-----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, SI5VfWGcJCW7nqPik8/pmR7LsEnC1C8y6ear75Ll4qfcwSTfgiAcaXg5e/uFpOR6 M6RGs40JHstyi58sHi7iRQ== 0001047469-99-012478.txt : 19990331 0001047469-99-012478.hdr.sgml : 19990331 ACCESSION NUMBER: 0001047469-99-012478 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 19 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990330 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: 99578982 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 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, 1998 I.C. ISAACS & COMPANY, INC. (Exact name of registrant as specified in charter) DELAWARE 52-1377061 (State or other jurisdiction of (IRS employer incorporation or organization) identification no.) 3840 BANK STREET, BALTIMORE, MARYLAND 21224-2522 (Address of principal executive office) (Zip code)
Registrant's telephone number, including area code: (410) 342-8200 Securities Registered Pursuant to Section 12(b) of the Act: NONE Securities Registered Pursuant to Section 12(g) of the Act: Title of Class: COMMON STOCK, $.001 PAR VALUE PER SHARE Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes _X_ No ___ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K [X]. As of March 26, 1999, the aggregate market value of the outstanding shares of the Registrant's Common Stock held by non-affiliates was approximately $8,477,750 based on the average closing price of the Common Stock as reported by the Nasdaq National Market on March 26, 1999. Determination of affiliate status for this purpose is not a determination of affiliate status for any other purpose. As of March 26, 1999, 6,782,200 shares of Common Stock were outstanding. DOCUMENT INCORPORATED BY REFERENCE Specified portions of the definitive Proxy Statement for the 1999 Annual Meeting of Stockholders of I.C. Isaacs & Company, Inc. to be held on June 3, 1999 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.............................................................................. 17 ITEM 3. LEGAL PROCEEDINGS....................................................................... 17 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..................................... 17 PART II ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.................. 18 ITEM 6. SELECTED FINANCIAL DATA................................................................. 19 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS... 20 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA............................................. 28 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.... 28 PART III *ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY......................................... 29 *ITEM 11. EXECUTIVE COMPENSATION.................................................................. 29 *ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.......................... 29 *ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.......................................... 29 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K........................ 29 SIGNATURES........................................................................................... 34
- ------------------------ * Incorporated by reference from the Registrant's definitive Proxy Statement for the 1999 Annual Meeting of Stockholders to be held June 3, 1999. 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 THE COMPANY AND ITS MANAGEMENT, INCLUDING INDICATIONS REGARDING THE STRENGTH OF UPCOMING COLLECTIONS AND THE COMPANY'S EXPECTATIONS FOR 1999, STATEMENTS REGARDING ANTICIPATED COST SAVINGS, ANTICIPATED WORKING CAPITAL NEEDS, AND DISCLOSURES REGARDING THE COMPANY'S YEAR 2000 READINESS, EXPENDITURES AND PLANS. WORDS SUCH AS "BELIEVES," "ANTICIPATES," "EXPECTS," "INTENDS," "PLANS," AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS BUT ARE NOT THE EXCLUSIVE MEANS OF IDENTIFYING SUCH STATEMENTS. SUCH STATEMENTS ARE FORWARD-LOOKING STATEMENTS WHICH ARE SUBJECT TO A VARIETY OF RISKS AND UNCERTAINTIES, MANY OF WHICH ARE BEYOND THE COMPANY'S CONTROL, WHICH COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE CONTEMPLATED IN SUCH FORWARD-LOOKING STATEMENTS, INCLUDING IN PARTICULAR THE RISKS AND UNCERTAINTIES DESCRIBED UNDER "RISK FACTORS" IN THE COMPANY'S PROSPECTUS, WHICH INCLUDE, AMONG OTHER THINGS (I) CHANGES IN THE MARKETPLACE FOR THE COMPANY'S PRODUCTS, INCLUDING CUSTOMER TASTES, (II) THE INTRODUCTION OF NEW PRODUCTS OR PRICING CHANGES BY THE COMPANY'S COMPETITORS, (III) CHANGES IN THE ECONOMY, AND (IV) TERMINATION OF ONE OR MORE OR ITS AGREEMENTS FOR USE OF THE BOSS, BEVERLY HILLS POLO CLUB AND GIRBAUD BRAND NAMES AND IMAGES IN THE MANUFACTURE AND SALE OF THE COMPANY'S PRODUCTS. EXISTING AND PROSPECTIVE INVESTORS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING STATEMENTS, WHICH SPEAK ONLY AS OF THE DATE HEREOF. THE COMPANY UNDERTAKES NO OBLIGATION TO UPDATE OR REVISE THE INFORMATION CONTAINED IN THIS ANNUAL REPORT ON FORM 10-K, WHETHER AS A RESULT OF NEW INFORMATION, FUTURE EVENTS OR CIRCUMSTANCES OR OTHERWISE. PART I ITEM 1. BUSINESS INTRODUCTION I.C. Isaacs & Company, Inc. (together with its predecessors, subsidiaries and affiliated companies, including I.C. Isaacs & Company L.P., the "Company") is a designer, manufacturer and marketer of branded 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 and boys under the BOSS brand in the United States and Puerto Rico and sportswear for men and boys under the Beverly Hills Polo Club brand in the United States, Puerto Rico and Europe. The Company offers broad collections of men's and women's sportswear under the Girbaud designer brand in the United States and Puerto Rico. 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 jeanswear and sportswear through specialty and department stores. The Company also offers women's pants and jeans under various other Company-owned brand names as well as under third-party private labels for sale to major chain stores and catalogs. 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. The BOSS collection has been expanded from an initial line of denim products to a full 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 denim products, tee shirts and active sportswear. Net sales of BOSS sportswear accounted for 73.4% and 74.6% of the Company's net sales in 1998 and 1997, respectively. The Company manufactures and markets certain sportswear under the Beverly Hills Polo Club brand in the United States, Puerto Rico and Europe under an exclusive license. The Company targets men and boys 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 14.6%, and 15.8% of the Company's net sales in 1998 and 1997, 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. In November 1998, both licenses were expanded to include selected countries in Central and South America and the Caribbean. The Girbaud brand is an internationally recognized designer sportswear label with a distinct European influence. By targeting customers who desire contemporary, international fashion, the Girbaud brand has enabled the Company to address another consumer segment with its branded product portfolio. The Company has positioned the Girbaud line with a broad assortment of products, styles and fabrications reflecting a contemporary European look. In February 1998, the Company began marketing a full collection of men's jeanswear and sportswear under the Girbaud brand including a broad array of bottoms, tops and outerwear. In August 1998, the Company introduced a women's sportswear collection under the Girbaud brand including bottoms, tops and outerwear. Net sales of Girbaud sportswear accounted for 4.1% of the Company's sales in 1998. 1 The Company also manufactures and markets a limited number of pants and jeans styles for women under its own "I.C. Isaacs," "Lord Isaacs" and "Pizzazz" brand names and under third-party private labels for sale to major chain stores and catalogs. Net sales of these labels accounted for 7.8% and 9.5% of the Company's net sales in 1998 and 1997, respectively. RECENT EVENTS The Company experienced increased competition in 1998 from a number of competitors, including the Tommy Jeans division of Tommy Hilfiger and the Polo Jeans division of Polo Ralph Lauren, at both the department store and specialty store channels of distribution. The Company believes that both Tommy Jeans and Polo Jeans have undertaken strategies that include massive consumer advertising and the addition of sales efforts directed at specialty stores as a way to expand distribution. In addition, other brands such as DKNY and Nautica have recently improved the jeanswear segments of their product lines, and a number of new companies, such as FUBU, have emerged with competing products targeted at the urban young men's market. In November 1998, the Company announced a restructuring plan designed to address this increasingly competitive environment for young men's jeanswear. Under the restructuring plan the Company has positioned and merchandized its Girbaud line of sportswear to offer jeanswear and sportswear products that are truly innovative and distinctive from a styling perspective. Second, the Company has restructured and expanded its BOSS young men's merchandising staff in an effort to develop product lines that are more consistent with market trends and to present the product lines to the market in a timely manner. In addition, the Company has focused its resources on those product lines with the greatest profit potential, and has made significant expense reductions. In connection with these activities, the Company recorded a $1.1 million charge in the third quarter of 1998 related to the write down of inventory and goodwill and an additional charge of $0.3 million in the fourth quarter related to the closure of the Company's Carthage, Mississippi manufacturing facility. Key elements of the restructuring plan include the following: - The Company has drastically reduced or eliminated several product lines or categories that were not profitable or did not have near-term profit potential. As a result of these initiatives, the Company's focus will be streamlined towards the BOSS young men's, juniors' and boys', Beverly Hills Polo Club men's and boys' and Girbaud men's and women's sportswear lines. - With the exception of continuing its basic jeans and pants models for sale to major chain stores and catalogs, the Company has discontinued production of women's sportswear manufactured under its own brand names and under third party private labels. This initiative is consistent with the Company's overall shift towards brand-driven products. - The Company has discontinued its line of women's sportswear manufactured under the Beverly Hills Polo Club label and focused its energy on designing and marketing its Beverly Hills Polo Club men's and boy's collections. - In addition to eliminating its Beverly Hills Polo Club women's line, the Company has significantly reduced and modified its European men's line under the Beverly Hills Polo Club label. In January 1999, the Company presented a collection designed to be more reflective of current trends in the European marketplace. - The Company has amended certain of its licensing agreements with the licensor of the Beverly Hills Polo Club brand name to provide for the elimination of international royalties for the remainder of 1999 and a substantial reduction in international royalties in 2000. - The BOSS juniors' line has been substantially reduced and is more focused on core price point products with greater volume potential, such as jeans and tee-shirts. - The Company has significantly cut the number of styles and SKUs offered in its continuing branded sportswear lines to reduce product development costs, selling expenses and inventory exposure. 2 - The Company's Carthage, Mississippi manufacturing plant--which was largely responsible for the production of women's pants and jeans--was closed in February 1999. A portion of the production in this facility has been transferred to the remaining Company-owned plant in Raleigh, Mississippi, as well as to independent contractors in Mexico. - The Company's advertising budget has been reduced to reflect the decrease in lines; more dollars will be allocated towards special events and point-of-sale advertising and promotions. The Company believes that this type of exposure provides the greatest benefit for its expenditures. There will be no reduction in the advertising to support growth of the Girbaud brand, which includes a full print media campaign as well as billboards, buses and special events. PRODUCTS The Company's sportswear collections under the BOSS, Beverly Hills Polo Club and Girbaud brands provide a broad range of product offerings for young men, women and boys including a variety of tops, bottoms and outerwear. 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 a limited number of styles of women's pants and jeans under its own "I.C. Isaacs," "Lord Isaacs" and "Pizzazz" brand names as well as under third-party private labels. BOSS PRODUCTS The BOSS brand is a full sportswear line characterized by innovative fabrication and creative graphics. 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 several 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 has 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. 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 Company's outerwear line 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. 3 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 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 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. 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 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. GIRBAUD PRODUCTS The Girbaud brand is an internationally recognized designer sportswear label. The Company has launched innovative European-inspired men's and women's sportswear collections under the Girbaud label. The Girbaud collections include full lines of bottoms consisting of jeans and casual pants in a variety of fabrications, including denim, stretch denim, cotton twill and nylon, cotton tee shirts, polo shirts, knit and woven tops, sweaters and outerwear. Reflecting contemporary European design, each of these collections is characterized by innovative styling and fabrication and is targeted to consumers ages 16 to 50. Estimated retail prices range from $20 to $25 for tee shirts, $50 to $75 for tops and bottoms, $60 to $90 for sweaters and $80 to $200 for outerwear products. COMPANY-OWNED AND THIRD-PARTY PRIVATE LABEL PRODUCTS The Company also produces a limited number of pants and jean styles for women under its own brands, including "I.C. Isaacs," "Lord Isaacs" and "Pizzazz," as well as under customers' private labels for 4 sale to major chain stores and catalogs. These brands focus on pull-on elastic waist pants and jeans. These pants are designed to appeal to more mature women looking for basic styling at value prices. The Company offers pants in a variety of fits, including missy, petite and large sizes. Estimated retail prices range from $15 to $24. CUSTOMERS AND SALES The Company's products are sold in over 3,500 specialty stores, specialty store chains and department stores. The Company uses both sales representatives and distributors for the sale of its products. Sales representatives include employees of the Company as well as independent contractors. Each of the Company's distributors and non-employee sales representatives has an agreement with the Company pursuant to which the distributor or sales representative serves as the exclusive distributor or sales representative of specified products of the Company within a specified territory. The Company does not have long-term contracts with any of its customers. Instead, its customers purchase the Company's products pursuant to purchase orders and are under no obligation to continue to purchase the Company's products. The Company's BOSS products are sold throughout the United States and Puerto Rico in over 2,500 specialty stores and specialty store chains. Substantially all of the Company's net revenues are attributable to domestic sales. The Company's newest level of distribution is to department stores, and its single largest customer in 1998 was J.C. Penney Company, Inc., which accounted for 26.2% of net sales. No other customer of the Company accounted for 10.0% or more of net sales in 1998. The Company's BOSS products are sold and marketed under the direction of its national sales office headquartered in New York. In addition to executive selling based in New York and Dallas, the Company has 19 commissioned BOSS sales representatives who work out of regional showrooms throughout the United States and Puerto Rico. The Company 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 to over 2,000 specialty stores, specialty store chains and department stores, such as J.C. Penney Company Inc. and Peebles. The Company's Beverly Hills Polo Club products are sold and marketed under the direction of its national sales offices in New York. In addition to executive selling based in New York and Dallas, the Company has a sales force consisting of 15 Beverly Hills Polo Club sales representatives. 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, 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. The Company has established three franchise stores in Spain. The Company began marketing men's sportswear under the Girbaud brand in February 1998 and introduced a women's sportswear collection under the Girbaud brand in the second quarter of 1998. The Company's Girbaud products are being sold to more than 800 stores in the United States and Puerto Rico, including major department stores such as Nordstroms, Bloomingdales, Macy's East, Macy's West and Dayton Hudson, and many prominent speciality stores such as Fred Segal Santa Monica and The Atrium in New York. The Company's Girbaud brand products are sold and marketed domestically under the direction of a 9-person sales force headquartered in New York and in Central and South America and the Caribbean by agreement with a third-party distributor. The Company-owned branded products and the Company's third-party private label products are sold under the direction of the sales headquarters in New York. The products are distributed to department 5 stores such as Sears Roebuck and Co.; mass merchandisers and discounters such as Hills Department Store Company and Ames Department Stores, Inc.; and catalogs such as National Wholesale Co., Inc. and Arizona Mail Order Company, Inc. 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 1998, the Company's design staff grew from 6 to 20 people. The Company currently has 16 people on the design staff in New York City. Design expenditures incurred were approximately $3.0 million in 1998. The Company estimates that design expenditures in 1999 will be approximately the same. ADVERTISING AND MARKETING The Company prides itself on its ability to efficiently utilize its advertising budget. Although the Company increased its expenditures on advertising to approximately $5.7 million or 5.0% of net sales in 1998, this is still a relatively modest amount as compared with some of its competitors. In 1997 and 1998, the Company's expenditures for advertising and marketing activities totaled $3.9 million and $5.7 million, respectively. The Company aggressively communicates and reinforces the brand and image of its BOSS, Beverly Hills Polo Club and Girbaud products through creative and innovative advertising and marketing efforts. The Company's advertising and marketing strategies are directed by its national sales offices and developed in collaboration with its advertising agencies and, in the case of Girbaud, with the Girbaud Paris office. 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, the Beverly Hills Polo Club brand since 1994 and the Girbaud brand since 1998. Its advertising campaigns have evolved from trade magazines to a wide variety of media, including billboards, television, fashion magazines and professional sports endorsements. Print advertisements for the BOSS brand appear in SOURCE, SLAM, SPORTSWEAR INTERNATIONAL, XXL and URBAN LATINO magazines, while television advertisements appear on MTV: Music Television, and the Madison Square Garden (MSG) Network. 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 and MSG. The Company is a sponsor of selected professional basketball teams, including the New York Knicks and New Jersey Nets, and Beverly Hills Polo Club was a sponsor of the NCAA Basketball Tournaments and the PGA Tour. The Company's products can 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. Recognizing that point of sale advertising is highly effective, the Company also provides an array of in-store signage and product videos for both BOSS and Beverly Hills Polo Club products. To increase consumer awareness of the Girbaud brand in the United States, the Company has begun a multifaceted marketing campaign which includes print advertisement in magazines such as ELLE, VIBE, DETOUR, DETAILS and INTERVIEW magazines. The campaign also includes outdoor advertising, including billboard and signage on New York City buses, point of sale materials and promotions, and celebrity wardrobing. As a first tier designer brand, Girbaud also presents international runway shows as well as appearing in major trade shows. 6 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 1998, approximately 16.5% of the Company's purchases of raw materials, labor and finished goods for its apparel were made in Mexico; approximately 32.9% were made in Asia; approximately 29.3% 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 78.7% of the Company's manufacturing and sourcing in 1998 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. UNITED STATES AND MEXICO Until the second quarter of 1998, the Company operated three manufacturing facilities in Mississippi. In 1998, the Company produced approximately 40% of its bottoms (slacks, jeans, shorts and skirts) in these facilities. In the second quarter of 1998, the Company closed its Newton, Mississippi manufacturing facility. This closure resulted in a charge of $0.2 million against earnings for the quarter ended March 31, 1998. The production in this facility, the majority of which was jeans, was transferred to a third party independent contractors' facilities in Mexico. The actual expenses incurred in connection with the closure were not significantly different than the reserve provided by the Company in the first quarter. In the first quarter of 1999, the Company closed its Carthage, Mississippi manufacturing facility. This closure resulted in a charge of $0.3 million against earnings in the quarter ended December 31, 1998. The production in this facility, the majority of which was ladies' pants and jeans under the Company's private labels, was transferred to the remaining Company-owned plant in Raleigh, Mississippi, as well as to independent contractors in Mexico. The Company's remaining facility in Raleigh, Mississippi employs approximately 230 people. The Company utilizes five contractors in the United States and three contractors in Mexico. The majority of the Company's U.S. and Mexico production is of bottoms and tee shirts. The Company 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 the Company-operated facility. All contractors in the United States and Mexico are selected and managed by the Company's manufacturing staff in Mississippi and Mexico. The Company uses a variety of raw materials, principally consisting of woven fabrics including denim, cotton and various trim items. While the Company must make commitments for a significant portion of its fabric purchases in advance of sales, the Company's risk is reduced because a substantial portion of the Company's products are sewn in basic denim which is widely available. ASIA In addition to the Company's domestic and Mexican pant and tee shirt production facilities, the balance of the Company's sportswear products is produced by approximately 30 different manufacturers in 7 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 1998. 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 percentage 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 services its United States customers and intends to service its Central and South American and Caribbean customers utilizing a 70,000 square foot Company-owned and operated distribution center in Milford, Delaware. The Company has established a computerized "Warehouse Management System" with real-time internal tracking information and the ability to provide its customers with electronically transmitted "Advance Shipping Notices." The accuracy of shipments is increased by the ability to scan coded garments at the packing operation. This process also provides for computerized routing and customer invoicing. The vast majority of shipments are handled by UPS, common carriers or parcel post. The Company previously determined, based on prior years' sales levels, that its distribution requirements could be better met by consolidating its warehousing and distribution functions into a new 150,000 square foot facility in Milford, Delaware. As a result of an overall decline in sales and demand, the Company has decided to delay the construction of the new distribution center for the foreseeable future. The Company does not intend to dispose of its current distribution center. The Company also has a warehouse in Carthage, Mississippi. The Company currently services its European customers through a contractual arrangement with a distribution center in Barcelona, Spain, where the Company maintains its European headquarters. QUALITY CONTROL The Company's quality control program is designed to ensure that all of the Company's products meet its high quality standards. The quality of piece goods is monitored prior to garments being produced, and prototypes of each product are inspected and approved before production runs are commenced. The goods produced by the Company-operated facility, as well as by United States and Mexican contractors, undergo continual audits by quality personnel during production. The quality control efforts of the Company-operated facility 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 6 persons dedicated to the quality control efforts of its United States and Mexican production. 