annual cost savings in the range of $0.3 million to $0.6 million after the transfer of production to Mexico as a result of lower labor and overhead costs. As of December 31, 1997 the Company had no borrowings under its revolving line of credit and term loan facility compared to $7.2 million as of December 31, 1996. Because of the Company's treatment as an S corporation for federal and state income tax purposes, the Company has provided funds to its stockholders for the payment of income taxes on the earnings of the Company. Accordingly, the Company made cash distributions to its stockholders in the amounts of $2.9 million, $3.2 million and $15.8 million in 1995, 1996 and 1997, respectively. Concurrently with completing its initial public offering the Company terminated its Subchapter S Corporation status. CREDIT FACILITIES The Company has an asset-based revolving line of credit with Congress Financial Corporation that allows it to borrow up to $30.0 million based on a percentage of eligible accounts receivable and inventory. Outstanding borrowings at December 31, 1995, 1996 and 1997 were $7.2 million, $6.3 million and $0.0 million, respectively. Borrowings under the revolving line of credit bear interest at the lender's prime rate plus 1.0%. Also, the Company has a term loan facility with the lender, which allows it to continually borrow up to $1.0 million. Outstanding borrowings under the term loan were $0.3 million, $0.9 million and $0.0 29 million at December 31, 1995, 1996 and 1997, respectively. The Company intends to enter into a new credit facility in 1998, which will replace the existing revolving line of credit and term loan facilities. The Company does not expect to incur material costs in connection with entering into a new credit facility. In November 1997, the Company borrowed $11.25 million from Ambra to finance the acquisition of certain BOSS trademark rights. This obligation is evidenced by a secured limited recourse promissory note which matures on December 31, 2007 (the "Note"). The Note bears interest at 10.0% per annum, payable quarterly; principal is payable in full upon maturity of the Note, which is collateralized by the Domestic BOSS Trademark Rights. See "ITEM 1. Business--Licenses and Other Rights Agreements." The Company extends credit to its customers. Accordingly, the Company may have significant risk in collecting accounts receivable from its customers. The Company has credit policies and procedures which it uses to minimize its exposure to credit losses. The Company's collection personnel regularly contact customers with receivable balances outstanding beyond 30 days to expedite collection. If these collection efforts are unsuccessful, the Company may discontinue merchandise shipments until the outstanding balance is paid. Ultimately, the Company may engage an outside collection organization to collect past due accounts. Timely contact with customers by collection personnel has been effective in reducing credit losses to an immaterial amount. In 1996 and 1997, the Company's credit losses were $0.9 million and $1.2 million, respectively. In each of these years, the Company's actual credit losses as a percentage of net sales has been less than three-quarters of one percent. See "ITEM 1. Business--Credit Control." The Company believes that current levels of cash and cash equivalents ($7.4 million at December 31, 1997) plus the $4.8 million received in January 1998 from the partial exercise of the over-allotment option, together with cash from operations and its existing credit facilities, will be sufficient to meet its capital requirements for the next 12 months. SELECTED QUARTERLY RESULTS The Company's business is impacted by the general seasonal trends that are characteristic of the apparel and retail industries. In the Company's segment of the apparel industry, sales are generally higher in the first and third quarters. Historically, the Company has taken greater markdowns in the second and fourth quarters. As the timing of the shipment of products may vary from year to year, the results for any particular quarter may not be indicative of results for the full year. The Company has not had significant overhead and other costs generally associated with large seasonal variations. INFLATION The Company does not believe that the relatively moderate rates of inflation experienced in the United States over the last three years have had a significant effect on its net sales or profitability. Although higher rates of inflation have been experienced in a number of foreign countries in which the Company's products are manufactured, the Company does not believe that they have had a material effect on the Company's net sales or profitability. IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation ("SFAS 123"). SFAS 123 will begin to affect the Company in 1997 with the establishment of the 1997 Omnibus Stock Plan. The Company will adopt only the disclosure provisions of SFAS 123 and account for stock-based compensation using the intrinsic value method set forth in APB Opinion 25. In March 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, Earnings Per Share ("SFAS 128"). SFAS 128 provides a different method of calculating earnings per share than is currently used in APB Opinion 15. SFAS 128 provides for the calculation of 30 basic and diluted earnings per share. Basic earnings per share includes no dilution and is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution of securities that could share in the earnings of an entity, similar to existing fully diluted earnings per share. As required by the policies of the Securities and Exchange Commission (the "Commission"), the Company has treated the shares being sold to fund the S Corporation Distribution as outstanding prior to the Offering. The Company adopted the provisions for computing earnings per share set forth in SFAS 128 in December 1997. In June 1997, the Financial Accounting Standards Board issue two new disclosure standards. The Company's results of operations and financial position will be unaffected by implementation of these new standards. Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income ("SFAS 130"), establishes standards for reporting and display of comprehensive income, its components and accumulated balances. Comprehensive income is defined to include all changes in equity except those resulting from investments by owners and distributions to owners. Among other disclosures, SFAS 130 requires that all items that are required to be recognized under current accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. Statement of Financial Accounting Standards No. 131, Disclosure about Segments of a Business Enterprise ("SFAS 131"), establishes standards for the way that public enterprises report information about operating segments in annual financial statements and requires reporting of selected information for disclosures regarding products and services, geographic areas and major customers. SFAS 131 defines operating segments as components of an enterprise about which separate financial information is available and that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. Both SFAS 130 and SFAS 131 are effective for financial statements for periods beginning after December 15, 1997 and require comparative information for earlier years to be restated. Management believes the impact, if any, would not be material to the financial statement disclosures. 31 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The consolidated financial statements of the Company and the report of independent certified public accountants thereon are set forth on pages F-1 through F-19 hereof. 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 1998 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" are incorporated herein by reference. The Proxy Statement will be filed not later than 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K. All executive officers are designated annually by the Board of Directors and serve at the pleasure of the Board. ITEM 11. EXECUTIVE COMPENSATION The information appearing in the Proxy Statement under the caption "Executive Compensation" is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information appearing in the Proxy Statement under the caption "Security Ownership of Certain Beneficial Owners and Management" is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information appearing in the Proxy Statement under the caption "Certain Relationships and Related Transactions" is incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a)1. Financial Statements. The following financial statements, related notes and the Report of Independent Auditors, are included in response to Item 8 hereof: 32 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE --------- Report of Independent Certified Public Accountants......................................................... F-2 Consolidated Balance Sheets at December 31, 1996 and 1997.................................................. F-3 Consolidated Statements of Income for the years ended December 31, 1995, 1996 and 1997..................... F-4 Consolidated Statements of Stockholders' Equity for the years ended December 31, 1995, 1996 and 1997....... F-5 Consolidated Statements of Cash Flows for the years ended December 31, 1995, 1996 and 1997................. F-6 Notes to Consolidated Financial Statements................................................................. F-7
(a)2. Financial Statements Schedules. The following is a list of all financial statement schedules filed herewith: Schedule II--Valuation and Qualifying Accounts Schedules other than those listed above have been omitted because they are not required or are not applicable, or the required information has been included in the Consolidated Financial Statements or the Notes thereto. (a)3. Exhibits (numbered in accordance with Item 601 of Regulation S-K). See accompanying Index to Exhibits. The following is a list of Exhibits filed herewith: 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 10.28 Beverly Hills Polo Club Letter Agreement dated March 18, 1998 10.29 Beverly Hills Polo Club Letter Agreement dated February 27, 1998 10.30 Beverly Hills Polo Club Letter Agreement dated February 27, 1998 27.01 Financial Data Schedule (b) Reports on Form 8-K. None
33 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE I.C. Isaacs & Company, Inc. The audits referred to in our report to I.C. Isaacs & Company, Inc., dated February 27, 1998 which is contained in Item 8 of this Form 10-K, include the audit of the financial statement schedule listed in the accompanying index for each of the three years in the period ended December 31, 1997. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statement schedule based upon our audits. In our opinion, such schedule presents fairly, in all material respects, the information set forth therein. /s/ BDO Seidman, LLP Washington, D.C. February 27, 1998 34 SCHEDULE II I. C. ISAACS & COMPANY, INC. VALUATION AND QUALIFYING ACCOUNTS
BALANCE AT CHARGED TO BEGINNING OF COSTS AND BALANCE AT YEAR EXPENSES DEDUCTION END OF YEAR ------------ ------------ ------------- ----------- DESCRIPTION Year ended December 31, 1995 Allowance for doubtful accounts......................... $ 350,000 $ 398,000 $ (398,000) $ 350,000 Reserve for sales returns and discounts................. 445,000 5,104,000 (5,062,000) 487,000 Year ended December 31, 1996 Allowance for doubtful accounts......................... 350,000 1,194,000 (884,000) 660,000 Reserve for sales returns and discounts................. 487,000 5,956,000 (5,634,000) 809,000 Year ended December 31, 1997 Allowance for doubtful accounts......................... 660,000 1,740,000 (1,215,000) 1,185,000 Reserve for sales returns and discounts................. 809,000 10,646,000 (11,278,000) 177,000
35 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 CO-CHIEF EXECUTIVE OFFICER Date: March 26, 1998 Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. SIGNATURE TITLE DATE - ------------------------------ --------------------------- ------------------- Chairman of the Board and /s/ ROBERT J. ARNOT Co-Chief Executive - ------------------------------ Officer and Director March 26, 1998 Robert J. Arnot (Principal Executive Officer) /s/ GERALD W. LEAR President and Co-Chief - ------------------------------ Executive Officer and March 26, 1998 Gerald W. Lear Director (Principal Executive Officer) Vice President and Chief /s/ EUGENE C. WIELEPSKI Financial Officer and - ------------------------------ Director (Principal March 26, 1998 Eugene C. Wielepski Financial and Accounting Officer) /s/ IRA J. HECHLER - ------------------------------ Director March 26, 1998 Ira J. Hechler /s/ JON HECHLER - ------------------------------ Director March 26, 1998 Jon Hechler /s/ RONALD S. SCHMIDT - ------------------------------ Director March 26, 1998 Ronald S. Schmidt 36 SIGNATURE TITLE DATE - ------------------------------ --------------------------- ------------------- /s/ GARY B. BRASHERS - ------------------------------ Director March 26, 1998 Gary B. Brashers /s/ NEAL J. FOX - ------------------------------ Director March 26, 1998 Neal J. Fox /s/ ANTHONY J. MARTERIE - ------------------------------ Director March 26, 1998 Anthony J. Marterie 37 I.C. ISAACS & COMPANY, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE ----- Report of Independent Certified Public Accountants......................................................... F-2 Consolidated Balance Sheets at December 31, 1996 and 1997.................................................. F-3 Consolidated Statements of Income for the years ended December 31, 1995, 1996 and 1997..................... F-4 Consolidated Statements of Stockholders' Equity for the years ended December 31, 1995, 1996 and 1997....... F-5 Consolidated Statements of Cash Flows for the years ended December 31, 1995, 1996 and 1997................................................................................................. F-6 Notes to Consolidated Financial Statements................................................................. F-7
F-1 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS To the Board of Directors and Stockholders I.C. Isaacs & Company, Inc. Baltimore, Maryland We have audited the accompanying consolidated balance sheets of I.C. Isaacs & Company, Inc. and subsidiaries as of December 31, 1996 and 1997 and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of I.C. Isaacs & Company, Inc. and subsidiaries at December 31, 1996 and 1997 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997 in conformity with generally accepted accounting principles. /S/ BDO SEIDMAN, LLP Washington, D.C. February 27, 1998 F-2 I.C. ISAACS & COMPANY, INC. CONSOLIDATED BALANCE SHEETS
DECEMBER 31, ---------------------------- 1996 1997 ------------- ------------- ASSETS Current Cash, including temporary investments of $368,175 and $6,512,455................. $ 938,799 $ 7,422,067 Accounts receivable, less allowance for doubtful accounts of $660,000 and $1,185,000 (Note 3)............................................................ 16,582,990 23,020,077 Inventories (Notes 1 and 3)...................................................... 14,090,974 23,936,226 Prepaid expenses and other....................................................... 1,266,655 1,768,792 ------------- ------------- Total current assets............................................................... 32,879,418 56,147,162 Property, plant and equipment, at cost, less accumulated depreciation and amortization (Notes 2 and 3)..................................................... 2,399,822 2,678,688 Trademark, less accumulated amortization of $187,500 (Note 7)...................... -- 11,062,500 Goodwill, less accumulated amortization of $797,265 and $863,505................... 1,854,835 1,788,595 Deferred income taxes (Note 5)..................................................... -- 1,505,000 Other Assets (Note 3).............................................................. 122,565 260,776 ------------- ------------- $ 37,256,640 $ 73,442,721 ------------- ------------- ------------- ------------- LIABILITIES AND STOCKHOLDERS' EQUITY Current Checks issued against future deposits............................................ $ 1,150,679 $ -- Current maturities of long-term debt and revolving line of credit (Note 3)....................................................................... 6,520,418 -- Current maturities of capital lease obligations (Note 3)......................... 216,764 172,515 Accounts payable................................................................. 6,378,310 6,967,488 Accrued expenses and other current liabilities (Note 4).......................... 2,144,277 1,979,364 Accrued compensation............................................................. 194,710 235,309 Income taxes payable............................................................. -- 156,000 ------------- ------------- Total current liabilities.......................................................... 16,605,158 9,510,676 Long-term debt (Note 3) Note payable..................................................................... -- 11,250,000 Term loan........................................................................ 699,994 -- Capital lease obligations........................................................ 358,638 186,122 ------------- ------------- Total long-term debt............................................................... 1,058,632 11,436,122 ------------- ------------- Minority interest.................................................................. 200,273 -- ------------- ------------- Commitments and Contingencies (Notes 3, 4, 7 and 8) STOCKHOLDERS' EQUITY (NOTE 6): Preferred stock; $.0001 par value; 5,000,000 shares authorized, none outstanding.................................................................... -- -- Common stock; $.0001 par value; 50,000,000 shares authorized; 4,024,699 and 7,824,699 shares issued; 4,000,000 and 7,800,000 shares outstanding............ 402 782 Additional paid-in capital....................................................... 266,579 34,120,190 Retained earnings................................................................ 19,140,464 18,389,819 Treasury stock, at cost (24,699 shares).......................................... (14,868) (14,868) ------------- ------------- Total stockholders' equity....................................................... 19,392,577 52,495,923 ------------- ------------- $ 37,256,640 $ 73,442,721 ------------- ------------- ------------- -------------
See accompanying summary of accounting policies and notes to consolidated financial statements. F-3 I.C. ISAACS & COMPANY, INC. CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, --------------------------------------------- 1995 1996 1997 ------------- -------------- -------------- Net sales........................................................ $ 93,271,157 $ 118,655,253 $ 161,445,362 Cost of sales.................................................... 68,529,969 84,421,651 109,693,828 ------------- -------------- -------------- Gross profit..................................................... 24,741,188 34,233,602 51,751,534 ------------- -------------- -------------- Operating expenses Selling........................................................ 8,926,800 11,897,834 16,235,974 License fees (Note 7).......................................... 3,174,656 4,817,037 7,577,482 Distribution and shipping...................................... 2,378,728 2,669,093 4,306,566 General and administrative..................................... 5,786,524 6,243,327 7,546,105 Recovery of legal fees (Note 7)................................ -- (718,558) (117,435) ------------- -------------- -------------- Total operating expenses......................................... 20,266,708 24,908,733 35,548,692 ------------- -------------- -------------- Operating income................................................. 4,474,480 9,324,869 16,202,842 ------------- -------------- -------------- Other income (expense) Interest, net of interest income of $21,099, $18,249 and $16,045.................................................. (1,247,353) (1,365,163) (2,372,132) Other, net..................................................... (3,178) 84,795 3,001 ------------- -------------- -------------- Total other income (expense)..................................... (1,250,531) (1,280,368) (2,369,131) ------------- -------------- -------------- Income before minority interest and income taxes................. 3,223,949 8,044,501 13,833,711 Minority interest................................................ (32,593) (81,842) (134,727) ------------- -------------- -------------- Income before income taxes....................................... 3,191,356 7,962,659 13,698,984 Income tax benefit (Note 5)...................................... -- -- 1,349,000 ------------- -------------- -------------- Net income....................................................... $ 3,191,356 $ 7,962,659 $ 15,047,984 ------------- -------------- -------------- ------------- -------------- -------------- Basic and diluted net income per share........................... $ 0.80 $ 1.99 $ 3.68 Weighted average common shares outstanding....................... 3,987,651 4,000,000 4,093,699 Pro forma financial information: Income before income taxes, as presented....................... $ 3,191,356 $ 7,962,659 $ 13,698,984 Pro forma provision for income taxes (unaudited)............... 1,308,000 3,265,000 5,617,000 ------------- -------------- -------------- Pro forma net income (unaudited)............................... $ 1,883,356 $ 4,697,659 $ 8,081,984 ------------- -------------- -------------- ------------- -------------- -------------- Pro forma basic and diluted earnings per share (unaudited)..... $ 0.95 $ 1.62 Weighted average shares outstanding............................ 4,930,000 5,000,767
See accompanying summary of accounting policies and notes to consolidated financial statements. F-4 I.C. ISAACS & COMPANY, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
PREFERRED STOCK COMMON STOCK ADDITIONAL ------------------------ ---------------------- PAID-IN RETAINED TREASURY SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS STOCK ----------- ----------- --------- ----------- ---------- ----------- ----------- Balance at December 31, 1994............ -- -- 4,024,699 $ 402 $ 247,791 $14,137,214 $ (76,722) Net income.............................. -- -- -- -- -- 3,191,365 -- Stockholder distributions............... -- -- -- -- -- (2,935,866) -- Sale of treasury stock (24,699 shares)............................... -- -- -- -- 18,788 -- 61,854 ----------- ----------- --------- ----- ---------- ----------- ----------- Balance at December 31, 1995............ -- -- 4,024,699 402 266,579 14,392,704 (14,868) Net income.............................. -- -- -- -- -- 7,962,659 -- Stockholder distributions............... -- -- -- -- -- (3,214,899) -- ----------- ----------- --------- ----- ---------- ----------- ----------- Balance at December 31, 1996............ -- -- 4,024,699 402 266,579 19,140,464 (14,868) Issuance of common stock................ -- -- 3,800,000 380 33,853,611 -- -- Net income.............................. -- -- -- -- -- 15,047,984 -- Stockholder distributions............... -- -- -- -- -- (15,798,629) -- ----------- ----------- --------- ----- ---------- ----------- ----------- Balance, at December 31, 1997........... -- -- 7,824,699 $ 782 $34,120,190 $18,389,819 $ (14,868) ----------- ----------- --------- ----- ---------- ----------- ----------- ----------- ----------- --------- ----- ---------- ----------- ----------- TOTAL ---------- Balance at December 31, 1994............ $14,308,685 Net income.............................. 3,191,356 Stockholder distributions............... (2,935,866) Sale of treasury stock (24,699 shares)............................... 80,642 ---------- Balance at December 31, 1995............ 14,644,817 Net income.............................. 7,962,659 Stockholder distributions............... (3,214,899) ---------- Balance at December 31, 1996............ 19,392,577 Issuance of common stock................ 33,853,991 Net income.............................. 15,047,984 Stockholder distributions............... (15,798,629) ---------- Balance, at December 31, 1997........... $52,495,923 ---------- ----------
See accompanying summary of accounting policies and notes to consolidated financial statements. F-5 I.C. ISAACS & COMPANY, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, ------------------------------------------- 1995 1996 1997 ------------- ------------- ------------- Operating Activities Net income......................................................... $ 3,191,356 $ 7,962,659 $ 15,047,984 Adjustments to reconcile net income to net cash provided by (used in) operating activities Deferred income taxes.............................................. -- -- (1,505,000) Provision for doubtful accounts.................................... 398,451 1,193,693 1,739,865 Write off of accounts receivable................................... (398,451) (883,693) (1,214,865) Provision for sales returns and discounts.......................... 5,104,266 5,955,658 10,646,418 Sales returns and discounts........................................ (5,062,285) (5,633,525) (11,277,938) Provision for overcharges.......................................... -- -- 166,150 Depreciation and amortization...................................... 1,477,450 1,359,252 1,123,460 (Gain) loss on sale of assets...................................... 99,116 (71,800) (26,928) Minority interest.................................................. 32,593 81,842 134,727 (Increase) decrease in assets Accounts receivable................................................ 886,051 (6,850,073) (6,496,717) Inventories........................................................ (2,936,042) 232,756 (9,845,252) Prepaid expenses and other......................................... (161,621) (563,388) (502,137) Other assets....................................................... -- -- (158,211) Increase (decrease) in liabilities Accounts payable................................................... 971,255 1,268,184 589,178 Accrued expenses and other current liabilities..................... 43,334 327,320 (164,913) Accrued compensation............................................... (44,030) (16,100) 40,599 Income taxes payable............................................... -- -- 156,000 ------------- ------------- ------------- Cash provided by (used in) operating activities...................... 3,601,443 4,362,785 (1,547,580) ------------- ------------- ------------- Investing Activities Proceeds from sale of assets....................................... 13,750 71,800 38,174 Capital expenditures............................................... (669,464) (701,821) (1,104,832) ------------- ------------- ------------- Cash used in investing activities.................................... (655,714) (630,021) (1,066,658) ------------- ------------- ------------- Financing Activities Checks issued against future deposits.............................. 345,929 (67,153) (1,150,679) Issuance of common stock........................................... -- -- 33,853,991 Sale of treasury stock............................................. 80,642 -- -- Stockholder distributions.......................................... (2,935,866) (3,214,899) (15,798,629) Principal payments on debt......................................... (760,618) (1,632,216) (7,437,177) Principal proceeds from debt....................................... 291,552 783,349 -- Deferred financing costs........................................... -- (75,000) (35,000) Purchase of minority interest...................................... -- -- (335,000) ------------- ------------- ------------- Cash provided by (used in) financing activities...................... (2,978,361) (4,205,919) 9,097,506 ------------- ------------- ------------- Increase (decrease) in cash and cash equivalents..................... (32,632) (473,155) 6,483,268 Cash and Cash Equivalents, at beginning of year...................... 1,444,586 1,411,954 938,799 ------------- ------------- ------------- Cash and Cash Equivalents, at end of year............................ $ 1,411,954 $ 938,799 $ 7,422,067 ------------- ------------- ------------- ------------- ------------- -------------
See accompanying summary of accounting policies and notes to consolidated financial statements. F-6 I.C. ISAACS & COMPANY, INC. SUMMARY OF ACCOUNTING POLICIES BASIS OF PRESENTATION The consolidated financial statements include the accounts of I. C. Isaacs & Company, Inc. ("ICI"), I.C. Isaacs Europe, S.L. ("Isaacs Europe"), I.C. Isaacs & Company, L.P. (the "Partnership"), Isaacs Design, Inc. ("Design") and I. C. Isaacs Far East (collectively, the "Company"). ICI operates as the general partner of the Partnership and has a 99.0% ownership interest. The limited partner with a 1.0% ownership interest was an individual. The Company accounted for the limited partner's ownership interest as a minority interest in the accompanying consolidated financial statements. In connection with the initial public offering of its common stock, ICI purchased the limited partnership interest, at book value, from the limited partner. The Company established Isaacs Europe in July 1996 as the exclusive licensee of Beverly Hills Polo Club sportswear in Europe. Isaacs Europe did not have any significant revenue or expenses in 1996 or 1997. All intercompany balances and transactions have been eliminated. ICI terminated its Subchapter S corporation status on December 22, 1997, and became subject to federal, state and local income taxes. BUSINESS DESCRIPTION The Company, which operates in one business segment, designs, manufactures and markets full lines of sportswear for young men, women and boys under the BOSS brand in the United States and Puerto Rico, and for men and women under the Beverly Hills Polo Club brand in the United States, Puerto Rico and Europe. In February 1998, the Company began offering collections of men's sportswear under the Girbaud brand in the United States and Puerto Rico. The Company intends to begin marketing women's sportswear under the Girbaud brand in the second quarter of 1998 for delivery during the 1998 holiday season. The Company also manufactures and markets women's sportswear under various other Company-owned brand names as well as under third-party private labels. INITIAL PUBLIC OFFERING Effective December 17, 1997, ICI sold 3,800,000 shares of its common stock in an initial public offering. Net proceeds of the offering, after deducting underwriting discounts and commissions and professional fees, approximated $33.9 million. Proceeds of the offering were used to retire the revolving line of credit totaling approximately $19.5 million and to pay the final distribution to stockholders of the Subchapter S corporation of $9.3 million. The remaining $5.1 million will be used for general corporate purposes. On January 23, 1998, upon the partial exercise of an over-allotment option, the Company sold an additional 520,000 shares of its common stock and received net proceeds of approximately $4.8 million. The additional proceeds will be used for general corporate purposes. The final distribution to the stockholders represented a portion of the cumulative undistributed S corporation earnings as of December 22, 1997 (termination date of S corporation status). RISKS AND UNCERTAINTIES The apparel industry is highly competitive. The Company competes primarily with larger, well capitalized companies which may seek to increase market share through price reductions. The risk to the Company is that such a strategy may ultimately lead to reduced profit margins. In the past several years, many of the Company's competitors have switched much of their apparel manufacturing from the United States to foreign locations such as Mexico, the Dominican Republic and throughout Asia. As competitors lower production costs it gives them greater flexibility to alter prices. Over the last several years, the F-7 I.C. ISAACS & COMPANY, INC. SUMMARY OF ACCOUNTING POLICIES (CONTINUED) Company has switched a significant portion of its production to contractors outside the United States to reduce costs. Management believes that it will continue this strategy for the foreseeable future. The Company faces other risks inherent in the apparel industry. These risks include changes in fashion trends and related consumer acceptance and the continuing consolidation in the retail segment of the apparel industry. The Company's ability, or inability, to manage these risk factors could influence future financial and operating results. USE OF ESTIMATES The preparation of financial statements in accordance with generally accepted accounting principles requires management to make certain estimates and assumptions, particularly regarding valuation of accounts receivable and inventory, recognition of liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Actual results could differ from those estimates. CONCENTRATION OF CREDIT RISK Financial instruments which potentially expose the Company to concentrations of credit risk consist primarily of trade accounts receivable. The Company's customer base is not concentrated in any specific geographic region, but is concentrated in the retail industry. For the years ended December 31, 1995, 1996, and 1997 sales to one customer were 19.0%, 13.0% and 14.0% of total sales, respectively. The significant customer was the same in 1996 and 1997, but was different in 1995. The Company establishes an allowance for doubtful accounts based upon factors surrounding the credit risk of specific customers, historical trends and other information. The Company's actual credit losses as a percentage of net sales have been less than three-quarters of one percent. The Company is also subject to concentrations of credit risk with respect to its cash and cash equivalents, which it minimizes by placing these funds with high-quality institutions. The Company is exposed to credit losses in the event of nonperformance by the counterparties to the letter of credit agreements, but it does not expect any financial institutions to fail to meet their obligation given their high credit rating. INVENTORIES Inventories are stated at the lower of cost or market. Cost is determined by the first-in, first-out (FIFO) method. PROPERTY, PLANT AND EQUIPMENT Property and equipment are stated at cost. Depreciation is computed over the estimated useful lives of the assets by both straight-line and accelerated methods. Leasehold improvements are amortized using the straight-line method over the life of the lease. GOODWILL The Company has recorded goodwill based on the excess of purchase price over net assets acquired, and it is being amortized on a straight-line basis over 40 years. The Company analyzes the operating income of the women's Company-owned and private label line in relation to the goodwill amortization for evidence of impairment. The Company analyzes only the profitability of this product line because it is the remaining activity of the business acquired in 1984 which gave rise to the goodwill. F-8 I.C. ISAACS & COMPANY, INC. SUMMARY OF ACCOUNTING POLICIES (CONTINUED) LICENSES Included in other assets is the cost of certain licenses which allow the Company to manufacture and market certain branded apparel. The Company capitalized the cost of obtaining the licenses, and the cost of the licenses is being amortized on a straight-line basis over the initial term of the 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. 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 $1,498,001, $2,529,109 and $3,867,371 for the years ended December 31, 1995, 1996 and 1997, respectively. CASH EQUIVALENTS For purposes of the statements of cash flows, all temporary investments purchased with a maturity of three months or less are considered to be cash equivalents. INCOME TAXES The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes ("SFAS 109"). Under SFAS 109, deferred taxes are determined using the liability method which requires the recognition of deferred tax assets and liabilities based on differences between financial statement and income tax 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 Pro forma earnings per share for the year ended December 31, 1996 are based on pro forma net income and the weighted average number of shares of common stock outstanding (4,000,000) adjusted to include the number of shares (930,000) sold by the Company which would be necessary to fund the distribution of $9.3 million of previously earned but undistributed Subchapter S corporation earnings. Pro forma earnings per share for the year ended December 31, 1997 are based on the weighted average of the above shares outstanding prior to the initial public offering and 7,800,000 shares for the period subsequent to the initial public offering. Supplementary pro forma earnings per share for the year ended December 31, 1996 and 1997 were $.83 and $1.17, respectively. Supplementary earnings per share for the year ended December 31, 1996 are based upon the weighted average number of shares of common stock used in the calculation of pro forma net income per share increased by the sale of 722,041 shares at the initial public offering price of $10.00 per share, the proceeds of which would be necessary to repay approximately $7,220,408 of the Company's F-9 I.C. ISAACS & COMPANY, INC. SUMMARY OF ACCOUNTING POLICIES (CONTINUED) term loan and revolving credit facility. Supplementary pro forma earnings per share for the year ended December 31, 1997 are based on the weighted average of the above shares increased by 1,950,000 shares related to the repayment of the term loan and credit facility for the period prior to the initial public offering and 7,800,000 shares for the period subsequent to the initial public offering. RECENT ACCOUNTING PRONOUNCEMENTS In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS 123). SFAS 123 will begin to affect the Company in fiscal 1997 with the establishment of the 1997 Omnibus Stock Plan. The Company will adopt only the disclosure provisions of SFAS 123 and account for stock-based compensation using the intrinsic value method set forth in APB Opinion 25. In March 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, Earnings Per Share ("SFAS 128"). SFAS 128 provides a different method of calculating earnings per share than is currently used in APB Opinion 15. SFAS 128 provides for the calculation of basic and diluted earnings per share. Basic earnings per share includes no dilution and is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution of securities that could share in the earnings of an entity, similar to existing fully diluted earnings per share. As required by the policies of the Securities and Exchange Commission (the "Commission"), the Company has treated the shares being sold to fund the S Corporation Distribution as outstanding prior to the Offering. The Company adopted the provisions for computing earnings per share set forth in SFAS 128 in December 1997. There is no difference in basic and diluted earnings per share. In June 1997, the Financial Accounting Standards Board issued two new disclosure standards. The Company's results of operations and financial position will be unaffected by implementation of these new standards. Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income ("SFAS 130"), establishes standards for reporting and display of comprehensive income, its components and accumulated balances. Comprehensive income is defined to include all changes in equity except those resulting from investments by owners and distributions to owners. Among other disclosures, SFAS 130 requires that all items that are required to be recognized under current accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. Statement of Financial Accounting Standards No. 131, Disclosure about Segments of a Business Enterprise ("SFAS 131"), establishes standards for the way that public enterprises report information about operating segments in annual financial statements and requires reporting of selected information about operating segments in interim financial statements issued to the public. It also establishes standards for disclosures regarding products and services, geographic areas and major customers. SFAS 131 defines operating segments as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. Both SFAS 130 and SFAS 131 are effective for financial statements for periods beginning after December 15, 1997 and require comparative information for earlier years to be restated. Management believes the impact, if any, would not be material to the financial statement disclosures. Results of operations and financial position, however, will be unaffected by implementation of these standards. F-10 I. C. ISAACS & COMPANY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. INVENTORIES Inventories consist of the following:
DECEMBER 31, ---------------------------- 1996 1997 ------------- ------------- Raw materials.................................................. $ 3,146,405 $ 4,742,653 Work-in process................................................ 3,345,545 1,864,569 Finished goods................................................. 7,599,024 17,329,004 ------------- ------------- $ 14,090,974 $ 23,936,226 ------------- ------------- ------------- -------------
2. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consists of the following:
DECEMBER 31, ESTIMATED -------------------------- USEFUL 1996 1997 LIVES ------------ ------------ ----------- Land................................................ $ 185,660 $ 185,660 Building and improvements........................... 5,301,761 5,339,371 18 years Machinery, equipment and fixtures................... 8,570,577 9,485,268 5-7 years Other............................................... 1,035,442 1,167,655 various ------------ ------------ 15,093,440 16,177,954 Less accumulated depreciation and amortization...... 12,693,618 13,499,266 ------------ ------------ $ 2,399,822 $ 2,678,688 ------------ ------------ ------------ ------------
3. LONG-TERM DEBT Long-term debt consists of the following:
DECEMBER 31, --------------------------- 1996 1997 ------------ ------------- Term loan (a).................................................... $ 899,998 $ -- Revolving line of credit (a)..................................... 6,320,414 -- Notes payable (b)................................................ -- 11,250,000 Capital lease obligations (c).................................... 575,402 358,637 ------------ ------------- Total............................................................ $ 7,795,814 $ 11,608,637 Less current maturities of long-term debt and revolving line of credit......................................................... 6,520,418 -- Less current maturities of capital lease obligations............. 216,764 172,515 ------------ ------------- $ 1,058,632 $ 11,436,122 ------------ ------------- ------------ -------------
(a) The Company has a renewable term loan agreement with a borrowing limit of $1,000,000. The term loan facility is payable in 60 monthly installments of $16,667 and is collateralized by property and equipment. The term loan facility may be renewed for periods of 60 months at the option of the lender. F-11 I. C. ISAACS & COMPANY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 3. LONG-TERM DEBT (CONTINUED) The term loan facility bears interest at the prime rate of interest plus 1.0% (effectively 9.5% at December 31, 1997) and is payable monthly. The revolving line of credit agreement and letter of credit arrangement provide that the Company may borrow up to 80% of the net amount of eligible accounts receivable and a portion of imported inventory, as defined in the financing agreement. The revolving line of credit expires on June 30, 1998. Borrowings under the revolving line of credit and outstanding letters of credit (limited to $10.0 million) may not exceed $30.0 million and bear interest at the prime rate of interest plus 1.0% (effectively 9.5% at December 31, 1997). Additional borrowings available under the revolving line of credit and letter of credit agreements are approximately $23 million at December 31, 1997. Borrowings under these agreements are collateralized by the Company's accounts receivable imported inventories and other assets. Outstanding letters of credit approximated $3.7 million at December 31, 1997. Among the provisions of the financing agreement are requirements to maintain specified levels of working capital and net worth. Retained earnings of approximately $8.0 million are restricted as to the payment of dividends. Average short-term borrowings and the related interest rates are as follows:
YEAR ENDED DECEMBER 31, ---------------------------- 1996 1997 ------------- ------------- Borrowing under revolving line of credit....................... $ 6,320,414 $ -- Weighted average interest rate................................. 9.25% 9.50% Maximum month-end balance during year.......................... 11,024,807 23,192,303 Average balance during the year................................ $ 9,814,896 $ 17,144,863
(b) In November 1997, the Company purchased certain BOSS trademark rights from Brookhurst, Inc. and issued a $11,250,000 secured limited recourse promissory note to finance this acquisition. The note bears interest at 10%, payable quarterly; principal is payable in full on December 31, 2007. The note is collateralized by the domestic BOSS trademark rights. (c) The Company leases equipment under various capital leases which are included in property, plant and equipment for $1,048,037 at December 31, 1996 and 1997. Amortization expense related to assets under capital leases amounted to $211,512, $191,490, and $169,107 for the years ended December 31, 1995, 1996 and 1997, respectively. As of December 31, 1997, future net minimum lease payments under capital leases that have initial or remaining noncancelable lease terms in excess of one year are as follows: 1998.............................................................. $ 202,827 1999.............................................................. 189,551 2000.............................................................. 6,296 --------- Total minimum lease payments...................................... 398,674 Less: amount representing interest................................ (40,037) --------- Present value of net minimum lease payments....................... 358,637 Less: current portion............................................. (172,515) --------- Long-term capital lease obligations............................... $ 186,122 --------- ---------
F-12 I. C. ISAACS & COMPANY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 4. ACCRUED EXPENSES Accrued expenses consist of the following:
DECEMBER 31, -------------------------- 1996 1997 ------------ ------------ Royalties......................................................... $ 1,194,637 $ 901,925 Accrued professional fees......................................... 150,000 150,000 Payable to salesmen............................................... 152,701 127,634 Severance agreements.............................................. 103,745 -- Payroll tax withholdings.......................................... 145,736 139,214 Customer credit balances.......................................... 254,244 240,530 Property taxes.................................................... -- 136,700 Accrued interest.................................................. -- 174,401 Other............................................................. 143,214 108,960 ------------ ------------ $ 2,144,277 $ 1,979,364 ------------ ------------ ------------ ------------
5. INCOME TAXES Concurrently with completing its initial public offering, ICI terminated its subchapter S corporation status. Therefore, for the years ended December 1995 and 1996 and for the period ended December 22, 1997 (the day prior to completing the offering) no provision has been made in the accompanying financial statements for federal and state income taxes since such taxes were the liability of the stockholders. In connection with the offering, ICI became subject to federal and state income taxes. In conjunction with becoming subject to federal and state income taxes, ICI recorded a deferred tax asset and a corresponding tax benefit of approximately $1.5 million in accordance with SFAS 109. The income tax provision (benefit) consists of the following:
YEAR ENDED DECEMBER 31, 1997 ----------------- Current Federal.................................................................. $ 128,000 State and local.......................................................... 28,000 ----------------- 156,000 Deferred................................................................... (1,505,000) ----------------- $ (1,349,000) ----------------- -----------------
F-13 I. C. ISAACS & COMPANY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 5. INCOME TAXES (CONTINUED) Deferred income taxes reflect the net effects of temporary differences between the carrying amounts of assets and liabilities for financial and income tax reporting purposes. Significant items comprising ICI's deferred tax asset are as follows:
DECEMBER 31, 1997 ----------------- Depreciation............................................................... $ 602,000 Allowance for doubtful accounts............................................ 486,000 Inventory valuation........................................................ 372,000 Other...................................................................... 45,000 ----------------- $ 1,505,000 ----------------- -----------------
The pro forma provision for income taxes represents the income tax provisions that would have been reported had ICI been subject to federal and state income taxes for the entire period. The pro forma estimated effective tax rate was 41.0%. The pro forma income tax provision consists of the following:
YEARS ENDED DECEMBER 31, -------------------------- 1996 1997 ------------ ------------ Current Federal......................................................... $ 2,900,000 $ 4,796,000 State........................................................... 465,000 1,021,000 ------------ ------------ 3,365,000 5,817,000 Deferred.......................................................... (100,000) (200,000) ------------ ------------ $ 3,265,000 $ 5,617,000 ------------ ------------ ------------ ------------
A reconciliation between the statutory and effective tax rates is as follows:
YEARS ENDED DECEMBER 31, ------------------------ 1996 1997 ----------- ----------- Federal statutory rate........................................................ 35.0% 35.0% State and local taxes, net of federal benefit................................. 4.5 5.0 Nondeductible entertainment expense........................................... 1.0 .5 Nondeductible goodwill amortization........................................... .5 .5 --- --- 41.0% 41.0% --- --- --- ---
6. STOCK OPTIONS In May 1997, ICI adopted the 1997 Omnibus Stock Plan. Under the 1997 Omnibus Stock Plan, ICI may grant qualified and nonqualified stock options, stock appreciation rights, restricted stock or performance awards, payable in cash or shares of common stock, to selected employees. The 1997 Omnibus Stock Plan will be administered by the Board of Directors. The Company has reserved 500,000 shares of common F-14 I. C. ISAACS & COMPANY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 6. STOCK OPTIONS (CONTINUED) stock for issuance under the 1997 Omnibus Stock Plan. ICI intends to grant stock options to selected employees in 1998. 7. COMMITMENTS AND CONTINGENCIES The Company rents real and personal property under leases expiring at various dates through 2003. Certain of the leases stipulate payment of real estate taxes and other occupancy expenses. Minimum annual rental commitments under noncancelable operating leases in effect at December 31, 1997 are summarized as follows:
COMPUTER TRUCKS SHOWROOMS HARDWARE MACHINERY TOTAL ---------- ------------ ---------- ---------- ------------ 1998................................ $ 111,742 $ 484,243 $ 126,252 $ 41,143 $ 763,380 1999................................ 57,720 266,706 48,231 3,654 376,311 2000................................ 57,720 251,743 22,224 -- 331,687 2001................................ 57,720 263,417 5,556 -- 326,693 2002................................ 43,290 262,584 -- -- 305,874 Thereafter.......................... -- 218,820 -- -- 218,820 ---------- ------------ ---------- ---------- ------------ $ 328,192 $ 1,743,513 $ 202,263 $ 44,797 $ 2,322,765 ---------- ------------ ---------- ---------- ------------ ---------- ------------ ---------- ---------- ------------
Total rent expense is as follows:
YEAR ENDED DECEMBER 31, -------------------------------------- 1995 1996 1997 ---------- ------------ ------------ Minimum rentals........................................... $ 344,047 $ 773,987 $ 855,347 Other lease costs......................................... 566,533 459,823 463,934 ---------- ------------ ------------ $ 910,580 $ 1,233,810 $ 1,349,281 ---------- ------------ ------------ ---------- ------------ ------------
During 1990, the Company executed a license agreement for the manufacture and sale of "sportswear" under the "BOSS" trademark. This agreement had an expiration date in December 1999 with additional options to extend it through 2004. The agreement provided for certain minimum license fees and additional license fees of 5.0% of denim sales and 6.0% of non-denim sales, as defined. Total license fees amounted to $2,753,422, $4,209,750 and $6,448,204 for 1995, 1996 and 1997, respectively. In February 1993, the owner of the "HUGO BOSS" trademark filed suit against the licensor of the "BOSS" trademark in the United States and several licensees, including the Company. The complaint alleged trademark infringement related to use of the "BOSS" and "HUGO BOSS" trademarks. However, the complaint did not challenge the exclusive right of the Company to use the "BOSS" trademark in connection with the manufacture and sale of certain clothing as set forth in its exclusive license agreement. The Company executed certain agreements in November 1997 which resulted in the settlement (the "Settlement") of the BOSS trademark litigation described above. As part of the BOSS litigation settlement, the Company borrowed $11.25 million to finance the acquisition of certain BOSS trademark rights. This obligation is evidenced by a secured limited recourse promissory note which matures on December 31, 2007 (the "Note"). The Note bears interest at 10.0% per annum, payable quarterly; principal is payable in full upon maturity of the Note, which is collateralized by the domestic BOSS trademark rights. F-15 I. C. ISAACS & COMPANY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 7. COMMITMENTS AND CONTINGENCIES (CONTINUED) The Settlement allowed the Company to acquire the domestic rights to the BOSS trademark for use in the manufacture and sale of apparel, subject to certain restrictions as set forth in the agreements, and the Company's transfer of the foreign rights to the BOSS trademark to Ambra, Inc., a wholly-owned subsidiary of Hugo Boss AG ("Ambra"). The Company also entered into a foreign rights manufacturing agreement with Ambra under which the Company obtained the license to manufacture apparel in foreign countries in which the Company is currently manufacturing BOSS products for sale in the United States and Puerto Rico. Under the foreign rights agreement, the Company will pay annual royalties of 12.5% on the first $32.0 million of net sales (the "Minimum Net Sales") attributable to apparel manufactured in specified foreign countries for each of the first four years of the agreement; on the first $20.0 million of such net sales in year five of the agreement and on the first $16.0 million of such net sales in years six through ten of the agreement. For the first four years of the agreement, an additional royalty of 5.0% is payable annually on net sales from $84.0 million to approximately $105.3 million and an additional royalty of 4.0% is payable annually on net sales in excess of $158.0 million. Additional royalties in years five through ten of the agreement increase for certain corresponding sales levels. To the extent that the Company does not achieve the Minimum Net Sales requirements, it will have the right, in order to avoid termination of the foreign rights agreement, to pay royalties as if it had achieved such net sales requirement. The foreign rights agreement has an initial term of four years but may be extended at the Company's option through December 31, 2007. The domestic BOSS trademark is subject to an option to purchase from the Company under conditions set forth in the agreements. The percentage of BOSS sportswear sales to total sales was 66.3%, 72.2%, and 74.6% for the years ended December 31, 1995, 1996 and 1997, respectively. Subsequent to September 30, 1997, the Company and one of its insurance carriers reached an agreement whereby the insurance company will provide reimbursement for the legal costs associated with the litigation described above. The Company records the reimbursement when received from the insurance carrier. As part of this agreement, the Company received $718,558 in 1996 and $117,435 in 1997. In September 1993, the Company purchased a license agreement for the manufacture and sale of certain apparel under the Beverly Hills Polo Club (BHPC) trademark. The agreement was amended in 1996, expires in December 1998, with options to extend through 2004. The licensor may terminate the agreement if the Company does not meet minimum sales requirements as set forth in the agreement. The agreement provides for minimum annual license fees or license fees of 5% of sales whichever is greater. Also, the Company is required to spend 1% of annual sales on product advertising. The license fees were $421,234, $607,287 and $1,129,278 for 1995, 1996 and 1997, respectively. In 1996, Isaacs Europe executed an exclusive license for the manufacture and sale, in Europe, of sportswear under the BHPC trademark. The license agreement has an initial term of three years with three one-year renewal options. The agreement provides for minimum annual license fees, beginning in the second year, or 6% of sales, whichever is greater. F-16 I. C. ISAACS & COMPANY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 7. COMMITMENTS AND CONTINGENCIES (CONTINUED) The minimum license fees under the Beverly Hills Polo Club agreements are as follows:
YEAR ENDING DECEMBER 31, - ---------------------------------------------------------------------------------- 1998.............................................................................. $ 674,000 1999.............................................................................. 304,000 ---------- $ 978,000 ---------- ----------
In November 1997 and as further amended in March 1998, the Company entered into an exclusive license agreement with Girbaud Design, Inc. and its affiliate to manufacture and market men's jeanswear, casualwear, outerwear and active influenced sportswear under the Girbaud brand and certain related trademarks in the United States, Puerto Rico and the U.S. Virgin Islands. The agreement has an initial term of two years and may be extended at the option of the Company for up to a total of ten 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: 1998............................................................ $1,200,000 1999............................................................ $1,500,000
Beginning with the first quarter of 1998, the Company is obligated to pay the greater of actual royalties earned or 8.3% of the minimum guaranteed royalties for that year. The Company is required to spend at least $350,000 in advertising for the men's Girbaud brand in 1998 and $500,000 each year thereafter while the agreement is in effect. Subsequent to December 31, 1997, the Company entered into an exclusive license agreement with Girbaud Design, Inc. and its affiliate to manufacture and market women's jeanswear, casualwear and active influenced sportswear under the Girbaud brand and certain related trademarks in the United States, Puerto Rico and the U.S. Virgin Islands. The agreement has an initial term of two years and may be extended at the option of the Company for up to a total of ten years. The Company paid an initial license fee of $600,000. Under the agreement, the Company is required to make payments to the licensor in an amount equal to 6.25% of net sales of regular licensed merchandise and 3.0% of certain irregular and closeout licensed merchandise. Payments are subject to guaranteed minimum annual royalties as follows: 1999.............................................................. $ 700,000 2000.............................................................. $ 800,000