8 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, 1998, the Company had unfilled orders of approximately $27.0 million, compared to approximately $46.0 million of such orders as of December 31, 1997. The Company expects to fill substantially all of these orders in 1999. The backlog of orders at any given time is affected by a number of factors, including seasonality, weather conditions, scheduling of manufacturing and shipment of products. During 1998, increased competition and continued sluggishness in the retail apparel market contributed to the decrease in backlog. All such orders are subject to cancellation for causes such as late delivery. Accordingly, a comparison of backlogs of orders from period to period is not necessarily meaningful and may not be indicative of eventual actual shipments. 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, Inc. ("Brookhurst") to use the registered trademark BOSS in the United States and Puerto Rico in connection with certain items of sportswear for men and women. 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. 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 9 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. 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 10 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 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 an exclusive wholesale licensing agreement (the "BHPC Agreement") with BHPC Marketing, Inc. for the manufacture and promotion of certain men's sportswear bearing the registered trademark Beverly Hills Polo Club with an accompanying horse and rider design (the "BHPC Trademark") for sale to moderate or better department stores and specialty stores in the United States and its possessions, including Puerto Rico. Under the BHPC Agreement, the Company may sell up to 25.0% of its total volume to warehouse clubs. The licenses generally allow the Company to use the BHPC Trademark on sportswear designed by or for the Company, subject to a quality approval process for marketing and advertising materials, manufacturing premises and products bearing the trademark. Under the license, 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 11 products. Under the license, the Company pays a monthly royalty equal to the greater of 8.3% of the guaranteed minimum annual royalty or the actual royalty earned by the licensor in the preceding month. Under the BHPC Agreement, the Company has been granted an exclusive license to use the BHPC Trademark in connection with menswear fashions made of materials other than silk in the following categories: denim sportswear, outerwear, knit and woven shirts, knit and woven casual pants and shorts, sweaters, basic and fashion fleece tops and bottoms, overalls and shortalls, knit tops (including tee shirts and polo shirts), swimwear and warm-ups. The BHPC Agreement has a three year term expiring December 31, 2001 and is renewable at the option of the Company, provided the Company is not in breach thereof at the time renewal notice is given, for a three-year period commencing January 1, 2000 through December 31, 2004. In 1998, the Company was subject to a guaranteed payment of $400,000. Guaranteed minimum annual royalties and guaranteed annual net shipments for the current term and the renewal term are equal to the greater of (i) 80.0% of the immediately preceding contract year's actual royalties and net shipments or (ii) the previous year's guaranteed minimum royalty and guaranteed net shipments. The BHPC Agreement may be terminated by the licensor upon the occurrence of certain events, including but not limited to the following: (i) a breach by the Company of any obligation under the agreement that remains uncured within 30 days following the receipt of written notice of such breach, (ii) the Company becomes insolvent, is the subject of a petition in bankruptcy or otherwise enters into any composition with its creditors, including reorganization, or (iii) the Company has committed three breaches of the agreement, in which case no right to cure the breach is afforded to the Company. During the term of the BHPC Agreement, the Company is prohibited from manufacturing or otherwise distributing any merchandise under a brand name which closely resembles the BHPC Trademark and from using on non-Beverly Hills Polo Club products any graphic, style or design which closely resembles any items supplied to the Company by the licensor. In addition, the rights of the Company under the BHPC's Agreement are subject to the terms of a Settlement Agreement and Consent Judgment between the licensor and Polo Fashions, Inc., which imposes certain restrictions on the licensor's manner of use and advertising of the BHPC Trademark, including a prohibition on the use of the words "Polo" and "Polo Club" alone on any item of apparel. The Company believes that the BHPC Trademark, as licensed to the Company, complies with those restrictions. In April 1998, the Company entered into an exclusive license (the "BHPC Boys' Agreement") to manufacture and market boys' sportwear, including knit and woven shirts, cotton and cotton mixed pants (excluding tailored pants), jeans, shorts, swim shorts and sports outerwear, under the Beverly Hills Polo Club brand in the United States and Puerto Rico. Under the terms of the BHPC Boys' Agreement, the Company must pay the licensor of the BHPC Trademark royalties equal to 5% of net shipments by the Company of licensed products. The Company is subject to guaranteed minimum annual royalties of $50,000 in 1999. The BHPC Boys' Agreement has an initial term of three years, and is renewable at the option of the Company, provided the Company is not in breach thereof at the time the renewal notice is given, until December 31, 2004. Beverly Hills Polo Club International Licenses On August 15, 1996, I.C. Isaacs Europe, S.L., a Spanish limited corporation and wholly-owned subsidiary of the Company, entered into retail and wholesale license agreements (collectively, the "International Agreements") for use of the BHPC Trademark in Europe. The International Agreements, as amended, 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, provided the Company is not in breach thereof at the time the renewal notice is given, through three consecutive extensions ending December 31, 2004. The International Agreements are subject to substantially the same terms and conditions as the BHPC Agreements described above. 12 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 apparel, including denim sportswear, outerwear, woven shirts, knit and woven casual pants and shorts, sweaters, basic and fashion fleece tops and bottoms, overalls and shortalls, knit tops (including tee shirts and polo shirts) swimwear and warm-ups (excluding suits, ties, dress shirts, underwear, shoes, overcoats and full length rainwear); (ii) women's apparel, including slacks, skirts, dresses, sweaters, outerwear, blouses and jeans; and (iii) all other products licensed by the Beverly Hills Polo Club licensor to other third parties (which must be purchased by the Company from the authorized third-party licensees). Under the Retail Agreement, the Company was required to pay the licensor royalties (the "Initial Retail Royalties") equal to (i) 4.0% of the wholesale purchases by the Company of Beverly Hills Polo Club products sold to Beverly Hills Polo Club retail stores ("Wholesale Purchases") and (ii) 2.0% of retail sales of licensed products by Beverly Hills Polo Club retail stores and was subject to guaranteed minimum annual royalty payments of $30,000 in 1999 and guaranteed net shipment volumes of $0.8 million in 1999. By amendment dated as of March 1, 1999 the Retail Agreement was amended (the "Retail Amendment") to provide as follows: (i) for the period beginning March 1, 1999 and ending December 31, 1999, no royalties, guaranteed minimum annual royalties or guaranteed net shipment volumes shall apply; (ii) for the period beginning January 1, 2000 and ending December 31, 2000, the Company shall pay the licensor royalties equal to 3.0% of Wholesale Purchases, and no guaranteed minimum annual royalties or guaranteed net shipment volumes shall apply; and (iii) for any periods thereafter, the Initial Retail Royalties shall apply and the Company shall be subject to the guaranteed minimum annual royalties and guaranteed net shipment volumes, in effect immediately prior to the date of the Retail Amendment. 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, including denim sportswear, outerwear, woven shirts, knit and woven casual pants and shorts, sweaters, basic and fashion fleece tops and bottoms, overalls and shortalls, knit tops (including tee shirts and polo shirts), swimwear and warm-ups (excluding suits, ties, dress shirts, underwear, shoes, overcoats, and full length rainwear); and (ii) women's apparel, including slacks, skirts, dresses, sweaters, outerwear, blouses and jeans. Under the Wholesale Agreement, the Company was required to pay the licensor royalties, (the "Initial Wholesale Royalties") equal to 6.0% of net shipments by the Company of licensed products directly to authorized Beverly Hills Polo Club distributors or to retail stores ("Net Shipments") and was subject to guaranteed minimum annual royalty payments of $120,000 in 1999 and guaranteed net shipment volume of $4.0 million in 1999. By amendment dated as of March 1, 1999, the Wholesale Agreement was amended (the "Wholesale Amendment") to provide as follows: (i) for the period beginning March 1, 1999 and ending December 31, 1999, no royalties, guaranteed minimum annual royalties or guaranteed net shipment volumes shall apply; (ii) for the period beginning January 1, 2000 and ending December 31, 2000, the Company shall pay royalties equal to 3.0% of Net Shipments and shall be subject to a guaranteed minimum annual royalty payment of $60,000; and (iii) for any periods thereafter, the Initial Wholesale Royalties shall apply and the Company shall be subject to the guaranteed minimum annual royalties and guaranteed net shipment volumes in effect immediately prior to the date of the Wholesale Amendment. 13 GIRBAUD LICENSES GIRBAUD DOMESTIC LICENSES In November 1997, the Company entered into an exclusive license agreement (the "Girbaud Men's Agreement") with Girbaud Design, Inc. and its affiliate Wurzburg Holding S.A. to manufacture and market men's jeanswear, casualwear and outerwear under the Girbaud brand and certain related trademarks (the "Girbaud Marks") in all channels of distribution in the United States, including Puerto Rico and the U.S. Virgin Islands. In March 1998, the Girbaud Men's Agreement was amended and restated to include active influenced sportswear as a licensed product category and to name Latitude Licensing Corp. as the licensor (the "Licensor"). Also in March 1998, the Company entered into an exclusive license agreement (the "Girbaud Women's Agreement" and, together with the Girbaud Men's Agreement, the "Girbaud Agreements") with the Licensor to manufacture and market women's jeanswear, casualwear and outerwear, including active influenced sportswear, under the Girbaud Marks in all channels of distribution in the United States, including Puerto Rico and the U.S. Virgin Islands. The Girbaud Agreements include the right to manufacture the licensed products in a number of foreign countries, and both 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 Girbaud Agreements generally allow the Company to use the Girbaud Marks on apparel designed by or for the Company or based on designs and styles previously associated with the Girbaud brand, subject to quality control by the Licensor over the final designs of the products, marketing and advertising material and manufacturing premises. The Girbaud Agreements provide that they may be terminated by the Licensor upon the occurrence of certain events, including, but not limited to, a breach by the Company of any obligation under the 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 $1.5 million in 1999, $2.0 million in 2000, $2.5 million in 2001 and $3.0 million each year from 2002 through 2007. In 1998, the Company was subject to minimum annual royalty payments of $1.2 million. 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 that year. The Company was required to spend at least $350,000 in advertising men's Girbaud brand products in 1998 and is required to spend at least $500,000 in each subsequent year 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 was required to spend at least $550,000 in advertising women's Girbaud brand products in 1998 and is required to spend at least $400,000 in each subsequent year 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. The Girbaud Women's Agreement initially required the Company to open a Girbaud flagship store for the sale of the Company's Girbaud men's and women's lines and other Girbaud licensed merchandise in New York City by the end of 1998. In December 1998, the Girbaud Women's Agreement was amended to defer this requirement for one year and to provide that the Company would spend an additional $1.8 million on enhanced sales and marketing in 1999. 14 In November 1998, the Company entered into amendments (the "Girbaud Amendments") to the Girbaud Agreements allowing distribution through an approved distributor in selected countries in Central and South America and the Caribbean. The Girbaud Amendments are effective until November 12, 2001 or until expiration of the Girbaud Agreements, whichever is earlier. In the event that the Company does not achieve more than 75% of target sales levels in any Central or South American or Caribbean country, its license to distribute Girbaud products in that country will become non-exclusive effective starting the following year. 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 3,500 accounts throughout the United States and Puerto Rico. All of the functions necessary to service this large volume of accounts are handled by the Company's in-house credit department in Baltimore, Maryland. The Company extends credit to its customers. Accordingly, the Company may have significant risk in collecting accounts receivable from its customers. The Company has credit policies and procedures which it uses to minimize exposure to credit losses. The Company currently employs six people in its credit department and believes that managing its own credit gives it unique flexibility as to which customers the Company should sell and how much business it should do with each. The Company obtains and periodically updates information regarding the financial condition and credit histories of customers. The Company's collection personnel evaluate this information and, if appropriate, establish a line of credit. Credit personnel track payment activity for each customer using customized computer software and directly contact customers with receivable balances outstanding beyond 30 days. If these collection efforts are unsuccessful, the Company may discontinue merchandise shipments until the outstanding balance is paid. Ultimately, the Company may engage an outside collection organization to collect past due accounts. Timely contact with customers has been effective in reducing credit losses to an immaterial amount. In 1997, and 1998, the Company's credit losses were $1.2 million and $1.4 million, respectively. The Company's actual credit losses as a percentage of net sales was 0.7% and 1.2%, respectively. COMPETITION The apparel industry is highly competitive and fragmented and is subject to rapidly changing consumer demands and preferences. The Company believes that its continued success depends in large part upon its ability to anticipate, gauge and respond to changing consumer demands and fashion trends in a timely manner and upon the continued appeal to consumers of the BOSS, Beverly Hills Polo Club and Girbaud brands. The Company competes with numerous apparel brands and distributors (including Calvin Klein, DKNY, Guess?, Mecca, Phat Farm, Polo Jeans, Tommy Jeans, and Nautica). Many of the Company's competitors have greater financial resources than the Company. Although the level and nature of competition differ among its product categories, the Company believes that it competes on the basis of its brand image, quality of design and value pricing. The Company experienced increased competition in 1998 from a number of competitors, including the Tommy Jeans division of Tommy Hilfiger and the Polo Jeans division of Polo Ralph Lauren, at both the department store and specialty store channels of distribution. The Company believes that both Tommy Jeans and Polo Jeans have undertaken strategies that include massive consumer advertising, and the addition of sales efforts directed at specialty stores as a way to expand distribution. Other brands such as DKNY and Nautica have recently improved the jeanswear segments of their product lines. In addition, a number of new companies such as FUBU have emerged with competing products targeted at the urban young men's market. For a discussion of the steps the Company has taken to address this increasingly competitive environment, see "--Recent Events." Under the Concurrent Use Agreement, the BHPC Agreements and the Girbaud Agreements, certain third parties have retained the right to produce, distribute, advertise and sell, and to authorize others to produce, distribute, advertise and sell certain garments that are similar to some of the Company's products, including, in the case of the BOSS brand, similar garments using the BOSS name at generally higher 15 wholesale price points. Any such production, distribution, advertisement or sale of such garments by such licensor or another authorized party could have a material adverse effect on the Company's financial condition or results of operations. MANAGEMENT INFORMATION SYSTEMS The Company believes that advanced information processing is essential to maintaining its competitive position. The Company 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. For a discussion of the Company's year 2000 compliance and expenditures, see "ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations--Year 2000 Compliance and Expenditures." 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 March 31, 1999, the Company had approximately 450 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. 16 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 10,100 Sourcing Headquarters Barcelona, Spain......................... Leased European Headquarters 2,000 Milford, DE.............................. Owned Distribution Center 70,000 Carthage, MS............................. Leased Warehouse 110,000 Newton, MS............................... Leased Subleased to third party 101,000 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 previously determined, based on prior years' sales levels, that its distribution requirements could be better met by consolidating its warehousing and distribution functions into a new 150,000 square foot facility in Milford, Delaware. As a result of an overall decline in sales and demand, the Company has decided to delay the construction of the new distribution center for the foreseeable future. The Company does not intend to dispose of its current distribution center. See "ITEM 1. Business-- Warehousing and Distribution" and Note 7 of Notes to Consolidated Financial Statements for further information. In the second quarter of 1998, the Company closed its Newton, Mississippi manufacturing facility. This closure resulted in a charge of $0.2 million against earnings. The production in this facility, the majority of which is jeans, was transferred to a third party independent contractors' facilities in Mexico. The Company has subleased the facility to a third party and is currently in negotiations to assign the lease to a third party. In the first quarter of 1999, the Company closed its Carthage, Mississippi manufacturing facility. This closure, resulted in a charge of $0.3 million against earnings for the quarter ended December 31, 1998. The production in this facility, the majority of which is ladies' pants and jeans under the Company's private labels, was transferred to the remaining Company-owned plant in Raleigh, Mississippi, as well as to independent contractors in Mexico. The Company now uses the Carthage facility as a warehouse. ITEM 3. LEGAL PROCEEDINGS 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 1998, there were no matters submitted to a vote of the Company's stockholders. 17 PART II ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The market for the Company's Common Stock is not an exchange but is established by the National Association of Securities Dealers' Automated Quotation System. As of March 26, 1999, the Company had approximately 40 holders of record of the Company's Common Stock. The Company's Common Stock trades on the Nasdaq National Market under the Symbol "ISAC." The reported last sale price of the Common Stock on the Nasdaq National Market on March 26, 1999 was $1.25. The following table sets forth for the periods indicated the high and low closing sale prices for the Common Stock reported by the Nasdaq National Market:
1998 1997 -------------------- --------------------- QUARTER ENDED HIGH LOW HIGH LOW - ---------------------------------------------------------------------- --------- --------- ---------- --------- March 31.............................................................. $ 11.375 $ 6.875 -- -- June 30............................................................... $ 7.00 $ 2.50 -- -- September 30.......................................................... $ 3.375 $ 1.875 -- -- December 31........................................................... $ 2.50 $ 1.0625 $ 10.1875 $ 10.00
Since November 1998, the Company's Common Stock has been closing at prices between $1.0312 and $2.4375. In order to maintain its listing on the Nasdaq National Market, a stock must have a minimum bid price of $1.00. There can be no assurances that the Company's Common Stock will maintain a minimum bid price of $1.00 or more in the future or that it will not be delisted from the Nasdaq National Market. The Company anticipates that all earnings of the Company will be retained for the foreseeable future for use in the operation of the Company's business. Any future determination as to the payment of dividends will be at the discretion of the Company's Board of Directors and will depend upon the Company's results of operations, financial condition, restrictions in the Company's credit facilities and other factors deemed relevant by the Board of Directors. On May 15, 1997, the Board of Directors of the Company and the Company's stockholders adopted the 1997 Omnibus Stock Plan (the "Plan"). The purpose of the Plan is to promote the long-term growth and profitability of the Company by providing key people with incentives to improve stockholder value and contribute to the growth and financial success of the Company, and by enabling the Company to attract, retain and reward the best-available persons for positions of substantial responsibility. The maximum number of shares of Common Stock that may be issued with respect to awards granted under the Plan is 500,000. The Board of Directors has approved an increase in the shares of Common Stock that may be issued with respect to awards granted under the Plan to an aggregate of 1.1 million shares. This increase is subject to approval by the Company's stockholders at the 1999 annual meeting of stockholders (the "Annual Meeting"). The Plan is administered by the Compensation Committee of the Board of Directors. Participation in the Plan will be open to all employees, officers, directors and consultants of the Company or any of its affiliates, as may be selected by the Compensation Committee from time to time. The Plan allows for stock options, stock appreciation rights, stock awards, phantom stock awards and performance awards to be granted. The Compensation Committee will determine the prices, vesting schedules, expiration dates and other material conditions upon which such awards may be exercised. Through December 31, 1998, the Company had granted stock options under the Plan exercisable upon vesting for an aggregate of 346,000 stock options. The weighted average exercise price of such options is $2.125 per share. Through December 31, 1998, none of those stock options had been exercised. The issuance of such stock options was exempt from the registration requirements of the Securities Act of 1933, as amended, pursuant to Section 4(2) thereunder. The Company previously filed a Registration Statement on Form S-8 (the "Form S-8") to register shares of Common Stock issuable pursuant to awards granted under the Plan. The Company intends to file a post effective amendment to the Form S-8 after following the Annual Meeting if stockholders vote to approve the increase in the shares of Common Stock that may be issued 18 with respect to awards granted under the Plan as described above. The purpose of the post effective amendment will be to register the additional shares of Common Stock issuable pursuant to awards granted under the Plan. 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, 1996, 1997 and 1998 and the balance sheet data as of December 31, 1997 and 1998 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, 1994 and 1995 and the balance sheet data as of December 31, 1994, 1995 and 1996 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.
YEAR ENDED DECEMBER 31, -------------------------------------------------------- 1994 1995 1996 1997 1998 --------- --------- ---------- ---------- ---------- (IN THOUSANDS EXCEPT PER SHARE DATA) STATEMENT OF INCOME DATA: Net sales........................................................ $ 85,298 $ 93,271 $ 118,655 $ 161,446 $ 113,721 Cost of sales.................................................... 62,216 68,530 84,421 109,694 90,661 --------- --------- ---------- ---------- ---------- Gross profit................................................... 23,082 24,741 34,234 51,752 23,060 Selling expenses................................................. 7,462 8,927 11,898 16,236 16,983 License fees..................................................... 3,012 3,174 4,817 7,577 6,020 Distribution and shipping expenses............................... 2,046 2,379 2,669 4,307 3,900 General and administrative expenses.............................. 5,813 5,787 6,243 7,546 9,999 Provision for plant closings..................................... -- -- -- -- 526 Recovery of legal fees........................................... -- -- (718) (117) -- --------- --------- ---------- ---------- ---------- Operating income (loss)........................................ 4,749 4,474 9,325 16,203 (14,368) Interest, net.................................................... 1,191 1,247 1,365 2,372 1,455 Other income (expense) (1)....................................... 1,235 (3) 85 3 381 Minority interest................................................ (53) (33) (82) (135) -- --------- --------- ---------- ---------- ---------- Income (loss) before extraordinary item and income taxes......... 4,740 3,191 7,963 13,699 (15,442) Extraordinary item (2)........................................... 389 -- -- -- -- --------- --------- ---------- ---------- ---------- Income (loss) before income taxes................................ 5,129 3,191 7,963 13,699 (15,442) Income tax (expense)/benefit..................................... -- -- -- 1,349 (1,351) --------- --------- ---------- ---------- ---------- Net income (loss).............................................. $ 5,129 $ 3,191 $ 7,963 $ 15,048 $ (16,793) --------- --------- ---------- ---------- ---------- --------- --------- ---------- ---------- ---------- Basic and diluted net income (loss) per share (3)................ $ 1.29 $ 0.80 $ 1.99 $ 3.68 $ (2.15) --------- --------- ---------- ---------- ---------- --------- --------- ---------- ---------- ---------- Weighted average common shares outstanding....................... 3,988 3,988 4,000 4,094 7,810 PRO FORMA STATEMENT OF INCOME DATA: Income before income taxes....................................... 5,129 3,191 7,963 13,699 Income tax provision (4)......................................... 2,103 1,308 3,265 5,617 --------- --------- ---------- ---------- Net income..................................................... $ 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
19
AS OF DECEMBER 31, ----------------------------------------------------- 1994 1995 1996 1997 1998 --------- --------- --------- --------- --------- (IN THOUSANDS) BALANCE SHEET DATA: Working capital............................................ $ 10,035 $ 10,807 $ 16,274 $ 45,940 $ 31,577 Total assets............................................... 30,103 31,764 37,257 73,443 59,046 Total debt................................................. 8,798 8,645 7,796 11,609 13,848 Stockholders' equity....................................... 14,428 14,645 19,393 52,496 37,313
- ------------------------ (1) Includes income from settlement of license disputes of $1.2 million in 1994. (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, 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, 1994, 1995, 1996 and 1997. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with the "Selected Financial Data" and the Company's consolidated financial statements and the related notes thereto, which are included elsewhere herein. OVERVIEW During its first 77 years, the Company became one of the leading manufacturers of pants, trousers and jeans in the United States. The Company was able to utilize its fabric sourcing and manufacturing expertise to build a well known franchise in the men's and women's bottoms segment of the apparel industry. In this period, the Company's marketing efforts were typically driven by its manufacturing capabilities, and branding was limited to Company-owned brands and third-party private labels. In the late 1980's, management made a decision to change the Company's marketing focus from a manufacturing-driven to a brand-driven strategy. This fundamental shift within the Company reflected senior management's belief that the American sportswear market would be dominated by recognized brands with clearly established images. Management also concluded that increasing market share would go to those companies that were market-driven and able to service their customers with diversified manufacturing and sourcing capabilities. Recognizing its strength in bottoms manufacturing, in 1990 the Company entered into a license agreement for the exclusive use of the BOSS brand name on men's denim apparel and on all types of juniors' sportswear for the young women's market. In 1994, the Company expanded its license agreement to include use of the BOSS brand name on men's, women's, boys' and youth sportswear in the United States and Puerto Rico. In 1997, the Company's rights to manufacture and market BOSS sportswear were further expanded to allow broader product offerings and significant Company control over styling, advertising and distribution. In the fall of 1993, the Company entered into license agreements for the use of the Beverly Hills Polo Club brand name on men's sportswear in the United States and Puerto Rico. License rights were expanded to include Europe in 1996. In November 1997, the Company acquired an exclusive license to manufacture and market certain men's 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 enables the Company to address another consumer segment within its branded product portfolio. The Company has positioned 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. 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 20 Puerto Rico. The Company began marketing women's sportswear under the Girbaud brand in the second quarter of 1998. The Company has positioned the Girbaud women's line with a broad assortment of contemporary sportswear products, styles and fabrications. The Company paid an initial license fee of $600,000. Under the Girbaud men's license agreement, the Company is required to spend at least $350,000 in advertising for the men's Girbaud brand in 1998 and at least $500,000 each year thereafter while the agreement is in effect. Under the Girbaud women's license agreement, the Company is required to spend at least $550,000 in advertising for the women's Girbaud brand in 1998 and at least $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. In December 1998 the Girbaud women's license agreement was amended to provide that the Company would spend an additional $1.8 million in sales and marketing of the brand in 1999. Minimum royalty payments began in the first quarter of 1998. In November 1998, the Company entered into an exclusive license agreement to manufacture and market certain men's and women's sportwear under the Girbaud brand in selected countries in Central and South America and in the Carribean. See "ITEM 1. Business--Licenses and Other Rights Agreements." The Company also manufactures and markets a limited number of pants and jeans styles for women under its own "I.C. Isaacs," "Lord Isaacs" and "Pizzazz" brand names and under third-party private labels for sale to major chain stores and catalogs. The Company intends to continue to manufacture and market these pants and jeans for the foreseeable future. See "ITEM 1. Business--Licenses and Other Rights Agreements." Over the past several years, the Company has completed its strategic repositioning from a manufacturing-driven company to a marketing and brand-driven company. Through a 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 1998, the BOSS, Beverly Hills Polo Club and Girbaud brands comprised 73.4%, 14.6% and 4.1% of net sales, respectively. Concurrently with this strategy, the Company has also shifted its product mix from predominately bottoms to a full array of sportswear, including tops and outerwear. The Company has also expanded its branded lines to include sportswear for boys, 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. 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, ----------------------------------- 1996(1) 1997(1) 1998 ----------- ----------- --------- Net sales.................................................................... 100.0% 100.0% 100.0% Cost of sales................................................................ 71.1 67.9 79.7 ----- ----- --------- Gross profit................................................................. 28.9 32.1 20.3 Selling expenses............................................................. 10.0 10.1 14.9 License fees................................................................. 4.1 4.7 5.3 Distribution and shipping expenses........................................... 2.2 2.7 3.4 General and administrative expenses.......................................... 4.7 4.6 9.3 ----- ----- --------- Operating income (loss)...................................................... 7.9% 10.0% (12.6)% ----- ----- --------- ----- ----- ---------
- ------------------------ (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. 21 YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997 NET SALES. Net sales decreased 29.6% to $113.7 million in 1998 from $161.4 million in 1997. The decrease was primarily due to increased competition coupled with a softer retail market and compounded by the delay in the introduction of the fall 1998 Boss and Beverly Hills Polo Club men's lines. Net sales of BOSS sportswear decreased $37.0 million or 30.7% to $83.4 million. Net sales of the BOSS tops segment were $32.7 million in 1998 versus $48.1 million in 1997. Net sales of Beverly Hills Polo Club sportswear decreased $8.9 million or 34.9% to $16.6 million. The spring 1999 BOSS and Beverly Hills Polo Club collections were presented on time. Net sales of Girbaud sportswear were $4.7 million in 1998. The Company began to recognize revenue from shipments of Girbaud men's sportswear in the second quarter of 1998 and from shipments of Girbaud sportswear for women in the fourth quarter of 1998. The Company's sales of Company-owned brands and private label brands decreased 41.8% to $9.0 million in 1998. In April 1998, the Company entered into an exclusive license agreement to manufacture and market boys' sportswear under the Beverly Hills Polo Club brand in the United States and Puerto Rico. In November 1998, the Company entered into exclusive international license agreements to manufacture and market men's and women's sportswear under the Girbaud brand in selected countries in Central and South America and in the Caribbean. GROSS PROFIT. Gross profit decreased 55.4% to $23.1 million in 1998 from $51.8 million in 1997. Gross profit as a percentage of net sales decreased from 32.1% to 20.3% over the same period. The decrease in gross profit was primarily due to the reduction in net sales coupled with excess capacity at its manufacturing facilities due to the reduction in customer orders. In addition, to reduce inventory levels, a significant amount of sales were made in 1998 to a mass retailer at gross profit margins significantly below the margins on goods that are sold to specialty stores. This adversely affected the overall gross margin. In addition, the Company recorded an inventory valuation allowance of $5.5 million in 1998 to properly reflect unsold inventory at net realizable value. The Company monitors inventory levels, by product category, weekly to help identify inventory shortages as well as excess inventory. Personnel look at recent sales data and order backlog to help identify slow moving inventory items. Further, the sales managers continually discuss product turnover and sales forecasts with sales personnel to aid in identifying product shortages and overages. Based on the information available, the Company believes the inventory valuation provision was appropriate at December 31, 1998. The decline in gross profit was offset somewhat by the continued shift of production of denim bottoms from the United States to Mexico to take advantage of the lower labor and overhead. SELLING, DISTRIBUTION, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, distribution, general and administrative ("SG&A") expenses increased 10.4% to $31.4 million in 1998 from $28.0 million in 1997. As a percentage of net sales, SG&A expenses increased to 27.6% from 17.4% over the same period due to lower net sales coupled with higher advertising expenditures and costs of merchandise samples offset somewhat by lower commissions to the Company's salespersons. Advertising expenditures increased $1.8 million to $5.7 million as the Company continued to focus on enhancing the identity and image of its brands through increased media exposure. The increase in advertising was primarily due to advertising for the Girbaud brand in 1998. Distribution and shipping expenses decreased $0.4 million because of a reduction in overtime wages, due to decreased additional temporary labor at its warehouse facility. General and administrative expenses increased $2.5 million to $10.0 million due to amortization of the BOSS trademark, a one-time write-off of goodwill, professional fees, directors and officers insurance and year 2000 consulting expenses of $1.1 million, $0.4 million, $0.4 million, $0.3 million and $0.2 million, respectively, and $0.2 million and $0.3 million loss provisions for estimated costs 22 associated with closing the Newton, Mississippi and Carthage, Mississippi manufacturing facilities. The loss provisions relate primarily to severance pay for employees. LICENSE FEES. License fees decreased $1.6 million to $6.0 million in 1998 from $7.6 million in 1997. As a percentage of net sales, license fees increased from 4.7% to 5.3%. The decrease in license fees was not in proportion to the decrease in net sales due to the minimum royalties under the Girbaud men's license agreement. OPERATING INCOME (LOSS). Operating income (loss) decreased 188.9% to ($14.4) million in 1998 from $16.2 million in 1997. The decline was due to lower net sales and reduced gross profit margin percentage and, to a lesser extent, an increase in operating expenses, as explained above. INTEREST EXPENSE. Interest expense decreased $0.9 million to $1.5 million in 1998. The Company repaid the outstanding balance of its asset-based revolving line of credit with a portion of the proceeds of its initial public offering completed in December 1997. Borrowings under the line of credit were insignificant in the first six months of 1998, however the Company began to borrow under the line of credit in the third and fourth quarters and incurred $0.2 million in interest expense in 1998. In addition, the Company incurred interest expense of $1.1 million related to the $11.25 million note payable associated with its purchase of the BOSS trademark in November 1997. This expense of $1.1 million was offset somewhat by interest income of $0.3 million earned on available cash. The Company invests its excess cash in short-term investments. INCOME TAXES. The Company recorded an income tax benefit of $0.2 million in 1998 to recognize a tax benefit for the carryback of net operating losses to recover income taxes paid during 1997. The Company wrote off a deferred tax asset of $1.5 million during the fourth quarter of 1998 due to the uncertainty surrounding the amount of taxable income to be generated in 1999. Prior to its initial public offering, the Company's earnings were not subject to federal, state and local taxes because it elected to be treated as a Subchapter S Corporation. The Company terminated its Subchapter S Corporation status in December 1997. 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. 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 23 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. 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 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. 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. The Company's working capital decreased significantly during 1998 compared to 1997, primarily due to the 1998 net loss and purchases of treasury stock partially offset by the issuance of Company stock upon the exercise of the over-allotment option in January 1998. As of December 31, 1998, the Company had cash, including temporary investments of $1.3 million and working capital of $31.6 million compared to $7.4 million and $45.9 million, respectively as of December 31, 1997. OPERATING CASH FLOW. Cash used in operations totaled $9.3 million in 1998, an increase of $7.7 million from December 31, 1997 to December 31, 1998, due to the net loss offset by decreases in accounts receivable, inventories, and 24 accounts payable offset somewhat by increases in refundable income taxes and other assets. Cash used for investing activities in 1998 totaled $1.9 million and was used primarily to purchase the land and initiate the architectural work related to construction of the new distribution center in Milford, Delaware, as well as the purchase of machinery for the Company's factories and upgrading computer equipment to help ensure year 2000 compliance. In addition, the Company paid an initial fee of $0.6 million for the women's Girbaud license. Cash provided by financing activities totaled $5.1 million in 1998, resulting primarily from the issuance of stock upon the exercise of the over-allotment option in January 1998 and borrowings under its revolving line of credit partially offset by the purchase of treasury stock. Inventory decreased $0.8 million from December 31, 1997 to December 31, 1998, compared to an increase of $9.8 million from December 31, 1996 to December 31, 1997. The change in 1998 was due to an increase in the quantity of finished goods offset, (in part due to continued production for sales that never materialized), by a $5.5 million inventory valuation allowance related to slow moving inventory. The increase in inventories was due to a decline in sales of BOSS men's and Beverly Hills Polo Club sportswear as well as inventory for the new Girbaud collections. The increase in refundable income taxes results from the expected return of estimated income taxes paid in the first quarter of 1998 and a refund of income taxes paid in 1997. The refunds will result from the proposed carryback of net operating losses to 1997 and the elimination of estimated tax payments due to net operating losses in 1998. Capital expenditures were $1.5 million in 1998 compared to $1.1 million in 1997. The Company's capital expenditures were primarily for the purchase of land and architectural fees related to construction of the new distribution center in Milford, Delaware as well as the purchase of machinery for the Company's factories and upgrading computer equipment to help ensure year 2000 compliance. In the second quarter, the Company decided to delay the construction of the distribution center in Milford, Delaware. The Company does not intend to dispose of its current distribution center. The Company expects to spend up to $0.5 million to upgrade its computer software programs to ensure year 2000 compliance. Conversion of its primary software programs was completed in November 1998 and testing occurred in the first quarter of 1999. The Company purchased new versions of the two secondary software programs which have been updated for year 2000 compliance. The Company has expensed all consulting fees related to the year 2000 conversion. The Company does not currently have commitments for any other capital expenditures in 1999. In March 1998 the Company paid an initial license fee of $0.6 million for the women's Girbaud license. In the second quarter of 1998, the Company closed its Newton, Mississippi manufacturing facility. This closure resulted in a charge of $0.2 million against earnings. The production in this facility, the majority of which was jeans, was transferred to a third party independent contractors facilities in Mexico. The actual expenses incurred were not significantly different than the reserve provided by the Company in the first quarter. In the first quarter of 1999, the Company closed its Carthage, Mississippi manufacturing facility. This closure resulted in a charge of $0.3 million against earnings for the quarter ended December 31, 1998. The production in this facility, the majority of which was ladies' pants and jeans under the Company's private labels, was transferred to the remaining Company-owned plant in Raleigh, Mississippi, as well as to independent contractors in Mexico. CREDIT FACILITIES. The Company has an asset-based revolving line of credit (the "Facility") with Congress Financial Corporation ("Congress"). As of December 31, 1998 the Company had $2.4 million in outstanding borrowings under the Facility compared to no borrowings as of December 31, 1997. In May 1998, the Company amended the Facility with Congress. The amended Facility provided that the Company could borrow up to 85.0% of the net eligible accounts receivable and a portion of imported inventory, as defined 25 in the agreement. Borrowings under the Facility were limited to $30.0 million including outstanding letters of credit which were limited to $12.0 million and bore interest at the lender's prime rate of interest less 0.25%. The amended Facility was due to expire on June 30, 1999. In March 1999, the Company further amended the Facility to extend the term of the Facility through December 31, 2000. The amended Facility provides that the Company may borrow up to 80.0% of net eligible accounts receivable and a portion of imported inventory, as defined in the agreement. Borrowings under the Facility may not exceed $25.0 million (including outstanding letters of credit which are limited to $8.0 million) and bear interest at the lender's prime rate of interest plus 1.0%. In connection with amending the Facility, the Company will pay Congress a financing fee of $125,000 one half of which was paid at the time of signing and the other half which will be paid on June 30, 2000. The financing fee will be amortized over 21 months. In November 1997, the Company borrowed $11.25 million from Ambra, Inc. 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. The Note 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 exposure to credit losses. The Company's collection personnel regularly contact customers with receivable balances outstanding beyond 30 days to expedite collection. If these collection efforts are unsuccessful, the Company may discontinue merchandise shipments until the outstanding balance is paid. Ultimately, the Company may engage an outside collection organization to collect past due accounts. Timely contact with customers has been effective in reducing credit losses to an immaterial amount. In 1997, and 1998, the Company's credit losses were $1.2 million and $1.4 million, respectively. The Company's actual credit losses as a percentage of net sales was 0.6% and 1.2%, respectively. The Company believes that current levels of cash and cash equivalents ($1.3 million at December 31, 1998) together with cash from operations and funds available under its Facility, will be sufficient to meet its capital requirements for the next 12 months. YEAR 2000 COMPLIANCE AND EXPENDITURES The Company has determined that it will be required to modify or replace portions of its information technology systems, both hardware and software, so that they will property recognize and utilize dates beyond December 31, 1999 (the "Year 2000 issue"). As a result, the Company has developed a plan to review and, as appropriate, modify or replace the software (and replace some hardware) in its computer systems. The Company presently believes that with modifications to existing software, conversions to new software and replacement of some hardware, the Year 2000 issue will be satisfactorily resolved in its own systems. The Company has established an internal auditing process to tract and verify the results of its plan and tests. The Company has substantially completed the renovation, validation and implementation phases of its plan with respect to its mission-critical systems. The Company is also working with key external parties with whom it has important financial and operational relationships, including banks, utilities and other vendors and third party payors, to assess the remediation efforts made by these parties with respect to their own systems and to determine the extent to which such systems are vulnerable to the Year 2000 issue. The Company has not yet received sufficient information from these parties about their remediation plans to predict the outcome of their efforts. The Company is also developing a contingency plan that is expected to address financial and operational problems that might arise on and around January 1, 2000. This contingency plan would include identifying back-up processes that do not rely on computers whenever possible. The Company has incurred and expects to continue to incur expenses allocable to internal staff, as well as costs for outside consultants, and computer systems' remediation and replacement in order to 26 achieve Year 2000 compliance. The Company completed the conversion of its primary software programs in November 1998 and testing occurred in the first quarter of 1999. The Company currently estimates that these costs will total approximately $0.5 million, $0.2 million of which was incurred in 1998. The costs of the year 2000 program and the date on which the Company plans to complete Year 2000 modifications are based on current estimates, which reflect numerous assumptions about future events, including the continued availability of certain resources, the timing and effectiveness of third-party remediation plans and other factors. The Company can give no assurance that these estimates will be achieved, and actual results could differ materially from the Company's plans. Specific factors that might cause such material differences include, but are not limited to, the availability and cost of personnel trained in this area, the ability to locate and correct relevant computer source codes and embedded technology, the results of internal and external testing and the timelessness and the effectiveness of remediation efforts of third parties. If the modifications and conversions referred to above are not made or are not completed on a timely basis, the Year 2000 issue could have a material adverse effect on the Company's business, financial condition and results of operations. Moreover, even if these changes are successful, failure of third parties to which the Company is financially or operationally linked to address their own system problems could have a material adverse effect on the Company. BACKLOG AND SEASONALITY The Company's business is impacted by the general seasonal trends that are characteristic of the apparel and retail industries. In the Company's segment of the apparel industry, sales are generally higher in the first and third quarters. Historically, the Company has taken greater markdowns in the second and fourth quarters. The Company generally receives orders for its products three to five months prior to the time the products are delivered to stores. As of December 31, 1998, the Company had unfilled orders of approximately $27.0 million, compared to approximately $46.0 million of such orders as of December 31, 1997. The backlog or orders at any given time is affected by a number of factors, including seasonality, weather conditions, scheduling or manufacturing and shipment of products. These factors, increased competition, and continued sluggishness in the retail apparel contributed to the decrease in backlog from December 31, 1997 to December 31, 1998. As the time of the shipment of products may vary from year to year, the results for any particular quarter may not be indicative of the results for the full year. INFLATION The Company does not believe that the relatively moderate rates of inflation experienced in the United States over the last 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. RECENT ACCOUNTING PRONOUNCEMENTS Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"), establishes standards for reporting and display of comprehensive income, its components accumulated balances. Comprehensive income is defined to include all changes in equity except those resulting from investments by owners and distributions to owners. Among other disclosures, SFAS 130 requires that all items that are required to be recognized under current accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. The Company adopted SFAS 130 during the first quarter of 1998 and has no items of comprehensive income to report. 27 Statement of Financial Accounting Standards (SFAS) 131, "Disclosure about Segments of a Business Enterprise", establishes standards for the way that public enterprises report information about operating segments in annual financial statements and requires reporting of selected financial information about operating segments in interim financial statements issued to the public for periods ending after December 15, 1997. 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. Presently, the Company operates in one business segment. In February 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 132, "Employers Disclosures about Pensions and Other Postretirement Benefits" ("SFAS 132"). SFAS 132 revised employers' disclosures about pension and other postretirement benefit plans but does not change measurement or recognition of those plans. Also, SFAS 132 requires additional information on changes in the benefit obligations and fair values of plan assets. Presently, the Company does not offer postretirement benefits. Consequently, disclosures about the Company's pension plan did not change upon adoption of SFAS 132. In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments" ("SFAS 133"). SFAS 133 establishes accounting and reporting standards for derivative instruments and for hedging activities. SFAS 133 requires that an entity recognize all derivatives as either assets or liabilities and measure those instruments at fair market value. Under certain circumstances, a portion of the derivative's gain or loss is initially reported as a component of other comprehensive income and subsequently reclassified into income when the transaction affects earnings. For a derivative not designated as a hedging instrument, the gain or loss is recognized in income in the period of change. Presently, the Company does not use derivative instruments either in hedging activities or as investments. Accordingly, the Company believes that adoption of SFAS 133 will have no impact on its financial position or results of operations. 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-21 hereof. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 28 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 1999 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: 29 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE --------- Report of Independent Certified Public Accountants......................................................... F-2 Consolidated Balance Sheets at December 31, 1997 and 1998.................................................. F-3 Consolidated Statements of Operations for the years ended December 31, 1996, 1997 and 1998................. F-4 Consolidated Statements of Stockholders' Equity for the years ended December 31, 1996, 1997 and 1998....... F-5 Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1997 and 1998................. 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: 10.37 Amended and Restated Omnibus Stock Plan 10.38 Amendment by and between BHPC Marketing, Inc. and I.C. Isaacs Europe, S.L. dated November 12, 1998 relating to the International Exclusive License Agreement (Wholesale) dated August 15, 1996 10.39 Amendment by and between BHPC Marketing, Inc. and I.C. Isaacs Europe, S.L. dated November 12, 1998 relating to the International Exclusive License Agreement (Retail) dated August 15, 1996 ++10.40 Amendment No. 1 dated November 12, 1998 to Trademark License and Technical Assistance Agreement for Men's Collections by and between I.C. Isaacs & Co., L.P. and Latitude Licensing Corp. ++10.41 Amendment No. 2 dated November 12, 1998 to Trademark License and Technical Assistance Agreement for Women's Collections by and between I.C. Isaacs & Co., L.P. and Latitude Licensing Corp. 10.42 Executive Employment Agreement by and between I.C. Isaacs & Company, Inc. and Daniel Gladstone dated January 21, 1999 10.48 Amendment No. 2 to Employment Agreement by and between I.C. Isaacs & Company, Inc. and Robert J. Arnot dated February 11, 1999 10.49 Amendment No. 2 to Employment Agreement by and between I.C. Isaacs & Company, Inc. and Gerald W. Lear dated February 11, 1999 10.50 Amendment No. 2 to Employment Agreement by and between I.C. Isaacs & Company, Inc. and Eugene C. Wielepski dated February 11, 1999 10.51 Amendment No. 2 to Employment Agreement by and between I.C. Isaacs & Company, Inc. and Thomas Ormandy dated February 11, 1999