Beginning with the first quarter of 1999, the Company is obligated to pay the greater of actual Royalties earned or 8.3% of the minimum guaranteed royalties for that year. The Company is required to spend at least $550,000 in advertising for the women's Girbaud brand in 1998 and $400,000 each year thereafter while the agreement is in effect. In addition, the Company is required to contribute $190,000 per year to the licensor's advertising and promotional expenditures for the Girbaud brand. The Company is party to employment agreements with five executive officers which provide for specified levels of compensation and certain other benefits. The agreements also provide for severance payments from the termination date through the expiration date under certain circumstances. F-17 I. C. ISAACS & COMPANY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 7. COMMITMENTS AND CONTINGENCIES (CONTINUED) In February 1998, the Company announced that it intends to close its Newton, Mississippi manufacturing facility. This closure will occur during the second quarter of 1998, resulting in a charge in the range of $200,000 to $300,000 made against earnings in the first quarter of 1998. The production in this facility, the majority of which is jeans, will be transferred to third party independent contractor facilities in Mexico where the Company currently has jeans manufactured. During 1998 the Company intends to construct a new distribution center in Milford, Delaware. The Company anticipates that this new facility will cost approximately $6.0 million and will be financed through a mortgage loan. 8. 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, 1997. Pension expense for 1995, 1996 and 1997 was approximately $310,000, $284,000 and $373,000, respectively, and includes the following components:
YEARS ENDED DECEMBER 31, ---------------------------------- 1995 1996 1997 ---------- ---------- ---------- Service cost of current period............................................... $ 206,000 $ 193,000 $ 211,000 Interest on the above service costs.......................................... 17,000 15,000 17,000 ---------- ---------- ---------- 223,000 208,000 228,000 Interest on the projected benefit obligation................................. 485,000 555,000 618,000 Expected return on plan assets............................................... (445,000) (526,000) (566,000) Amortization of prior service cost........................................... 16,000 16,000 42,000 Amortization of transition amount............................................ 31,000 31,000 31,000 Amortization of loss......................................................... -- -- 20,000 ---------- ---------- ---------- Pension cost................................................................. $ 310,000 $ 284,000 $ 373,000 ---------- ---------- ---------- ---------- ---------- ----------
F-18 I. C. ISAACS & COMPANY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 8. RETIREMENT PLAN (CONTINUED) The following table sets forth the Plan's funded status and amounts recognized at December 31, 1995, 1996 and 1997:
YEARS ENDED DECEMBER 31, ---------------------------------------- 1995 1996 1997 ------------ ------------ ------------ Vested benefits......................................................... $ 5,987,000 $ 6,730,000 $ 7,500,000 Nonvested benefits...................................................... 37,000 56,000 43,000 ------------ ------------ ------------ Accumulated benefit obligation.......................................... 6,024,000 6,786,000 7,543,000 Effect of anticipated future compensation levels and other events....... 457,000 862,000 983,000 ------------ ------------ ------------ Projected benefit obligation............................................ 6,481,000 7,648,000 8,526,000 ------------ ------------ ------------ Fair value of assets held in the plan................................... 6,139,000 7,357,000 7,852,000 ------------ ------------ ------------ Excess of projected benefit obligation over plan assets................. (342,000) (291,000) (674,000) Unrecognized net loss from past experience different from that assumed............................................................... 344,000 661,000 935,000 Unrecognized prior service cost......................................... 159,000 143,000 342,000 Unamortized liability at transition..................................... 155,000 124,000 93,000 ------------ ------------ ------------ Net prepaid periodic pension cost....................................... $ 316,000 $ 637,000 $ 696,000 ------------ ------------ ------------ ------------ ------------ ------------
With respect to the above table, the weighted average discount rate used to measure the projected benefit obligation was 8%; 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 prepaid expenses and other current assets in the accompanying consolidated balance sheets. 9. FOURTH QUARTER ADJUSTMENT During the fourth quarter ended December 31, 1997 the Company increased its allowance for doubtful accounts by $400,000 which had the effect of reducing net income by $400,000 or $0.08 per share. 10. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during the year for interest amounted to $1,272,794, $1,389,023 and $2,213,776 for 1995, 1996 and 1997, respectively. During 1995 the Company purchased property and equipment totaling $316,245 by issuing notes payable. During 1997, the Company purchased a trademark totaling $11,250,000 by issuing a note payable. F-19 EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION - ------------- --------------------------------------------------------------------------------------------------- *3.01 Amended and Restated Certificate of Incorporation *3.02 Amended and Restated By-Laws *4.01 Specimen Common Stock Certificate *10.01(a) Form of Amended and Restated Shareholders' Agreement *10.01(b) Form of Amendment No. 1 to Amended and Restated Shareholders' Agreement *10.02 Employment Agreement dated as of May 15, 1997, between the Registrant and Robert J. Arnot *10.03 Employment Agreement dated as of May 15, 1997, between Registrant and Gerald W. Lear *10.04 Employment Agreement dated as of May 15, 1997 between Registrant and Gary B. Brashers *10.05 Employment Agreement dated as of May 15, 1997, between the Registrant and Eugene C. Wielepski *10.06 Employment Agreement dated as of May 15, 1997, between the Registrant and Thomas Ormandy *10.07 1997 Omnibus Stock Plan *10.08(a) Accounts Financing Agreement dated June 16, 1992 *10.08(b) Covenant Supplement to Accounts Financing Agreement dated June 16, 1992 *10.08(c) Inventory and Equipment Security Agreement Supplement to Accounts Financing Agreement dated June 16, 1992 *10.08(d) Trade Financing Agreement Supplement to Accounts Financing Agreement (Security Agreement) dated June 16, 1992 *10.08(e) Amendment to Financing Agreements dated October 30, 1992 *10.08(f) Second Amendment to Financing Agreements dated January 4, 1993 *10.08(g) Third Amendment to Financing Agreements dated March 10, 1993 *10.08(h) Fourth Amendment to Financing Agreements dated May 1, 1993 *10.08(i) Fifth Amendment to Financing Agreements dated January 1, 1994 *10.08(j) Sixth Amendment to Financing Agreements dated September 1, 1993 *10.08(k) Seventh Amendment to Financing Agreements dated August, 1994 *10.08(l) Eighth Amendment to Financing Agreements dated December 31, 1994 *10.08(m) Ninth Amendment to Financing Agreements dated April, 1995 *10.08(n) Tenth Amendment to Financing Agreements dated June 23, 1995 *10.08(o) Eleventh Amendment to Financing Agreements dated January 1, 1996 *10.08(p) Twelfth Amendment to Financing Agreements dated June 25, 1996 *10.08(q) Thirteenth Amendment to Financing Agreements dated August, 1996 *10.08(r) Term Promissory Note dated June, 1996
EXHIBIT NO. DESCRIPTION - ------------- --------------------------------------------------------------------------------------------------- *10.08(s) Trademark Collateral Assignment and Security Agreement dated June 16, 1992 *10.09 Form of Indemnification Agreement *10.10(a) BOSS Worldwide Rights Acquisition Agreement dated September 30, 1997 *10.10(b) Promissory Note dated November 5, 1997 *10.10(c) Guaranty of Promissory Note dated November 5, 1997 *10.10(d) Trademark Assignment dated November 5, 1997 *10.10(e) Trademark Assignment dated November 5, 1997 *10.10(f) Trademark Assignment dated November 5, 1997 *10.10(g) Trademark Assignment dated November 5, 1997 *10.10(h) Assignment and Assumption Agreement dated November 5, 1997 *10.10(i) Escrow Agreement dated November 5, 1997 *10.10(j) Collateral Assignment of Trademarks dated November 5, 1997 *10.10(k) Termination of License Agreement dated November 5, 1997 *10.10(l) Logo Typeface *10.10(m) Certain Provisions in Settlement Agreement *10.11(a) Foreign BOSS Rights Acquisition Agreement dated September 30, 1997 *10.11(b) Trademark Assignment dated November 5, 1997 *10.11(c) Assignment and Assumption Agreement dated November 5, 1997 +*10.11(d) Concurrent Use Agreement dated November 5, 1997 +*10.11(e) Foreign Manufacturing Rights Agreement dated November 5, 1997 *10.11(f) Option Agreement dated November 5, 1997 *10.11(g) Secured Limited Recourse Promissory Note dated November 5, 1997 *10.11(h) Note Assumption Agreement dated November 5, 1997 *10.11(i) Guaranty of Promissory Note dated November 5, 1997 *10.11(j) Agreement Regarding Consent to Release and Waiver of Brookhurst Note Claims dated November 5, 1997 *10.11(k) Certain Provisions in Settlement Agreement *10.11(l) Indemnification Agreement dated November 5, 1997 *10.12 Uniforms License Agreement dated November 5, 1997 *10.13 Trademark License Agreement Relating to BOSS Golf and Other Marks dated November 5, 1997 *10.14 Beverly Hills Polo Club Exclusive Domestic License Agreement dated December 14, 1995 *10.15 Beverly Hills Polo Club Amendment to Exclusive License Agreement (Men's) dated June 3, 1997 *10.16 Beverly Hills Polo Club Exclusive Domestic License Agreement dated June 1, 1993 *10.17 Beverly Hills Polo Club Assignment of Licenses (Women's) dated August 31, 1993
EXHIBIT NO. DESCRIPTION - ------------- --------------------------------------------------------------------------------------------------- *10.18 Beverly Hills Polo Club Amendment (Women's) dated September 1, 1993 *10.19 Beverly Hills Polo Club Amendment to Exclusive License Agreement (Women's) dated June 3, 1997 *10.20 Beverly Hills Polo Club Amendment to Exclusive License Agreement (Men's dated July 29, 1997 *10.21 Beverly Hills Polo Club International Exclusive License Agreement (Wholesale) dated August 15, 1996 *10.22 Beverly Hills Polo Club Amendment to Exclusive License Agreement (Wholesale) dated June 3, 1997 *10.23 Beverly Hills Polo Club International Exclusive License Agreement (Retail) dated August 15, 1996 *10.24 Beverly Hills Polo Club Amendment to International Exclusive License Agreement (Retail) dated June 3, 1997 *10.25 Beverly Hills Polo Club Amendment to Exclusive License Agreement dated July 29, 1997 10.26(a) Girbaud Trademark License and Technical Assistance Agreement dated January 15, 1998 10.26(b) Girbaud Trademark License and Technical Assistance Agreement for Women's Collection dated March 4, 1998 10.26(c) Cancellation Agreement dated March 4, 1998 *10.27(a) Defined Benefit Pension Plan *10.27(b) First Amendment to Defined Benefit Pension Plan 10.28 Beverly Hills Polo Club Letter Agreement dated March 18, 1998 10.29 Beverly Hills Polo Club Letter Agreement dated February 27, 1998 10.30 Beverly Hills Polo Club Letter Agreement dated February 27, 1998 *21.01 List of Subsidiaries 27.01 Financial Data Schedule
- ------------------------ * Previously filed with the Company's Registration Statement on Form S-1 (SEC File No. 333-37155). + 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. EX-10.26(A) 2 EXHIBIT 10.26(A) TRADEMARK LICENSE AND TECHNICAL ASSISTANCE AGREEMENT AGREEMENT effective this 15th day of January 1998, by and between LATITUDE LICENSING CORP., ("Licensor") a corporation to be organized under the laws of the State of Delaware having its offices at 22 Carpenter Plaza - Suite 217 - Wilmington, DE 19810. and I.C. ISAACS & COMPANY, L.P. ("Licensee"), limited partneship organized and existing under the laws of Delaware having its offices at 3840 Bank Street, Baltimore, Maryland 21224-2522 and 350 Fifth Avenue, Suite 1029 - New York 10118. W I T N E S S E T H WHEREAS, Licensor is the holder of all rights to license certain trademarks and tradenames hereinafter defined (the "Marks") within the Territory hereinafter defined (the "Territory") which Marks are known throughout the world in connection with creative design and products of high quality in various fields of fashion and accessories; and WHEREAS, Licensor possesses certain technical know-how and expertise with respect to the design, manufacture, promotion and marketing of the Products, as said term is defined hereinafter; and WHEREAS, Licensor, due to the character of its designers and the quality of its techniques, has acquired worldwide recognition and prestige in the field of fashion design, and Licensee is desirous of consulting and cooperating with Licensor in the design and marketing of said Products; and WHEREAS, Licensee wishes a license to engage in the manufacture, importation, distribution, and sale of certain products that bear the Marks and to avail itself of the creative design, know-how and quality control services of Licensor; and WHEREAS, Licensee is desirous of securing the design and technical expertise and quality control services of Licensor in connection with manufacturing and promoting the Products; WHEREAS, Licensee has requested, and Licensor has agreed to grant to Licensee, the right and license to use the Marks upon and subject to the terms and conditions hereinafter set forth; NOW, THEREFORE, IN CONSIDERATION of the mutual covenants and undertakings hereinafter set forth, the parties have agreed as follows: 1. Grant 1.1 Licensor hereby grants to Licensee, and Licensee hereby accepts, for the term of this Agreement pursuant to the terms, conditions and covenants hereinafter set forth, an exclusive license (even against Licensor and its affiliated entities): (a) to manufacture and/or cause to be manufactured anywhere in the world, and to import, promote, distribute and sell within the territory with exclusivity two of Licensor's collections of clothes as follows: a "men's Jean" collection, and a "men's Casual" collection including outerwear, as further described in Exhibit C (the "Products") fashioned after archival and newer designs created by Licensor or an affiliate thereof, and designs provided or recommended by Licensee and approved by Licensor (which approval shall not be unreasonably withheld), under the terms and conditions hereinafter set forth and bearing the trademarks set forth in Exhibit A attached hereto (the "Marks"). Licensee agrees to label the men's Jeans collection and the men's casual collection differently so that there is some product line differentiation. Products authorized by this Agreement shall include tops and bottoms which incorporate active influences in terms of silhouettes, fabrics, details and other technical influences as adapted to Jean wear and Casual wear including but not limited to products such as tee-shirts, polo shirts, sweat shirts, sweat pants, coats and trousers. (b) To use and display the Marks within the Territory, but solely in advertising and promoting the Products within the limits herein set forth, to the specific exclusion of any use of said Marks in combination with any other trademarks not approved by Licensor or in any form in connection with any other products or with Licensee's overall business operation (except for accurate references to the relationship between Licensor and Licensee and as required by law) or in Licensee's trade or corporate names, except as may otherwise be provided herein. (c) To use the know-how, designs, copyrights, and patents, if any, of Licensor and its affiliates in connection with the manufacture of the Products. 1.2 The License herein granted shall only extend to products designed, manufactured, promoted, advertised and sold according to high standards of quality and in full compliance with the terms and conditions hereof, so as to maintain, enhance and protect the image and prestige associated with the Marks. 1.3 The Trademark Owner hereby represents to Licensee (i) that Licensor has all necessary rights to grant to Licensee the exclusive license in the Territory to import, promote, distribute and sell the Products in accordance with the terms of this Agreement and that Trademark Owner will not, directly or indirectly, take any action or cause others to take any action inconsistent therewith, (ii) that Licensor, Trademark Owner or an affiliated entity has or will secure the rights to authorize Licensee to manufacture products at least in the countries listed in Exhibit B hereto (the "Manufacturing Countries"), (iii) that Trademark Owner will take all 2 reasonable and diligent steps in the Territory and the Manufacturing Countries to obtain and maintain valid and in effect trademark registrations for the Marks to cover all the Products, and (iv) that it will fully cooperate with Licensor and Licensee in implementing the provisions of this Agreement which relate to the protection of the Marks, in protecting the rights of Licensee to use the Marks, and in preventing the importation into the Territory of Products manufactured by or for other licensees of the Marks outside of the Territory. Licensee will take reasonable and diligent steps to ensure that its foreign manufacturers do not, directly or indirectly, distribute any merchandise branded with the Marks which is manufactured for Licensee to anyone other than Licensee (and its agents) for distribution in the Territory. 1.4 Notwithstanding any other provision of this Agreement, Licensor hereby acknowledges that Licensee manufactures, promotes and distributes other collections of apparel, including but not limited to the branded BOSS collections and the Beverly Hills Polo Club collections, and that nothing in this Agreement is intended to restrict in any way Licensee's ability to conduct those other businesses as presently conducted or as they may be expanded in the future in Licensee's regular course of business. 1.5 In connection with the development and implementation of the licensing relationship between the parties and in order to resolve any potential issues with respect to the labeling of certain of Licensee's Boss product lines, Licensee acknowledges that Licensor or its affiliates own the horizontal, rectangular label shown in Exhibit D hereto as positioned on the fly of pants. In furtherance thereof, Licensee agrees that, commencing with garment collections to be shown to the trade at the February 1999 Magic Show (USA) and thereafter, Licensee will not manufacture or distribute any pants which have on the fly of the pant a label which bears the horizontal rectangular shape and size of the label shown in Exhibit D hereto. From and after February 1999, Licensee may continue to distribute existing inventory of pants bearing the horizontal, rectangular label shown in Exhibit D until such inventory is exhausted, and Licensee's customers may likewise continue to sell products bearing such labels which are in their possession or were on order prior to February 1999 until such inventory is exhausted. Notwithstanding anything else in this Agreement, Licensor (for itself and its affiliates) agrees that it will not object to the use by Licensee (and its affiliates) of the particular labels and markings to be positioned on the fly of pants which are shown on Exhibit E attached hereto and others not limited by clor, or size (if larger) or design (is similar). 2. Term and Territory 2.1 The initial term of this Agreement shall commence and become effective as of the date first written above and shall expire on December 31, 1999 unless sooner terminated as hereinafter provided. Licensor shall coordinate with the prior Licensee of the Products in the Territory for a smooth transition so that Licensee has the ability to fill orders for Products from existing and new customers, without any gap in time, as soon as the former licensee ceases to ship Products, and Licensor shall as soon as possible (and not later than 30 days after the date hereof) advise Licensee of the date in which shipments can commence in accordance with this sentence (which date shall not be later than May 1, 1998). Licensee shall have the option to renew this Agreement 3 for an additional term of three years commencing on January 1, 2000 and ending on December 31, 2002. In addition, Licensee shall the option to renew this Agreement for an additional term of five years commencing on January 1, 2003 and ending on December 31, 2007. 2.2 The License herein granted shall only extend to the United States of America (Fifty states and the District of Columbia), Puerto Rico and the U.S. Virgin Islands, and shall include sales made to all branches of the United States military for distribution in United States military installations anywhere (the "Territory"). 2.3 Licensee shall promptly refer to Licensor all requests or inquiries relating to the Products from outside the Territory or from within the Territory if the request or inquiry concerns the possible sale or delivery outside the Territory. Likewise, Licensor shall (and shall cause its affiliates to) promptly refer to Licensee all requests or inquiries relating to the Products from within the Territory or from outside the Territory if the request or inquiry concerns the possible sale or delivery inside the Territory. 2.4 Licensee recognizes and acknowledges that similar products may be under license to other licensees for areas outside the Territory and that no Products will be sold, directly or for export, shipped to a destination or delivered by Licensee outside the Territory. Licensee shall not, directly or indirectly, market, distribute or sell products outside the Territory and shall use its reasonable commercial efforts to ensure that products it has sold or distributed are not resold or redistributed outside the Territory, nor shall Licensee sell or distribute Products to any person or entity which it knows, has reason to believe or has been notified by Licensor that such person or entity has exported or intends to export Products from the Territory. Licensee shall exercise reasonable commercial efforts to ensure that products manufactured by or for other licensees of the Marks outside the Territory are not exported to the Territory in violation of Licensee's exclusivity under this Agreement. 3. Use of the Trademarks 3.1 Licensee shall have the right, during the term of this Agreement, to the use of the Marks with respect to and only with respect to the Products and the Territory as defined herein (and in other parts of the world as it relates to manufacturing Products bearing the Marks). All Products manufactured, sold and distributed pursuant to this Agreement shall bear one or more of the Marks except as hereinafter provided and no such Products shall be sold or otherwise distributed by Licensee under any trademark other than one or more of the Marks. Licensee shall not use the Marks on or in connection with products manufactured from designs not approved pursuant to this Agreement. 3.2 The license herein granted shall apply only to those Marks included in Exhibit A and shall not include nor be deemed to include any other trademarks which Licensor or its affiliates and subsidiaries may now or hereafter own. Licensor agrees during the term of this Agreement to maintain and uphold the reputation and goodwill attendant to the Marks and not to 4 take any action which is likely to adversely affect the public image of the Marks and the quality of the products sold thereunder. 3.3 Except as provided herein, Licensee further agrees that it will not reproduce or use the distinguishing styling features or the patterns provided by Licensor or an affiliate or subsidiary of Licensor for the manufacture and sale of Products under any label or trademark other than the Marks or for the Products. Nothing in this Agreement is intended to preclude Licensee from utilizing in any of its other product collections, any designs, markings, garment features, coloring, method of fabrication, materials, construction, or patterns that are common in the trade or merely functional or utilitarian in nature. 3.4 Sales by Licensee shall be deemed to have been made by Licensor for purposes of trademark registration and all uses of the Marks by Licensee shall be deemed to inure to Licensor's benefit. Licensee will not, at any time, knowingly do or suffer to be done any act or thing which may, in any way, adversely affect any rights of Licensor in and to the Marks or any registration thereof. Licensee further agrees that it shall not sell the Products as miscuts, seconds, irregulars or as otherwise damaged merchandise except as otherwise permitted under this Agreement, if it were detrimental in Licensor's reasonable opinion to the goodwill embodied in the Marks. 3.5 Licensor reserves all rights to the Marks except as specifically granted herein to Licensee and may exercise such rights at any time. Licensee acknowledges that Licensor is the sole and rightful owner of all right, title and interest in the Marks and shall not claim any title to the Marks nor any right to use said Marks except as provided herein. Licensee shall not question, attack, contest or otherwise impugn the validity of the Marks or their registration(s), including, but not limited to, in connection with any action brought seeking to enforce the terms of this Agreement. The use of the Marks pursuant to or as specified in this Agreement shall be for the benefit of Licensor, and shall not vest in Licensee any title to or right or presumptive right to expand or continue such use. Licensee, for itself and its affiliated companies, covenants and agrees that it shall, at no time, adopt or use any trademark, tradename or corporate name which is likely to cause confusion with any of the Marks except with the prior written consent of Licensor. The provisions of this Paragraph shall survive the expiration or earlier termination of this Agreement. 3.6 All Products bearing the Marks shall be manufactured exclusively from designs and specifications provided by Licensor and its affiliates or otherwise selected by Licensee from the archives of Licensor and its affiliates or created by Licensee and submitted to Licensor for approval under the terms of this Agreement (which approval shall not be unreasonably withheld). No Products other than those manufactured in strict compliance therewith shall bear the Marks. Licensee shall use only the Marks indicated in Exhibit A and only in connection with the Products as defined in Article 1. The license herein granted shall confer unto Licensee no proprietary rights whatsoever in the name Marithe & Francois Girbaud, the Marks, logos or the goodwill now attached or hereafter to become attached thereto. Without Limiting Licensee's ability to conduct 5 its other businesses, Licensee shall only use the Marks as provided herein and in full compliance with the terms and conditions hereof and only for the duration of this Agreement. 3.7 Notwithstanding any other provision of this Agreement, Licensor acknowledges that Licensee intends to select from existing and archival designs, fabrics and stylistic features associated with the Marks and the Products and also to recommend to Licensor modifications, updates, and desirable additions to those designs and stylistic features associated with the Marks and products bearing the Marks so as to maintain the image for the Products, the Marks and the tags, labels and other collateral used with the Products that is suitable for successful distribution in the Territory at competitive price ranges. Licensor agrees to consider in good faith and reasonably all such design and stylistic feature recommendations made by Licensee and, unless they significantly detract from the goodwill associated with the marks, to approve the implementation of those recommendations by Licensee subject to Licensor's right to review and approve samples under this Agreement. Licensee shall have discretion to select designs and stylistic features associated with former collections of apparel sold under the Marks for incorporation into Licensee's Products and shall have no obligation to accept any designs, fabrics or stylistic features that, in licensee's reasonable opinion, would not be commercially successful in the Territory or would be too expensive to manufacture in light of the expected marketability. 3.8 Subject to Section 3.7, the use of the Marks, including the specific design, artwork or graphics thereof and any tags, wrappers, letterhead, invoices, stationery or other items incorporating the Marks must be in full compliance with the Licensor's written policies and procedures, as they are communicated to Licensee from time to time, and is, in each instance, subject to the prior written approval of Licensor, which approval shall not be unreasonably withheld. Licensor can only promulgate policies and procedures that change the guidelines for use of the Marks prospectively and not with respect to any Products already approved by Licensor or for Product collections which have been designed. The Marks may only be used by Licensee as part of an approved label and may only be used in their entirety. Licensee shall not alter or modify the Marks in any manner whatsoever nor shall Licensee add to, remove or abbreviate any part or distinctive feature thereof including script, graphics, colors or logos. 3.9 Licensee shall cooperate fully and in good faith with Licensor for the purpose of securing, preserving and protecting Licensor's rights in and to the Marks in the Territory and the Manufacturing Countries. Without limiting the rights of Licensee under this Agreement, Licensee shall execute, deliver and/or file any and all documents which Licensor reasonably requests to make fully effective or to implement the provisions of this Agreement relating to the ownership or registration of the Marks in the Territory and Manufacturing Countries. All costs and expenses for any application for registration or extension of registration with respect to the Products within the Territory and Manufacturing Countries shall be borne by Licensor. 3.10 Licensee will use the Marks in the Territory strictly in compliance with the legal requirements obtaining therein. Whenever any of the Marks is used on any Product or item of packaging or labeling or in any advertisement or other promotion material, it must be followed, in the case of a registered trademark by the registration symbol, i.e. -Registered Trademark-, and in the case of all other 6 trademarks by the symbol -TM-, or other appropriate symbols of similar import acceptable to Licensor. Licensee shall duly display all other notices with respect to the Marks on the Products and otherwise as are or may be required by the trademark laws and regulations applicable within the Territory or any portion thereof. 3.11 Any copyright, design patent or any similar industrial or intellectual property right which exist or may be created in any sketch, design, sample, print, package, label, tag or the like used uniquely in connection with the Products shall be the property of Licensor, and if not created by Licensor they shall be deemed works made by Licensee for hire for Licensor. Licensee shall place a copyright notice whenever required by Licensor to protect said copyrights. Licensee shall not knowingly, at any time, do or cause to be done any act or thing which may adversely affect any rights of Licensor in such sketches, designs, samples, prints, packages, labels, tags and the like and will do at Licensor's cost all things reasonably required by Licensor to preserve and protect said rights. Nothing herein is intended to preclude Licensee from utilizing in any of its other product collections, any designs, markings, garment features, coloring, method of fabrication, materials, construction, or patterns that are not uniquely associated with Licensor's products or which are otherwise common in the trade or merely functional in nature, and Licensee shall not assign any rights thereof to Licensor. Licensee does not warrant that any proprietary rights will exist in any designs or other materials created by or for it in connection with the Products. 4. Provision left blank intentionally. 5. Royalties 5.1 Subject to the provisions of Section 1.4 above, Licensee agrees to exercise its best efforts to promote and maximize sales of the Products throughout the Territory. Licensee shall conduct its activities pursuant to this Agreement so as to enhance the goodwill and reputation of the Marks and shall not engage in conduct known to be detrimental to the same. 5.2 In consideration of the rights granted to Licensee pursuant to this Agreement, Licensee shall pay to the Licensor for each Calendar Year during the Term, or any portion thereof, Royalties in an amount of 6.25% of all Net Sales (the "Royalties"). The Royalties for close-out sales under Section 5.9 and irregulars shall be 3.0% of Net Sales of the close-out Products. In no event shall the amount of Royalties (including close-out Royalties) due and payable for any Calendar Year be less than the minimum amount ("Minimum Royalties") set forth for each Calendar Year as follows: Minimum 1998 $1,200,000 1999 $1,500,000 2000 $2,000,000 2001 $2,500,000 2002 $3,000,000 2003 $3,000,000 2004 $3,000,000
7 2005 $3,000,000 2006 $3,000,000 2007 $3,000,000
The term "Calendar Year" shall mean January 1 through December 31 of each year of the term. For purposes of paying Royalties, the first Calendar Year of this Agreement commences on January 1, 1998. 5.3 The term "Net Sales" shall mean the invoiced price (excluding sales tax, insurance and shipping charges) for Products shipped or sold by Licensee or any of its subsidiaries or affiliates, or authorized sub-licensees, during the relevant period, less credits granted for Products actually returned and accepted, and reasonable customary and usual trade discounts and mark-downs actually granted to non-affiliated customers and an allowance for bad debt. Bad debt shall consist of any accounts receivable of a customer who is under a bankruptcy or insolvency proceeding, or which is otherwise uncollected despite Licensee's collection efforts for at least 120 days after the due date, and shall be considered a reduction of the invoiced price for Products only up to an aggregate amount of 1.5% of Net Sales during each Calendar Year of the term and any renewal of this Agreement. For purposes of calculating royalties due for any sale, transfer or other distribution of Products made otherwise than at arm's length, the "Net Sales" price of such Products shall be deemed to be the "Net Sales" price of a corresponding sale to unaffiliated independent retailers. The royalties herein provided shall be due and paid on sales of any and all Products bearing the Marks by Licensee or its affiliates. Except as may be otherwise provided herein, no deduction shall be made for any discount, mark-down, advertising allowance, other allowances of any kind or for any purpose whatsoever or costs incurred by Licensee. Royalties shall not be due to Licensor on products sold by Licensee to Licensor under this Agreement. 5.4 In the event that Licensee sells Products in a currency or currencies other than United States dollars, the "Net Sales" price, with respect to such sales, shall be computed on the basis of the average exchange rates of said currency or currencies into U.S. dollars, as of the close of business on the last day of each of the three months of each applicable calendar quarter as published in The Wall Street Journal. 5.5 The Minimum Royalties shall be paid in equal monthly payments on the last day of each calendar month during the term. Payments for the initial term will start on January 31, 1998, and there will be equal monthly payments of $100,000 each, with the last payment for 1998 due on December 31, 1998. For all other Calendar Years, there will be 12 equal monthly payments each in the amount of 1/12 of the Minimum Royalties payable for that Calendar Year as stated above. Actual Royalties shall be paid quarterly within thirty (30) days of the last day of each calendar quarter with respect to sales of Products during said calendar quarter. Within 30 days of the end of a calendar quarter commencing in Calendar Year 1998, Licensee will calculate actual Royalties owed to Licensor based on actual Net Sales of Products during the preceding calendar quarter and shall by the 30th day following the end of the quarter remit to Licensor the difference between the total Royalties paid during the calendar quarter as Minimum Royalties and the actual Royalties due for that quarter. If the Minimum Royalties are greater than the actual Royalties due 8 in any quarter, then Licensee shall not owe Licensor any further payments for that calendar quarter. There will be no deductions or set offs from any payments whatsoever, unless agreed to by the parties. 5.6 Licensee shall, within thirty (30) days of the end of each calendar quarter and within ninety (90) days of the end of each Calendar Year during the term hereof, provide Licensor with a certified statement of sales of the Products during the immediately preceding calendar quarter or Calendar Year, as the case may be. Said statement shall be signed by a duly authorized officer of the Licensee and be certified by said officer as true and accurate. Said statement shall conform to a format agreed upon between the parties and, at the option of Licensor, be subdivided by Product. 5.7 All royalties payable hereunder shall be paid directly to a bank designated by Licensor, in writing, as depositary (the "Depositary"). 5.8 Late payments of royalties shall bear interest at the Citibank, N.A., New York prime rate plus 3% per annum, but, in no event shall exceed the maximum rate permitted under applicable law. 5.9 For the purpose of this Agreement, close-outs are defined as Products sold at a reduction of twenty (20%) percent or greater from Licensee's regular full list price of such Products and Licensee acknowledges that the excessive or indiscriminate disposal of close-outs may adversely affect the prestige attached to the Marks. Licensee shall therefore exercise its reasonable efforts to plan and conduct its manufacturing and sales operations with a view to limiting the quantity of close-outs and to disposing of all Products through normal channels of distribution and otherwise only through stores specialized in high quality close-outs, including outlets, such as Ross Stores, T.J. Maxx, Filene's Basement, and the like, that offer for sale other similar designer labels. All sales of close-outs shall comply with the terms specified herein. 5.10 Only genuine end-of-season close-outs may be sold under the label, or with any reference to the Marks. No close-outs shall be shipped until at least ninety (90) days shall have elapsed from the date of the first substantial delivery by Licensee of a season's collection of which it is a part. 5.11 For purposes of calculating Royalties, the Net Sales price of such authorized close-out sales shall be based on the actual reduced Net Sales price for said Products. On excessive close-out sales (which shall be defined as close out sales equivalent to more than 30% of Net Sales for the first Calendar Year of this Agreement and to more than 10% for any subsequent Calendar Year of this Agreement), the royalties shall be computed at the normal Net Sales price as applied to the initial standard (i.e. non-close-out) selling price of the Product. Within sixty (60) days of the close of each calendar quarter and within ninety (90) days of the close of each Calendar Year, Licensee shall furnish to Licensor a statement setting forth the amount of total regular sales and total close-out sales. At the option of Licensor, said statement shall be subdivided by Product class. 9 5.12 Receipt or acceptance by Licensor of any royalty payments due hereunder, in an amount or amounts which are less than amount or amounts due, shall not constitute a waiver of Licensor's rights in or to the balance thereof which shall remain due and payable pursuant to the terms of this Agreement. Any excess Royalties paid by Licensee to Licensor hereunder during any Calendar Year which were paid in error shall be counted as a credit against future Royalties due to Licensor. 5.13 Licensee shall provide Licensor for each calendar quarter within forty-five (45) days of the end of the preceding calendar quarter, reports setting forth in reasonable detail sales by U.S. dollars and unit shipments with respect to each product collection and models in each product collection, aggregate sales to regular price customers, off-price customers, large retailers, specialty retailers and sales by significant geographic segments. Such report shall be in accordance with Licensee's current reporting capabilities and format. 6. Designs and Technical Assistance 6.1 Licensor shall provide Licensee with recommendations for a full and varied collection of Products (as a "collection" is customarily defined in the trade) for each of the four seasons (fall, winter, spring, summer) that Licensor in consultation with Licensee and subject to Section 3.7 above, shall deem appropriate for sale in the Territory. Licensor shall develop each seasonal collection in a timely manner so that Licensee shall have sufficient time to produce the Products but in any event in accordance with the following minimum lead times:
Collection Delivery Date by Licensor Fall August 15 Winter November 15 Spring February 15 Summer May 15
6.2 The recommended collection will contain a basic core offering of jeans and shirts in addition to a casual informal sportswear line of tops, bottoms and outerwear pieces designed to be worn separately or collectively. Licensor will be conscious in its design and selection of the Products for the Territory as to the cost and commercial availability of the raw materials, the degree and sophistication of the construction, the cost of manufacturing, and the current fashion trends in vogue with the target customers in the Territory. The final collections shall be determined by Licensor and Licensee in close consultation with each other, with the final approval authority residing in Licensor who shall act in good faith in considering Licensee's garment proposals and Licensee's concern's with any designs or features proposed by Licensor. 6.3 Subject to the rights of Licensee under Section 3.7, Licensor shall make available to Licensee in New York, on a basis sufficiently timely to meet scheduled deliveries to customers 10 as stated in section 6.1 above, such samples, patterns, sketches, photographs, technical specifications and other materials and information relating to the design and manufacture of the Products (all such materials and information are hereinafter referred to as "Technical Information") as they may create in the normal course of their operations and as may be reasonably necessary to enable Licensee to carry out its obligations under this Agreement. Without limiting the generality of the foregoing, the Technical Information will include the basic cuttings for the collections, the patterns for each model, a sample of each model in base size, technical specifications concerning the making and fitting of each model and information concerning the selection, fabrication and treatment of materials and fabrics (including the names and references of the manufacturers) and supplies and accessories (labels, designs, etc.). If Technical Information, including finished samples, is shown to any third person with or without the prior written consent of Licensor, Licensee shall take any and all action necessary to ensure that such third person fully conforms to all applicable terms and conditions hereof, specifically to avoid any unauthorized use of the Technical Information. All such Technical Information shall remain the sole property of Licensor and Licensee shall have no ownership interest therein subject to the second sentence of Section 3.3 above. Upon the expiration or earlier termination of this Agreement, all Technical Information in the possession or under the control of Licensee shall be immediately returned to Licensor. In order to reimburse Licensor for its costs, and not as a purchase price or with any transfer of ownership, Licensee shall pay to Licensor an amount equal to two and one half (2.5) times the ordinary wholesale price for any samples so ordered, F.O.B. place of shipment, plus shipping costs and duties, of all samples furnished to Licensee hereunder. Such amounts shall be paid within thirty (30) days of delivery. Licensor shall not request that Licensee that Licensee make any material changes or modifications to product designs approved by Licensor under this Agreement and any such changes shall be prospective only. 6.4 Licensor must keep a current archive of products previously offered under the Marks in an accessible location in the New York Metropolitan area. Licensor will maintain in the New York Metropolitan area at least one representatives of Licensor with authority to act for Licensor under this Agreement and to facilitate consultation between Licensor and Licensee. Any archive piece borrowed by Licensee from Licensor shall be logged by Licensor and must be returned within three (3) months. Licensee acknowledges that the failure to return any archive piece within the required time shall be detrimental to Licensor, the Marks and the Products and may subject Licensee to liability for damages to Licensor. Licensee may remove small pieces of fabric from archival pieces for the purpose of sourcing the fabric necessary to manufacture the Products. 6.5 Prior to manufacturing, selling or distributing any Products in any seasonal collection, Licensee shall make available for inspection in New York by Licensor CAD (computer aided design) samples (with proposed colors and fabrics) of each Product in any proposed seasonal collection sufficiently far in advance of first manufacture to permit Licensee to make any changes requested by Licensor. Licensee shall notify Licensor of the date on which samples are made available and of the scheduled first production date. Licensor shall inspect said samples and either approve or reject the same, in writing, no later than five (5) days after the inspection date. Any sample not rejected in a timely fashion shall be deemed approved. Once a sample has been 11 approved, Licensee shall not make any material changes (and Licensor shall not require any changes) to the design thereof, including materials, fabrics, colors and quality of workmanship, without Licensor's prior written approval. All samples of Products submitted to Licensor pursuant to this Paragraph 6.5 shall be provided at Licensee's sole cost and expense. As an alternative to the process described herein, Licensee shall provide to Licensor a calendar of product development, prototyping and manufacture similar to that which Licensee follows in connection with its BOSS product lines, and Licensor shall have the right to review and comment on the Products in New York as they go through development at such points in the development process noted on the calendar as Licensor deems appropriate, provided that Licensor must do so while there is sufficient time for Licensee to make changes requested by Licensor. No Products shall be displayed, manufactured, distributed (including offerings for samples) and/or sold by Licensor unless such Products are at least equal in quality, workmanship, fit and design to the samples previously approved by Licensor in accordance with this Paragraph 6.5, all materials used shall conform to the specifications indicated in the Technical Information concerning each Product approved by Licensor. 6.6 In order to control the production and quality of manufacturing, Licensor may, at its option, send one (1) representative to Licensee's facilities, five (5) times a year, (corresponding to the five fashion seasons). Licensor shall be responsible for the cost of business class round-trip air fare for such visits from Europe to the United States and for all lodging and food expenses related to such visits. The Licensee may, at its option and at its cost, send technicians to Licensor's facilities, in order to obtain any information necessary to the realization of the collection (but without prejudice to Licensor's obligation to provide any necessary Technical Information in New York). Such visit shall be at a date to be agreed upon by both parties, on or before the delivery of each collection. Nothing in this Section shall grant Licensor the right to inspect or visit any portion of any facility where Licensee conducts its other lines of business. 6.7 Licensee agrees that it shall treat all non-public information relating to the design, manufacture, marketing and sale of the Products as Proprietary Information. No Proprietary Information other than manufacturing specifications and finished samples, shall be shown to any third party without the prior consent of Licensor. Licensee shall use its reasonable efforts to ensure that its employees, agents, subcontractors (if any) and others subject, directly or indirectly, to its control, do not disclose or make any unauthorized use of any Technical Information. Likewise, Licensor shall treat all non-public information relating to the manufacture, sourcing, marketing, forecasts and sale of the Products by Licensee and its agents as Proprietary Information of Licensee. No Proprietary Information shall be disclosed to any third party or used for any purpose not related to this Agreement by Licensee or its agents. 6.8 Subject to the other provisions of this Agreement, any Designs and other materials provided or approved by Licensor for use under this Agreement shall remain the property of Licensor and are licensed hereunder solely and exclusively for use in connection with the manufacture and sale of the Products in the Territory. Licensor may use and permit others to use said Designs and other material in any manner they desire, provided that such use does not conflict with any rights granted to Licensee hereunder. Licensee specifically acknowledges that 12 such Designs and other materials may be used by Licensor and other licensees on the Products in jurisdictions outside the Territory and on products other than Products anywhere in the world. 6.9 Licensee shall take all reasonable precautions to protect the secrecy of the materials, samples, designs and Technical Information described in this Article 6 prior to their commercial distribution or the showing of samples for sale. 6.10 (a) In order to maintain the distinctiveness of the image, quality and special characteristics of the Products, Licensor may recommend, but not require, that Licensee use fabrics and yarns produced by manufacturers specified by Licensor, so long as the quality of products and price and reasonable delivery terms shall be equivalent to those offered by other manufacturers. When Licensee elects to deal with such manufacturers, it shall also use its reasonable commercial efforts to maintain a good commercial relationship with these manufacturers. In this regard, Licensee undertakes, except in the case of defective, low quality or untimely goods, not to make any changes or cancellations of orders of such fabrics and yarns contrary to commercial usage. (b) Certain collections of Products or certain particular Products are and may in the future be fabricated in special fabrics and yarns, developed by Licensor. These fabrics and yarns carry with them a particular name and are or will be protected by the registration of a mark or fabrication patent. These fabrics or yarns constitute an essential and distinctive element of such Products and it is thereby necessary, to protect the originality and technical components of such fabrics and yarns, to license a very limited number of manufacturers with the right to use the technical components and the know-how to produce these fabrics. Licensee shall consequently deal with certain manufacturers designated by Licensor in order to manufacture such Products. A copy of orders placed by Licensee with such manufacturers shall be sent at the same time to Licensor. Licensee shall be entitled to quality of products and price and delivery terms from such manufacturers equivalent to those given to other licensees of Licensor outside the Territory. Licensee undertakes, except in the case of defective, poor quality or late delivery of goods, to maintain a good commercial relationship with these manufacturers and not to make any changes or cancellations of orders of such fabrics and yarns contrary to commercial usage. 7. Manufacture and Technical Data 7.1 Licensor shall consult with Licensee regarding the manufacturing process, methods of production, treatment, fabrics and technical specifications necessary for the production of high quality products from designs approved by Licensor. All such information shall be strictly confidential and shall not be disclosed by Licensee nor its agents and/or employees without the prior written consent of Licensor. 7.2 The Products shall not be manufactured by anyone other than Licensee and/or quality manufacturers chosen by Licensee. Licensee shall take reasonable and diligent steps necessary to ensure that such manufacturer fully conforms to all applicable terms and conditions hereof, that said manufacturer produces only those Products specifically ordered by Licensee and in the quantities ordered without over-runs or extra labels, and, that said manufacturer controls 13 the manufacture and production to avoid any possible use that might be detrimental to the Marks, or unauthorized use of the Technical Information. 7.3 Licensor reserves the right to require Licensee to terminate a manufacturer whose workmanship has suffered, in the reasonable opinion of Licensor, a deterioration in quality which is not satisfactorily corrected within thirty (30) days after notice thereof to Licensee, or any manufacturer who, in Licensor's reasonable opinion fails to comply with any provision hereof or whose conduct, if committed by Licensee, would constitute a breach of this Agreement, provided that Licensor must make a reasonable allowance for completion of current orders by the manufacturer. 7.4 No disapproved or otherwise defective Products shall be sold by Licensee under or with any reference whatsoever to the Marks if it were detrimental to the Marks. Should any Products manufactured and sold by Licensee be defective, in the sole opinion of Licensor, Licensee shall, at its sole cost and expense, take any and all reasonable action necessary to withdraw and remove said Products from the market through repurchase or otherwise. 8 Advertising and Promotion 8.1 Throughout the duration of this Agreement, Licensee shall spend upon advertising of the Products throughout the Territory an annual minimum of three percent (3%) of Net Sales but no less than $500,000 per year, except that for the time between the effective date and December 31, 1998, the minimum advertising expense shall be only $350,000 (the "Minimum Advertising Expense"). This Minimum Advertising Expense is an independent obligation, and amounts spent on advertising Licensee shall not be deducted from Royalties nor from any other amounts due and owing from Licensee to Licensor under this Agreement. 8.2 Advertising expenses shall be defined as direct expenses for promotions such as television, radio, printed press and billboards advertising, celebrity endorsements, event sponsorships, in store point of sale items, store promotions, and new shop in shop fixturing, at the exclusion of any other expenses, except that the participation in trade shows described in Article 10 below shall be included in the Minimum Advertising Expenses. 8.3 Licensee shall exercise every reasonable effort to promote and advertise the Products throughout the Territory and shall, prior to the end of each calendar year, submit to Licensor, in reasonable detail, proposed plans and budgets for the subsequent annual promotional campaign. Licensor shall cooperate, as may reasonably be required by Licensee, in furnishing, at cost, such advertising and promotional material, as is available to Licensor and which appears suitable, in Licensor's opinion, for the Territory. Licensor and Licensee shall cooperate closely in the creation and execution of advertising programs. 8.4 Licensee shall submit to Licensor for review, prior to submission to the advertising agency, any campaign briefing materials, and shall consult with Licensor before accepting any creative response to such briefing materials. Visual representation of Products and of the Trademarks shall be subject to written approval by Licensor (which shall not be unreasonably 14 withheld) prior to public distribution or display in any medium provided, however, that any advertising or promotional materials supplied by Licensor will not require its approval prior to dissemination by Licensee. Except as otherwise provided in this Agreement, all advertising campaigns in the Territory shall correspond to the international advertising theme and image worldwide. Licensor will make available to Licensee all advertising campaigns produced worldwide. The Licensee shall cause its advertising staff and/or agency to consult with Licensor's designated advertising agency and/or creative staff, at least twice a year, for a review of Product image and with a view toward coordinating and enhancing worldwide advertising strategy. Approved advertising and promotional materials shall not be disapproved by Licensor for use within the same campaign. 8.5 Licensee shall submit to Licensor, for its prior approval, not to be unreasonable withheld, any and all advertising for any medium referring to the Products before publication or dissemination thereof. Should Licensor deem said materials appropriate for use outside the Territory, it shall have the right to use the same, provided, however, any additional costs incurred thereby, if any, for advertising agency fees, talent, residuals, copyright clearances, photographers fees, or otherwise shall be paid and secured by Licensor. 8.6 Licensee shall, on January 31st of each year commencing January 31, 1999, inform Licensor of its expenditures in fulfillment of its advertising and promotional obligations during the preceding year and shall account to Licensor for the use thereof. 8.7 Failure on the part of Licensee to make the Minimum Advertising Expenses required hereunder during any contract year shall constitute a material breach hereof. Notwithstanding, Licensor may, at its sole discretion, permit Licensee to cure such breach by either paying to Licensor the amount by which the actual expenses fell short of the Minimum required or, by allowing Licensee to increase its advertising obligations for the immediately subsequent year by an amount equal to the deficiency. 8.8 Notwithstanding any other provision of this Agreement, Licensor acknowledges and agrees that Licensee may primarily focus its advertising and promotion of the Products on the Girbaud brand and is not required (i) to implement or follow as its primary campaign for the Products in the Territory the "BE" theme adopted by Licensor in other geographic areas, or (ii) to apply the word "BE" to the Products themselves by either temporary or permanently affixed means. 8.9 Licensor shall arrange. at Licensee's request, the participation of one or both of the designers - Marithe and Francois Girbaud - when available, in certain social events. Such participation shall be at Licensee's expense with first class hotels and restaurants and first class air travel and local transportation. 