30 10.52 Amendment No. 1 to Consulting Agreement by and between I.C. Isaacs & Company and Gary Brashers dated February 11, 1999 10.53 Sixteenth Amendment to Financing Agreements dated March 26, 1999 10.54 Amendment by and between BHPC Marketing, Inc. dated March 1, 1999 relating to the International Exclusive License Agreement (Wholesale) dated August 15, 1996 10.55 Amendment by and between BHPC Marketing, Inc. dated March 1, 1999 relating to the International Exclusive License Agreement (Retail) dated August 15, 1996 10.56 Amendment No. 1 dated March 4, 1998 to Trademark License and Technical Assistance Agreement for Men's Collections by and between the Company and Latitude Licensing Corp. ++10.57 Amendment No. 3 dated December 23, 1998 to Trademark License and Technical Assistance Agreement for Women's Collections by and between the Company and Latitude Licensing Corp. 23.01 Consent of BDO Seidman, LLP 27.01 Financial Data Schedule
(b) Reports on Form 8-K: On August 27, 1998, the Company filed a Current Report on Form 8-K to announce that its Board of Directors had approved a restructuring of the senior management team resulting in a streamlined and clarified chain of command. Mr. Robert J. Arnot remained Chairman of the Board and became the Company's sole Chief Executive Officer. Mr. Gerald W. Lear relinquished his position as Co-CEO, but continues to serve as President and has assumed the title and responsibilities of Chief Operating Officer. Mr. Gary Brashers resigned as Chief Operating Officer and as a member of the Board of Directors. His resignation reflected the Company's reduction in domestic manufacturing in favor of global sourcing to move forward as a marketing and brand-driven company focused on design and image. Mr. Brashers continues to serve the Company as a consultant in connection with its existing manufacturing operations in Mississippi and the expansion of the Company's manufacturing operations in Mexico. Mr. Thomas Ormandy was named by the Board of Directors to fill the vacancy on the Board of Directors created by Mr. Brashers' resignation and will serve Mr. Brashers' remaining term which expires in 1999 or until his successor has been elected and has qualified. Mr. Ormandy has been Vice President-Sales of the Company since 1986. - ------------------------ ++ Certain portions of this exhibit have been omitted pursuant to a request for an order granting confidential treatment and have been filed separately with the Securities and Exchange Commission. 31 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 26, 1999 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, 1998. 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 26, 1999, except for Note 3, which is as of March 19, 1999 32 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, 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 Year ended December 31, 1998 Allowance for doubtful accounts........................ 1,185,000 1,595,000 (1,427,000) 1,353,000 Reserve for sales returns and discounts................ 177,000 6,733,000 (6,814,000) 96,000
33 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. I.C. ISAACS & COMPANY , INC. (REGISTRANT) By: /s/ ROBERT J. ARNOT ----------------------------------------- Robert J. Arnot CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER Date: March 26, 1999 Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. SIGNATURE TITLE DATE - ------------------------------ --------------------------- ------------------- /s/ ROBERT J. ARNOT Chairman of the Board and - ------------------------------ Chief Executive Officer March 26, 1999 Robert J. Arnot and Director (Principal Executive Officer) /s/ GERALD LEAR President and Chief - ------------------------------ Operating Officer and March 26, 1999 Gerald Lear Director Vice President and Chief /s/ EUGENE C. WIELEPSKI Financial Officer and - ------------------------------ Director (Principal March 26, 1999 Eugene C. Wielepski Financial and Accounting Officer) /s/ IRA J. HECHLER - ------------------------------ Director March 26, 1999 Ira J. Hechler /s/ JON HECHLER - ------------------------------ Director March 26, 1999 Jon Hechler /s/ RONALD S. SCHMIDT - ------------------------------ Director March 26, 1999 Ronald S. Schmidt /s/ THOMAS P. ORMANDY - ------------------------------ Director March 26, 1999 Thomas P. Ormandy /s/ NEAL J. FOX - ------------------------------ Director March 26, 1999 Neal J. Fox /s/ ANTHONY J. MARTERIE - ------------------------------ Director March 26, 1999 Anthony J. Marterie 34 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, 1997 and 1998.................................................. F-3 Consolidated Statements of Operations for the years ended December 31, 1996, 1997 and 1998................. F-4 Consolidated Statements of Stockholders' Equity for the years ended December 31, 1996, 1997 and 1998....... F-5 Consolidated Statements of Cash Flows for the years ended December 31 1996, 1997 and 1998.................. 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, 1997 and 1998 and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1998. 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, 1997 and 1998 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998 in conformity with generally accepted accounting principles. /S/ BDO SEIDMAN, LLP Washington, D.C. February 26, 1999, except for Note 3, which is as of March 19, 1999 F-2 I.C. ISAACS & COMPANY, INC. CONSOLIDATED BALANCE SHEETS
DECEMBER 31, ---------------------------- 1997 1998 ------------- ------------- ASSETS Current Cash, including temporary investments of $6,512,455 and $887,845................. $ 7,422,067 $ 1,345,595 Accounts receivable, less allowance for doubtful accounts of $1,185,000 and $1,353,000 (Note 3)............................................................ 23,020,077 14,904,501 Inventories (Notes 1 and 3)...................................................... 23,936,226 23,121,971 Prepaid expenses and other....................................................... 1,072,436 882,355 Refundable income taxes.......................................................... -- 1,799,450 ------------- ------------- Total current assets............................................................... 55,450,806 42,053,872 Property, plant and equipment, at cost, less accumulated depreciation and amortization (Notes 2 and 3)..................................................... 2,678,688 3,247,646 Trademark and licenses, less accumulated amortization of $187,500 and $1,412,500 (Note 7)......................................................................... 11,062,500 10,437,500 Goodwill, less accumulated amortization of $863,505 and $1,412,790................. 1,788,595 1,239,310 Deferred income taxes (Note 5)..................................................... 1,505,000 -- Other assets (Note 8).............................................................. 957,132 2,067,815 ------------- ------------- $ 73,442,721 59,046,143 ------------- ------------- ------------- ------------- LIABILITIES AND STOCKHOLDERS' EQUITY Current Checks issued against future deposits............................................ $ -- $ 1,298,929 Current maturities of long-term debt and revolving line of credit (Note 3)....................................................................... -- 2,412,235 Current maturities of capital lease obligations (Note 3)......................... 172,515 179,864 Accounts payable................................................................. 6,967,488 4,301,707 Accrued expenses and other current liabilities (Note 4).......................... 1,979,364 2,074,305 Accrued compensation............................................................. 235,309 209,773 Income taxes payable............................................................. 156,000 -- ------------- ------------- Total current liabilities.......................................................... 9,510,676 10,476,813 ------------- ------------- Long-term debt (Note 3) Note payable..................................................................... 11,250,000 11,250,000 Capital lease obligations........................................................ 186,122 6,258 ------------- ------------- Total long-term debt............................................................... 11,436,122 11,256,258 ------------- ------------- Commitments and Contingencies (Notes 3, 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; 7,824,699 and 8,344,699 shares issued; 7,800,000 and 6,782,200 shares outstanding............ 782 834 Additional paid-in capital....................................................... 34,120,190 38,924,998 Retained earnings................................................................ 18,389,819 1,597,270 Treasury stock, at cost (24,699 and 1,562,499 shares)............................ (14,868) (3,210,030) ------------- ------------- Total stockholders' equity....................................................... 52,495,923 37,313,072 ------------- ------------- $ 73,442,721 59,046,143 ------------- ------------- ------------- -------------
See accompanying summary of accounting policies and notes to consolidated financial statements. F-3 I.C. ISAACS & COMPANY, INC. CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, ---------------------------------------------- 1996 1997 1998 -------------- -------------- -------------- Net sales....................................................... $ 118,655,253 $ 161,445,362 $ 113,720,799 Cost of sales................................................... 84,421,651 109,693,828 90,660,582 -------------- -------------- -------------- Gross profit.................................................... 34,233,602 51,751,534 23,060,217 -------------- -------------- -------------- Operating expenses Selling....................................................... 11,897,834 16,235,974 16,982,794 License fees (Note 7)......................................... 4,817,037 7,577,482 6,020,196 Distribution and shipping..................................... 2,669,093 4,306,566 3,899,917 General and administrative.................................... 6,243,327 7,546,105 9,998,503 Provision for severance (Note 7).............................. -- -- 526,326 Recovery of legal fees (Note 7)............................... (718,558) (117,435) -- -------------- -------------- -------------- Total operating expenses........................................ 24,908,733 35,548,692 37,427,736 -------------- -------------- -------------- Operating income (loss)......................................... 9,324,869 16,202,842 (14,367,519) -------------- -------------- -------------- Other income (expense) Interest, net of interest income of $18,249, $16,045 and $252,392................................................ (1,365,163) (2,372,132) (1,454,748) Other, net.................................................... 84,795 3,001 380,718 -------------- -------------- -------------- Total other income (expense).................................... (1,280,368) (2,369,131) (1,074,030) -------------- -------------- -------------- Income (loss) before minority interest and income taxes......... 8,044,501 13,833,711 (15,441,549) Minority interest............................................... (81,842) (134,727) -- -------------- -------------- -------------- Income (loss) before income taxes............................... 7,962,659 13,698,984 (15,441,549) Income tax benefit (provision) (Note 5)......................... -- 1,349,000 (1,351,000) -------------- -------------- -------------- Net income (loss)............................................... $ 7,962,659 $ 15,047,984 $ (16,792,549) -------------- -------------- -------------- -------------- -------------- -------------- Basic and diluted net income (loss) per share................... $ 1.99 $ 3.68 $ (2.15) Weighted average common shares outstanding...................... 4,000,000 4,093,699 7,809,540 Pro forma financial information: Income before income taxes, as presented...................... $ 7,962,659 $ 13,698,984 Pro forma provision for income taxes (unaudited).............. 3,265,000 5,617,000 -------------- -------------- Pro forma net income (unaudited).............................. $ 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, 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) Net loss.............................. -- -- -- -- -- (16,792,549) -- Issuance of stock options to non- employee directors.................. -- -- -- -- 30,000 -- -- Purchase of treasury stock............ -- -- -- -- -- -- (3,195,162) Issuance of common stock.............. -- -- 520,000 52 4,774,808 -- -- ----------- ----------- --------- ----- ---------- ----------- ---------- Balance, at December 31, 1998......... -- -- 8,344,699 $ 834 $38,924,998 $ 1,597,270 $(3,210,030) ----------- ----------- --------- ----- ---------- ----------- ---------- ----------- ----------- --------- ----- ---------- ----------- ---------- TOTAL ----------- 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 Net loss.............................. (16,792,549) Issuance of stock options to non- employee directors.................. 30,000 Purchase of treasury stock............ (3,195,162) Issuance of common stock.............. 4,774,860 ----------- Balance, at December 31, 1998......... $37,313,072 ----------- -----------
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, -------------------------------------------- 1996 1997 1998 ------------- ------------- -------------- Operating Activities Net income (loss)................................................. $ 7,962,659 $ 15,047,984 $ (16,792,549) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities Deferred income taxes............................................. -- (1,505,000) 1,505,000 Provision for doubtful accounts................................... 1,193,693 1,739,865 1,594,925 Write off of accounts receivable.................................. (883,693) (1,214,865) (1,426,925) Provision for sales returns and discounts......................... 5,955,658 10,646,418 6,733,208 Sales returns and discounts....................................... (5,633,525) (11,277,938) (6,814,537) Provision for overcharges......................................... -- 166,150 -- Depreciation and amortization..................................... 1,359,252 1,123,460 2,640,279 (Gain) loss on sale of assets..................................... (71,800) (26,928) (68,895) Minority interest................................................. 81,842 134,727 -- Compensation expense on stock options............................. -- -- 30,000 (Increase) decrease in assets Accounts receivable............................................... (6,850,073) (6,496,717) 8,028,905 Inventories....................................................... 232,756 (9,845,252) 814,255 Prepaid expenses and other........................................ (563,388) 194,219 190,081 Refundable income taxes........................................... -- -- (1,799,450) Other assets...................................................... -- (854,567) (1,140,683) Increase (decrease) in liabilities Accounts payable.................................................. 1,268,184 589,178 (2,665,781) Accrued expenses and other current liabilities.................... 327,320 (164,913) 94,941 Accrued compensation.............................................. (16,100) 40,599 (25,536) Income taxes payable.............................................. -- 156,000 (156,000) ------------- ------------- -------------- Cash provided by (used in) operating activities..................... 4,362,785 (1,547,580) (9,258,762) ------------- ------------- -------------- Investing Activities Proceeds from sale of assets...................................... 71,800 38,174 188,067 Capital expenditures.............................................. (701,821) (1,104,832) (1,524,124) Acquisition of license............................................ -- -- (600,000) ------------- ------------- -------------- Cash used in investing activities................................... (630,021) (1,066,658) (1,936,057) ------------- ------------- -------------- Financing Activities Checks issued against future deposits............................. (67,153) (1,150,679) 1,298,929 Issuance of common stock.......................................... -- 33,853,991 4,774,860 Purchase of treasury stock........................................ -- -- (3,195,162) Stockholder distributions......................................... (3,214,899) (15,798,629) -- Principal payments on debt........................................ (1,632,216) (7,437,177) (172,515) Principal proceeds from debt...................................... 783,349 -- 2,412,235 Deferred financing costs.......................................... (75,000) (35,000) -- Purchase of minority interest..................................... -- (335,000) -- ------------- ------------- -------------- Cash provided by (used in) financing activities..................... (4,205,919) 9,097,506 5,118,347 ------------- ------------- -------------- Increase (decrease) in cash and cash equivalents.................... (473,155) 6,483,268 (6,076,472) Cash and Cash Equivalents, at beginning of year..................... 1,411,954 938,799 7,422,067 ------------- ------------- -------------- Cash and Cash Equivalents, at end of year........................... $ 938,799 $ 7,422,067 $ 1,345,595 ------------- ------------- -------------- ------------- ------------- --------------
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, 1997 and 1998. All intercompany balances and transactions have been eliminated. Also, 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 under the Beverly Hills Polo Club brand in the United States, Puerto Rico and Europe. The Company began marketing boys sportswear under the Beverly Hills Polo Club brand in the first quarter of 1999. 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 began 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 was used for general corporate purposes. On January 23, 1998, upon the partial exercise of an over-allotment option, the Company sold an additional 520,000 shares of its common stock and received net proceeds of approximately $4.8 million. The additional proceeds were used for general corporate purposes. The final distribution to the stockholders represented a portion of the cumulative undistributed S corporation earnings as of December 22, 1997 (termination date of S corporation status). RISKS AND UNCERTAINTIES The apparel industry is highly competitive. The Company competes primarily with larger, well capitalized companies which 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, 1996, 1997, and 1998 sales to a specific customer were $15,445,131, $22,610,114 and $29,840,195. These amounts constitute 13.0%, 14.0% and 26.2% of total sales, respectively. The Company establishes an allowance for doubtful accounts based upon factors surrounding the credit risk of specific customers, historical trends and other information. The Company's actual credit losses as a percentage of net sales have been less than 1.2%. 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. The Company analyzes the operating income of the women's Company-owned and private label lines in relation to the goodwill amortization on a quarterly basis for evidence of impairment. During the year ended December 31, 1998, management determined that the reduction in sales had significantly impacted the operating income of the women's Company-owned and private label lines and that an impairment of the goodwill has occurred. In response, management has recorded a one-time write down of $435,000 and F-8 I.C. ISAACS & COMPANY, INC. SUMMARY OF ACCOUNTING POLICIES (CONTINUED) has reduced the life of the goodwill from 40 years to 20 years. The remaining goodwill will be amortized over 63 months. Management will continue to analyze the profitability of women's private label lines on a quarterly basis for any additional impairment. TRADEMARK AND LICENSES Included in trademark and licenses is the cost of certain trademark and licenses which allow the Company to manufacture and market certain branded apparel. The Company capitalized the cost of obtaining the trademarks and licenses, and the cost is being amortized on a straight-line basis over the initial term of the trademark or license. The Company accrues royalty expense related to the licenses at the greater of the specified percentage of sales or the minimum guaranteed royalty set forth in the license agreements. ASSET IMPAIRMENT Effective January 1, 1996, ICI adopted Statement of Financial Accounting Standard No. 121, "Accounting for the Impairment of Long-Lived Assets" ("SFAS 121"). In accordance with SFAS 121, ICI periodically evaluates the carrying value of long-lived assets when events and circumstances warrant such a review. The carrying value of a long-lived asset is considered impaired when the anticipated undiscounted cash flow from such asset is separately identifiable and is less than the carrying value. In that event, a loss is recognized based on the amount by which the carrying value exceeds the fair market value of the long-lived asset. Fair market value is determined primarily using the anticipated cash flows discounted at a rate commensurate with the risk involved. REVENUE RECOGNITION Sales are recognized upon shipment of products. Allowances for estimated returns are provided when sales are recorded. ADVERTISING COSTS Advertising costs, included in selling expenses, are expensed as incurred and were $2,529,109, $3,867,371 and $5,676,799 for the years ended December 31, 1996, 1997 and 1998, 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. F-9 I.C. ISAACS & COMPANY, INC. SUMMARY OF ACCOUNTING POLICIES (CONTINUED) EARNINGS PER SHARE Earnings per share is based on the weighted average number of shares of common stock and dilutive common stock equivalents outstanding. Basic earnings per share includes no dilution and is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution of securities that could share in the earnings of an entity. Basic and diluted earnings per share are the same during 1998 because the impact of dilutive securities is anti-dilutive. During 1996 and 1997 there were no dilutive common stock equivalents outstanding. 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 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 Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"), establishes standards for reporting and display of comprehensive income, its components accumulated balances. Comprehensive income is defined to include all changes in equity except those resulting from investments by owners and distributions to owners. Among other disclosures, SFAS 130 requires that all items that are required to be recognized under current accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. The Company adopted SFAS 130 during the first quarter of 1998 and has no items of comprehensive income to report. Statement of Financial Accounting Standards (SFAS) 131, "Disclosure about Segments of a Business Enterprise", 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 for periods ending after December 15, 1997. 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. Presently, the Company operates in one business segment. In February 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 132, "Employers Disclosures about Pensions and Other Postretirement Benefits" F-10 I.C. ISAACS & COMPANY, INC. SUMMARY OF ACCOUNTING POLICIES (CONTINUED) ("SFAS 132"). SFAS 132 revised employers' disclosures about pension and other postretirement benefit plans but does not change measurement or recognition of those plans. Also, SFAS 132 requires additional information on changes in the benefit obligations and fair values of plan assets. Presently, the Company does not offer postretirement benefits. Consequently, disclosures about the Company's pension plan did not change upon adoption of SFAS 132. In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments" ("SFAS 133"). SFAS 133 establishes accounting and reporting standards for derivative instruments and for hedging activities. SFAS 133 requires that an entity recognize all derivatives as either assets or liabilities and measure those instruments at fair market value. Under certain circumstances, a portion of the derivative's gain or loss is initially reported as a component of other comprehensive income and subsequently reclassified into income when the transaction affects earnings. For a derivative not designated as a hedging instrument, the gain or loss is recognized in income in the period of change. Presently, the Company does not use derivative instruments either in hedging activities or as investments. Accordingly, the Company believes that adoption of SFAS 133 will have no impact on its financial position or results of operations. F-11 I. C. ISAACS & COMPANY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. INVENTORIES Inventories consist of the following:
DECEMBER 31, ---------------------------- 1997 1998 ------------- ------------- Raw materials.................................................. $ 4,742,653 $ 4,790,634 Work-in process................................................ 1,864,569 1,531,424 Finished goods................................................. 17,329,004 16,799,913 ------------- ------------- $ 23,936,226 $ 23,121,971 ------------- ------------- ------------- -------------
2. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consists of the following:
DECEMBER 31, ESTIMATED -------------------------- USEFUL 1997 1998 LIVES ------------ ------------ ----------- Land................................................ $ 185,660 $ 731,004 Building and improvements........................... 5,339,371 5,439,734 18 years Machinery, equipment and fixtures................... 9,485,268 9,086,270 5-7 years Other............................................... 1,167,655 1,351,454 various ------------ ------------ 16,177,954 16,608,462 Less accumulated depreciation and amortization...... 13,499,266 13,360,816 ------------ ------------ $ 2,678,688 $ 3,247,646 ------------ ------------ ------------ ------------
3. LONG-TERM DEBT Long-term debt consists of the following:
DECEMBER 31, ---------------------------- 1997 1998 ------------- ------------- Revolving line of credit (a)................................... $ -- $ 2,412,235 Notes payable (b).............................................. 11,250,000 11,250,000 Capital lease obligations (c).................................. 358,637 186,122 ------------- ------------- Total.......................................................... 11,608,637 13,848,357 Less current maturities of long-term debt and revolving line of credit....................................................... -- 2,412,235 Less current maturities of capital lease obligations........... 172,515 179,864 ------------- ------------- $ 11,436,122 $ 11,256,258 ------------- ------------- ------------- -------------
(a) The Company has an asset-based revolving line of credit (the "Agreement") with Congress Financial Corporation ("Congress"). As of December 31, 1998 the Company had $2,412,235 in outstanding borrowings under its revolving line of credit. There were no borrowings as of December 31, 1997. In May 1998, the Company amended the Agreement with Congress. The amended Agreement provided that the Company could borrow up to 85.0% of the net eligible accounts receivable and a portion of imported inventory, as defined in the Agreement. Borrowings under the Agreement were limited to F-12 I. C. ISAACS & COMPANY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 3. LONG-TERM DEBT (CONTINUED) $30.0 million including outstanding letters of credit which were limited to $12.0 million, and bore interest at the lender's prime rate of interest less 0.25% (effectively 7.5% at December 31, 1998). The amended Agreement was due to expire on June 30, 1999. Additional borrowings available under the revolving line of credit and letter of credit agreements were approximately $8.0 million at December 31, 1998. Borrowings under the Agreement are collateralized by the Company's accounts receivable, imported inventories and other assets. Outstanding letters of credit approximated $2.3 million at December 31, 1998. Among the provisions of the 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. In March 1999, the Company further amended the Agreement to extend the term of the Agreement through December 31, 2000. The amended Agreement provides that the Company may borrow up to 80.0% of net eligible accounts receivable and a portion of imported inventory, as defined in the Agreement. Borrowings under the Agreement may not exceed $25.0 million including outstanding letters of credit which are limited to $8.0 million, and bear interest at the lender's prime rate of interest plus 1.0%. In connection with amending the Agreement the Company will pay Congress a financing fee of $125,000, one half of which will be paid at the time of closing and the other half of which will be paid on June 30, 2000. The financing fee will be amortized over 21 months. Average short-term borrowings and the related interest rates are as follows:
YEAR ENDED DECEMBER 31, --------------------------- 1997 1998 ------------- ------------ Borrowing under revolving line of credit......................... $ -- $ 2,412,235 Weighted average interest rate................................... 9.50% 8.5% Maximum month-end balance during year............................ $ 23,192,303 $ 6,316,535 Average month-end balance during the year........................ $ 17,144,863 $ 2,035,144
(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, 1997 and 1998. Amortization expense related to assets under capital leases amounted to $191,490, $169,107 and $143,252 for the years ended December 31, 1996, 1997 and 1998, respectively. As of December 31, 1998, future net minimum lease payments under capital leases that have initial or remaining noncancelable lease terms in excess of one year are as follows: 1999.............................................................. $ 189,548 2000.............................................................. 6,296 --------- Total minimum lease payments...................................... 195,844 Less: amount representing interest................................ 9,722 --------- Present value of net minimum lease payments....................... 186,122 Less: current portion............................................. 179,864 --------- Long-term capital lease obligations............................... $ 6,258 --------- ---------
F-13 I. C. ISAACS & COMPANY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 4. ACCRUED EXPENSES Accrued expenses consist of the following:
DECEMBER 31, -------------------------- 1997 1998 ------------ ------------ Royalties......................................................... $ 901,925 $ 912,657 Accrued professional fees......................................... 150,000 150,000 Payable to salesmen............................................... 127,634 2,519 Severance benefits................................................ -- 300,000 Payroll tax withholdings.......................................... 139,214 111,725 Customer credit balances.......................................... 240,530 226,479 Property taxes.................................................... 136,700 -- Accrued interest.................................................. 174,401 189,816 Franchise taxes payable........................................... -- 96,000 Other............................................................. 108,960 85,109 ------------ ------------ $ 1,979,364 $ 2,074,305 ------------ ------------ ------------ ------------
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 1998 ------------- ------------ Current Federal........................................................ $ 128,000 $ (128,000) State and local................................................ 28,000 (26,000) ------------- ------------ 156,000 (154,000) Deferred......................................................... (1,505,000) -- Valuation allowance.............................................. -- 1,505,000 ------------- ------------ $ (1,349,000) $ 1,351,000 ------------- ------------ ------------- ------------
F-14 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 DECEMBER 31, 1998 ----------------- ----------------- Net operating loss carryforwards....................... $ -- $ 5,632,000 Depreciation and amortization.......................... 602,000 554,000 Allowance for doubtful accounts........................ 486,000 560,000 Inventory valuation.................................... 372,000 217,000 Other.................................................. 45,000 13,000 ----------------- ----------------- 1,505,000 6,976,000 Valuation allowance.................................... -- (6,976,000) ----------------- ----------------- Net deferred tax asset................................. $ 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 1998 ----------- ----------- --------- Federal statutory rate............................................ 35.0% 35.0% (35.0)% State and local taxes, net of federal benefit..................... 5.0 5.0 (5.0) Nondeductible entertainment expense............................... .5 .5 -- Nondeductible goodwill amortization............................... .5 .5 3.5 Change in valuation allowance..................................... -- -- 10.0 Net operating losses not currently available...................... -- -- 35.3 --- --- --------- 41.0% 41.0% 8.8% --- --- --------- --- --- ---------
6. STOCK OPTIONS In May 1997, ICI adopted the 1997 Omnibus Stock Plan (the "Plan"). Under the 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 Company has reserved 500,000 F-15 I. C. ISAACS & COMPANY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 6. STOCK OPTIONS (CONTINUED) shares of common stock for issuance under the Plan. In August 1998, the Board of Directors granted options to purchase 351,000 shares of common stock at $2.125 per share. Options vest at the end of the second year and expire 10 years from the date of grant and upon termination of employment. The Board of Directors has approved an increase in the shares of Common Stock that may be issued with respect to awards granted under the Plan to an aggregate of 1.1 million shares. This increase is subject to approval by the Company's stockholders at the 1999 annual meeting of stockholders. The following table relates to options activity in 1998, under the Plan:
NUMBER OF OPTION PRICE SHARES PER SHARE ----------- ------------- Granted............................................................. 351,000 $ 2.125 Cancelled........................................................... (5,000) $ 2.125 ----------- Outstanding......................................................... 346,000 $ 2.125 -----------
Included in the outstanding stock options are 30,000 granted to non-employee directors. ICI recorded compensation expense of $30,000 in August 1998 related to these stock options. ICI has adopted the disclosure-only provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock Based Compensation" ("SFAS 123"), but applies the intrinsic value method set forth in Accounting Principles Board Opinion No. 25. For stock options granted to employees, ICI has estimated the fair value of each option granted using the Black-Scholes option pricing model with the following assumptions: risk-free interest rate of 5.01%, expected volatility of 40%, expected option life of 5.5 years and no dividend payment expected. Using these assumptions, the fair value of the stock options granted is $1.00. There were no adjustments made in calculating the fair value to account for vesting provisions or for non-transferability or risk of forfeiture. The weighted average remaining life for options outstanding at December 31, 1998 is nine years. If ICI had elected to recognize compensation expense based on the fair value at the grant dates, consistent with the method prescribed by SFAS No. 123, net loss per share would have been changed to the pro forma amount indicated below:
YEAR ENDED DECEMBER 31, 1998 ----------------- Net loss: As reported.............................................................. $ (16,792,549) Pro forma................................................................ (17,108,549) Basic and diluted loss per share: As reported.............................................................. $ (2.15) Pro forma................................................................ (2.19)
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 F-16 I. C. ISAACS & COMPANY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 7. COMMITMENTS AND CONTINGENCIES (CONTINUED) annual rental commitments under noncancelable operating leases in effect at December 31, 1998 are summarized as follows:
COMPUTER TRUCKS SHOWROOMS HARDWARE MACHINERY TOTAL ---------- ------------ ----------- ----------- ------------ 1999................................. $ 57,720 $ 310,106 $ 48,231 $ 3,654 $ 419,711 2000................................. 57,720 284,072 22,224 -- 364,016 2001................................. 57,720 295,914 5,556 -- 359,190 2002................................. 43,290 284,804 -- -- 328,094 2003................................. -- 218,820 -- -- 218,820 ---------- ------------ ----------- ----------- ------------ $ 216,450 $ 1,393,716 $ 76,011 $ 3,654 $ 1,689,831 ---------- ------------ ----------- ----------- ------------ ---------- ------------ ----------- ----------- ------------
Total rent expense is as follows:
YEAR ENDED DECEMBER 31, ---------------------------------------- 1996 1997 1998 ------------ ------------ ------------ Minimum rentals......................................... $ 773,987 $ 855,347 $ 796,367 Other lease costs....................................... 459,823 463,934 750,274 ------------ ------------ ------------ $ 1,233,810 $ 1,319,281 $ 1,546,641 ------------ ------------ ------------ ------------ ------------ ------------
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 $4,209,750, $6,448,204 and $3,746,215 for 1996, 1997 and 1998, 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. 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 F-17 I. C. ISAACS & COMPANY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 7. COMMITMENTS AND CONTINGENCIES (CONTINUED) 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 72.2%, 74.6% and 74.1% for the years ended December 31, 1996, 1997 and 1998, respectively. In November, 1996, the Company and one of its insurance carriers reached an agreement whereby the insurance company agreed to 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 2001, with an option 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 $607,287, $1,129,278 and $1,073,981 for 1996, 1997 and 1998, respectively. In 1996, Isaacs Europe executed exclusive licenses for the manufacture and sale, in Europe, of sportswear under the BHPC trademark. The license agreements have an initial term of three years ending December 31, 1999, renewable at the Company's option, provided the Company is not in breach thereof at the time the renewal notice is given, through December 31, 2004. Under the international retail agreement, the Company is required to pay royalties equal to (i) in 2000, 3% of wholesale purchases by the Company of Beverly Hills Polo Club products sold to Beverly Hills Polo Club stores ("Wholesale Purchases") and (ii) thereafter, the greater of (x) 4% of Wholesale Purchases plus 2% of retail sales and (y) minimum annual licence fees. Under the international wholesale agreement, the Company is required to pay royalties equal to (i) in 2000, the greater of (x) 3% of net shipments by the Company of products directly to authorized Beverly Hills Polo Club distributors or to retail stores ("Net Shipments") and (y) guaranteed minimum annual royalties and (ii) thereafter, the greater of (x) 6% of Net Shipments and (z) guaranteed minimum annual royalties. In May 1998, the Company entered into a license agreement with BHPC Marketing, Inc., to manufacture and market boys' knitted and woven shirts, cotton pants, jeanswear, shorts, swimwear and outerwear under the Beverly Hills Polo Club-Registered Trademark- brand in the United States and Puerto Rico. The initial term of the agreement is three years, commencing January 1, 1999, with renewal options for a total of six years. Under the agreement the Company is required to make payments to the licensor in an amount equal to 5.0% of net sales. Payments are subject to guaranteed minimum annual royalties as follows: F-18 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, - ---------------------------------------------------------------------------------- 1999.............................................................................. $ 636,000 2000.............................................................................. 661,000 2001.............................................................................. 736,000
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. The minimum guarantee is $1,500,000. Beginning with the first quarter of 1998, the Company was obligated to pay the greater of actual royalties earned or 8.3% of the minimum guaranteed royalties for that year. The Company was required to spend at least $350,000 in advertising for the men's Girbaud brand in 1998 and is required to spend at least $500,000 each year thereafter while the agreement is in effect. In March 1998, the Company entered into an exclusive license agreement with 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 was required to spend at least $550,000 in advertising for the women's Girbaud brand in 1998 and and is required to spend at least $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. In December 1998 the Girbaud women's license agreement was amended to provide that the Company would spend an additional $1.8 million on sales and marketing in 1999. Total license fees were $1,200,000 in 1998. 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. In the second quarter of 1998, the Company closed its Newton, Mississippi manufacturing facility. This closure resulted in a charge of $0.2 million against earnings for the period ended September 30, 1998. The production in this facility, the majority of which is jeans, was transferred to a third party independent F-19 I. C. ISAACS & COMPANY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 7. COMMITMENTS AND CONTINGENCIES (CONTINUED) contractors facilities in Mexico. The actual expenses incurred were not significantly different than the reserve provided by the Company in the first quarter. In November 1998, the Company announced that it intends to close its Carthage, Mississippi manufacturing facility. This closure, which occurred in the first quarter of 1999, resulted in a charge of $0.3 million against earnings in the fourth quarter of 1998. The production in this facility, the majority of which is ladies pants and jeans under the Company's private labels, will be transferred to the remaining Company-owned plant in Raleigh, Mississippi, as well as to independent contractors in Mexico. 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, 1998. Pension expense for 1996, 1997 and 1998 was approximately $284,000, $373,000 and $616,000, respectively, and includes the following components:
YEARS ENDED DECEMBER 31, ----------------------------------- 1996 1997 1998 ---------- ---------- ----------- Service cost of current period.............................................. $ 193,000 $ 211,000 $ 267,000 Interest on the above service costs......................................... 15,000 17,000 20,000 ---------- ---------- ----------- 208,000 228,000 287,000 Interest on the projected benefit obligation................................ 555,000 618,000 712,000 Expected return on plan assets.............................................. (526,000) (566,000) (630,000) Amortization of prior service cost.......................................... 16,000 42,000 42,000 Amortization of transition amount........................................... 31,000 31,000 31,000 Amortization of loss........................................................ -- 20,000 174,000 ---------- ---------- ----------- Pension cost................................................................ $ 284,000 $ 373,000 $ 616,000 ---------- ---------- ----------- ---------- ---------- -----------
F-20 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, 1996, 1997 and 1998:
YEARS ENDED DECEMBER 31, ----------------------------------------- 1996 1997 1998 ------------ ------------ ------------- Vested benefits....................................................... $ 6,730,000 $ 7,500,000 $ 8,653,000 Nonvested benefits.................................................... 56,000 43,000 103,000 ------------ ------------ ------------- Accumulated benefit obligation........................................ 6,786,000 7,543,000 8,756,000 Effect of anticipated future compensation levels and other events..... 862,000 983,000 1,655,000 ------------ ------------ ------------- Projected benefit obligation.......................................... 7,648,000 8,526,000 10,411,000 ------------ ------------ ------------- Fair value of assets held in the plan................................. 7,357,000 7,852,000 9,245,000 ------------ ------------ ------------- Excess of projected benefit obligation over plan assets............... (291,000) (674,000) (1,166,000) Unrecognized net loss from past experience different from that assumed............................................................. 661,000 935,000 2,519,000 Unrecognized prior service cost....................................... 143,000 342,000 299,000 Unamortized liability at transition................................... 124,000 93,000 62,000 ------------ ------------ ------------- Net prepaid periodic pension cost..................................... $ 637,000 $ 696,000 $ 1,714,000 ------------ ------------ ------------- ------------ ------------ -------------
With respect to the above table, the weighted average discount rate used to measure the projected benefit obligation was 8% for 1996 and 1997 and 7.5% for 1998; the rate of increase in future compensation levels is 3%; and the expected long-term rate of return on assets is 8%. The net prepaid periodic pension cost is included in other assets in the accompanying consolidated balance sheets. 9. FOURTH QUARTER ADJUSTMENTS During the fourth quarter ended December 31, 1998, ICI increased the inventory valuation reserve by $2,500,000 and the valuation allowance related to the deferred tax asset by $1,505,000 which had the effect of increasing the net loss by $4,005,000 or $0.58 per share. During the fourth quarter ended December 31, 1997 ICI increased the 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 $1,389,023, $2,213,776 and $1,689,005 for 1996, 1997 and 1998, respectively. Cash paid for income taxes was $1,799,450 in 1998. During 1997, the Company purchased a trademark totaling $11,250,000 by issuing a note payable. F-21 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 ***10.31 Beverly Hills Polo Club Exclusive Domestic License Agreement (Boys) dated April 24, 1998 ****10.32 Amendment No. 1 dated June 18, 1998 to Trademark License and Technical Assistance Agreement for Women's Collections dated January 15, 1998 by and between I.C. Isaacs & Co., L.P. and Latitude Licensing Corp. ****10.33 Fourteenth Amendment to Financing Agreements dated July 31, 1997 ****10.34 Fifteenth Amendment to Financing Agreements dated May 1, 1998 *****10.35 Amendment by and between BHPC Marketing, Inc. and I.C. Isaacs & Company, L.P. dated October 21, 1998 relating to the Exclusive Domestic License Agreement dated December 14, 1995 *****10.36 Letter Agreement by and between BHPC Marketing, Inc. and I.C. Isaacs & Company, L.P. dated October 21, 1998 relating to the Exclusive Domestic License Agreement for Women's BHPC Sportswear dated June 1, 1993 10.37 Amended and Restated Omnibus Stock Plan
EXHIBIT NO. DESCRIPTION - ------------------ ---------------------------------------------------------------------------------------------- 10.38 Amendment by and between BHPC Marketing, Inc. and I.C. Isaacs Europe, S.L. dated November 12, 1998 relating to the International Exclusive License Agreement (Wholesale) dated August 15, 1996 10.39 Amendment by and between BHPC Marketing, Inc. and I.C. Isaacs Europe, S.L. dated November 12, 1998 relating to the International Exclusive License Agreement (Retail) dated August 15, 1996 ++10.40 Amendment No. 1 dated November 12, 1998 to Trademark License and Technical Assistance Agreement for Men's Collections dated January 15, 1998 by and between I.C. Isaacs & Co., L.P. and Latitude Licensing Corp. ++10.41 Amendment No. 2 dated November 12, 1998 to Trademark License and Technical Assistance Agreement for Women's Collections dated January 15, 1998 by and between I.C. Isaacs & Co., L.P. and Latitude Licensing Corp. 10.42 Executive Employment Agreement by and between I.C. Isaacs & Company, Inc. and Daniel Gladstone dated January 21, 1999 *****10.43 Amendment No. 1 to Employment Agreement by and between I.C. Isaacs & Company, Inc. and Robert J. Arnot dated August 27, 1998 *****10.44 Amendment No. 1 to Employment Agreement by and between I.C. Isaacs & Company, Inc. and Gerald W. Lear dated August 27, 1998 *****10.45 Amendment No. 1 to Employment Agreement by and between I.C. Isaacs & Company, Inc. and Eugene C. Wielepski dated August 27, 1998 *****10.46 Amendment No. 1 to Employment Agreement by and between I.C. Isaacs & Company, Inc. and Thomas Ormandy dated August 27, 1998 *****10.47 Consulting Agreement by and between I.C. Isaacs & Company and Gary Brashers dated August 27, 1998 10.48 Amendment No. 2 to Employment Agreement by and between I.C. Isaacs & Company, Inc. and Robert J. Arnot dated February 11, 1999 10.49 Amendment No. 2 to Employment Agreement by and between I.C. Isaacs & Company, Inc. and Gerald W. Lear dated February 11, 1999 10.50 Amendment No. 2 to Employment Agreement by and between I.C. Isaacs & Company, Inc. and Eugene C. Wielepski dated February 11, 1999 10.51 Amendment No. 2 to Employment Agreement by and between I.C. Isaacs & Company, Inc. and Thomas Ormandy dated February 11, 1999 10.52 Amendment No. 1 to Consulting Agreement by and between I.C. Isaacs & Company and Gary Brashers dated February 11, 1999 10.53 Sixteenth Amendment to Financing Agreements dated March 26, 1999 10.54 Amendment by and between BHPC Marketing, Inc. dated March 1, 1999 relating to the International Exclusive License Agreement (Wholesale) dated August 15, 1996 10.55 Amendment by and between BHPC Marketing, Inc. dated March 1, 1999 relating to the International Exclusive License Agreement (Retail) dated August 15, 1996 10.56 Amendment No. 1 dated March 4, 1998 to Trademark License and Technical Assistance Agreement for Men's Collections by and between the Company and Latitude Licensing Corp.
EXHIBIT NO. DESCRIPTION - ------------------ ---------------------------------------------------------------------------------------------- ++10.57 Amendment No. 3 dated December 23, 1998 to Trademark License and Technical Assistance Agreement for Women's Collections by and between the Company and Latitude Licensing Corp. *21.01 List of Subsidiaries 23.01 Consent of BDO Seidman, LLP 27.01 Financial Data Schedule