15 9. Sales 9.1 Licensee shall keep Licensor fully and promptly informed of all its successive price lists and sales policies relating to the Products which information shall be kept by Licensor in strict confidence and not be used for any purpose not relating to this Agreement. Licensee hereby acknowledges that repeated untimely deliveries by Licensee to its customers (except for force majeure) and/or the delivery, distribution and sale of defective Products would adversely affect the reputation of the Licensor and the prestige of the Marks and shall constitute a material breach of this Agreement. 9.2 All Products manufactured, distributed or sold by Licensee shall be marked, labeled, packaged, advertised, distributed and sold in accordance with the terms and conditions of this Agreement and in accordance with all laws, rules and regulations applicable within the Territory and any subdivision thereof and, in such a manner as to not mislead or deceive the public. 10. Trade Shows 10.1 Licensee shall participate in and contribute to the costs and expenses of two (2) annual fashion shows in the Territory ("the Fashion Shows"). Licensee shall, within ten (10) business days of receipt of the invoice pay to Licensor an amount of $75,000 twice per Calendar Year provided that Licensor actually implements the Fashion Shows. Licensee's obligation to participate in the Fashion Shows by paying the amounts indicated above shall be an independent obligation and no sums incurred by Licensee under this provision shall be deducted from Royalties payable to Licensor, nor from any other amounts due and owing from Licensee to Licensor under the terms of this Agreement (except that they will count under Section 8.2 above). 10.2 Licensee may participate, at its discretion, in other major trade shows, which participation shall be at its sole cost and expense. Any expenditures so incurred shall be considered advertising expenses pursuant to Section 8.2 hereof. Should Licensor organize cooperative exhibitions at such other trade shows in the Territory with its licensees, Licensee shall participate in such shows and shall share in the cost and expense thereof in an amount representing its pro rata cost and expense, which amount shall be agreed upon prior to the event. 11. Access to Books and Records 11.1 Licensee shall, at its sole cost and expense, maintain complete and accurate sets of books and records (including the originals or copies of documents supporting entries herein) covering all transactions arising out of, in connection with or relating to this Agreement. 11.2. Licensor and/or its duly authorized representatives shall have the right (subject to confidentiality obligations reasonably acceptable to Licensee) upon five (5) days prior written notice, to examine and audit said books, records and all other documents in Licensee's possession or under Licensee's control relating to the subject matter of and terms of this Agreement. Said right shall be exercisable during normal business hours once each Calendar Year during the term 16 hereof and, once a year during the three Calendar Years immediately following the expiration or earlier termination hereof. All said books, records and documents shall be kept and made accessible during the full term hereof and for three years thereafter. 11.3 Any auditor designated by Licensor to audit and examine Licensee's books, records and documents, shall be approved in advance by Licensee, such approval not to be unreasonably withheld. In the event that an audit or examination of Licensee's books, records and documents reveals an underpayment of any Royalties due hereunder, Licensee shall immediately pay to Licensor the amount of such deficiency, plus interest thereon from the date said Royalties were due at the interest sale rate specified in Paragraph 5.8 hereof. 11.4 In the event that an audit of Licensee's books and records shall reveal that Licensee's Royalties were underpaid by an amount equal to 5% or more in any year, Licensee shall bear the cost of said audit. 12. Protection of the Marks 12.1 Licensor represents that the Marks are and shall be during the term of this Agreement valid and enforceable trademarks in the Territory and the Manufacturing Countries; that they are owned by Licensor or that Licensor is authorized and empowered by the registered owner to grant the License herein contained and that this Agreement does not conflict to any other Agreement to which Licensor is a party, that the use of the Marks in the Territory will not infringe upon any other trademark in the Territory and that the Licensor will defend, indemnify and hold harmless Licensee against any claim against Licensee (including by its manufacturers and customers) in connection with the use of the Marks and any damages paid in settlement or as part of a judgment in such claim (including attorney's fees and costs). 12.2 Licensee shall promptly notify Licensor, in writing, of any infringement, threatened infringement, or otherwise unauthorized use or threatened use of the Marks, or confusingly similar trademarks or tradenames, whether in connection with the Products or otherwise, of which it may have knowledge or suspicion. In the event of an infringement, threatened infringement, or otherwise unauthorized use of the Marks, or confusingly similar trademarks or tradenames in the Territory or Manufacturing Countries, Licensee shall take such immediate action as may reasonably be necessary to protect the Mark(s) and the rights of the Licensor therein, until Licensor is in a position to take whatever action is required (provided that Licensor must act diligently and promptly). Licensor and Licensee shall mutually decide what actions shall be taken, including any actions in collaboration with investigators or U.S. Customs, cease and desist correspondence, and application for injunctive relief, and shall designate counsel for such purpose, and, in such case, Licensee shall pay one half of the cost and expense incurred in such actions in the Territory or Manufacturing Countries, up to and including an amount equal to 0.25% of Net Sales, payable for each year during which any such actions are taken, brought and/or pending, within thirty (30) days of receipt of the documented invoice. Licensor warrants payment of the balance by Licensor. In the event of an award of monetary damages, the proceeds thereof shall be shared pro rata to the expenses paid by the parties. Licensee shall abide by regulations, laws and 17 practices applicable to the Products in force or use in the Territory in order to safeguard Licensor's rights to the Marks. 12.3 Licensee shall cooperate with Licensor in any action based upon the unauthorized manufacture, sale and/or use in the Territory or outside the Territory by any of Licensee's manufacturers and suppliers of Products, labels and tags bearing the Mark at Licensee's cost (but without further liability from Licensee to Licensor provided that Licensee has met its obligations under this Agreement). 12.4 Upon the expiration or earlier termination of this Agreement, Licensee shall immediately and absolutely cease and discontinue the use of the Marks in any manner or form whatsoever subject, however, to the provisions of Article 14 hereof. 13. Termination 13.1 In the event of a breach of a payment obligation by Licensee under this Agreement not cured in all material respects within ten (10) days from the receipt of a written notice thereof, or in the event of any other breach of this Agreement by Licensee not cured in all material respects within forty-five (45) days from the date of receipt of written notice thereof, this Agreement may be terminated by the Licensor. The exercise or failure to exercise the aforementioned right of termination during an extended period of time shall not be considered a waiver by Licensor of any right to terminate this Agreement nor of any other legal or equitable rights and remedies. A good faith payment dispute shall not deemed a breach of this Agreement by Licensee. In the event of a breach of this Agreement by Licensor not cured in all material respects within forty-five (45) days from the date of receipt of written notice thereof, this Agreement may be terminated by the Licensee. The exercise or failure to exercise the aforementioned right of termination during an extended period of time shall not be considered a waiver by Licensee of any right to terminate this Agreement nor of any other legal or equitable rights and remedies. 13.2 This Agreement shall immediately terminate and, Licensor shall be relieved of all liability to Licensee, if Licensee: (i) admits in writing its inability, or is unable, to pay its debts as they mature, (ii) makes a general assignment for the benefit of creditors, (iii) is adjudicated a bankrupt or files a petition or answer, seeking reorganization or an arrangement with creditors, (iv) files a petition or otherwise avails itself of any bankruptcy or insolvency law or statute of any country or any state or subdivision thereof, now or hereafter in effect, (v) suffers a petition or proceeding filed against it under any provision of the Bankruptcy Act or any other insolvency law or statute of any country or any state or subdivision thereof, which petition or proceeding is not dismissed within sixty (60) days after the commencement thereof, (vi) has a receiver, trustee, custodian, conservator or other person appointed by any court to take charge of its affairs or assets or business and such appointment is not vacated or discharged within sixty (60) days thereafter, or (vii) discontinues its business as it relates to the Products or suspends it, for whatever cause, for more than 120 consecutive days. 18 14. Remaining Inventory 14.1 Upon the expiration or earlier termination of this Agreement, for any reason whatsoever, Licensee shall, within thirty (30) days thereof, deliver to Licensor a complete and accurate schedule of Licensee's inventory of Products, work in progress and raw materials. Such schedule shall be prepared as of the close of business on the date of such termination. 14.2 Licensor shall thereupon have the option, exercisable by written notice delivered to Licensee within thirty (30) days of receipt of the schedule of inventory, to purchase any or all of the inventory for an amount equal to Licensee's actual cost, F.O.B. factory or LDP with freight warehouse, as defined according to Generally Accepted Accounting Principles of the United States. Should Licensor send such notice, Licensee will ship to Licensor all of the inventory specified therein, within thirty (30) days of receipt thereof for inventory located in Licensee's facilities, or, for all other inventory, promptly thereafter but no more than forty-five (45) days thereafter. Licensor shall pay Licensee for such inventory within thirty (30) days of receipt. 14.3 In the event that Licensor elects not to exercise its option to purchase the remaining inventory, Licensee shall have a period of six (6) months from the effective date of termination to complete work in progress and to sell and deliver to other purchasers its remaining inventory under Licensor's Marks on a non-exclusive basis. Licensee will make its reasonable effort to sell only to the previous season's customers and to sell only at regular prices. Royalties on said sales shall be due on the 30th day following the sale thereof. 14.4 The right provided immediately above shall only apply to the remaining inventory of Products as are in good saleable condition. Licensee shall not commence the manufacture of Products during said period and, at the end of such six (6) month period, shall not sell any of its then remaining inventory, unless completely debranded by the removal of all labels, tags, lining, embroidery which identifies the Mark(s). 14.5 If termination is due to the uncured defective quality of the Products manufactured, imported, sold or distributed by Licensee or the unauthorized use of Licensor's Marks by Licensee, Licensee shall be deemed to have waived the provisions of this Article 14 and shall not sell or distribute any remaining inventory, whatsoever, unless completely debranded. 14.6 All imprints, lettering, stationery, tags, labels, packaging, lining, embroidery or other reproductions of or reference to the Marks shall be removed from all inventory remaining after such six (6) month period and shall be immediately returned to Licensor at no charge or shall be destroyed together with such remaining inventory which cannot be debranded. Either operation shall be conducted under the control of Licensor. In the event that Licensee shall be deemed to have waived the six (6) month inventory liquidation period, as provided in Paragraph 14.3 above, the provisions of this Paragraph 14.6 shall be applicable immediately upon receipt of the Notice of Termination. 14.7 Upon the expiration or earlier termination of this Agreement, for any reason whatsoever, all rights of Licensee under this Agreement shall terminate forthwith and all Royalties 19 on sales theretofore made shall become immediately due and payable. Licensee shall, subject to the provisions of Paragraph 14.3, immediately discontinue all use of the Marks, any imitation or simulation thereof or any Marks similar thereto (subject to the second sentence of section 3.7 above) and shall promptly transfer to Licensor, at cost, all registrations, filings, and rights with regard to the Marks it may have had. 14.8 Upon the expiration or earlier termination of this Agreement, Licensee shall deliver to Licensor, freight and insurance charges at Licensee's expense unless Licensor's default or its notice of non-renewal has caused such termination, all technical information, fabric production information, patterns, markers (provided that markers and graded patterns, with respect to which Licensee has not recovered the value thereof, shall be purchased from Licensee by Licensor at original invoice cost), sketches, designs, colors and the like in its possession or control, designed or approved by Licensor, and, at cost, all samples, labels, tags, packaging material, business supplies and advertising and promotional materials bearing the Marks in Licensee's possession or control. 15. Force Majeure (a) Neither party shall be responsible for any delay or failure in performance of any part of this Agreement to the extent that such delay or failure is caused by fire, flood, explosion, war, embargo, labor problems, shortage, government requirement, civil or military authority, act of God, act or omission of carriers or other similar causes beyond its control. If any such event of force majeure occurs, the party delayed or unable to perform shall give immediate notice to the other party, and shall resume performance once the condition ceases with an option in the affected party to extend the period of this Agreement up to the length of time the condition endured. During the event of force majeure the parties shall consult with each other regarding efforts to mitigate the force majeure and continue performance hereunder. (b) Licensor shall have the right to terminate this Agreement in whole or as to a portion thereof without further liability by Licensee. (i) In the event that the sales operations of Licensee are suspended or disrupted because of a recognized cause of force majeure (including strikes, lockouts, war, natural disaster or other similar cause), and should such suspension or disruption last for a consecutive period of 180 days, unless Licensee shall forthwith take affirmative steps to rectify the situation, except that if it is apparent at the time of such suspension or disruption that it cannot be rectified within the 180 day period, Licensor may terminate forthwith. (ii) In the event that payment to Licensor of any Royalties or other sums due under this Agreement is prohibited or otherwise made impossible for a period of ninety (90) days by the laws and/or regulations in effect in the Territory or any portion thereof. 20 16. Assignment, Sublicenses 16.1 The License and rights granted hereunder are personal in nature. Licensee recognizes and acknowledges that Licensor has agreed to contract with Licensee in reliance upon the experience, reputation and personal qualities of the management and shareholders of Licensee. Licensor shall have the right to terminate this Agreement in the event Licensee (or an authorized assignee or successor under the control of Licensee) shall no longer be under the control of Licensee. Licensee shall not sell, transfer , sublicense or assign its rights and interest hereunder, without the prior written consent of Licensor, which consent shall not be unreasonably withheld; provided, however, that Licensee shall be permitted, upon notice to Licensor, to transfer, sublicense or assign its rights and interest hereunder to any corporation or other legal entity which is under common control with Licensee. For the purpose of this Article 16, "Control", shall mean majority ownership. 16.2 Any sale or other transfer of all or a majority of the outstanding capital stock of Licensee, excluding sales of capital stock of Licensee in a public offering that widely distributes such stock, but, including specifically, without limitation, any merger, consolidation or similar combination, shall be deemed an assignment of the Licensee's rights, interest and obligations under this Agreement. However, an assignment to an entity controlled by Licensee shall be permitted. 16.3 A sale or other transfer of all or substantially all of the assets of Licensee shall be deemed an assignment of Licensee's rights and interest under this Agreement, but such an assignment to an entity controlled by Licensee shall be permitted. 16.4 Licensor shall, with the prior written consent of Licensee, which consent shall not be unreasonably withheld (except as otherwise provided in this Article 16) have a right to sell, transfer, lease or assign its rights and interest in this Agreement, provided that no such consent shall be required in the case of a sale, transfer, lease or assignment by Licensor to a corporation in which Licensor beneficially owns a majority of the voting stock, and provided further, that Licensor hereby agrees and acknowledges that their services are personal in nature and essential to this Agreement. Sublicensing of the Licensed Marks, Products and/or Territories shall not be permitted without the express prior written consent of Licensor (but this does not prohibit the subcontracting of manufacturing and other production tasks by Licensee). 17. Arbitration 17.1 Any claim controversy arising out of or relating to this Agreement shall be resolved by binding arbitration in the City of New York pursuant to the rules then obtaining of the American Arbitration Association. The panel of Arbitrators appointed to settle any controversy or claim shall consist of three (3) arbitrators experienced in agreements of this type. 17.2 The arbitrators sitting in any such controversy shall have no power or jurisdiction to alter or modify any express provision of this Agreement or to make any award which by its terms effects such alternation or modification. 21 17.3 The parties consent for award enforcement purposes to the jurisdiction of the appropriate state and/or federal courts within the State of New York and further consent that any demand for arbitration or any process or notice of motion or other application to the court or a judge thereof, in connection with the same, may be served in or out of the State of New York, by registered mail or by personal service, provided a reasonable time for appearance is allowed. 17.4 The provision for arbitration herein shall not be deemed a waiver of the rights of either party to any provisional remedy provided under state or federal law. It is agreed that in the event of any violation hereof, the other party hereto shall have the right to seek a preliminary injunction enjoining any further violation of this Agreement pending arbitration. 18. Transfer of Existing Business in the Territory Licensor will undertake all reasonable steps to assist in the transfer of the existing business in the Territory and in coordinating the transition of the business from VF and the provision to Licensee of all information in the possession of VF necessary for Licensee to be able to continue servicing the existing business under the Marks in the Territory. Licensee accepts no liability with respect to any conduct of any business under the Marks by any other entity at any time. Licensor shall indemnify and hold harmless Licensee and any of its officers, directors, and agents for any claims or damages (including attorneys' fees and costs) resulting from the conduct of the business under the Marks by any third party. 19. Relationship Nothing herein shall create or be deemed to create any agency, partnership, joint venture or other similar relationship between the parties hereto. Licensee shall not represent itself as the legal representative, agent or partner of Licensor and shall have no right to create or assume any obligations express or implied, on behalf of Licensor. 20. Merger This Agreement sets forth the entire and complete Agreement among the parties hereto with respect to its subject matter. This Agreement supersedes and annuls all prior understandings, arrangements and agreements, oral or written, between the parties relating to its subject matter. Neither this Agreement nor any provision hereof may be modified, waived or discharged except by subsequent written instrument signed by each party. 21. Severability If for any reason whatsoever, any provision of this Agreement shall be declared invalid, illegal or unenforceable, in whole or in part, such provision shall be ineffective to the extent of such invalidity, illegality or unenforceability without effecting the validity, legality or enforceability of the remaining provisions hereof or any other portion thereof not declared illegal or unenforceable shall remain in full force and effect. 22 22. Reversion of Rights and Territories Upon the expiration or earlier termination of this Agreement and subject to the other provisions of this Agreement, all rights with respect to the Marks, Products and Territory shall immediately revert to Licensor. 23. Remedies and Waivers No failure on the part of the Licensor or Licensee to exercise, and no delay on its part in exercising any right or remedy under this Agreement shall operate as a waiver thereof, nor shall any single or partial exercise of any right or remedy preclude any other or further exercise thereof or the exercise of any other right or remedy. The rights and remedies provided herein are cumulative and are not exclusive of any other rights or remedies provided by law or in equity. 24. 24. Notices All reports, approvals and notices required or permitted to be given under this Agreement shall, unless specifically provided otherwise in this Agreement, be deemed to have been given if mailed by (i) registered or certified mail, return receipt requested (if such service is available), postage prepaid, or (ii) telecopy, receipt confirmed, and follow up hard copy by overnight express, to the party concerned at its address indicated below (or at such other address or addresses as any party hereto may from time to time respectively designate by notice in writing to the other party). If to Licensor, to: LATITUDE LICENSING CORP. 22 Carpenter Plaza - Suite 217 Wilmington, DE 19810 With a copy to: Martin & Maynadier, LLC 324 East 51st Street New York, New York 10022 Fax- 212-754-3397 If to Licensee, to: I.C. ISAACS AND CO., L.P. 350 Fifth Avenue, Suite 1029 New York, New York 10118 Attn: Chairman and Co-CEO Fax-212-695-7579 23 With a copy to: I.C. Isaacs and Co., L.P. 3840 Bank Street Baltimore, Maryland 21224 Attn: President and Co-CEO Fax- 410-558-2096 Robert J. Mathias, Esquire Piper & Marbury L.L.P. 36 S. Charles Street Baltimore, Maryland 21201 Fax- 410-539-0489 25. Governing Law This Agreement shall be construed, and interpreted in accordance with and as governed by the laws of the State of New York, without regard to the conflict of laws provisions thereof. 26. Right of First Refusal Should Licensor decide, at its initiative or upon an offer from a third party, to introduce, market, import, manufacture and/or distribute, or cause to be introduced, marketed, imported or manufactured, within the Territory, any of the following additional products: Men's Active, Boys', Women's and Girls' Jeans, Casual or Active collections, Licensee shall have a right of First Refusal for a license for these products, with terms and royalty rates as offered by the third party or otherwise to be discussed and agreed upon at that time. Without limitation to the previous sentence, Licensor and Licensee shall, at the option of Licensee, negotiate in good faith in August 1998 the financial terms applicable to an extension of this Agreement to add Women's Jean and Women's Casual collections to the Products commencing with products to be presented at the February 1999 Magic Show in the USA. 24 27. Indemnification and Insurance 27.1 Licensee does hereby indemnify and hold harmless Licensor from and against any and all losses, liability, damages and expenses (including reasonable attorneys fees and expenses) which it may incur or be obligated to pay as a result of or in defending any action, claim or proceeding against Licensor, for or by reason of any acts or omissions committed by Licensee or any of its servants, agents or employees in connection with Licensee's performance of this Agreement. Licensee shall immediately notify Licensor of any claim or law suit seeking damages in excess of $100,000. The provisions of this Paragraph and Licensee's obligations hereunder shall survive the expiration or earlier termination of this Agreement. In the event that a judgment, levy, attachment or other seizure is entered against Licensor arising from any claim as to which indemnification is provided hereunder, Licensor shall promptly post the necessary bond to prevent execution against any property of Licensor. 27.2 Licensee shall procure and maintain in full force and effect, at its sole cost and expense, at all times during which Products are being sold, a product liability insurance policy with respect to the Products with a limit of liability of not less that $1,000,000. Such insurance policy shall include Licensor as an additional insured thereunder and shall provide for at least thirty (30) days prior written notice to Licensor of the cancellation or substantial modification thereof. Such insurance may be obtained by Licensee in conjunction with a policy of products liability insurance which covers products other than the Products. Licensee will deliver a certificate of such insurance to Licensor promptly upon issuance of said insurance policy and shall, from time to time upon reasonable request by Licensor, promptly furnish to Licensor evidence of the maintenance of said insurance policy. Likewise, without limitation of its indemnification obligations under this Agreement, Licensor shall procure and maintain in full force and effect, at its sole cost and expense, at all times during which Products are being sold, a product liability insurance policy with respect to potential liability under this Agreement with a limit of liability of not less that $1,000,000. 28. Limitation of Liability EXCEPT WITH RESPECT TO INDEMNIFICATION OBLIGATIONS DUE TO THIRD PARTIES, NEITHER PARTY SHALL BE LIABLE TO THE OTHER FOR ANY SPECIAL, INDIRECT, CONSEQUENTIAL OR SIMILAR DAMAGES ARISING FROM A BREACH OF THIS AGREEMENT OR OF ANY ORDER HEREUNDER EVEN IF ADVISED OF THE POSSIBILITY OF SUCH DAMAGES. 29. Plural, Singular Whenever the singular is used it shall include the plural and vice versa. 25 30. Headings The headings of the Articles and Paragraphs of this Agreement are for convenience only and shall in no way be deemed to limit or affect the terms or conditions of this Agreement. 31. Counterparts This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. IN WITNESS WHEREOF, the parties have executed, by their respective duly authorized officers, this Agreement as of the day and year first above written. LATITUDE LICENSING CORP. I.C. ISAACS & COMPANY, L.P. By: /s/ Francois Girbaud By: I.C. ISAACS & COMPANY, INC. ----------------------- General Partner Name: Title: /s/ Robert J. Arnot --------------------------- Name: Robert J. Arnot Title: Chairman & Co-CEO EX-10.26(B) 3 EXHIBIT 10.26(B) 3/04/98-X TRADEMARK LICENSE AND TECHNICAL ASSISTANCE AGREEMENT FOR WOMEN'S COLLECTIONS AGREEMENT dated this 4th day of March, 1998, by and between LATITUDE LICENSING CORP. (Licensor") a corporation organized and existing under the laws of the State of Delaware having its offices at 22, Carpenter Plaza - Suite 217 - Wilmington, DE 19810. and I.C. ISAACS AND COMPANY, L.P. ("Licensee"), a limited partnership organized and existing under the laws of Delaware, having its offices at 3840 Bank Street, Baltimore, Maryland 21224-2522 and 350 Fifth Avenue, Suite 1029 - New York 10118. W I T N E S S E T H WHEREAS, Licensor is the holder of all rights to license certain trademarks and tradenames hereinafter defined (the "Marks") within the Territory hereinafter defined (the "Territory") which Marks are known throughout the world in connection with creative design and products of high quality in various fields of fashion and accessories; and WHEREAS, Licensor possesses certain technical know-how and expertise with respect to the design, manufacture, promotion and marketing of the Products, as said term is defined hereinafter; and WHEREAS, all the designs and models have been created and are owned, by Marie-Therese Bachellerie and Francois Girbaud (the "Designers") WHEREAS, Licensor, due to the character of its Designers and the quality of its techniques, has acquired worldwide recognition and prestige in the field of fashion design, is developing worldwide licenses as part of the GMW marketing plan and Licensee is desirous of consulting and cooperating with Licensor in the design and marketing of said Products; and WHEREAS, Licensee wishes a license to engage in the Territory in the manufacture, importation, distribution, and sale of certain products that bear the Marks and to avail itself of the creative design, know-how and quality control services of Licensor; and WHEREAS, Licensee is desirous of securing the design and technical expertise and quality control services of Licensor in connection with manufacturing and promoting the Products; WHEREAS, Licensee has requested, and Licensor has agreed to grant to Licensee, the right and license to use the Marks upon and subject to the terms and conditions hereinafter set forth; NOW, THEREFORE, in consideration of the mutual covenants and undertakings hereinafter set forth, the parties have agreed as follows: 1. Grant 1.1 Licensor hereby grants to Licensee, and Licensee hereby accepts, for the term of this Agreement pursuant to the terms, conditions and covenants hereinafter set forth, an exclusive license (even against Licensor and its affiliated entities): (a) to manufacture and/or cause to be manufactured anywhere in the world, subject to Section 7.2.1. herein, and to import, promote, distribute and sell within the territory with exclusivity Licensor's collections of clothes as follows: a "Women's Jean" collection, and a "Women's Casual" collection including outerwear, as further described in Exhibit C (the "Products") fashioned after archival and newer designs created by Licensor or an affiliate thereof, and designs or adaptations of designs provided or recommended by Licensee and approved by Licensor (which approval shall not be arbitrarily withheld), under the terms and conditions hereinafter set forth and bearing the trademarks set forth in Exhibit A attached hereto (the "Marks"). Licensee agrees to label the Women's Jeans collection and the Women's casual collection differently so that there is some product line differentiation. Products authorized by this Agreement shall include tops and bottoms which incorporate active influences in terms of silhouettes, fabrics, details and other technical influences as adapted to Jean wear and Casual wear including but not limited to products such as tee-shirts, polo shirts, sweat shirts, sweat pants, coats and trousers. (b) To use and display the Marks, within the Territory, but solely in advertising and promoting the Products within the limits herein set forth, to the specific exclusion of any use of said Marks in combination with any other trademarks not approved by Licensor or in any form in connection with any other products or with Licensee's overall business operation (except for accurate references to relationship between Licensor and Licensee and as required by law) or in Licensee's trade or corporate names, except as may otherwise be provided herein. (c) To use and display the Marks in connection with the branding, advertising, and promotion of the Boutique described in Section 8.9 of this Agreement. 1.2 The License herein granted shall only extend to top quality products, designed, manufactured, promoted, advertised and sold according to high standards of quality and in full compliance with the terms and conditions hereof, so as to maintain, enhance and protect the image and prestige associated with the Marks. What constitutes the different segments of the collections shall be decided by Licensor with reasonable consultation with Licensee and shown later on the labels and packaging. 2 1.3 Licensor hereby represents to Licensee (i) that it has all the necessary rights to grant to Licensee the exclusive license in the Territory to import, promote, distribute and sell the Products in accordance with the terms of this Agreement, and that it will not, directly or indirectly, take any action or cause others to take any action inconsistent therewith, (ii) that Licensor has or will secure the rights to authorize Licensee to manufacture products at least in the countries listed in Exhibit B hereto (the "Manufacturing Countries"), (iii) that Licensor will take all reasonable and diligent steps in the Territory and the Manufacturing Countries to obtain and maintain valid and in effect trademark registrations for the Marks to cover all the Products. and (iv) that Licensor will fully cooperate with Licensee in implementing the provisions of this Agreement which relate to the protection of the Marks, in protecting the rights of Licensee to use the Marks, and in preventing the importation into the Territory of Products manufactured by or for other licensees of the Marks outside of the Territory. Licensee's right to manufacture shall be limited to the Manufacturing Countries. Any changes in the list of such countries shall be immediately notified to Licensor pursuant to Section 25. 1.4. Notwithstanding any other provision of this Agreement, Licensor hereby acknowledges that Licensee manufactures, promotes and distributes other collections of apparel depicting a variety of trademarks and markings, including but not limited to the branded BOSS collections and the Beverly Hills Polo Club collections, and that nothing in this Agreement is intended to restrict in any way Licensee's ability to use such other trademarks and markings and to conduct those other business as presently conducted or as they may be expanded in the future in Licensee's regular course of business. 1.5. In connection with the development and implementation of the licensing relationship between the parties and in order to resolve any potential issues with respect to the labeling of certain of Licensee's Boss product lines, Licensee acknowledges that Licensor or its affiliates own the horizontal, rectangular label shown in Exhibit D hereto as positioned on the fly of pants. In furtherance thereof, Licensee agrees that, commencing with garment collections to be shown to the trade at the February 1999 Magic Show (USA) and thereafter, Licensee will not manufacture or distribute any pants which have on the fly of the pant a label which bears the horizontal rectangular shape and size of the label shown in Exhibit D hereto. From and after February 1999, Licensee may continue to distribute existing inventory of pants bearing the horizontal, rectangular label shown in Exhibit D until such inventory is exhausted, and Licensee's customers may likewise continue to sell products bearing such labels which are in their possession or were on order prior to February 1999 until such inventory is exhausted. Notwithstanding anything else in this Agreement, Licensor (for itself and its affiliates) agrees that it will not object to the use by Licensee (and its affiliates) of the particular labels and markings to be positioned on the fly of pants which are shown on Exhibit E attached hereto and others not limited by color, or size (if larger) or design (if similar). 1.6. The Product shall be exhibited and presented in a New York showroom, distinct and separate from the showroom used for Licensee's other lines of non-Girbaud apparel. The showroom used by Licensee for the Products shall follow the concept of the Paris showroom featuring an example of "shop in the shop", and separate and exclusive sales personnel. 3 2. Term and Territory 2.1 The initial term of this Agreement shall commence and become effective as of the date first written above and shall expire on December 31, 1999 unless sooner terminated as hereinafter provided. Licensee shall have the option to renew this Agreement for an additional term of three (3) years commencing on January 1, 2000 and ending on December 31, 2002. At the end of that term, Licensee shall again have an additional option to renew for five (5) years, until December 31, 2007. Licensee shall be entitled to these two options to renew only if there has been no material default on the part of the Licensee of which licensee shall have been notified at the time and which has not been cured, during each term of this Agreement. Licensee shall notify Licensor of its intent to renew at least six (6) months before the expiration of each term. 2.2 The License herein granted shall only extend to the United States of America (Fifty states and the District of Columbia), Puerto-Rico and the US Virgin Islands, and shall include sales made to all branches of the United States military for distribution in United States military installations anywhere (the "Territory"). 2.3 Licensee shall promptly refer to Licensor all requests or inquiries relating to the Products from outside the Territory or from within the Territory if the request or inquiry concerns the possible sale or delivery outside the Territory. Likewise, Licensor shall (and shall cause its affiliates to) promptly refer to Licensee all requests or inquiries relating to the Products from within the Territory or from outside the Territory if the request or inquiry concerns the possible sale or delivery inside the Territory. 2.4 Licensee recognizes and acknowledges that similar products may be under license to other licensees for areas outside the Territory and that no Products will be sold, directly or for export, shipped to a destination or delivered by Licensee outside the Territory. Licensee shall not, directly or indirectly, market, distribute or sell Products outside the Territory and shall use its reasonable commercial efforts to ensure that Products it has sold or distributed are not resold or redistributed outside the Territory, nor shall Licensee sell or distribute Products to any person or entity which it knows, has reason to believe or has been notified by Licensor that such person or entity has exported or intends to export Products from the Territory. Licensor shall exercise reasonable commercial efforts to ensure that products manufactured by or for other licensees of the Mark outside the Territory are not exported to the Territory in violation of Licensee's exclusivity under this Agreement. 3. Use of the Trademarks 3.1 Licensee shall have the right and the obligation during the term of this Agreement, to use the Marks with respect to and only with respect to the Products and the Territory as defined herein (and in other parts of the world as it relates to manufacturing Products bearing the Marks). All Products manufactured, sold and distributed pursuant to this Agreement shall bear one or more of the Marks except as hereinafter provided and no such Products shall be sold or otherwise distributed by Licensee under any trademark other than one or more of the Marks. Licensee shall not use the Marks on or in connection with products manufactured from designs not approved pursuant to this Agreement. 4 3.2 The license herein granted shall apply only to those Marks included in Exhibit A and shall not include nor be deemed to include any other trademarks which Licensor or its affiliates and subsidiaries may now or hereafter own. Licensor agrees during the term of this Agreement to maintain and uphold the reputation and goodwill attendant to the Marks and not to take any action which is likely to adversely affect the public image of the Marks and the quality of the products sold thereunder. 3.3 Except as provided herein, Licensee further agrees that it will not reproduce or use the distinguishing styling features or the patterns provided by Licensor or an affiliate or subsidiary of Licensor for the manufacture and sale of Products under any label or trademark other than the Marks or for the Products. Nothing in this Agreement is intended to preclude Licensee from utilizing in any of its other products collections, any designs, markings, garment features, coloring method of fabrication, materials, construction, or pattern that are common in the trade or merely functional or utilitarian in nature. 3.4 Sales by Licensee shall be deemed to have been made by Licensor for purposes of trademark registration and all uses of the Marks by Licensee shall be deemed to inure to Licensor's benefit. Licensee will not, at any time, knowingly do or suffer to be done, any act or thing which may, in any way, adversely affect any rights of Licensor in and to the Marks or any registrations thereof which will, directly or indirectly, reduce or detract from the value of the Marks. Licensee further agrees that it shall not sell the Products as miscuts, seconds, irregulars or as otherwise damaged merchandise except as otherwise permitted under this Agreement, if it were detrimental, in Licensor's reasonable opinion, to the goodwill embodied in the Marks. 3.5 Licensor reserves all rights to the Marks except as specifically granted herein to Licensee and may exercise such rights at any time. Licensee acknowledges that Licensor is the sole and rightful owner of all right, title and interest in the Marks and shall not claim any title to the Marks nor any right to use said Marks or any confusingly similar variation thereof except as provided herein. Licensee shall not question, attack, contest or otherwise impugn the validity of the Marks or their registration(s), Licensor's proprietary rights nor Licensor's rights in the designs including, but not limited to, in connection with any action brought seeking to enforce the terms of this Agreement. The use of the Marks pursuant to or as specified in this Agreement shall be for the benefit of Licensor, and shall not vest in Licensee any title to or right or presumptive right to expand or continue such use. Licensee, for itself and its affiliated companies, covenants and agrees that it shall, at no time, adopt or use any trademark, trade name or corporate name which is likely to cause confusion with any of the marks or with any other trademark or name used or owned by Licensor except with the prior written consent of Licensor. The provisions of this Paragraph shall survive the expiration or earlier termination of this Agreement. 3.6 All Products bearing the Marks shall be manufactured exclusively from designs and specifications provided by Licensor and its affiliate or otherwise selected by Licensee from the archives of Licensor and its affiliates or created by Licensee and submitted to Licensor for approval under the terms of this Agreement (which approval shall not be unreasonably withheld). No Products other than those manufactured in strict compliance therewith shall bear the Marks. Licensee shall use only the Marks indicated in Exhibit A and only in connection with the Products as defined in Section 1. The license herein granted shall confer unto Licensee no proprietary rights whatsoever in the name Marithe & Francois Girbaud, the Marks, logos or the 5 goodwill now attached or hereafter to become attached thereto. Without limiting Licensee's ability to conduct its other businesses, Licensee shall only use the Marks as provided herein and in full compliance with the terms and conditions hereof and only for the duration of this Agreement. 3.7 Notwithstanding any other provision of this Agreement Licensor acknowledges that Licensee intends to select from existing and archival designs, fabrics and stylistic features associated with the Marks and the Products and also to recommend to Licensor modifications updates, and desirable additions to those designs and stylistic features associated with the Marks and products bearing the Marks so as to maintain the image for the Products, the Marks and the tags labels and other collateral used with the Products that is suitable for successful distribution in the Territory at competitive price ranges. Licensor agrees to consider in good faith and reasonably all such design and stylistic feature recommendations made by Licensee and, unless they significantly detract from the goodwill associated with the Marks to approve the implementation of those recommendations by Licensee subject to Licensor's right to review and approve samples under this Agreement. Licensee shall have discretion to select designs and stylistic features associated with former collections of apparel sold under the Marks for incorporation into Licensee's Products and shall have no obligation to accept any designs fabrics or stylistic features that, in licensee's reasonable opinion would not be commercially successful in the Territory or would be too expensive to manufacture in light of the expected marketability. 3.8 Subject to Section 3.7, the use of the Marks, including the specific design, artwork or graphics thereof and any tags, wrappers, letterhead, invoices, stationery or other items incorporating the Marks must be in full compliance with the Licensor's written policies and procedures, as they are communicated to Licensee from time to time, and is, in each instance, subject to the prior written approval of Licensor, which approval shall not be unreasonably withheld. Licensor can only promulgate policies and procedures that change the guidelines for use of the Marks prospectively and not with respect to any Products already approved by Licensor for Products collections which have been designed. The Marks may only be used by Licensee as part of an approved label and may only be used in their entirety. Licensee shall not alter or modify the Marks in any manner whatsoever nor shall Licensee add to, remove or abbreviate any part or distinctive feature thereof including script, graphics, colors or logos. 3.9 Licensee shall cooperate fully and in good faith with Licensor for the purpose of securing, preserving and protecting Licensor's rights in and to the Marks in the Territory and the Manufacturing Countries. Without limiting the rights of Licensee under this Agreement, Licensee shall execute, deliver and/or file any and all documents and do all other acts and things which Licensor reasonably requests, provided the request does not prejudice other business of Licensee, to make fully effective or to implement the provisions of this Agreement relating to the ownership or registration of the Marks in the Territory and Manufacturing Countries. All costs and expenses for any application for registration or extension of registration with respect to the Products within the Territory and Manufacturing Countries shall be borne by Licensor. 3.10 Licensee will use the Marks in the Territory strictly in compliance with the legal requirements obtaining therein. Whenever any of the Marks is used on any Product or item of packaging or labeling or in any advertisement or other promotional material, it must be followed, in the case of a registered trademark by the registration symbol, i.e. -Registered Trademark-, and in the case of all other trademarks by the symbol -TM-, or other appropriate symbols of similar import acceptable to 6 Licensor. Licensee shall duly display all other notices with respect to the Marks on the Products and otherwise as are or may be required by the trademark laws and regulations applicable within the Territory or any portion thereof. 3.11 Any copyright, design patent or any similar industrial or intellectual property right which exist or may be created in any sketch, design, sample, print, package, label, tag or the like used uniquely in connection with the Products shall be the property of Licensor, and if not created by Licensor they shall be deemed works made by Licensee for hire for Licensor. Licensee shall place a copyright notice whenever required by Licensor to protect said copyrights. Licensee shall not, knowingly, at any time, do or cause to be done any act or thing which may adversely affect any rights of Licensor in such sketches, designs, samples, prints, packages, labels, tags and the like and will do at Licensor's cost all things reasonably required by Licensor to preserve and protect said rights. Nothing herein is intended to preclude licensee from utilizing in any of its other product collections, any designs, markings, garment features, coloring, method of fabrication, materials, construction, or patterns that are not uniquely associated with Licensor's products or which are otherwise common in the trade or merely functional in nature, and licensee shall not assign any rights thereof to Licensor. 4. Royalties 4.1 Subject to the provisions of Section 1.4 above, Licensee agrees to exercise its best efforts to promote and maximize sales of the Products throughout the Territory. Licensee shall conduct its activities pursuant to this Agreement so as to enhance the goodwill and reputation of the Marks and shall not engage in conduct known to be detrimental to the same. 4.2 In consideration of the rights granted to Licensee pursuant to this Agreement, Licensee shall pay to the Licensor for each Calendar Year during the Term, or any portion thereof, Royalties in an amount of 6.25% of all Net Sales (the "Royalties"). The Royalties for close-out sales as defined under Section 4.9 and irregulars shall be 3.0% of Net Sales of the close-out Products. In no event shall the amount of Royalties (including close-out Royalties) due and payable for any Calendar Year be less than the minimum amount ("Minimum Royalties") set forth for each Calendar Year during the Term, including any possible renewal term, as follows: 1998 0 1999 $ 700,000 2000 $ 800,000 2001 $1,000,000 2002 $1,500,000 2003 $1,500,000 2004 $1,500,000 2005 $1,500,000 2006 $1,500,000 2007 $1,500,000 7 A License Acquisition fee in the amount of $600,000 shall be paid by Licensee to Licensor within three days of execution of this Agreement by both parties. The term "Calendar Year" shall mean January 1 through December 31 of each year of the term. 4.3 The term "Net Sales" shall mean the invoiced price (excluding sales tax, insurance and shipping charges) for Products shipped or sold by Licensee or any of its subsidiaries or affiliates, or authorized sub-licensees, during the relevant period, less credits granted for Products actually returned and accepted, and reasonable customary and usual trade discounts and mark-downs actually granted to non-affiliated customers and an allowance for bad debt. Bad debt shall consist of any accounts receivable of a customer who is under a bankruptcy or insolvency proceeding, or which is otherwise uncollected despite Licensee's collection efforts for at least 120 days after the due date. For purposes of calculating royalties due for any sale, transfer or other distribution of Products made otherwise than at arm's length, the Net Sales price of such Products shall be deemed to be the Net Sales price of a corresponding sale to unaffiliated independent retailers. The royalties herein provided shall be due and paid on sales of any and all Products bearing the Marks and/or sales of any and all Products manufactured by Licensee or its affiliates. Except as may be otherwise provided herein, no deduction shall be made for any discount, mark-down, advertising allowance, other allowances of any kind or for any purpose whatsoever or costs incurred by Licensee. Royalties shall not be due to Licensor on products sold by Licensee to Licensor under this Agreement. 4.4 In the event that Licensee sells Products in a currency or currencies other than United States dollars, the Net Sales price, with respect to such sales, shall be computed on the basis of the average exchange rates of said currency or currencies into US dollars, as of the close of business on the last day of each of the three months of each applicable calendar quarter as published in The Wall Street Journal. 4.5 The Minimum Royalties for each calendar year shall be paid in 12 equal monthly payments, each in the amount of 1/12 of the Minimum Royalties payable for that Calendar Year as stated above in Section 4.2. Within 60 days of the end of a Calendar Year commencing with Calendar Year 1998, Licensee will calculate actual Royalties owed to Licensor based on actual Net Sales of Products during the Calendar Year and shall by the 60th day remit to Licensor the difference between the total Royalties paid during the Calendar Year as Minimum Royalties and the actual Royalties due. If the Minimum Royalties are greater that the actual Royalties due then Licensee shall not owe Licensor any further payments for the Calendar Year. There will be no deductions or set offs from any payments whatsoever, unless specifically agreed to by the Parties. 4.6 Licensee shall, within thirty (30) days of the end of each Calendar quarter and within ninety (90) days of the end of each Calendar Year during the term hereof, provide Licensor with a certified statement of sales of the Products during the immediately preceding calendar quarter or Calendar Year, as the case may be. Said statement shall be signed by a duly authorized officer of the Licensee and be certified by said officer as true and accurate. Said statement shall conform to a format agreed upon between the parties and, at the option of Licensor, be subdivided by Product. 8 4.7 All royalties payable hereunder shall be paid directly to a bank designated by Licensor, in writing, as depositary (the "Depositary"). 4.8 Late payments of royalties shall bear interest at the Citibank, N.A., New York prime rate plus 3%, but, in no event shall exceed the maximum rate permitted under applicable law. 4.9 For the purpose of this Agreement, close-outs are defined as Products sold at a reduction of twenty (20%) percent or greater from Licensee's regular full list price of such Products and Licensee acknowledges that the excessive or indiscriminate disposal of close-outs may adversely affect the prestige attached to the Marks. Licensee shall therefore exercise its best reasonable efforts to plan and conduct its manufacturing and sales operations with a view to limiting the quantity of close-outs and to disposing of all Products through normal channels of distribution and otherwise only through stores specialized in high quality close-outs, including outlets such as Ross Stores, T.J. Maxx, Filene's Basement, and the like that offer for sale other similar designer labels. All sales of close-outs shall comply with the terms specified herein. 4.10 Only genuine end-of-season close-outs may be sold under the label, or with any reference to the Marks. No close-outs shall be shipped until at least ninety (90) days shall have elapsed from the date of the first substantial delivery by Licensee of a season's collection of which it is a part. 4.11 For purposes of calculating Royalties the Net Sales price of such authorized close-out sales shall be based on the actual reduced Net Sales price for said Products. On excessive, unauthorized close-out sales which shall be defined as close-out sales equivalent to more than 25% of Net Sales for the first Calendar Year and to more than 10% for any subsequent Calendar Year, the Royalties shall be computed at the normal Net Sales price as applied to the initial standard (i.e., non close-out) selling price of the Product. Within sixty (60) days of the close of each calendar quarter and within ninety (90) days of the close of each Calendar Year, Licensee shall furnish to Licensor a statement setting forth the amount of total regular sales and total close-out sales. At the option of Licensor, said statement shall be subdivided by Product class. 4.12 Receipt or acceptance by Licensor of any royalty payments due hereunder, in an amount or amounts which are less than amount or amounts due, shall not constitute a waiver of Licensor's rights in or to the balance thereof which shall remain due and payable pursuant to the terms of this Agreement. Any excess Royalties paid by Licensee hereunder shall be counted as a credit against future Royalties due to Licensor. 4.13 Licensee shall provide Licensor for each calendar quarter within forty-five (45) days of the end of the preceding calendar quarter, reports setting forth in reasonable detail sales by US dollars and unit shipments with respect to each product line and models in each product line, aggregate sales to regular price customers, off-price customers, large retailers, specialty retailers and sales by significant geographic segments. Such report shall be in accordance with Licensee's current reporting capabilities and format. 5. Designs and Technical Assistance 9 5.1. Technical Assistance Licensor will provide technical assistance defined as but not restricted to: new products concepts/ideas, styles, fabrics, colors, trims and packaging; prototype garments, fabrics swatches, lab dips, samples patterns, access to and recommendations from product segment archives; fabric sources. 5.2 Collections Licensor shall provide Licensee with recommendations for a full and varied collection of Products (as a "collection" is customarily defined in the trade) for each of the four seasons (fall, winter, spring, summer) that Licensor in consultation with Licensee and subject to Section 3.7 above shall deem appropriate for sale in the Territory. Licensor shall develop each seasonal collection in a timely manner so that Licensee shall have sufficient time to produce the Products but in any event in accordance with the following minimum lead times: Collection Delivery date by Licensor Fall August 15 Winter November 15 Spring February 15 Summer May 15 The recommended collection will contain, in the different lines, a basic core offering of Jeans and tops in addition to a Casual sportswear line of tops and bottoms pieces designed to be worn separately or collectively to support another basic core line of casual pants and tops for Casual, as well as tops and bottoms in familiar styles adapted to incorporate active influences of fabrics, details, silhouettes and technical adaptations thereof. The Women's collection covered by this Agreement shall be identified, as described in section 8.7 herein, by a specific marking, such as shown in Exhibit F. 5.3 GRIDS Subject to the right of Licensee under Section 3.7, Licensor shall make available to Licensee in New York, on a basis sufficiently timely to meet scheduled deliveries to customers, as stated in Section 5.2 above such samples, patterns, sketches, photographs, technical specifications and other materials and information relating to the design and manufacture of the Products (all such materials and information are hereinafter referred to as "Technical Information") as they may create in the normal course of their operations and as may be reasonably necessary to enable Licensee to carry out its obligations under this Agreement. Without limiting the generality of the foregoing, the Technical Information will include the basic cuttings for the collections, the patterns for each model, a sample of each model in base size, technical specifications concerning the making and fitting of each model and information concerning the selection, fabrication and treatment of materials and fabrics (including the names and references of the manufacturers) and 10 supplies and accessories (labels, designs, etc.). If Technical Information, including finished samples, is shown to any third person with or without the prior written consent of Licensor, Licensee shall take any and all action necessary to ensure that such third person fully conforms to all applicable terms and conditions hereof, specifically to avoid any unauthorized use of the Technical Information. All such Technical Information shall remain the sole property of Licensor and Licensee shall have no ownership interest therein. Upon the expiration or earlier termination of this Agreement, all Technical Information in the possession or under the control of Licensee shall be immediately returned to Licensor. In order to reimburse Licensor for its costs, and not as a purchase price or with any transfer of ownership, Licensee shall pay to Licensor an amount equal to two and one half (2.5) times the ordinary wholesale price for any samples so ordered, F.O.B. place of shipment, plus shipping costs and duties, of all samples furnished to Licensee hereunder. Such amounts shall be paid within thirty (30) days of delivery. Licensor shall not request that Licensee make any material changes or modifications to products designs approved by Licensor under this Agreement and any such changes shall be the prospective only. 5.4 Archives Licensor must keep a current archive of products previously offered under the Marks in an accessible location in the New York Metropolitan area. Licensor will maintain in the New York Metropolitan area at least one representative of Licensor with authority to act for Licensor under this Agreement and to facilitate consultation between Licensor and Licensee. Any archive piece borrowed by Licensee from Licensor shall be logged by Licensor and must be returned within three (3) months. Licensee acknowledges that the failure to return any archive piece within the required time shall be detrimental to Licensor, the Marks and the Products and may subject Licensee to liability for damages to Licensor. Licensee may remove small pieces of fabric from archival pieces for the purpose of sourcing the fabric necessary to manufacture the Products. Licensee may not reproduce the products in the archives without the prior written consent of Licensor which shall not be arbitrarily withheld. 