- ------------------------ * Previously filed with the Company's Registration Statement on Form S-1 (SEC File No. 333-37155). ** Previously filed with the Company's Annual Report on Form 10-K for the Year Ended December 31, 1997 (SEC File No. 0-23379). *** Previously filed with the Company's Quarterly Report on Form 10-Q for the Quarter Ended March 31, 1998 (SEC File No. 0-23379). **** Previously filed with the Company's Quarterly Report on Form 10-Q for the Quarter Ended June 30, 1998 (SEC File No. 0-23379). ***** Previously filed with the Company's Quarterly Report on Form 10-Q for the Quarter Ended September 30, 1998 (SEC File No. 0-23379). ****** Previously filed with the Company's Current Report on Form 8-K dated August 27, 1998 (SEC File No. 0-23379). + Certain portions of this exhibit have been omitted pursuant to an order granting confidential treatment and have been filed separately with the Securities and Exchange Commission. ++ Certain portions of this exhibit have been omitted pursuant to a request for an order granting confidential treatment and have been filed separately with the Securities and Exchange Commission. EX-10.37 2 EXHIBIT 10.37 Exhibit 10.37 I.C. ISAACS & COMPANY, INC. AMENDED AND RESTATED ONMIBUS STOCK PLAN 1. ESTABLISHMENT, PURPOSE AND TYPES OF AWARDS I.C. Isaacs & Company, Inc., a Delaware corporation (the "Company"), established and maintains the I.C. Isaacs & Company, Inc. 1997 Omnibus Stock Plan which is hereby amended and restated in its entirety to be known hereafter as the I.C. Isaacs & Company, Inc. Amended and Restated Omnibus Stock Plan (the "Plan"). The purpose of the Plan is to promote the long-term growth and profitability of the Company by (i) providing key people with incentives to improve stockholder value and to contribute to the growth and financial success of the Company, and (ii) enabling the Company to attract, retain and reward the best-available persons. The Plan permits the granting of stock options (including incentive stock options qualifying under Code section 422 and nonqualified stock options), stock appreciation rights, restricted or unrestricted stock awards, phantom stock, performance awards, or any combination of the foregoing. 2. DEFINITIONS Under this Plan, except where the context otherwise indicates, the following definitions apply: (a) "AFFILIATE" shall mean any entity, whether now or hereafter existing, which controls, is controlled by, or is under common control with, the Company (including, but not limited to, joint ventures, limited liability companies, and partnerships). For this purpose, "control" shall mean ownership of 50% or more of the total combined voting power or value of all classes of stock or interests of the entity. (b) "AWARD" shall mean any stock option, stock appreciation right, stock award, phantom stock award, or performance award. (c) "BOARD" shall mean the Board of Directors of the Company. (d) "CODE" shall mean the Internal Revenue Code of 1986, as amended, and any regulations promulgated thereunder. (e) "COMMON STOCK" shall mean shares of common stock of the Company, par value of $0.0001 per share. (f) "EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, as amended. (g) "FAIR MARKET VALUE" of a share of the Company's Common Stock for any purpose on a particular date shall be determined in a manner such as the Administrator shall in good faith determine to be appropriate; provided that in the event the Common Stock shall become registered under Section 12(b) of the Exchange Act, then thereafter the Fair Market Value of the Company's Common Stock for any purpose on a particular date shall mean the last reported sale price per share of Common Stock, regular way, on such date or, in case no such sale takes place on such date, the average of the closing bid and asked prices, regular way, in either case as reported in the principal consolidated transaction reporting system with respect to securities listed or admitted to trading on a national securities exchange or included for quotation on the Nasdaq-National Market, or if the Common Stock is not so listed or admitted to trading or included for quotation, the last quoted price, or if the Common Stock is not so quoted, the average of the high bid and low asked prices, regular way, in the over-the-counter market, as reported by the National Association of Securities Dealers, Inc. Automated Quotation System or, if such system is no longer in use, the principal other automated quotations system that may then be in use or, if the Common Stock is not quoted by any such organization, the average of the closing bid and asked prices, regular way, as furnished by a professional market maker making a market in the Common Stock as selected in good faith by the Administrator or by such other source or sources as shall be selected in good faith by the Administrator. If, as the case may be, the relevant date is not a trading day, the determination shall be made as of the next preceding trading day. As used herein, the term "trading day" shall mean a day on which public trading of securities occurs and is reported in the principal consolidated reporting system referred to above, or if the Common Stock is not listed or admitted to trading on a national securities exchange or included for quotation on the Nasdaq-National Market, any business day. (h) "GRANT AGREEMENT" shall mean a written document memorializing the terms and conditions of an Award granted pursuant to the Plan and shall incorporate the terms of the Plan. (i) "PARENT" shall mean a corporation, whether now or hereafter existing, within the meaning of the definition of "parent corporation" provided in Code section 424(e), or any successor thereto. (j) "SUBSIDIARY" AND "SUBSIDIARIES" shall mean only a corporation or corporations, whether now or hereafter existing, within the meaning of the definition of "subsidiary corporation" provided in Code section 424(f), or any successor thereto. 3. ADMINISTRATION (a) ADMINISTRATION OF THE PLAN. The Plan shall be administered by the Board or by such committee or committees as may be appointed by the Board from time to time (the Board committee or committees hereinafter referred to as the "Administrator"). (b) POWERS OF THE ADMINISTRATOR. The Administrator shall have all the powers vested in it by the terms of the Plan, such powers to include authority, in its sole and absolute discretion, to grant Awards under the Plan, prescribe Grant Agreements evidencing such Awards and establish such programs for granting Awards. The Administrator shall have full power and authority to take all other actions necessary to carry out the purpose and intent of the Plan, including, but not limited to, the authority to: (i) determine the eligible persons to whom, and the time or times at which Awards shall be granted; (ii) determine the types of Awards to be granted; (iii) determine the number of shares to be covered by or used for reference purposes for each Award; (iv) impose such terms, limitations, restrictions and conditions upon any such Award as the Administrator shall deem appropriate; (v) modify, amend, extend or renew outstanding Awards, or accept the surrender of outstanding Awards and substitute new Awards (provided however, that, except as provided in Section 7(d) of the Plan, any modification that would materially adversely affect any outstanding Award shall not be made without the consent of the holder); (vi) accelerate or otherwise change the time in which an Award may be exercised or becomes payable and to waive or accelerate the lapse, in whole or in part, of any restriction or condition with respect to such Award, including, but not limited to, any restriction or condition with respect to the vesting or exercisability of an Award following termination of any grantee's employment or other relationship with the Company; and -2- (vii) establish objectives and conditions, if any, for earning Awards and determining whether Awards will be paid after the end of a performance period. The Administrator shall have full power and authority, in its sole and absolute discretion, to administer and interpret the Plan and to adopt and interpret such rules, regulations, agreements, guidelines and instruments for the administration of the Plan and for the conduct of its business as the Administrator deems necessary or advisable. (c) NON-UNIFORM DETERMINATIONS. The Administrator's determinations under the Plan (including without limitation, determinations of the persons to receive Awards, the form, amount and timing of such Awards, the terms and provisions of such Awards and the Grant Agreements evidencing such Awards) need not be uniform and may be made by the Administrator selectively among persons who receive, or are eligible to receive, Awards under the Plan, whether or not such persons are similarly situated. (d) LIMITED LIABILITY. To the maximum extent permitted by law, no member of the Administrator shall be liable for any action taken or decision made in good faith relating to the Plan or any Award thereunder. (e) INDEMNIFICATION. To the maximum extent permitted by law and by the Company's charter and by-laws, the members of the Administrator shall be indemnified by the Company in respect of all their activities under the Plan. (f) EFFECT OF ADMINISTRATOR'S DECISION. All actions taken and decisions and determinations made by the Administrator on all matters relating to the Plan pursuant to the powers vested in it hereunder shall be in the Administrator's sole and absolute discretion and shall be conclusive and binding on all parties concerned, including the Company, its stockholders, any participants in the Plan and any other employee, consultant, or director of the Company, and their respective successors in interest. 4. SHARES AVAILABLE FOR THE PLAN; MAXIMUM AWARDS Subject to adjustments as provided in Section 7(d) of the Plan, the shares of Common Stock that may be issued with respect to Awards granted under the Plan shall not exceed an aggregate of 1,100,000 shares of Common Stock. The Company shall reserve such number of shares for Awards under the Plan, subject to adjustments as provided in Section 7(d) of the Plan. If any Award, or portion of an Award, under the Plan expires or terminates unexercised, becomes unexercisable or its forfeited or otherwise terminated, surrendered or canceled as to any shares, or if any shares of Common Stock are surrendered to the Company in connection with any Award (whether or not such surrendered shares were acquired pursuant to any Award), the shares subject to such Award and the surrendered shares shall thereafter be available for further Awards under the Plan; provided, however, that any such shares that are surrendered in the Company in connection with any Award or that are otherwise forfeited after issuance shall not be available for purchase pursuant to incentive stock options intended to qualify under Code section 422. Subject to adjustments as provided in Section 7(d) of the Plan, the maximum number of shares of Common Stock subject to Awards of any combination that may be granted during any one fiscal year of the Company to any one individual under this Plan shall be limited to 500,000 shares. Such per-individual limit shall not be adjusted to effect a restoration of shares of Common Stock with respect to which the related Award is terminated, surrendered or canceled. -3- 5. PARTICIPATION Participation in the Plan shall be open to all employees, officers, directors, and consultants of the Company, or of any Affiliate of the Company, as may be selected by the Administrator from time to time. 6. AWARDS The Administrator, in its sole discretion, establishes the terms of all Awards granted under the Plan. Awards may be granted individually or in tandem with other types of Awards. All Awards are subject to the terms and conditions provided in the Grant Agreement. (a) STOCK OPTIONS. The Administrator may from time to time grant to eligible participants Awards of incentive stock options as that term is defined in Code section 422 or nonqualified stock options; provided, however, that Awards of incentive stock options shall be limited to employees of the Company or of any Parent or Subsidiary of the Company. Options intended to qualify as incentive stock options under Code section 422 must have an exercise price at least equal to Fair Market Value on the date of grant, but nonqualified stock options may be granted with an exercise price less than Fair Market Value. No stock option shall be an incentive stock option unless so designated by the Administrator at the time of grant or in the Grant Agreement evidencing such stock option. (b) STOCK APPRECIATION RIGHTS. The Administrator may from time to time grant to eligible participants Awards of Stock Appreciation Rights ("SAR"). An SAR entitles the grantee to receive, subject to the provisions of the Plan and the Grant Agreement, a payment having an aggregate value equal to the product of (i) the excess of (A) the Fair Market Value on the exercise date of one share of Common Stock over (B) the base price per share specified in the Grant Agreement, times (ii) the number of shares specified by the SAR, or portion thereof, which is exercised. Payment by the Company of the amount receivable upon any exercise of an SAR may be made by the delivery of Common Stock or cash, or any combination of Common Stock and cash, as determined in the sole discretion of the Administrator. If upon settlement of the exercise of an SAR a grantee is to receive a portion of such payment in shares of Common Stock, the number of shares shall be determined by dividing such portion by the Fair Market Value of a share of Common Stock on the exercise date. No fractional shares shall be used for such payment and the Administrator shall determine whether cash shall be given in lieu of such fractional shares or whether such fractional shares shall be eliminated. (c) STOCK AWARDS. The Administrator may from time to time grant restricted or unrestricted stock Awards to eligible participants in such amounts, on such terms and conditions, and for such consideration, including no consideration or such minimum consideration as may be required by law, as it shall determine. A stock Award may be paid in Common Stock, in cash, or in a combination of Common Stock and cash, as determined in the sole discretion of the Administrator. (d) PHANTOM STOCK. The Administrator may from time to time grant Awards to eligible participants denominated in stock-equivalent units ("phantom stock") in such amounts and on such terms and conditions as it shall determine. Phantom stock units granted to a participant shall be credited to a bookkeeping reserve account solely for accounting purposes and shall not require a segregation of any of the Company's assets. An Award of phantom stock may be settled in Common Stock, in cash, or in a combination of Common Stock and cash, as determined in the sole discretion of the Administrator. Except as otherwise provided in the applicable Grant Agreement, the grantee shall not have the rights of a stockholder with respect to any shares of Common Stock represented by a phantom stock unit solely as a result of the grant of a phantom stock unit to the grantee. -4- (e) PERFORMANCE AWARDS. The Administrator may, in its discretion, grant performance awards which become payable on account of attainment of one or more performance goals established by the Administrator. Performance awards may be paid by the delivery of Common Stock or cash, or any combination of Common Stock and cash, as determined in the sole discretion of the Administrator. Performance goals established by the Administrator may be based on the Company's or an Affiliate's operating income or one or more other business criteria selected by the Administrator that apply to an individual or group of individuals, a business unit, or the Company or an Affiliate as a whole, over such performance period as the Administrator may designate. 7. MISCELLANEOUS (a) WITHHOLDING OF TAXES. Grantees and holders of Awards shall pay to the Company or its Affiliate, or make provision satisfactory to the Administrator for payment of, any taxes required to be withheld in respect of Awards under the Plan no later than the date of the event creating the tax liability. The Company or its Affiliate may, to the extent permitted by law, deduct any such tax obligations from any payment of any kind otherwise due to the grantee or holder of an Award. In the event that payment to the Company or its Affiliate of such tax obligations is made in shares of Common Stock, such shares shall be valued at Fair Market Value on the applicable date for such purposes. (b) LOANS. The Company or its Affiliate may make or guarantee loans to grantees to assist grantees in exercising Awards and satisfying any withholding tax obligations. (c) TRANSFERABILITY. Except as otherwise determined by the Administrator, and in any event in the case of an incentive stock option or a stock appreciation right granted with respect to an incentive stock option, no Award granted under the Plan shall be transferable by a grantee otherwise than by will or the laws of descent and distribution. Unless otherwise determined by the Administrator in accord with the provisions of the immediately preceding sentence, an Award may be exercised during the lifetime of the grantee, only by the grantee or, during the period the grantee is under a legal disability, by the grantee's guardian or legal representative. (d) ADJUSTMENTS; BUSINESS COMBINATIONS. In the event of changes in the Common Stock of the Company by reason of any stock dividend, spin-off, split-up, recapitalization, merger, consolidation, business combination or exchange of shares and the like, the Administrator shall, in its discretion, make appropriate adjustments to the maximum number and kind of shares reserved for issuance or with respect to which Awards may be granted under the Plan as provided in Section 4 of the Plan and to the number, kind and price of shares covered by outstanding Awards, and shall, in its discretion and without the consent of holders of Awards, make any other adjustments in outstanding Awards, including but not limited to reducing the number of shares subject to Awards or providing or mandating alternative settlement methods such as settlement of the Awards in cash or in shares of Common Stock or other securities of the Company or of any other entity, or in any other matters which relate to Awards as the Administrator shall, in its sole discretion, determine to be necessary or appropriate. Notwithstanding anything in the Plan to the contrary and without the consent of holders of Awards, the Administrator, in its sole discretion, may make any modifications to any Awards, including but not limited to cancellation, forfeiture, surrender or other termination of the Awards in whole or in part regardless of the vested status of the Award, in order to facilitate any business combination that is authorized by the Board to comply with requirements for treatment as a pooling of interests transaction for accounting purposes under generally accepted accounting principles. - 5 - The Administrator is authorized to make, in its discretion and without the consent of holders of Awards, adjustments in the terms and conditions of, and the criteria included in, Awards in recognition of unusual or nonrecurring events affecting the Company, or the financial statements of the Company or any Affiliate, or of changes in applicable laws, regulations, or accounting principles, whenever the Administrator determines that such adjustments are appropriate in order to prevent dilution or enlargement of the benefits or potential benefits intended to be made available under the Plan. (e) SUBSTITUTION OF AWARDS IN MERGERS AND ACQUISITIONS. Awards may be granted under the Plan from time to time in substitution for Awards held by employees, officers, consultants or directors of entities who become or are about to become employees, officers, consultants or directors of the Company or an Affiliate as the result of a merger or consolidation of the employing entity with the Company or an Affiliate, or the acquisition by the Company or an Affiliate of the assets or stock of the employing entity. The terms and conditions of any substitute Awards so granted may vary from the terms and conditions set forth herein to the extent that the Administrator deems appropriate at the time of grant to conform the substitute Awards to the provisions of the awards for which they are substituted. (f) TERMINATION, AMENDMENT AND MODIFICATION OF THE PLAN. The Board may terminate, amend or modify the Plan or any portion thereof at any time. (g) NON-GUARANTEE OF EMPLOYMENT OR SERVICE. Nothing in the Plan or in any Grant Agreement thereunder shall confer any right on an individual to continue in the service of the Company or shall interfere in any way with the right of the Company to terminate such service at any time with or without cause or notice. (h) NO TRUST OR FUND CREATED. Neither the Plan nor any Award shall create or be construed to create a trust or separate fund of any kind or a fiduciary relationship between the Company and a grantee or any other person. To the extent that any grantee or other person acquires a right to receive payments from the Company pursuant to an Award, such right shall be no greater than the right of any unsecured general creditor of the Company. (i) GOVERNING LAW. The validity, construction and effect of the Plan, of Grant Agreements entered into pursuant to the Plan, and of any rules, regulations, determinations or decisions made by the Administrator relating to the Plan or such Grant Agreements, and the rights of any and all persons having or claiming to have any interest therein or thereunder, shall be determined exclusively in accordance with applicable federal laws and the laws of the State of Delaware, without regard to its conflict of laws principles. (j) EFFECTIVE DATE; TERMINATION DATE. The Plan initially became effective May 15, 1997, and shall continue in effect as amended and restated herein, subject to approval of the stockholders of the Company at the 1999 Annual Meeting of the Stockholders or a special meeting of the stockholders at which the Plan, as amended and restated, is presented for approval, provided that any such special meeting is held within twelve months of the date this amended and restated Plan is adopted by the Board. No Award shall be granted under the Plan after the close of business on May 14, 2007. Subject to other applicable provisions of the Plan, all Awards made under the Plan prior to such termination of the Plan shall remain in effect until such Awards have been satisfied or terminated in accordance with the Plan and the terms of such Awards. - 6 - EX-10.38 3 EXHIBIT 10.38 Exhibit 10.38 AMENDMENT TO INTERNATIONAL EXCLUSIVE LICENSE AGREEMENT This Amendment is made and entered into by and between BHPC Marketing, Inc. ("LICENSOR") and I.C. Isaacs Europe, S.L. ("LICENSEE") and is dated as of November 12, 1998. This Amendment amends and modifies that certain International Exclusive License Agreement between LICENSOR and LICENSEE, dated August 15, 1996 (the "Agreement"). (I) The promises, covenants, agreements and declarations made and set forth herein are intended to and shall have the same force and effect as if set forth at length in the body of the Agreement. To the extent that the provisions of this Amendment are inconsistent with the terms and conditions of the Agreement, the terms set forth herein shall control. (II) 1. Effective as of April 1, 1999, item 2 of the License Agreement Detail Schedule is hereby deleted in its entirety, and the following is hereby inserted in its place and stead: "2. Definition of Licensed Product (by category): --------------------------------------------- Men's apparel including denim sportswear, outerwear, woven shirts, knit and woven casual pants and shorts, sweaters, basic and fashion fleece tops and bottoms, overalls and shortalls, knit tops (including t-shirts and polo shirts), swimwear, and warm-ups (excluding suits, ties, dress shirts, underwear, shoes, overcoats, and full-length rainwear). Women's apparel including slacks, skirts, dresses, sweaters, outerwear, blouses and jeans" 2. Effective as of January 1, 1999, Item 7.(D) of the License Agreement Detail Schedule is hereby amended to change and insert the following: "7. Guarantees: in U.S. Dollars ----------- --------------- (D) Guaranteed Monthly Royalty Payments Third Contract Year $10,000.00" AMENDMENT TO INTERNATIONAL EXCLUSIVE LICENSE AGREEMENT Product Category: Wholesale Sales I.C. ISAACS EUROPE, S.L. Page Two of Two (III) LICENSOR AND LICENSEE acknowledge and agree that the Agreement, as amended by this Amendment, remains in full force and effect and represents the entire agreement of the parties with respect to the matters contained herein. IN WITNESS WHEREOF, the parties hereto agree that this Amendment shall take effect as of the date and year first written above. LICENSOR: LICENSEE: BHPC MARKETING, INC. I.C. ISAACS EUROPE, S.L. BY: /s/Don Garrison BY: /s/Robert Arnot ------------------------------- --------------------------------- Don Garrison Robert Arnot Vice President Chairman of the Board, Co-C.E.O. DATE: 11/30/98 DATE: 12/2/98 ------------------------------- --------------------------------- BY: /s/Roger Tomlinson BY: /s/Gerald Lear ------------------------------- --------------------------------- Roger Tomlinson Gerald Lear Treasurer/Director President, Co-C.E.O. DATE: 11/30/98 DATE: 12/4/98 ------------------------------- --------------------------------- EX-10.39 4 EXHIBIT 10.39 Exhibit 10.39 AMENDMENT TO INTERNATIONAL EXCLUSIVE LICENSE AGREEMENT This Amendment is made and entered into by and between BHPC Marketing, Inc. ("LICENSOR") and I.C. Isaacs Europe, S.L. ("LICENSEE") and is dated as of November 12, 1998. This Amendment amends and modifies that certain International Exclusive License Agreement between LICENSOR and LICENSEE, dated August 15, 1996 (the "Agreement"). (I) The promises, covenants, agreements and declarations made and set forth herein are intended to and shall have the same force and effect as if set forth at length in the body of the Agreement. To the extent that the provisions of this Amendment are inconsistent with the terms and conditions of the Agreement, the terms set forth herein shall control. (II) 1. Effective as of April 1, 1999, Item 2 of the License Agreement Detail Schedule is hereby deleted in its entirety, and the following is hereby inserted in its place and stead: "2. Definition of Licensed Product (by category): --------------------------------------------- Men's apparel including denim sportswear, outerwear, woven shirts, knit and woven casual pants and shorts, sweaters, basic and fashion fleece tops and bottoms, overalls and shortalls, knit tops (including t-shirts and polo shirts), swimwear, and warm-ups (excluding suits, ties, dress shirts, underwear, shoes, overcoats, and full-length rainwear); Women's apparel including slacks, skirts, dresses, sweaters, outerwear, blouses and jeans; All other BHPC Licensed Product produced by other Licensees." 2. Effective as of January 1, 1999, Item 7.(D) of the License Agreement Detail Schedule is hereby amended to change and insert the following: "7. Guarantees: in U.S. Dollars ----------- --------------- (D) Guaranteed Monthly Royalty Payments Third Contract Year $2,500.00" AMENDMENT TO INTERNATIONAL EXCLUSIVE LICENSE AGREEMENT Product Category: Retail Stores I.C. ISAACS EUROPE, S.L. Page Two of Two (III) LICENSOR AND LICENSEE acknowledge and agree that the Agreement, as amended by this Amendment, remains in full force and effect and represents the entire agreement of the parties with respect to the matters contained herein. IN WITNESS WHEREOF, the parties hereto agree that this Amendment shall take effect as of the date and year first written above. LICENSOR: LICENSEE: BHPC MARKETING, INC. I.C. ISAACS EUROPE, S.L. BY: /s/Don Garrison BY: /s/Robert Arnot ------------------------------- --------------------------------- Don Garrison Robert Arnot Vice President Chairman of the Board, Co-C.E.O. DATE: 11/30/98 DATE: 12/2/98 ------------------------------- --------------------------------- BY: /s/Roger Tomlinson BY: /s/Gerald Lear ------------------------------- --------------------------------- Roger Tomlinson Gerald Lear Treasurer/Director President, Co-C.E.O. DATE: 11/30/98 DATE: 12/4/98 ------------------------------- --------------------------------- EX-10.40 5 EX-10.40 EXHIBIT 10.40 11/12/98 AMENDMENT NO. 1 TO TRADEMARK LICENSE AND TECHNICAL ASSISTANCE AGREEMENT COVERING MEN'S PRODUCTS This is Amendment No. 1 dated November 12, 1998 to the Trademark License and Technical Assistance Agreement for Men's Collections dated January 15, 1998 by and between Latitude Licensing Corp. and I.C. Isaacs & Co., L.P. covering Men's Products (the "Agreement"). Capitalized terms used herein have the meaning ascribed to them in the Agreement unless otherwise indicated. WHEREAS, the Parties have agreed to extend the Territory, as defined in Sub-Section 2.2 of the Agreement, in order for the Licensor to grant to the Licensee the right to enter into a distribution agreement with Abert Trading, Inc. for additional countries (the "Distribution Agreement"). FOR GOOD AND VALUABLE CONSIDERATION, THE RECEIPT OF WHICH IS HEREBY ACKNOWLEDGED, THE PARTIES AGREE TO AMEND THE AGREEMENT AS FOLLOWS: 1. The Distribution Agreement must be submitted to the Licensor for approval and approved by the Licensor, in writing, before its signature by the Licensee and Abert Trading, Inc. 2. Paragraph 2.2 is amended to read as follows: 2.2(a)The License herein granted shall extend to the United States of America (Fifty states and the District of Columbia), Puerto-Rico, 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"). 2.2(b)The License shall also extend to Argentina, Brazil, The Carribean other than Puerto-Rico and the US Virgin Islands, Chile, Costa Rica, Curacao, the Dominican Republic, El Salvador, French Guyana, Guatemala, Guyana, Honduras, Panama, Paraguay, Peru, Surinam, and Uruguay (the "New Territory"). 2.2(c)The License for the New Territory shall be exclusive. However, should the annual sales for each country of the New Territory be seventy-five percent (75%) or less than the amount as targeted in Annex A for that country, the license for such country or countries shall become non-exclusive starting the following year. 3. The royalties due by the Licensee to the Licensor for the new Territory and pursuant to Article 4 of the Agreement shall be calculated based on Net Sales, as defined in Sub-Section 4.3 of the Agreement, from which the Abert discount shall be deducted. 1 4. This Amendment is effective starting November 12, 1998, for a period of three (3) years, or until the termination or expiration of the Agreement, whichever is earlier. Should this Amendment expire before the Agreement expires or terminates, the Agreement as existing until the execution of the Amendment shall remain in full force and effect. 5. Except for the terms amended by this Amendment, the Agreement as existing until the execution of the Amendment shall continue in full force and effect. Dated: November 12, 1998 LATITUTE LICENSING CORP. I.C. ISAACS & CO., L.P. By: /s/ [Illegible] By: /s/ Robert J. Arnot ----------------------------- ---------------------------------- Name: Name: Robert J. Arnot Title: Title: Chairman & CEO By: ----------------------------- Name: Title: 2 ABERT TRADING INC. PROJECTED SALES FOR "MARITHE FRANCOIS GIRBAUD" IN LATIN AMERICA THESE FIGURES ARE BASED ON OUR EXPERIENCES WITH OTHER POPULAR BRANDS AND ARE IN CONSIDERATION OF THE SHOP CONCEPT DEVELOPMENT. THEY ARE CONSERVATIVE FIGURES AND AFTER COMPLETING 1999 AND SEEING THE OVERALL RESPONSE TO THE BRAND THROUGHOUT SOUTH AMERICA, WE WILL BE ABLE TO PROVIDE YOU WITH FIGURES THAT ARE MORE ACCURATE. UPDATED: NOVEMBER 5, 1998
PROJECTIONS *