5.5 Product Development Licensor will consult with, help and advise Licensee during the product development process with regards to the proper execution of the product. Licensor will review all garments style and fabric prototypes prior to finalization and provide input Licensee at a time in the product development process where garments are reasonably complete but the feasibility of changes/modifications still exists. 5.6 Sample Approval Prior to manufacturing, selling or distributing any products in any seasonal collection, Licensee shall make available for inspection in New York by Licensor CAD samples (computer assisted designed samples) with proposed colors and fabrics, as well as samples of actual clothing items, when available after the CADs have been reviewed, of each Products in any proposed seasonal collection. Samples shall be made available sufficiently far in advance of first manufacture to permit Licensee to make any changes requested by Licensor and in no event less than three (3) weeks before first manufacture. Licensee shall notify Licensor of the date on which samples are made available and of the scheduled first production date. Licensor shall inspect said 11 samples and either approve or reject the same, such approval or rejection to be done by Licensor, in writing, on each photograph or CAD provided by Licensee and depicting each sample no later than five (5) days after the inspection date. Any sample not rejected in a timely fashion shall be deemed approved. Once a sample has been approved, Licensee shall not make any material changes (and Licensor shall not require any changes) to the design thereof, including materials, fabrics, colors and quality of workmanship, without Licensor's prior written approval. All samples of products submitted to Licensor pursuant to this Section 5.6 shall be provided at Licensee's sole cost and expense. No products shall be displayed, manufactured, distributed (including offerings for samples) and/or sold by Licensor unless such products are at least equal in quality, workmanship, fit and design to the samples previously approved by Licensor in accordance with this Section 5.6. All materials used shall conform to the specifications indicated in the technical information concerning each product approved provided by Licensor. 5.7 Quality Control In order to control the production and quality of manufacturing, Licensor may, at its option, send one (1) representative to Licensee's facilities, five (5) times a year, (corresponding to the five fashion seasons). Licensor shall be responsible for the cost of business class round-trip air fare for such visits from Europe to the United States and for all lodging and food expenses related to such visits. The Licensee may, at its option and at its cost, send technicians to Licensor's facilities, in order to obtain any information necessary to the realization of the collection (but without prejudice to Licensor's obligation to provide any necessary Technical Information in New York). Such visit shall be at a date to be agreed upon by both parties, on or before the delivery of each collection. Nothing in this Section shall grant Licensor the right to inspect or visit any portion of any facility where Licensee conducts its other lines of business. 6. Protection of Technical Information 6.1 Licensee agrees that it shall treat all non-public information relating to the design, manufacture, marketing and sale of the Products as proprietary information of Licensor. No proprietary information other than manufacturing specifications and finished samples, shall be shown to any third party without the prior consent of Licensor. If technical information, including finished samples, is shown to any third party with or without the prior written consent of Licensor, Licensee shall take any and all reasonable action to ensure that such third party fully conforms to all applicable terms and conditions hereof, specifically to avoid any unauthorized use of the technical information. Licensee shall use its reasonable efforts to ensure that its employees, agents, subcontractors (if any) and others subject, directly or indirectly, to its control, do not disclose or make any unauthorized use of any technical information. Likewise Licensor shall treat all non-public information relating to the manufacture, sourcing, marketing, forecasts and sale of the products by Licensee and its agents and all business information related to the boutique, as later defined in this Agreement as proprietary information of Licensee. No proprietary information of one party shall be disclosed to any third party or used for any purpose not related to this Agreement by the other party. 6.2 Subject to the other provisions of this Agreement, any Designs and other materials provided or approved by Licensor for use under this Agreement shall remain the property of Licensor and are licensed hereunder solely and exclusively for use in connection with the 12 manufacture and sale of the Products in the Territory. Licensor may use and permit others to use said Designs and other material in any manner they desire, provided that such use does not conflict with any rights granted to Licensee hereunder. Licensee specifically acknowledges that such Designs and other materials may be used by Licensor and other licensees on the Products in jurisdictions outside the Territory and on products other than Products anywhere in the world. 6.3 Licensee shall take all reasonable precautions to protect the secrecy of the materials, samples, designs and Technical Information described in this Section 6 prior to their commercial distribution or the showing of samples for sale. All such Technical Information shall remain the sole property of Licensor and Licensee shall have no ownership interest therein, subject to the second sentence of Section 3.3. above. Upon the expiration or earlier termination of this Agreement, all Technical Information in the possession or under the control of Licensee shall be immediately returned to Licensor. 7. Manufacture 7.1 Licensor shall consult with Licensee regarding the manufacturing process, methods of production, treatment, fabrics and technical specifications necessary for the production of high quality products from designs approved by Licensor. All such information shall be strictly confidential and shall not be disclosed by Licensee nor its agents and/or employees without the prior written consent of Licensor. 7.2 Subject to Section 7.2.1, the Products shall not be manufactured by anyone other than Licensee and/or quality manufacturers chosen by Licensee and not disapproved by Licensor or an affiliate thereof. Licensee shall take reasonable and diligent steps necessary to ensure that such manufacturer fully conforms to all applicable terms and conditions hereof, that said manufacturer produces only those Products specifically ordered by Licensee and in the quantities ordered without over-runs or extra labels, and, that said manufacturer controls the manufacture and production to avoid any possible use that might be detrimental to the Marks, or unauthorized use of the Technical Information. 7.2.1 In order for Licensor to identify any manufacturers known to Licensor to be objectionable, based on counterfeiting, parallel market sales concerns, or other dishonest business practices. Licensee shall provide to Licensor a list of its current manufacturers and of any new manufacturers. The list shall be kept confidential by Licensor and shall not be used for any purpose other than as relates to this Agreement. Licensor shall then indicate to Licensee its disaproval, if any, of any manufacturer and Licensee shall make reasonable efforts to discontinue its relationship with such manufacturer. Should Licensee continue to work with such manufacturer, Licensee shall be held responsible for any damages arising from such relationship notwithstanding anything to the contrary stated in Section 25.3. 7.3 (a) In order to maintain the distinctiveness of the image, quality and special characteristics of the Products, Licensor may recommend, but not require, that Licensee use fabrics and yarns produced by manufacturers specified by Licensor, so long as the quality of products and price and reasonable delivery terms shall be equivalent to those offered by other manufacturers. When Licensee elects to deal with such manufacturers, it shall also use its reasonable commercial efforts to maintain the good commercial relationship with these 13 manufacturers. In this regard, Licensee undertakes, except in the case of defective low quality or untimely goods, not to make any changes or cancellations of orders of such fabrics and yarns contrary to commercial usage and prejudicial to the interest of Licensor. (b) Certain lines of Products or certain particular Products are and may in the future be fabricated in special fabrics and yarns, developed by Licensor. These fabrics and yarns carry with them a particular name and are or will be protected by the registration of a mark or fabrication patent. These fabrics or yarns constitute an essential and distinctive element of such Products and it is thereby necessary, to protect the originality and technical components of such fabrics and yarns, to license a very limited number of manufacturers with the right to use the technical components and the know-how to produce these fabrics. Licensee shall consequently deal with certain manufacturers designated by Licensor in order to manufacture such Products. A copy of orders placed by Licensee with such manufacturers shall be sent at the same time to Licensor. Licensee shall be entitled to quality of products and price and delivery terms from such manufacturers equivalent to those given to other licensees of Licensor outside the Territory. Licensee undertakes, except in the case of defective poor quality or late delivery of goods to maintain a good commercial relationship with these manufacturers and not to make any changes or cancellations of orders of such fabrics and yarns contrary to commercial usage and prejudicial to the interest of Licensor. 7.4 Licensor reserves the right to require Licensee to terminate a manufacturer whose workmanship has suffered , in the reasonable opinion of Licensor, a deterioration in quality which is not satisfactorily corrected within thirty (30) days after notice thereof to Licensee, or any manufacturer who, in Licensor's reasonable opinion fails to comply with any provision hereof or whose conduct, if committed by Licensee, would constitute a breach of this Agreement, provided that Licensor must make a reasonable allowance for completion of current orders by the manufacturer. 7.5 No disapproved or otherwise defective Products shall be sold by Licensee under or with any reference whatsoever to the Marks if it were detrimental to the Marks. Should any Products manufactured and sold by Licensee be defective, in the sole opinion of Licensor, Licensee shall, at its sole cost and expense, take any and all reasonable action necessary to withdraw and remove said Products from the market through repurchase or otherwise. 8. Advertising and Promotion 8.1 Throughout the duration of this Agreement, Licensee shall spend upon advertising of the Products throughout the Territory an annual minimum of three percent (3%) of Net Sales (The "Minimum Advertising Expenses") but in any event, no less than Five hundred fifty thousand dollars ($550,000) in 1998 and $400,000 in 1999. In each subsequent year the Minimum Advertising Expenses shall be not less than $400,000. Such Minimum Advertising Expense is an independent obligation, and amounts spent on advertising by Licensee shall not be deducted from Royalties nor from any other amounts due and owing from Licensee to Licensor under this Agreement. 8.2 In addition to the Minimum Advertising Expenses, Licensee shall pay for the expenses of an advertising agency of Licensor's choice in the United States, in a monthly amount 14 of $ 5,000, paid to Licensor each month, and to the production costs of photos and images, in an amount of $65,000, paid to Licensor twice per year. The agency shall consider Licensee's input in creative matters with respect to Girbaud products sold by Licensee. Licensee shall be allowed to use the photographs and images developed by Licensor or its agents concerning the Girbaud products, free of charge from Licensor. Licensor shall make reasonable efforts to secure, at the time of original agreements with artists, agencies and/or models, all rights for U.S. usage for such photographs and images. However, Licensee shall be responsible for the direct payments of any usage rights and/or costs to third party, if any are applicable. Licensor and Licensee shall evaluate each calendar year the need for and reasonableness of continuing the payment by Licensee referenced above in connection with the work of such agency. (a) In 1998 and in 1999, an annual minimum of $400,000 of the Minimum Advertising Expenses shall be spent on direct advertising expenses for promotion such as television, radio, printed press, billboards advertising, celebrity endorsements, events sponsorships, in-store point of sale items and store promotions at the exclusion of any other expenses. (b) For the subsequent years, expenses for new shop-in-shop fixturing may be part of the Minimum Advertising Expenses. At no time shall the participation in the Fashion Shows as described in Section 10.1 below may be included in the Minimum Advertising Expenses. 8.3 Licensee shall exercise every reasonable effort to promote and advertise the Products throughout the Territory and shall, prior to the end of each calendar year, submit to Licensor, in reasonable detail, proposed plans and budgets for the subsequent annual promotional campaign. Licensor shall cooperate, as may reasonably be required by Licensee, in furnishing, at cost, such advertising and promotional material, as is available to Licensor and which appears suitable, in Licensor's opinion, for the Territory. Licensor and Licensee shall cooperate closely in the creation and execution of advertising programs. 8.4 Licensor is responsible for, and will control the brand's strategic positioning and the voice of the brand. Licensor will provide communication guidelines to Licensee to help in developing communication execution. Licensee shall submit to Licensor for review, prior to submission to the advertising agency, any campaign briefing materials, and shall consult with Licensor before accepting any creative response to such briefing materials. The Trademarks, the visual representation, and the image of the Products shall be subject to written approval by Licensor (which shall not be unreasonable withheld) prior to public distribution or display in any medium provided, however, that any advertising or promotional materials supplied by Licensor will not require its approval prior to dissemination by Licensee, except as otherwise provided in this agreement. All advertising campaigns in the Territory shall correspond to the international advertising theme and image worldwide. Licensor will make available to Licensee all advertising campaigns produced worldwide. The Licensee shall cause its advertising staff and/or agency to consult with Licensor's designated advertising agency and/or creative staff, at least twice a year, for a review of Product image and with a view toward coordinating and enhancing worldwide advertising strategy. Approved advertising and promotional materials shall not be disapproved by Licensor for use within the same campaign. 8.5 Licensee shall submit to Licensor, for its prior approval, not to be unreasonable withheld any and all advertising for any medium referring to the Products before publication or 15 dissemination thereof. Should Licensor deem said materials appropriate for use outside the Territory, it shall have the right to use the same, provided, however, any additional costs incurred thereby, if any, for advertising agency fees talent, residuals, copyright clearance, photographers fees or otherwise shall be paid and secured by Licensor. 8.6 Licensee shall, on January 31st of each year, commencing January 31, 1999, inform Licensor of its expenditures in fulfillment of its advertising and promotional obligations during the preceding year and shall account to Licensor for the use thereof. 8.7 Failure on the part of Licensee to make the Minimum Advertising Expenses required hereunder during any contract year shall constitute a material breach hereof. Notwithstanding, Licensor may, at its sole discretion, permit Licensee to cure such breach by either paying to Licensor the amount by which the actual expenses fell short of the Minimum required or, by allowing Licensee to increase its advertising obligations for the immediately subsequent year by an amount equal to the deficiency. 8.7.1 Notwithstanding any other provision of this Agreement, Licensor acknowledges and agrees that Licensee may primarily focus its advertising and promotion of the Products on the Girbaud brand and is not required (i) to implement or follow as its primary campaign for the products in the territory the "BE" theme adopted by Licensor in other geographic areas or (ii) to use "BE' as a permanent marking on the Products. However, "BE" should appear on removable and/or disposable elements, such as: hand-tags, ribbons, trimmings, badges, tear-off labels, packaging. 8.8 Licensee may request, with reasonable advance notice, and Licensor shall then arrange, the participation of one or both of the designers, when available, in certain social events. Such participation shall be at licensee's expense with first class hotels, air travel and local transportation. The licensee shall pay for travel expenses comprising round-trip first class airline tickets for two persons, twice a year, between Europe and the US, for the Designers and/or their collaborators (Total 4 tickets per year). Such expenses shall also include, for any trips in the US outside New York City, first class air travel, first class local transportation and first class hotels. 8.9 Flagship Boutique (a) Licensee agrees to open a flagship store for sale of Licensor's men's and women's lines and other Girbaud licensed merchandise (the "Boutique") in a mutually agreed location in Manhattan, New York City, with a target selling space of no less than 800 square meters. The parties will cooperate in good faith to make efforts to identify and select the space by March 15, 1998, with an opening target date for the Boutique of September 30, 1998. Licensor recognizes that factors outside of the control of Licensee and construction requirements may cause the Boutique opening to occur at a later date. (b) The presentation, organization and decoration of the Boutique shall be similar to the Paris Girbaud Store, at rue Etienne Marcel ("the Paris Girbaud Store"), and on three levels above ground if at the currently selected location at West Broadway and Broome Street. Licensor grants to Licensee and the contractors in the project the rights necessary to imitate the 16 trade dress of the Paris Girbaud Store. The architect for the Boutique shall be Kristian Gavoille (provided he agrees to be available and can perform in accordance with Licensee's requirements) who will be assisted by Olivier Bachellerie and an American architect mutually agreed to by Licensor and Licensee. Licensee is not responsible for delays or other nonperformance caused by these individuals in the performance of their duties. The final decision on the design of the Boutique shall be mutually agreed to by Licensor and Licensee. Only Girbaud branded products may be sold in the Boutique. Two annual Europe/US trips, business class for up to 2 persons in charge of the Service Boutique, shall be paid by Licensee. (c) Licensee shall have the sole right to negotiate the terms for the Boutique lease with the relevant landlord, and Licensor shall reasonably cooperate with Licensee in lease negotiations as necessary and provide information required by the landlord. Licensee shall have the right to relocate the Boutique in the event the lease is lost or the terms thereof become unreasonable in the future. In the event of termination of this Agreement, Licensee shall be provided a commercially reasonable phase out period to close the Boutique, negotiate a termination of the lease with the landlord, or take out the Girbaud branding so as to maintain the facility for other purposes. (d) Licensor agrees, for itself and all related companies, that they will not permit any other party to open a Girbaud apparel store in New York City for as long as the Boutique is open. It is understood that other Girbaud products such as eyewear, footwear or other accessories or products may be sold in other stores. (e) Licensee will make all reasonable efforts (subject to product availability and reasonableness of terms) to have at least 30% of the products at the Boutique (measured by retail dollar volume) be products sold by Girbaud entities in European markets, including (but not necessarily all of) Jeans/Casual European products, the SPQRCITY line, underwear, shoes (France), children's wear, and accessories. Licensee will also make its reasonable efforts to display a representative collection of SPQRCITY Men and SPQRCITY Women consistent with the role of the store as a flagship location, similar to the presentation and space allocation in the Paris Girbaud store. Licensor shall ensure that both the licensees of these European products (including any Girbaud affiliated entities) and other Girbaud licensees make Girbaud products available to Licensee, in a timely manner and on reasonable terms, for sale at the Boutique and at a discount of at least 10 percent from the wholesale price for those products. (f) Licensee shall have the right to close the Boutique, without being in default under this Agreement, in the event the Boutique suffers operational losses in excess of One and one half Million Dollars ($1,500,000) in any three-year period of the term. Licensor shall be consulted regularly in the operation of the Boutique with the advice of the Designers. Before the third anniversary of operation of the Boutique, Licensor shall have the option to make an investment in the Boutique on terms to be agreed upon by the parties. (g) Licensee shall send to Licensor sales and inventory reports for the Boutique on a quarterly basis and internally calculated financial results twice per year. 9. Sales 9.1 Licensee shall keep Licensor fully and promptly informed of all its successive price lists and sales policies relating to the Products which information shall be kept by Licensor in 17 strict confidence and not be used for any purpose not relating to this Agreement. Licensee hereby acknowledges that repeated untimely deliveries by Licensee to its customers (except for force majeure) and/or the delivery, distribution and sale of defective Products would adversely affect the reputation of the Licensor and the prestige of the Marks and shall constitute a material breach of this Agreement. 9.2 All Products manufactured, distributed or sold by Licensee shall be marked, labeled, packaged, advertised, distributed and sold in accordance with the terms and conditions of this Agreement and in accordance with all laws, rules and regulations applicable within the Territory and any subdivision thereof and, in such a manner as to not mislead or deceive the public. 10. Fashion Shows 10.1 Licensee shall participate in and contribute to the costs and expenses of two (2) annual fashion shows ("the Fashion Shows"). Licensee shall, within ten (10) business days of receipt of the invoice pay to Licensor an amount of $75,000 twice per Calendar Year, the first of such shows being scheduled for April 1998, in New York City, provided that Licensor actually implements the Fashion Shows. Licensee's obligation to participate in the Fashion Shows by paying the amounts indicated above shall be an independent obligation and no sums incurred by Licensee under this provision shall be deducted from Royalties payable to Licensor, nor from any other amounts due and owing from Licensee to Licensor under the terms of this Agreement. This participation concerns international fashion shows that may take place in America, Europe or Asia and which are intended to develop the image of the product and of the trademark. At these Fashion Shows, the clothes of the different lines, manufactured by different licensees, shall be presented. The Licensee shall provide free of charge the clothes for the Fashion Shows. 10.2 Licensee may participate, at its discretion, in other major trade shows, which participation shall be at its sole cost and expense. Any expenditures so incurred shall be considered included in the Minimum Advertising Expenses. Should Licensor organize cooperative exhibitions at such other trade shows in the Territory with its licensees, Licensee shall participate in such shows and shall share in the cost and expense thereof in an amount representing its pro rata cost and expense, which amount shall be agreed upon prior to the event. 11. Access to Books and Records 11.1 Licensee shall, at its sole cost and expense, maintain complete and accurate sets of books and records (including the originals or copies of documents supporting entries herein) covering all transactions arising out of, in connection with or relating to this Agreement. 11.2 Licensor, and/or, its duly authorized representatives shall have the right (subject to confidentiality obligations reasonable acceptable to Licensee) upon five (5) days, prior written notice, to examine and audit said books, records and all other documents in Licensee's possession or under Licensee's control relating to the subject matter of and terms of this Agreement. Said right shall be exercisable during normal business hours once each Calendar Year during the term hereof and, once a year during the three Calendar Years immediately following the expiration or 18 earlier termination hereof. All said books, records and documents shall be kept and made accessible during the full term hereof and for three years thereafter. 11.3 Any auditor designated by Licensor to audit and examine Licensee's books, records and documents, shall be approved in advance by Licensee, such approval not to be unreasonably withheld. In the event that an audit or examination of Licensee's books, records and documents reveals an underpayment of any Royalties due hereunder, Licensee shall immediately pay to Licensor the amount of such deficiency, plus interest thereon from the date said Royalties were due at the interest sale rate specified in Section 4.8 hereof. 11.4 In the event that an audit of Licensee's books and records shall reveal that Licensee's Royalties were underpaid by an amount equal to 5% or more in any year, Licensee shall bear the cost of said audit. 12. Protection of the Marks 12.1 Licensor represents that the Marks are and shall be during the term of this Agreement valid and enforceable trademarks in the Territory and the Manufacturing Countries; that they are owned by Licensor or that Licensor is authorized and empowered by the registered owner to grant the License herein contained and that this Agreement does not conflict with any other Agreement to which Licensor is a party, that the use of the Marks in the Territory will not infringe upon any other trademark in the Territory and that the Licensor will defend, indemnify and hold harmless Licensee against any claim against Licensee (including by its manufacturers and customers) in connection with the use of the Marks and any damages paid in settlement or as part of a judgment in such claim (including attorney's fees and costs). 12.2 Licensee shall promptly notify Licensor, in writing, of any infringement, threatened infringement, or otherwise unauthorized use or threatened use of the Marks, or confusingly similar trademarks or tradenames, whether in connection with the Products or otherwise, of which it may have knowledge or suspicion. In the event of an infringement, threatened infringement, or otherwise unauthorized use of the Marks, or confusingly similar trademarks or tradenames, in the Territory or the Manufacturing Countries, Licensee shall take such immediate action as may reasonably be necessary to protect the Mark(s) and the rights of the Licensor therein, until Licensor is in a position to take whatever action is required (provided that Licensor must act diligently and promptly). Licensor and Licensee shall mutually decide what actions shall be taken, including any actions in collaboration with investigators or US Customs, cease and desist correspondence, and application for injunctive relief, and for such purpose shall use the same counsel who handles the Girbaud Trademarks matters unless otherwise agreed by both parties, and, in such case, Licensee shall pay one half of the cost and expense incurred in such actions, in the Territory or the Manufacturing Countries, up to and including an amount equal to 0.25% of net sales payable for each year during which any such actions are taken, brought and/or pending, within thirty (30) days of receipt of the documented invoice. Licensor warrants payment of the balance by Licensor. In the event of an award of monetary damages, the proceeds thereof shall be shared pro rata to the expenses paid by the parties. Licensee shall abide by regulations, laws and practices applicable to the Products in force or use in the Territory in order to safeguard Licensor's rights to the Marks. 19 12.3 Licensee shall be liable to Licensor for any unauthorized manufacture, sale and/or use in the Territory or outside the Territory by itself and shall cooperate with Licensor in any action based upon the unauthorized manufacture, sale and/or use in the Territory or outside the Territory by any of Licensee's manufacturers and suppliers of products, labels and tags bearing the Mark. At Licensor's request, Licensee shall furnish Licensor with full documentation evidencing the control and use of its labels including purchase orders and other agreements between it and its manufacturers, if any. In the event the parties determine it is necessary to terminate a relationship with a manufacturer who has infringed the Mark, Licensee will terminate the relationship as soon as commercially feasible allowing for completion of pending orders, and will not place any new orders with that manufacturer. 12.4 Upon the expiration or earlier termination of this Agreement, Licensee shall immediately and absolutely cease and discontinue the use of the Marks in any manner or form whatsoever subject, however, to the provisions of Section 13 hereof. 13. Termination 13.1 In the event of a breach of a payment obligation by Licensee under this Agreement not cured in all material respects within ten (10) days from the receipt of a written notice thereof, or in the event of any other breach of this Agreement by Licensee not cured in all material respects within forty five days from the date of receipt of written notice thereof, this Agreement may be terminated by the Licensor. The exercise or failure to exercise the aforementioned right of termination during an extended period of time shall not be considered a waiver by Licensor of any right to terminate this Agreement nor of any other legal or equitable rights and remedies. A good faith payment dispute shall not be deemed a breach of this Agreement by Licensee. In the event of a breach of this Agreement by Licensor not cured in all material respects within forty-five (45) days from the date of receipt of written notice thereof, this Agreement may be terminated by the Licensee. The exercise or failure to exercise the aforementioned right of termination during an extended period of time shall not be considered a waiver by Licensee or any right to terminate this Agreement nor of any other legal or equitable rights and remedies. 13.2 This Agreement shall immediately terminate and, Licensor shall be relieved of all liability to Licensee, if Licensee: (i) admits in writing its inability, or is unable, to pay its debts as they mature, (ii) makes a general assignment for the benefit of creditors, (iii) is adjudicated a bankrupt or files a petition or answer, seeking reorganization or an arrangement with creditors, (iv) files a petition or otherwise avails itself of any bankruptcy or insolvency law or statute of any country or any state or subdivision thereof, now or hereafter in effect, (v) suffers a petition or proceeding filed against it under any provision of the Bankruptcy Act or any other insolvency law or statute of any country or any state or subdivision thereof, which petition or proceeding is not dismissed within sixty (60) days after the commencement thereof, (vi) has a receiver, trustee, custodian, conservator or other person appointed by any court to take charge of its affairs or assets or business and such appointment is not vacated or discharged within sixty (60) days thereafter, or (vii) discontinues its business as it relates to the Products or suspends it, for whatever cause, for more than 120 consecutive days. 14. Remaining Inventory 20 14.1 Upon the expiration or earlier termination of this Agreement, for any reason whatsoever, Licensee shall, within thirty (30) days thereof, deliver to Licensor a complete and accurate schedule of Licensee's inventory of Products, work in progress and raw materials. Such schedule shall be prepared as of the close of business on the date of such termination. 14.2 Licensor shall thereupon have the option, exercisable by written notice delivered to Licensee within thirty (30) days of receipt of the schedule of inventory, to purchase any or all of the inventory for an amount equal to Licensee's actual cost, F.O.B. factory or LDP with freight or warehouse, as defined according to Generally Accepted Accounting Principles of the United States. Should Licensor send such notice, Licensee will ship to Licensor all of the inventory specified therein, within thirty (30) days of receipt thereof for inventory located in Licensee's facilities, or, for all other inventory, promptly thereafter but no more than forty five (45) thereafter. Licensor shall pay Licensee for such inventory within thirty (30) days of receipt. 14.3 In the event that Licensor elects not to exercise its option to purchase the remaining inventory, Licensee shall have a period of six (6) months from the effective date of termination to complete work in progress and to sell and deliver to other purchasers its remaining inventory under Licensor's Marks on a non-exclusive basis. Licensee will make its reasonable effort to sell only to the previous season's customers and to sell only at regular prices. Royalties on said sales shall be due on the 30th day following the sale thereof. 14.4 The right provided immediately above shall only apply to the remaining inventory of Products as are in good saleable condition. Licensee shall not commence the manufacture of Products during said period and, at the end of such six (6) month period, shall not sell any of its then remaining inventory, unless completely debranded by the removal of all labels, tags, lining, embroidery which identifies the Mark(s). 14.5 If termination is due to the uncured defective quality of the Products manufactured, imported, sold or distributed by Licensee or the unauthorized use of Licensor's Marks by Licensee or its manufacturers, Licensee shall be deemed to have waived the provisions of this Section 14 and shall not sell or distribute any remaining inventory, whatsoever, unless completely debranded. 14.6 All imprints, lettering, stationery, tags, labels, packaging, lining, embroidery or other reproductions of or reference to the Marks shall be removed from all inventory remaining after such six (6) month period and shall be immediately returned to Licensor at no charge or shall be destroyed together with such remaining inventory which cannot be debranded. Either operation shall be conducted under the control of Licensor. In the event that Licensee shall be deemed to have waived the six (6) month inventory liquidation period, as provided in Section 14.3 above, the provisions of this Section 14.6 shall be applicable immediately upon receipt of the Notice of Termination. 14.7 Upon the expiration or earlier termination of this Agreement, for any reason whatsoever, all rights of Licensee under this Agreement shall terminate forthwith and all Royalties on sales theretofore made shall become immediately due and payable. Licensee shall, subject to the provisions of Section 14.3, immediately discontinue all use of the Marks, any imitation or simulation thereof or any Marks similar thereto (subject to the second sentence of Section 3.3 21 above) and shall promptly transfer to Licensor, at cost, all registrations, filings, and rights with regard to the Marks it may have had. 14.8 Upon the expiration or earlier termination of this Agreement, Licensee shall deliver to Licensor, freight and insurance charges at Licensee's expense unless Licensor's default or its notice of non-renewal has caused such termination, all technical information, fabric production information, patterns, markers (provided that markers and graded patterns, with respect to which Licensee has not recovered the value thereof, shall be purchased from Licensee by Licensor at original invoice cost), sketches, designs, colors and the like in its possession or control, designed or approved by Licensor or its duly authorized representatives, and, at cost, all samples, labels, tags, packaging material, business supplies and advertising and promotional materials bearing the Marks in Licensee's possession or control. 15. Force Majeure 15.1 Neither party shall be responsible for any delay of failure in performance of any part of this Agreement to the extent that such delay of failure is caused by fire, flood, explosion, war, embargo, labor problems, shortage, government requirement, civil or military authority, act of God, act of omission of carriers or other similar causes beyond its control. If any such event of force majeure occurs, the party delayed or unable to perform shall give immediate notice to the other party, and shall resume performance once the condition cases with an option in the affected party to extend the period of this Agreement up to the length of time the condition endured. During the event of force majeure the parties shall consult with each other regarding efforts to mitigate the force majeure and continue performance hereunder. 15.2 Licensor shall have the right to terminate this Agreement in whole or as to a portion thereof without further liability by Licensee: (a) In the event that the manufacturing and/or sales operations of Licensee are suspended or disrupted because of a recognized cause of force majeure (including strikes, lockouts, war, natural disaster or other similar cause), and should such suspension or disruption last for a consecutive period of one hundred and eighty (180) days within any six (6) month period, unless Licensee shall forthwith take affirmative steps to rectify the situation, except that if it is apparent at the time of such suspension or disruption that it cannot be rectified within the one hundred and eighty (180) day period, Licensor may terminate forthwith. (b) In the event that payment to Licensor of any Royalties or other sums due under this Agreement is prohibited or otherwise made impossible for a period of ninety (90) days by the laws and/or regulations in effect in the Territory or any portion thereof. 16. Assignment, Sublicenses 16.1 The License and rights granted hereunder are personal in nature. Licensee recognizes and acknowledges that Licensor has agreed to contract with Licensee in reliance upon the experience, reputation and personal qualities of the management and shareholders of Licensee. Licensor shall have the right to terminate this Agreement in the event Licensee (or an authorized assignee or successor under the control of Licensee) shall no longer be under the control of 22 Licensee. Licensee shall not sell, transfer, sublicense or assign its rights and interest hereunder, without the prior written consent of Licensor, which consent shall not be unreasonably withheld; provided, however, that Licensee shall be permitted, upon notice to Licensor, to transfer, sublicense or assign its rights and interest hereunder to any corporation or other legal entity which is under common control with Licensee. For the purpose of this Section 16, "Control", shall mean majority ownership. 16.2 Any sale or other transfer of all or a majority of the outstanding capital stock of Licensee, excluding sales of capital stock of Licensee in a public offering that widely distributes such stock, but, including specifically, without limitation, any merger, consolidation or similar combination, shall be deemed an assignment of the Licensee's rights, interest and obligations under this Agreement. However, an assignment to an entity controlled by Licensee shall be permitted. 16.3 A sale or other transfer of all or substantially all of the assets of Licensee shall be deemed an assignment of Licensee's rights and interest under this Agreement, but such an assignment to an entity controlled by Licensee shall be permitted. 16.4 Licensor shall, with the prior written consent of Licensee, which consent shall not be unreasonably withheld (except as otherwise provided in this Section 16) have a right to sell, transfer, lease or assign its rights and interest in this Agreement, provided that no such consent shall be required in the case of a sale, transfer, lease or assignment by Licensor to a corporation in which Licensor beneficially own a majority of the voting stock, and provided further, that Licensor hereby agree and acknowledge that their services are personal in nature and essential to this Agreement. Sublicensing of the Licensed Marks, Products and/or Territories shall not be permitted without the express prior written consent of Licensor (but this does not prohibit the subcontracting of manufacturing and other production tasks by Licensee). 17. Arbitration 17.1 Any claim controversy arising out of or relating to this Agreement shall be resolved by arbitration in the City of New York pursuant to the rules then obtaining of the American Arbitration Association. The panel of Arbitrators appointed to settle any controversy or claim shall consist of three (3) arbitrators experienced in agreements of this type. 17.2 The arbitrators sitting in any such controversy shall have no power or jurisdiction to alter or modify any express provision of this Agreement or to make any award which by its terms effects such alteration or modification. 17.3 The parties consent for award enforcement purposes to the jurisdiction of the appropriate state and/or federal courts within the State of New York and further consent that any demand for arbitration or any process or notice of motion or other application to the court or a judge thereof, in connection with the same, may be served in or out of the State of New York, by registered mail or by personal service, provided a reasonable time for appearance is allowed. 17.4 The provision for arbitration herein shall not be deemed a waiver of the rights of either party to any provisional remedy provided under state or federal law. It is agreed that in the 23 event of any violation hereof, the other party hereto shall have the right to seek a preliminary injunction enjoining any further violation of this Agreement pending arbitration. 18. Relationship Nothing herein shall create or be deemed to create any agency, partnership, joint venture or other similar relationship between the parties hereto. Licensee shall not represent itself as the legal representative, agent or partner of Licensor and shall have no right to create or assume any obligations express or implied, on behalf of Licensor. 19. Merger This Agreement sets forth the entire and complete Agreement among the parties hereto with respect to its subject matter. This Agreement supersedes and annuls all prior understandings, arrangements and agreements, oral or written, between the parties relating to its subject matter. Neither this Agreement nor any provision hereof may be modified, waived or discharged except by subsequent written instrument signed by each party. 20. Severability If for any reason whatsoever, any provision of this Agreement shall be declared invalid, illegal or unenforceable, in whole or in part, such provision shall be ineffective to the extent of such invalidity, illegality or unenforceability without effecting the validity, legality or enforceability of the remaining provisions hereof or any other portion thereof not declared illegal or unenforceable shall remain in full force and effect. 21. Reversion of Rights and Territories Upon the expiration or earlier termination of this Agreement, and subject to the other provisions of this Agreement, all rights with respect to the Marks, Products and Territory shall immediately revert to Licensor. 22. Remedies and Waivers No failure on the part of the Licensor or Licensee to exercise, and no delay on its part in exercising any right or remedy under this Agreement shall operate as a waiver thereof, nor shall any single or partial exercise of any right or remedy preclude any other or further exercise thereof or the exercise of any other right or remedy. The rights and remedies provided herein are cumulative and are not exclusive of any other rights or remedies provided by law or in equity. 23. Notices All reports, approvals and notices required or permitted to be given under this Agreement shall, unless specifically provided otherwise in this Agreement, be deemed to have been given if mailed by (i) registered or certified mail, return receipt requested (if such service is available), postage prepaid, or (ii) telecopy, receipt confirmed, and follow up hard copy by overnight express 24 to the party concerned at its address indicated below (or at such other address or addresses as any party hereto may from time to time respectively designate by notice in writing to the other party). If to Licensor, to: LATITUDE LICENSING CORP. 22 Carpenter Plaza - Suite 217 Wilmington, DE 19810 with a copy to: MARTIN & MAYNADIER, LLC. 324 East 51st Street New York, NY 10022 If to Licensee, to: I.C. ISAACS AND COMPANY, L.P. 350 Fifth Avenue - Suite 1029- New York, NY 10118 Attn.: Chairman and Co-CEO with a copy to: I.C. ISAACS AND COMPANY, L.P. 3840 Bank Street Baltimore, Maryland 21224 Attn.: President and Co-CEO with a copy to: PIPER AND MARBURY - Attn: Robert Mathias, Esq. 1100 Charles Street Center - 36 South Charles Street Baltimore, Md 21201 24. Governing Law This Agreement shall be construed, and interpreted in accordance with and as governed by the laws of the State of New York, without regard to the conflict of laws provisions thereof. 25. Indemnification and Insurance 25.1 Licensee does hereby indemnify and hold harmless Licensor from and against any and all losses, liability, damages and expenses (including reasonable attorneys fees and expenses) which it may incur or be obligated to pay as a result of or in defending any action, claim or proceeding against Licensor, for or by reason of any acts or omissions committed or suffered by Licensee or any of its servants, agents or employees in connection with Licensee's performance of this Agreement. Licensee shall immediately notify Licensor of any claim or law suit seeking damages in excess of $100,000. The provisions of this Section and Licensee's obligations hereunder shall survive, the expiration or earlier termination of this Agreement. In the event that a judgment, levy, attachment or other seizure is entered against Licensor arising from any claim as to which indemnification is provided hereunder, Licensor shall promptly post the necessary bond to prevent execution against any property of Licensor. 25.2 Licensee shall procure and maintain in full force and effect, at its sole cost and expense, at all times during which Products are being sold, a product liability insurance policy with respect to the Products with a limit of liability of not less than $1,000,000. Such insurance policy shall include Licensor as an additional insured thereunder and shall provide for at least 25 thirty (30) days prior written notice to Licensor of the cancellation or substantial modification thereof. Such insurance may be obtained by Licensee in conjunction with a policy of products liability insurance which covers products other than the Products. Licensee will deliver a certificate of such insurance to Licensor promptly upon issuance of said insurance policy and shall, from time to time upon reasonable request by Licensor, promptly furnish to Licensor evidence of the maintenance of said insurance policy. Likewise without limitation of its indemnification obligations under this Agreement, Licensor shall procure and maintain in full force and effect, at its sole cost and expense, at all times during which Products are being sold, a product liability insurance policy with respect to potential liability under this Agreement with a limit of liability of not less that $1,000,000. 26. Plural, Singular Whenever the singular is used it shall include the plural and vice versa. 27. Headings The headings of the Articles and Paragraphs of this Agreement are for convenience only and shall in no way be deemed to limit or affect the terms or conditions of this Agreement. 28 . Counterparts This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.222922 29. Limitation of Liability Except with respect to indemnification obligations due to third parties and to the provisions of Section 7.2.1 herein, neither party shall be liable to the other for any special, indirect, consequential or similar damages arising from a breach of this Agreement or of any order hereunder even if advised of the possibility of such damages. IN WITNESS WHEREOF, the parties have executed, by their respective duly authorized officers, this Agreement as of the day and year first above written. LATITUDE LICENSING CORP. I.C. ISAACS AND COMPANY, L.P. By: /s/ Francois Girbaud By: /s/ Robert J. Arnot ----------------------- ----------------------- Name: Name: Robert J. Arnot Title: Title: Chairman and Co-CEO Isaac\womeagr.doc 26 TRADEMARK LICENSE AND TECHNICAL ASSISTANCE AGREEMENT FOR WOMEN'S COLLECTIONS 1. Grant......................................................................2 2. Term and Territory.........................................................4 3. Use of the Trademarks......................................................4 4. Royalties..................................................................7 5. Designs and Technical Assistance...........................................9 6. Protection of Technical Information.......................................12 7. Manufacture...............................................................13 8. Advertising and Promotion.................................................14 10. Fashion Shows.............................................................18 11. Access to Books and Records...............................................18 12. Protection of the Marks...................................................19 13. Termination...............................................................20 14. Remaining Inventory.......................................................20 15. Force Majeure.............................................................22 16. Assignment, Sublicenses...................................................22 17. Arbitration...............................................................24 18. Relationship..............................................................24 19. Merger....................................................................24 20. Severability..............................................................24 21. Reversion of Rights and Territories.......................................24 22. Remedies and Waivers......................................................24 23. Notices...................................................................24 27 24. Governing Law.............................................................25 25. Indemnification and Insurance.............................................25 26. Plural, Singular..........................................................26 27. Headings..................................................................26 28 . Counterparts.............................................................26 29. Limitation of Liability...................................................26 28 EX-10.26(C) 4 EXHIBIT 10.26(C) CANCELLATION AGREEMENT AGREEMENT dated this 4th day of March, 1998, by and between GIRBAUD DESIGN, INC., ("Licensor") a corporation organized and existing under the laws of the State of Delaware having its offices at: 411 East 50th Street, New York, NY 10023. and I.C. ISSACS & COMPANY, L.P. ("Licensee"), a limited partnership organized and existing under the laws of Delaware having the offices at 3840 Bank Street, Baltimore, Maryland 21224-2522 and 350 Fifth Avenue, Suite 1029-New York, NY 10118. WHEREAS, Licensor and Licensee have entered into a Trademark License and Technical Assistance Agreement (the "License Agreement") for Men's Jean wear and Casual wear dated November 1997. 1. For good and valuable consideration, the receipt of which is hereby acknowledged, the parties have agreed to cancel the License Agreement. 2. This cancellation is effective as of January 15, 1998. GIRBAUD DESIGN, INC. I.C. ISAACS & COMPANY, L.P. By: Francois Girbaud By: I.C., ISAACS & COMPANY, INC -------------------- General Partner Name: Title: /s/ Robert J. Arnot --------------------------------- Name: Robert J. Arnot Title: Chairman & Co-CEO Date: March 4, 1998 EX-10.28 5 EXHIBIT 10.28 [Letterhead] To: Bob Arnot, Chairman of the Board/C.E.O. - I.C. ISAACS & COMPANY, LP FAX #212-967-4389 Date: March 17, 1998 "VIA FACSIMILE & CERTIFIED MAIL" -------------------------------- Pages: 1 page(s) total, including cover sheet COMMENTS: LETTER AGREEMENT ---------------- Dear Bob: Pursuant to my discussion with Bruce Arnold and your subsequent approval, this letter shall serve as our agreement that BHPC Marketing, Inc. hereby is approving and allowing the patches in question bearing the color navy blue to be used on apparel with the understanding that if said patches infringe in any way, shape or form the settlement agreement with Polo Fashions, Inc., I.C. Isaacs & Company, LP and BHPC Marketing, Inc. shall bear eventual total cost in correcting the infringement equally. If you agree with the aforementioned, please sign where indicated below and send back to me as soon as possible. Best regards, BHPC Marketing, Inc. /s/ Don Garrison The foregoing is agreed to and accepted, as setting for - ----------------- the agreement of the undersigned with respect to the Don Garrison matters set forth above. Vice President /s/ Robert Arnot ---------------------------------------------- by: Robert Arnot, Chairman of the Board/C.E.O. I.C. ISAACS & COMPANY, L.P. 3/18/98 ------- DATE EX-10.29 6 EXHIBIT 10.29 [LOGO] February 25, 1998 Via Facsimile & Certified Mail Mr. Bob Arnot I.C. Isaacs & Co., L.P. 3840 Bank Street Baltimore, MD 21224-2522 RE: International License Agreement for I.C. Isaacs Europe S.L. Wholesale Sales Dear Bob: Pursuant to our conversations, BHPC Marketing, Inc. agrees to the following: Effective immediately for the current Contract Year in progress and subsequent Contract Years, this letter will confirm our agreement that in the event that I.C. Isaacs Europe S.L. does not achieve the Guaranteed Target Net Shipment, BHPC Marketing, Inc. will not terminate subject agreement. Should you have any questions, please do not hesitate to call me. Sincerely, BHPC Marketing, Inc. The foregoing is agreed to and accepted as setting for /s/ Don Garrison the agreement of the undersigned with respect to the - -------------------- matters set forth above. Don Garrison Vice President by: /s/ Robert Arnot 2/27/98 ---------------------------------------- ------- Robert Arnot, Chairman of the Board DATE and Co-CEO I.C. Isaacs & Co., Inc. by: --------------------------------------- -------- Gerald Lear, President/C.E.O. DATE I.C. Isaacs & Co., L.P. EX-10.30 7 EXHIBIT 10.30 [LOGO] February 25, 1998 Via Facsimile & Certified Mail Mr. Bob Arnot I.C. Isaacs & Co., L.P. 3840 Bank Street Baltimore, MD 21224-2522 RE: International Exclusive License Agreement for I.C. Isaacs Europe S.L. Retail Stores Dear Bob: Effective immediately for the current Contract Year in progress and subsequent Contract Years, this letter will confirm our agreement that BHPC Marketing, Inc. will base performance of this International Exclusive License Agreement on the payment of Monthly Guaranteed Royalty Payments rather than the achievement of Guaranteed Net Shipments. BHPC further agrees that in the event I.C. Isaacs Europe S.L. does not achieve the Guaranteed Target Net Shipments, BHPC Marketing, Inc. will not terminate subject agreement. It is further stated that Section 7. Guarantees is amended as follows:
Guaranteed Guaranteed Guaranteed Target Guaranteed Annual Monthly Net Net Royalty Royalty Shipments Shipments Payments Payments ----------- ---------- ----------- ----------- 1998 $500,000 $500,000 $40,000.00 $2,500.00* 1999 $800,000 $800,000 $64,000.00 $5,333.33 2000 $1,000,000 $1,000,000 $80,000.00 $6,666.67
*NOTE: Commencement March 1, 1998. Should you have any questions, please do not hesitate to call me. Sincerely, BHPC Marketing, Inc. The foregoing is agreed to and accepted as setting /s/ Don Garrison for the agreement of the undersigned with respect - ------------------ to the matters set forth above. Don Garrison Vice President by: /s/ Robert Arnot 2/27/98 --------------------------------------- -------- Robert Arnot, Chairman of the Board DATE and Co-CEO I.C. Isaacs & Co., Inc. by: --------------------------------------- -------- Gerald Lear, President/C.E.O. DATE I.C. Isaacs & Co., L.P. EX-27.01 8 EXHIBIT 27.01
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1997 AND THE CONSOLIDATED STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER 31, 1997 OF I.C. ISAACS & COMPANY, INC. AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. YEAR DEC-31-1997 DEC-31-1996 DEC-31-1997 7,422,067 0 24,205,077 (1,185,000) 23,926,226 56,147,162 16,177,954 (13,499,266) 73,442,721 9,510,676 11,608,637 0 0 782 0 73,442,721 161,445,362 161,445,362 109,693,828 145,242,520 0 1,739,865 (2,372,132) 13,698,984 1,349,000 15,047,984 0 0 0 15,047,984 1.62 1.62 BENEFIT TOTAL DEBT GROSS GROSS
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