TOTAL GIRBAUD SALES CUMULATIVE TO DATE OF 12/31/98 = $32,096.50 ***PLEASE NOTE THAT IT IS ABERT'S TENDENCY TO BE CONSERVATIVE WITH SALES PROJECTIONS**** CARRIBEAN - EXCLUDES PUERTO RICO, U.S. VIRGIN ISLANDS OR ANY U.S. TERRITORY* - ------------------ *Text omitted pursuant to a request for confidential treatment and filed separately with the Securities and Exchange Commission. Annex A 3 EX-10.41 6 EX-10.41 Exhibit 10.41 11/12/98 Amendment No. 2 To Trademark License And Technical Assistance Agreement Covering Women's Products This is Amendment No. 2 dated November 12, 1998 to the Trademark License and Technical Assistance Agreement for Women's Collections dated January 15, 1998 by and between Latitude Licensing Corp. and I.C. Isaacs & Co., L.P. covering Women's Products (the "Agreement"). An Amendment No. 1 was agreed upon and made effective on June 18, 1998. Capitalized terms used herein have the meaning ascribed to them in the Agreement unless otherwise indicated. WHEREAS, the Parties have agreed to extend the Territory, as defined in Sub-Section 2.2 of the Agreement, in order for the Licensor to grant to the Licensee the right to enter into a distribution agreement with Abert Trading, Inc. for additional countries (The "Distribution Agreement"). FOR GOOD AND VALUABLE CONSIDERATION, THE RECEIPT OF WHICH IS HEREBY ACKNOWLEDGED, THE PARTIES AGREE TO AMEND THE AGREEMENT AS FOLLOWS: 1. The Distribution Agreement must be submitted to the Licensor for approval and approved by the Licensor, in writing, before its signature by the Licensee and Abert Trading, Inc. 2. Paragraph 2.2 is amended to read as follows: 2.2(a) The License herein granted shall 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 "New Territory"). 2.2(b) The License shall also extend to Argentina, Brazil, The Carribean other than Puerto-Rico and the US Virgin Islands, Chile, Costa Rica, Curacao, the Dominican Republic, El Salvador, French Guyana, Guatemala, Guyana, Honduras, Panama, Paraguay, Peru, Surinam, and Uruguay (the "New Territory"). 2.2(c) The License for the New Territory shall be exclusive. However, should the annual sales for each country of the New Territory be seventy-five percent (75%) or less than the amount as targeted in Annex A for that country, the license for such country or countries shall become non-exclusive starting the following year. 3. The royalties due by the Licensee to the Licensor for the new Territory and pursuant to Article 5 of the Agreement shall be calculated based on Net Sales, as defined in Sub-Section 5.3 of the Agreement, from which the Abert discount shall be deducted. 1 4. This Amendment is effective starting November 12, 1998, for a period of three (3) years, or until the termination or expiration of the Agreement, whichever is earlier. Should this Amendment expire before the Agreement expires or terminates, the Agreement as existing until the execution of the Amendment shall remain in full force and effect. 5. Except for the terms amended by this Amendment, the Agreement as existing until the execution of the Amendment shall continue in full force and effect. Dated: November 12, 1998 LATITUDE LICENSING CORP I.C. ISAACS & CO., L.P. By: /s/ [Illegible] By: /s/ Robert J. Arnot ----------------------------- ---------------------------------- Name: Name: Robert J. Arnot Title: Title: Chairman & CEO By: ----------------------------- Name: Title: 2 ABERT TRADING INC. PROJECTED SALES FOR "MARITHE FRANCOIS GIRBAUD" IN LATIN AMERICA THESE FIGURES ARE BASED ON OUR EXPERIENCES WITH OTHER POPULAR BRANDS AND ARE IN CONSIDERATION OF THE SHOP CONCEPT DEVELOPMENT. THEY ARE CONSERVATIVE FIGURES AND AFTER COMPLETING 1999 AND SEEING THE OVERALL RESPONSE TO THE BRAND THROUGHOUT SOUTH AMERICA, WE WILL BE ABLE TO PROVIDE YOU WITH FIGURES THAT ARE MORE ACCURATE. UPDATED: NOVEMBER 5, 1998
* 9/01/98 - 12/31/98 1999 1999 2000 2000 2001 ACTUAL ACTUAL ACTUAL COUNTRY SALES PROJECTIONS SALES PROJECTIONS SALES PROJECTIONS - ----------- ---------- ------------- ------ ------------- ------ ------------- PROJECTIONS
TOTAL GIRBAUD SALES CUMULATIVE TO DATE OF 12/31/98 = $32,096.50 ***PLEASE NOTE THAT IT IS ABERT'S TENDENCY TO BE CONSERVATIVE WITH SALES PROJECTIONS**** CARRIBEAN - EXCLUDES PUERTO RICO, U.S. VIRGIN ISLANDS OR ANY U.S. TERRITORY* Annex A - --------------- * Text omitted pursuant to a request for confidential treatment and filed separately with the Securities and Exchange Commission. 3 EX-10.42 7 EXHIBIT 10.42 Exhibit 10.42 EXECUTIVE EMPLOYMENT AGREEMENT THIS EXECUTIVE EMPLOYMENT AGREEMENT is made this 21st day of January 1999, by and between I. C. Isaacs & Company, Inc., a Delaware corporation (the "Company"), and Daniel Gladstone (the "Executive"). EXPLANATORY STATEMENT The Company desires to employ the Executive as its President - Girbaud Division on the terms and conditions herein set forth, and the Executive has agreed to accept employment with the Company on the terms and conditions herein set forth. NOW, THEREFORE, in consideration of the premises and the mutual promises made herein, the parties agree as follows: 1. EMPLOYMENT. The Company hereby employs the Executive as its President - Girbaud Division and agrees to continue the Executive in that position during the term set forth in Section 2. 2. TERM. Subject to the terms and conditions set forth herein, the Executive's term of employment shall begin January 21, 1999 and shall continue until January 21, 2001 (the "Initial Employment Period") Thereafter, Executive's term of employment shall renew automatically from Employment Year to Employment Year (as defined below), subject to the right of either party (i) to prevent the automatic renewal of the Executive's term of employment upon sixty (60) days' prior written notice to the other party or (ii) to terminate the Executive's employment as of the end of any Employment Year upon sixty (60) days' prior written notice to the other party. An "Employment Year" begins each January 21, and ends on the immediately following January 21. 3. BASE SALARY. The Executive's base salary for each Employment Year under this Agreement shall be at the rate of Three Hundred Fifty Thousand Dollars ($350,000) per annum. The Executive's base salary shall be paid throughout the year, in accordance with the normal payroll practices of the Company. 4. INCENTIVE COMPENSATION. In addition to his base salary, during the term of this Agreement, the Executive shall be entitled to receive incentive compensation within ninety (90) days following each fiscal year during which the Company's Net Sales (as defined below) of Girbaud sportswear exceeds $20.0 million. The amount of such incentive compensation shall equal one-half of one percent of the amount by which the Company's net sales of Girbaud sportswear exceeds $20.0 million. Net Sales of Girbaud sportswear shall mean domestic gross revenues from the sale of such sportswear recorded in accordance with the Company's normal -1- revenue recognition policies, less discounts, returns, allowances and off-price sales to off-price customers. 5. OTHER BENEFITS. During the term of this Agreement, the Executive shall also be entitled to participate in or receive benefits under all of the Company's benefit plans, programs, arrangements and practices, including pension, disability, and group life, sickness, accident or health insurance programs, if any, as may be established from time to time by the Board of Directors of the Company for the benefit of executive employees serving in similar capacities with the Company (and/or its affiliates), in accordance with the terms of such plans, as amended by the Company from time to time; it being understood that there is no assurance with respect to the establishment of such plans or, if established, the continuation of such plans during the term of this Agreement. 6. DUTIES. A. During the term of this Agreement, the Executive shall serve as the President -Girbaud Division of the Company and have such powers and shall perform such duties as shall be assigned to him by the Chief Executive Officer and that are incident and customary to those of the president of a division. The Chief Executive Officer shall have final authority regarding the sourcing, styling, pricing, distribution and marketing of Girbaud sportswear. B. The Executive shall devote his full time, attention, skill, and energy to the performance of his duties under this Agreement, and shall comply with all reasonable professional requests of the Company; provided, however, that the Executive will be permitted to engage in and manage personal investments and to participate in community and charitable affairs, so long as such activities do not interfere with his duties under this Agreement. 7. VACATION AND SICK LEAVE. A. Following six (6) months of employment with the Company, the Executive shall be entitled to a total of four (4) weeks of vacation each Employment Year, such vacation to be in accordance with the terms of the Company's announced policy for executive employees, as in effect from time to time. The Executive may take his vacation at such time or times as shall not interfere with the performance of his duties under this Agreement. B. The Executive shall be entitled to paid sick leave and holidays in accordance with the Company's announced policy for executive employees, as in effect from time to time. 8. EXPENSES. The Company shall reimburse the Executive for all reasonable expenses incurred in connection with his duties on behalf of the Company, provided that the Executive shall keep, and present to the Company, records and receipts relating to reimbursable expenses incurred by him. Such records and receipts shall be maintained and presented in a format, and with such regularity, as the Company reasonably may require in order to substantiate the Company's right to claim income tax deductions for such expenses. Without limiting the -2- generality of the foregoing, the Executive shall be entitled to reimbursement for any business-related travel, business-related entertainment, whether at his residence or otherwise, and other costs and expenses reasonably incident to the performance of his duties on behalf of the Company. 9. TERMINATION OF EMPLOYMENT FOR CAUSE. Notwithstanding the provisions of Section 2 of this Agreement, the Executive's employment (and all of his rights and benefits under this Agreement) shall terminate immediately and without further notice upon the happening of any one or more of the following events: A. The Executive has been or is guilty of (i) a criminal offense involving moral turpitude, (ii) criminal or dishonest conduct pertaining to the business or affairs of the Company (including, without limitation, fraud and misappropriation), (iii) any act or omission the intended or likely consequence of which is material injury to the Company's business, property or reputation, which act or omission continues uncured for a period of ten (10) days after the Executive has received written notice from the Company, and/or (iv) gross negligence or willful misconduct which continues uncured for a period of ten (10) days after the Executive has received written notice from the Company; B. The Executive persists, for a period of fifteen (15) days after written notice from the Company, in willful misconduct injurious to the Company's interests, willful breach in the performance of his duties under this Agreement, or habitual neglect by the Executive in the performance of his duties under this Agreement (other than as a result of incapacity for physical or mental illness); C. The Executive's death; or D. The continuous and uninterrupted inability to perform the Executive's duties on behalf of the Company, by reason of accident, mental or physical illness or impairment, or disease, for a period of one hundred and eighty (180) days from the first day of such inability to perform his duties. Subsections A, B, C, D and E of this Section 9 are hereinafter referred to collectively and individually as "Cause." In the event of a termination for Cause, the Company shall pay the Executive his base salary through the effective date of the employment termination, and the Executive shall immediately thereafter forfeit all rights and benefits (other than vested benefits), including but not limited to any right to compensation pursuant to Sections 4 and 5 of this Agreement, he would otherwise have been entitled to receive under this Agreement. The Company and the Executive thereafter shall have no further obligations under this Agreement except as otherwise provided in Sections 13 and 14 of this Agreement. 10. CHANGE OF CONTROL; TERMINATION OF EMPLOYMENT BY THE COMPANY WITHOUT CAUSE. Notwithstanding the provisions of Section 2 of this Agreement, the Board of Directors may terminate the Executive's employment, at any time, for reasons other than for Cause by -3- notifying the Executive in writing of such termination. If the Executive is terminated pursuant to this Section 10 for reasons other than for Cause, the Company shall pay the Executive, throughout the year in accordance with the normal payroll practices of the Company, an amount equal to one (1) year's worth of his base salary or, if the Executive is terminated before January 21, 2000, the remaining base salary otherwise payable during the Initial Employment Period, in either case at the rate in effect immediately prior to the date of termination. The payments described in the immediately preceding sentence shall be reduced by any income paid to the Executive during the severance period from other employment or consulting services he performs for other persons or entities. The Executive shall immediately thereafter forfeit all rights and benefits (other than vested benefits, including vested stock options and earned but unpaid incentive compensation (prorated for any partial year and paid within ninety (90) days after the end of the current fiscal year) under Section 4 of this Agreement), including but not limited to any right to compensation pursuant to Sections 4 or 5 of this Agreement, he would otherwise have been entitled to receive under this Agreement. The Company and the Executive thereafter shall have no further obligations under this Agreement except as otherwise provided in Sections 13 and 14 of this Agreement. If a Change of Control (as defined below) occurs and (i) the Executive voluntarily terminates his employment between ninety (90) and one hundred and twenty (120) days following the Change of Control or (ii) is involuntarily terminated within one hundred and twenty (120) days following the Change of Control, the Company shall pay the Executive, in a lump sum within thirty (30) days, an amount equal to one (1) year's worth of his base salary or, if the Executive is terminated before January 21, 2000, the remaining base salary otherwise payable during the Initial Employment Period, in either case at the rate in effect immediately prior to the date of termination. The payments described in the immediately preceding sentence shall be reduced by any income paid to the Executive during the severance period from other employment or consulting services he performs for other persons or entities. The Executive shall immediately thereafter forfeit all rights and benefits (other than vested benefits, including vested stock options and earned but unpaid incentive compensation (prorated for any partial year and paid within ninety (90) days after the end of the current fiscal year) under Section 4 of this Agreement), including but not limited to any right to compensation pursuant to Sections 4 or 5 of this Agreement, he would otherwise have been entitled to receive under this Agreement. The Company and the Executive thereafter shall have no further obligations under this Agreement except as otherwise provided in Sections 13 and 14 of this Agreement. For purposes of this Agreement, the term "Change of Control" shall mean (i) the sale of all or substantially all of the assets of the Company, (ii) the sale of more than 50% of the outstanding capital stock of the Company in a non-public sale, (iii) the dissolution or liquidation of the Company, or (iv) any merger, share exchange, consolidation or other reorganization or business combination of the Company if immediately after such transaction either (A) persons who were members of the Board of Directors of the Company immediately prior to such transaction do not constitute at least a majority of the Board of Directors of the surviving entity, or (B) persons who hold a majority of the voting capital stock of the surviving entity are not persons who held voting capital stock of the Company immediately prior to such transaction. -4- 11. TERMINATION OF EMPLOYMENT BY THE EXECUTIVE. Notwithstanding the provisions of Section 2 of this Agreement, the Executive may terminate his employment at any time by giving the Board of Directors written notice of his intent to terminate, delivered at least sixty (60) days prior to the effective date of such termination. Upon expiration of the sixty (60) day notice period (or such earlier date as may be approved by the Board of Directors), the termination by the Executive shall become effective. The Executive shall immediately thereafter forfeit all rights and benefits (other than vested benefits, including vested stock options and earned but unpaid incentive compensation (prorated for any partial year and paid within ninety (90) days after the end of the current fiscal year) under Section 4 of this Agreement), including but not limited to any right to compensation pursuant to Sections 4 or 5 of this Agreement, he would otherwise have been entitled to receive under this Agreement. The Company and the Executive thereafter shall have no further obligations under this Agreement except as otherwise provided in Sections 13 and 14 of this Agreement. In the event the Company persists, for a period of fifteen (15) days after written notice from the Executive, in assigning the Executive duties that are materially inconsistent with the duties that are incident and customary to those of the president of a division, the Executive may terminate his employment at any time by giving the Board of Directors written notice of his intent to terminate, delivered at least thirty (30) days prior to the effective date of such termination. If the Executive's employment is terminated pursuant to this paragraph, the Company shall pay the Executive, throughout the year in accordance with the normal payroll practices of the Company, an amount equal to one (1) year's worth of his base salary or, if the Executive's employment is terminated before January 21, 2000, the remaining base salary otherwise payable during the Initial Employment Period, in either case at the rate in effect immediately prior to the date of termination. The payments described in the immediately preceding sentence shall be reduced by any income paid to the Executive during the severance period from other employment or consulting services he performs for other persons or entities. The Executive shall immediately thereafter forfeit all rights and benefits (other than vested benefits, including vested stock options and earned but unpaid incentive compensation (prorated for any partial year and paid within ninety (90) days after the end of the current fiscal year) under Section 4 of this Agreement), including but not limited to any right to compensation pursuant to Sections 4 or 5 of this Agreement, he would otherwise have been entitled to receive under this Agreement. The Company and the Executive thereafter shall have no further obligations under this Agreement except as otherwise provided in Sections 13 and 14 of this Agreement. This Section 11 shall not apply to a termination by the Executive following a Change of Control, as described in Section 10. 12. NON-RENEWAL. If, upon termination of the Initial Employment Period or any subsequent Employment Year, the Company shall decide not to renew this Agreement for one (1) Employment Year, the Company shall pay the Executive, throughout the year in accordance with the normal payroll practices of the Company, an amount equal to one (1) year's worth of his base salary at the rate in effect immediately prior to the date of termination. The payments described in the immediately preceding sentence shall be reduced by any income paid to the -5- Executive during the severance period from other employment or consulting services he performs for other persons or entities. The Executive shall immediately thereafter forfeit all rights and benefits (other than vested benefits, including vested stock options and earned but unpaid incentive compensation (prorated for any partial year and paid within ninety (90) days after the end of the current fiscal year) under Section 4 of this Agreement), including but not limited to any right to compensation pursuant to Sections 4 or 5 of this Agreement, he would otherwise have been entitled to receive under this Agreement. The Company and the Executive thereafter shall have no further obligations under this Agreement except as otherwise provided in Sections 13 and 14 of this Agreement. 13. NON-COMPETITION. The Executive and the Company recognize that due to the nature of his employment, and his relationship with the Company, the Executive has had and will have access to, and has acquired and will acquire, and has assisted and will assist in developing, confidential and proprietary information relating to the business and operations of the Company (for purposes of this Section 13 and Section 14 below, the Company shall mean the Company, I.C. Isaacs & Company, L.P., I. G. Design, Inc., or any of its/their affiliates or successors) including, without limitation, information with respect to their present and prospective services, systems, products, clients, customers, agents, and sales and marketing methods. The Executive acknowledges that such information has been and will be of central importance to the Company's business and that disclosure of it to others or its use by others could cause substantial loss to the Company. The Executive and the Company also recognize that an important part of the Executive's duties will be to develop good will for the Company through his personal contact with the Company's clients, and that there is a danger that this good will, a proprietary asset of the Company, may follow the Executive if and when his relationship with the Company is terminated. A. The Executive agrees that, except in the event that (i) the Executive voluntarily terminates his employment between ninety (90) and one hundred and twenty (120) days following the Change of Control or (ii) is involuntarily terminated within one hundred and twenty (120) days following the Change of Control, during the term of his employment with the Company, and for a period of ninety (90) days after the termination of his employment for any reason whatsoever (including the non-renewal of this Agreement by either party), the Executive will not directly or indirectly, within the United States, whether as a partner, proprietor, employee, consultant, agent or otherwise, participate or engage in any business that competes with, restricts, or interferes with the business of the Company, including, without limitation, any business in the young men's, women's contemporary sportswear and jeanswear industry. B. The Executive further agrees that during the term of his employment with the Company, and for a period of two (2) years after the termination of his employment for any reason whatsoever (including the non-renewal of this Agreement by either party): (i) The Executive will not, directly or indirectly (for his own account, or for the account of others), urge any current or potential client, customer, supplier or contractor of the Company to discontinue business, in whole -6- or in part, or not to do business, with the Company or otherwise interfere with the Company's relationship or potential relationship with any such parties; and (ii) The Executive will not directly or indirectly (for his own account, or for the account of others), solicit, hire or arrange to hire any person who at the time of such hire or within two (2) years prior to the time of such hire was an employee of the Company and was not involuntarily terminated by the Company, for himself or for any business entity with which he may be, or may be planning to be, affiliated or associated, or otherwise interfere with the retention of employees that the Company desires to retain as such. C. The Executive expressly acknowledges and agrees (i) that the restrictions set forth herein are reasonable, in terms of scope, duration, geographic area, and otherwise, (ii) that the protections afforded to the Company hereunder are necessary to protect its legitimate business interests, and (iii) that the agreement to observe such restrictions form a material part of the consideration for this Agreement and the Executive's employment by the Company. 14. CONFIDENTIAL INFORMATION. The Executive agrees that, during the term of his employment with the Company, and for a period of two (2) years after the termination of his employment for any reason whatsoever (including the non-renewal of this Agreement by either party), he shall not disclose to any person or use the same in any way, other than in the discharge of his duties under this Agreement in connection with the business of the Company, any trade secrets or confidential or proprietary information of the Company, including, without limitation, any information or knowledge relating to (i) the business, operations or internal structure of the Company, (ii) the clients (or customers) or potential clients (or potential customers) of the Company, (iii) any method and/or procedure (such as records, programs, systems, correspondence, or other documents), relating or pertaining to projects developed by the Company or contemplated to be developed by the Company, or (iv) the Company's business, which information or knowledge the Executive shall have obtained during the term of this Agreement, and which is otherwise of a secret or confidential nature. Further, upon leaving the employ of the Company for any reason whatsoever, the Executive shall not take with him, without prior written consent of the Board of Directors of the Company, any documents, forms, or other reproductions of any data or any information relating to or pertaining to the Company, any clients (or customers) or potential clients (or potential customers) of the Company, or any other confidential information or trade secrets and will promptly return any such materials already in his possession to the Company. 15. AMENDMENTS, OTHER AGREEMENTS. This Agreement may not be amended, waived, discharged or terminated orally, but only by an instrument in writing. Any earlier employment agreements between the Executive and the Company are hereby terminated and shall be of no further effect after the effective date hereof. -7- 16. MISCELLANEOUS. A. Any notices required by this Agreement shall (i) be made in writing and mailed by certified mail, return receipt requested, with adequate postage prepaid; (ii) be deemed given when so mailed; (iii) be deemed received by the addressee within ten (10) days after given or when the certified mail receipt for such mail is executed, whichever if earlier; and (iv) in the case of the Company, be mailed to its principal office, or in the case of the Executive, be mailed to the last address that the Executive has given to the Company. B. This Agreement shall be binding upon and inure to the benefit of, the parties, their successors, assigns, personal representatives, distributees, heirs, and legatees. C. This Agreement shall be governed by, and construed and enforced in accordance with, the laws of the State of Maryland, without giving effect to the principles of conflicts of law thereof. D. Subject to the Company's rights described in paragraph G below, any dispute regarding any aspect of this Agreement or any act which allegedly has or would violate any provision of this Agreement will be submitted to binding arbitration. Such arbitration shall be conducted before an arbitrator sitting in a location agreed to by the Company and the Executive within fifty (50) miles of the location of the Executive's principal place of employment, in accordance with the rules of the American Arbitration Association then in effect. Each party will be entitled to limited discovery, to consist of a maximum of three (3) depositions (maximum two (2) hours each), and twenty-five (25) written interrogatories per party, which will be completed within one hundred twenty (120) days following the selection of the arbitrator. Judgment may be entered on the award of the arbitrator in any court having competent jurisdiction. E. Any failure by the Company to insist upon strict compliance with any term or provision of this Agreement, to exercise any option, to enforce any right, or to seek any remedy upon any breach by the Executive shall not affect, or constitute a waiver of, the Company's right to insist upon such strict compliance, exercise such option, enforce such right, or seek such remedy with respect to such breach or any prior, contemporaneous, or subsequent breach. No custom or practice of the Company at variance with any provision of this Agreement shall affect or constitute a waiver of, the Company's right to demand strict compliance with all provisions of this Agreement. F. Any provision of this Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be deemed severable from the remainder of this Agreement, and the remaining provisions contained in this Agreement shall be construed to preserve to the maximum permissible extent the intent and purposes of this Agreement. Any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. G. It is recognized that damages in the event of any breach or threatened breach of any provision of Sections 12 and 13 above by the Executive would be difficult, if not -8- impossible, to ascertain and that any such breach would result in immediate and irreparable injury to the Company for which there is no adequate remedy at law, and it is therefore agreed that the Company, in addition to and without limiting any other remedy or right it may have, will be entitled to a decree of specific performance, injunctive relief, mandamus or other appropriate remedy to enforce performance of such requirements. IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the day and year first hereinabove written. ATTEST: I. C. ISAACS & COMPANY, INC. /s/ Danielle Lambert By: /s/ Robert J. Arnot - ------------------------------ ------------------------------- Robert J. Arnot Chairman of the Board and Chief Executive Officer WITNESS: EXECUTIVE /s/ Danielle Lambert /s/ Daniel Gladstone - ------------------------------ ------------------------------- Daniel Gladstone -9- EX-10.48 8 EXHIBIT 10.48 Exhibit 10.48 AMENDMENT NO. 2 TO EMPLOYMENT AGREEMENT by and between I.C. ISAACS & COMPANY, INC. and ROBERT J. ARNOT THIS AMENDMENT NO. 2, dated as of February 11, 1999, is made a part of that certain EXECUTIVE EMPLOYMENT AGREEMENT (the "Agreement"), dated as May 15, 1997, and as amended by Amendment No. 1 thereto dated as of August 27, 1998, by and between I. C. Isaacs & Company, Inc. (the "Company"), and Robert J. Arnot (the "Executive"). It is intended by the parties that the terms of this Amendment No. 2, to the extent that they are more specific than the terms contained in the Agreement, or to the extent that they should conflict with the terms contained in the Agreement, shall supersede the terms of the Agreement. Section numbers utilized in this Amendment No. 2 correspond, where applicable, to section numbers used in the Agreement. W I T N E S S E T H: Accordingly, in consideration of the mutual covenants and representations contained herein and the mutual benefits derived herefrom, the parties hereto agree as follows: 1. Paragraph 3 is hereby restated in its entirety as follows: 3. BASE SALARY. The Executive's base salary for each Employment Year under this Agreement (May 15, 1997 through May 15, 2001) shall be at the rate of Three Hundred Fifty Thousand Dollars ($350,000) per annum. Such base salary shall be increased to Four Hundred Thousand Dollars ($400,000) per annum for the remaining term of this Agreement after the Company achieves positive net earnings in two consequtive fiscal quarters. Such base salary may also be increased based on periodic reviews by the Compensation Committee of the Board of Directors. The Executive's base salary shall be paid throughout the year, in accordance with normal payroll practices of the Company. IN WITNESS WHEREOF, the parties have executed and delivered this Amendment No. 2 on the date first above written. ATTEST: I.C. ISAACS & COMPANY, INC. /s/ Eugene C. Wielepski By: /s/ Gerald W. Lear - ---------------------------------- --------------------------------- Secretary Gerald W. Lear, President WITNESS: EXECUTIVE /s/ Thomas Ormandy /s/ Robert J. Arnot - ---------------------------------- --------------------------------- Robert J. Arnot -2- EX-10.49 9 EXHIBIT 10.49 Exhibit 10.49 AMENDMENT NO. 2 TO EMPLOYMENT AGREEMENT by and between I.C. ISAACS & COMPANY, INC. and GERALD W. LEAR THIS AMENDMENT NO. 2, dated as of February 11, 1999, is made a part of that certain EXECUTIVE EMPLOYMENT AGREEMENT (the "Agreement"), dated as May 15, 1997, and as amended by Amendment No. 1 thereto dated as of August 27, 1998, by and between I. C. Isaacs & Company, Inc. (the "Company"), and Gerald W. Lear (the "Executive"). It is intended by the parties that the terms of this Amendment No. 2, to the extent that they are more specific than the terms contained in the Agreement, or to the extent that they should conflict with the terms contained in the Agreement, shall supersede the terms of the Agreement. Section numbers utilized in this Amendment No. 2 correspond, where applicable, to section numbers used in the Agreement. W I T N E S S E T H: Accordingly, in consideration of the mutual covenants and representations contained herein and the mutual benefits derived herefrom, the parties hereto agree as follows: 1. Paragraph 3 is hereby restated in its entirety as follows: 3. BASE SALARY. The Executive's base salary for each Employment Year under this Agreement (May 15, 1997 through May 15, 2001) shall be at the rate of Three Hundred Fifty Thousand Dollars ($350,000) per annum. Such base salary shall be increased to Four Hundred Thousand Dollars ($400,000) per annum for the remaining term of this Agreement after the Company achieves positive net earnings in two consequtive fiscal quarters. Such base salary may also be increased based on periodic reviews by the Compensation Committee of the Board of Directors. The Executive's base salary shall be paid throughout the year, in accordance with normal payroll practices of the Company. IN WITNESS WHEREOF, the parties have executed and delivered this Amendment No. 2 on the date first above written. ATTEST: I.C. ISAACS & COMPANY, INC. /s/ Eugene C. Wielepski By: /s/ Robert J. Arnot - ------------------------------- -------------------------------- Secretary Robert J. Arnot, CEO WITNESS: EXECUTIVE /s/ Eugene C. Wielepski By: /s/ Gerald W. Lear - ------------------------------- -------------------------------- Gerald W. Lear -2- EX-10.50 10 EXHIBIT 10.50 Exhibit 10.50 AMENDMENT NO. 2 TO EMPLOYMENT AGREEMENT BY AND BETWEEN I.C. ISAACS & COMPANY, INC. AND EUGENE C. WIELEPSKI THIS AMENDMENT NO. 2, dated as of February 11, 1999, is made a part of that certain EXECUTIVE EMPLOYMENT AGREEMENT (the "Agreement"), dated as May 15, 1997, and as amended by Amendment No. 1 thereto dated as of August 27, 1998, by and between I.C. Isaacs & Company, Inc. (the "Company"), and Eugene C. Wielepski (the "Executive"). It is intended by the parties that the terms of this Amendment No. 2, to the extent that they are more specific than the terms contained in the Agreement, shall supersede the terms of the Agreement. Section numbers utilized in this Amendment No. 2 correspond, where applicable, to section numbers used in the Agreement. W I T N E S S E T H: Accordingly, in consideration of the mutual covenants and representations contained herein and the mutual benefits derived herefrom, the parties hereto agree as follows: 1. Paragraph 3 is hereby restated in its entirety as follows: 3. BASE SALARY. The Executive's base salary for each Employment Year under this Agreement (May 15, 1997 through May 15, 2000) shall be at the rate of One Hundred and Seventy-Five Thousand Dollars ($175,000) per annum. Such base salary shall be increased to Two Hundred Thousand Dollars ($200,000) per annum for the remaining term of this Agreement after the Company achieves positive net earnings in two consecutive reviews by the Compensation Committee of the Board of Directors. The Executive's base salary shall be paid throughout the year, in accordance with normal payroll practices of the Company. IN WITNESS WHEREOF, the parties have executed and delivered this Amendment No. 2 on the date first above written. ATTEST: I.C. ISAACS & COMPANY, INC. /s/ Eugene C. Wielepski By: /s/ Gerald W. Lear - ---------------------------- --------------------------------- Secretary Gerald W. Lear, President WITNESS: EXECUTIVE /s/ Jackie A. Adams /s/ Eugene C. Wielepski - ---------------------------- --------------------------------- Eugene C. Wielepski -2- EX-10.51 11 EX-10.51 Exhibit 10.51 AMENDMENT NO. 2 TO EMPLOYMENT AGREEMENT by and between I.C. ISAACS & COMPANY, INC. and THOMAS ORMANDY THIS AMENDMENT NO. 2, dated as of February 11, 1999, is made a part of that certain EXECUTIVE EMPLOYMENT AGREEMENT (the "Agreement"), dated as May 15, 1997, and as amended by Amendment No. 1 thereto dated as of August 27, 1998, by and between I. C. Isaacs & Company, Inc. (the "Company"), and Thomas Ormandy (the "Executive"). It is intended by the parties that the terms of this Amendment No. 2, to the extent that they are more specific than the terms contained in the Agreement, or to the extent that they should conflict with the terms contained in the Agreement, shall supersede the terms of the Agreement. Section numbers utilized in this Amendment No. 2 correspond, where applicable, to section numbers used in the Agreement. W I T N E S S E T H: Accordingly, in consideration of the mutual covenants and representations contained herein and the mutual benefits derived herefrom, the parties hereto agree as follows: 1. Paragraph 3 is hereby restated in its entirety as follows: 3. BASE SALARY. The Executive's base salary for each Employment Year under this Agreement (May 15, 1997 through May 15, 2000) shall be at the rate of Two Hundred Sixty-Two Thousand Five Hundred Dollars ($262,500) per annum. Such base salary shall be increased to Three Hundred Thousand Dollars ($300,000) per annum for the remaining term of this Agreement after the Company achieves positive net earnings in two consequtive fiscal quarters. Such base salary may also be increased based on periodic reviews by the Compensation Committee of the Board of Directors. The Executive's base salary shall be paid throughout the year, in accordance with normal payroll practices of the Company. IN WITNESS WHEREOF, the parties have executed and delivered this Amendment No. 2 on the date first above written. ATTEST: I.C. ISAACS & COMPANY, INC. /s/ Eugene C. Wielepski By: /s/ Robert J. Arnot - ------------------------------- -------------------------------- Secretary Robert J. Arnot, CEO WITNESS: EXECUTIVE /s/ Robert J. Arnot By: /s/ Thomas Ormandy - ------------------------------- -------------------------------- Thomas Ormandy -2- EX-10.52 12 EXHIBIT 10.52 Exhibit 10.52 AMENDMENT NO. 1 TO CONSULTING AGREEMENT by and between I.C. ISAACS & COMPANY, INC. and GARY BRASHERS THIS AMENDMENT NO. 1, dated as of February 11, 1999, is made a part of that certain CONSULTING AGREEMENT (the "Agreement"), dated as August 27, 1998, by and between I. C. Isaacs & Company, Inc. (the "Company"), and Gary Brashers (the "Consultant"). It is intended by the parties that the terms of this Amendment No. 1, to the extent that they are more specific than the terms contained in the Agreement, or to the extent that they should conflict with the terms contained in the Agreement, shall supersede the terms of the Agreement. Section numbers utilized in this Amendment No. 1 correspond, where applicable, to section numbers used in the Agreement. W I T N E S S E T H: Accordingly, in consideration of the mutual covenants and representations contained herein and the mutual benefits derived herefrom, the parties hereto agree as follows: 1. Paragraph 2 is hereby restated in its entirety as follows: 2 TERM. This Agreement shall begin August 27, 1998 and shall continue until August 27, 2000 (the "Term"), unless earlier terminated in accordance with the terms hereof. 2. Paragraph 3 is hereby restated in its entirety as follows: 3. FEE. The Consultant's fee (the "Fee") for providing services to the Company during the Term under the terms and conditions of this Agreement shall be at the rate of Two Hundred Seventeen Thousand Dollars ($217,000) per annum. Such Fee shall be increased to Two Hundred Forty-Seven Thousand Dollars ($247,000) per annum for the remainder of the Term after the Company achieves positive net earnings in two consecutive fiscal quarters. IN WITNESS WHEREOF, the parties have executed and delivered this Amendment No. 1 on the date first above written. ATTEST: I.C. ISAACS & COMPANY, INC. /s/ Eugene C. Wielepski By: /s/ Gerald W. Lear - ------------------------------- -------------------------------- Secretary Gerald W. Lear, President WITNESS: CONSULTANT /s/ Donna J. Derencz By: /s/ Gary Brashers - ------------------------------- -------------------------------- Gary Brashers -2- EX-10.53 13 EX-10.53 EXHIBIT 10.53 March 26, 1999 Congress Financial Corporation 1133 Avenue of the Americas New York, New York 10036 Re: Sixteenth Amendment to Financing Agreements Gentlemen: Reference is made to the Accounts Financing Agreement [Security Agreement] between Congress Financial Corporation ("Congress") and I.C. Isaacs & Company L.P. ("Borrower"), dated June 16, 1992 (as amended, the "Accounts Agreement"), the Covenant Supplement to Accounts Financing Agreement between Congress and Borrower, dated June 16, 1992 (as amended, the "Covenant Supplement"), the letter re Inventory Loans between Congress and Borrower, dated December 31, 1994 (as amended, the "Inventory Loan Letter"), the Trade Financing Agreement Supplement to the Accounts Agreement between Congress and Borrower, dated June 16, 1992 (as amended, the "Trade Financing Agreement Supplement"), and all other agreements supplements, instruments and documents related thereto and executed in connection therewith (collectively, all of the foregoing, as the same now exist or may hereafter be further amended, modified, supplemented, extended, renewed, restated or replaced, the "Financing Agreements"). Capitalized terms used herein, unless otherwise defined herein, shall have the meanings ascribed thereto in the Financing Agreements. Borrower has requested certain modifications and amendments to the Financing Agreements and Congress is willing to agree to such modifications, subject to the terms and conditions set forth herein. In consideration of the foregoing, the mutual agreements and covenants contained herein and for other good and valuable consideration, Borrower and Congress hereby agree as follows: 1. AMENDMENT TO DEFINITIONS. All references to the term "Maximum Credit" in the Financing Agreements, including, but not limited to, Section 1.7 of the Accounts Agreement, effective as of July 1, 1999, shall be deemed and each such reference is hereby amended to mean "$25,000,000", and the reference to the amount "$30,000,000" in such Section 1.7 is hereby deleted and replaced with the amount "$25,000,000". 2. AMENDMENTS TO FINANCING AGREEMENTS. (a) ACCOUNTS ADVANCES. Effective as of July 1, 1999, Section 2.1 of the Accounts Agreement shall be amended by deleting the reference to "eighty-five (85%) percent" therein and inserting "eighty (80%) percent" in its stead; (b) INTEREST. Effective as of July 1, 1999, the first sentence of Section 3.1 of the Accounts Agreement shall be deleted and the following shall be inserted in its stead: "Interest shall be payable by us to you on the first day of each month upon the closing daily balances in our loan account for each day during the immediately preceding month at a rate equal to one percent (1.00%) per annum in excess of the rate from time to time publicly announced by First Union National Bank, or its successors, as its prime rate, whether or not such announced rate is the best rate available at such bank." (c) RENEWAL DATE. The term "Renewal Date" as defined in Section 9.1 of the Accounts Agreement is hereby amended, effective as of the date hereof, to mean, December 31, 2000; (d) INVENTORY LOAN SUBLIMIT. Effective as of July 1, 1999, Section 3 of the Inventory Loan Letter shall be amended by deleting the figure of "$6,000,000" therein and inserting the figure of "$5,000,000" in its stead. (e) LETTER OF CREDIT SUBLIMIT. Effective as of July 1, 1999, Section 1.5 of the Trade Financing Agreement Supplement shall be amended, by deleting the figure of "$12,000,000" therein and inserting the figure of "$8,000,000" in its stead. (f) NET WORK. Effective as of July 1, 1999, Section 4.13 of the Covenant Supplement is hereby deleted in its entirety and the following substituted therefor: "4.13 NET WORTH. Borrower will, until all Obligations have been indefeasibly paid in full, maintain a Net Worth of not less than (a) $30,000,000 at all times prior to September 30, 2000 and (b) $35,000,000 on September 30, 2000 and at all times thereafter." (g) WORKING CAPITAL. Effective as of July 1, 1999, Section 4.14 of the Covenant Supplement is hereby amended by deleting the reference to "$5,000,000" therein and inserting $20,000,000" in its stead. 3. EXTENSION AND AMENDMENT FEE. In consideration of the amendments set forth herein, Borrower shall pay to Congress a fee in the amount of $125,000, which fee (a) shall be fully earned as of the date hereof, (b) may be charged by lender to Borrower's loan account with Lender and (c) shall be payable as follows: (i) $62,500 on the date hereof and (ii) $62,500 on June 30, 2000; PROVIDED, THAT, the entire amount of such fee shall become immediately due and payable, without notice or demand, at Congress' option upon the occurrence of an Event of Default. 4. REPRESENTATIONS, WARRANTIES AND COVENANTS. In addition to the continuing representations, warranties and covenants heretofore or hereafter made by Borrower to lender pursuant to the Financing Agreements, Borrower hereby represents, warrants and covenants with and to Lender as follows (which representations, warranties and covenants are continuing and shall survive the execution and delivery hereof and shall be incorporated into and made a part of the Financing Agreements); (a) No Event of Default or act, condition or event which with notice or passage of time or both would constitute an Event of Default exists or has occurred as of the date of this Amendment (after giving effect to the amendments to the Financing Agreements made by this Amendment). (b) This Amendment has been duly executed and delivered by Borrower and is in full force and effect as of the date hereof, and the agreements and obligations of Borrower contained herein constitute legal, valid and binding obligations of Borrower enforceable against Borrower in accordance with their respective terms. 5. CONDITIONS PRECEDENT. This Amendment shall be effective upon the execution thereof by both Borrower and Congress. 6. EFFECT OF THIS AMENDMENT. Except as specifically modified pursuant hereto, no other changes or modifications to the Financing Agreements are intended or implied and, in all other respects, the Financing Agreements are hereby ratified and confirmed by all parties hereto as of the date hereof. This Amendment represents and incorporates the entire understanding and agreements of the parties with respect to the matters set forth herein and the parties hereto agree that there are no representations, warranties, covenants or understandings of any kind, nature or description whatsoever made by Congress to Borrower with respect to this Amendment, except as specifically set forth herein. This Amendment represents the final agreement between the parties as to the subject matter hereof and may not be contradicted by evidence or prior, contemporaneous or subsequent oral agreements of the parties. 7. WAIVER, MODIFICATION, ETC. No provision or term hereof may be modified, altered, waived, discharged or terminated orally, but only by an instrument in writing executed by the party against whom such modification, alteration, waiver, discharge or termination is sought. 8. FURTHER ASSURANCES. The parties hereto shall execute and deliver such additional documents and take such additional action as may be necessary to effectuate the provisions and purposes of this Amendment. 9. COUNTERPARTS. This Amendment may be executed in one or more counterparts which, taken together, shall constitute the agreement of the parties. Very truly yours, I.C. Isaacs & Company, L.P. By: I.C. ISAACS & COMPANY, INC., formerly known as Isbuyco, Inc., General Partner By: /s/ Eugene C. Wielepski ----------------------- Eugene C. Wielepski Title: Vice President ----------------------- Agreed and Accepted CONGRESS FINANCIAL CORPORATION By: /s/ Keith Holler ------------------------ Keith Holler Title: Assistant Vice President ------------------------ EX-10.54 14 EXHIBIT 10.54 Exhibit No. 10.54 AMENDMENT TO INTERNATIONAL EXCLUSIVE LICENSE AGREEMENT This Amendment is made and entered into by an between BHPC Marketing, Inc. ("Licensor") and I.C. Isaacs Europe, S.L. by name change from Zacari 2000, S.L. ("Licensee") and is dated and effective as of March 1, 1999. This Amendment amends and modifies that certain International Exclusive License Agreement (Wholesale) between Licensor and Licensee dated August 15, 1996, as amended as of June 3, 1997 (the "Agreement"). (I) The promises, covenants, agreements and declarations made and set forth herein are intended to and shall have the same force and effect as if set forth at length in the body of the Agreement. To the extent that the provisions of this Amendment are inconsistent with the terms and conditions of the Agreement, the terms set forth herein shall control. The parties agree that there is sufficient and adequate consideration for the amendments set forth herein. (II) 1. The License Agreement Detail Schedule (Wholesale sales), as amended, is hereby amended by deleting Section 4, "Renewal Term" and replacing it with the following:
4. Renewal Term FROM TO ------------ ---- -- First Renewal Period (if any) January 1, 2000 December 31, 2000 Second Renewal Period (if any) January 1, 2001 December 31, 2002 Third Renewal Period (if any) January 1, 2003 December 31, 2004
The Initial Term shall end on December 31, 1999, unless otherwise renewed as stated above in accordance with the Agreement. Conforming changes are hereby made to Section 7b. to reflect the renewal terms stated above. 2. The royalty payment obligations of Licensee as stated in Sections 8(a)(i) and 8(a)(ii) of the Agreement are hereby amended, for Contract Year 2000, if the Agreement is renewed for that year, by stating that the royalty rates for Net Shipments under each of Sections 8(a)(i) and 8(a)(ii) shall be "three percent (3%)", and not six percent (6%). A conforming amendment is hereby made to the License Agreement Detail Schedule. 3. The parties agree that the royalties as stated in Paragraph (2) above and Section 10 of the Agreement for Contract Year 2000 shall be paid as follows: A Guaranteed Annual Royalty Payment for Contract Year 2000 commencing January 1, 2000 in the amount of Sixty Thousand Dollars ($60,000.00), payable in Guaranteed Monthly Royalty Payments of Five Thousand Dollars ($5,000.00). - 1 - A conforming amendment is hereby made to the License Agreement Detail Schedule to reflect the amended Guaranteed Annual Royalty Payment and Guaranteed Monthly Royalty Payment as stated in this Paragraph 3. All Guaranteed Target Net Shipments and Guaranteed Net Shipments shall be "0". 4. The royalty payment obligations of Licensee as stated in Sections 8(a)(i) and 8(a)(ii) of the Agreement are hereby amended by adding a new sentence to Section 8(a) as follows: "Notwithstanding any other provision of this Agreement, the parties agree that actual royalty payments and any Guaranteed Annual Royalty Payments and Guaranteed Monthly Royalty Payments are not due or payable by Licensee to Licensor for the period commencing on March 1, 1999 and through and including December 31, 1999. Royalty payments and annual/monthly minimum payments as stated in the March 1, 1999 Amendment to this Agreement shall become applicable for the Contract Year which begins January 1, 2000, if the Agreement is renewed for that period." 5. The Agreement is hereby amended by stating that the One Percent (1%) advertising and marketing expenditures required to be invested by Licensee shall be a Four Percent (4%), for the Contract Year which begins on January 1, 2000. 6. For Contract Years after Contract Year 2000, if there is a further renewal of the Agreement, the royalty rates and minimums in effect as of the date of this Amendment shall apply unless the parties agree in writing to different terms. 7 Section 7b. of the Agreement is amended by adding the following sentence at the end of it: "Notwithstanding any other provision of this Agreement, the parties agree that renewal notice to extend the Agreement for the First Renewal Period (Contract Year 2000) shall be given by Licensee by not later than August 1, 1999." (III) Licensor and Licensee acknowledge and agree that the Agreement, as amended by this Amendment, remains in full force and effect and represents the entire Agreement of the parties with respect to the matters contained herein. - 2 - IN WITNESS WHEREOF, the parties hereto agree that this Amendment shall take effect as of the date and year first written above. LICENSOR: LICENSEE: BHPC MARKETING, INC. I.C. ISAACS EUROPE, S.L. By: /s/ Don Garrison By: /s/ Robert Arnot ---------------- -------------------- Don Garrison Robert Arnot Title: Vice President Title: Chairman & CEO -------------- --------------
- 3 - EX-10.55 15 EX-10.55 Exhibit No. 10.55 AMENDMENT TO INTERNATIONAL EXCLUSIVE LICENSE AGREEMENT This Amendment is made and entered into by an between BHPC Marketing, Inc. ("Licensor") and I.C. Isaacs Europe, S.L. by name change from Zacari 2000, S.L. ("Licensee") and is dated and effective as of March 1, 1999. This Amendment amends and modifies that certain International Exclusive License Agreement (Retail) between Licensor and Licensee dated August 15, 1996, as amended as of June 3, 1997 (the "Agreement"). (I) The promises, covenants, agreements and declarations made and set forth herein are intended to and shall have the same force and effect as if set forth at length in the body of the Agreement. To the extent that the provisions of this Amendment are inconsistent with the terms and conditions of the Agreement, the terms set forth herein shall control. The parties agree that there is sufficient and adequate consideration for the amendments set forth herein. (II) 1. The License Agreement Detail Schedule (Retail sales), as amended, is hereby amended by deleting Section 4. "Renewal Term" and replacing it with the following:
"4. Renewal Term FROM TO ------------ ---- -- First Renewal Period (if any) January 1, 2000 December 31, 2000 Second Renewal Period (if any) January 1, 2001 December 31, 2002 Third Renewal Period (if any) January 1, 2003 December 31, 2004
The Initial Term shall end on December 31, 1999, unless otherwise renewed as stated above in accordance with the Agreement. Conforming changes are hereby made to Section 7b. to reflect the renewal terms stated above. 2. The Royalty payment obligations of Licensee as stated in Sections 8(a)(i) and 8(a)(ii) of the agreement are hereby amended by adding a new subsection 8(a)(iii) as follows: "(iii) For Contract Year 2000, if the Agreement is renewed for that period, and notwithstanding any other provision of this Agreement, "Royalty", as used in this Agreement, shall consist of Licensee paying to Licensor a Royalty in an amount equal to three percent (3%) of the Wholesale Purchases by Licensee for Licensed Product under the Trademarks to Beverly Hills Polo Club Retail Stores." A conforming amendment is hereby made to the License Agreement Detail Schedule. 3. The parties agree that, for Contract Year 2000, the royalties as stated in Paragraph (1) above and Section 10 of the Agreement shall not be subject to any Guaranteed Annual Royalty - 1 - Payment, Guaranteed Monthly Royalty Payments, Guaranteed Target Net Shipments or Guaranteed Net Shipment. The License Detail Schedule is hereby amended to reflect that the amount payable by Licensee to Licensor for all such amounts in Contract Year 2000 shall be "0". 4. The royalty payment obligations of Licensee as stated in Section 8(a)(i) of the Agreement are hereby amended by adding a new sentence to Section 8(a) as follows: "Notwithstanding any other provision of this Agreement, the parties agree that actual Royalty payments and any Guaranteed Annual Royalty Payments and Guaranteed Monthly Royalty Payments are not due or payable by Licensee to Licensor for the period commencing on March 1, 1999 and through and including December 31, 1999. Actual Royalty payments shall become applicable for the Contract Year which begins January 1, 2000, if the Agreement is renewed for that period." 5. For Contract Years after Contract Year 2000, if there is a renewal of the Agreement, the royalty rates and minimums in effect as of the date of this Amendment shall apply unless the parties agree in writing to different terms. 6. Section 7b. of the Agreement is amended by adding the following sentence at the end of it: "Notwithstanding any other provision of this Agreement, the parties agree that renewal notice to extend the Agreement for the First Renewal Period (Contract Year 2000) shall be given by Licensee by not later than August 1, 1999." (III) Licensor and Licensee acknowledge and agree that the Agreement, as amended by this Amendment, remains in full force and effect and represents the entire Agreement of the parties with respect to the matters contained herein. IN WITNESS WHEREOF, the parties hereto agree that this Amendment shall take effect as of the date and year first written above. LICENSOR: LICENSEE: BHPC MARKETING, INC. I.C. ISAACS EUROPE, S.L. By: /s/ Don Garrison By: /s/ Robert Arnot ---------------- ---------------- Don Garrison Robert Arnot Title: Vice President Title: Chairman & CEO -------------- --------------
- 2 - EX-10.56 16 EX-10.56 EXHIBIT 10.56 Amendment No. 1 To Trademark License And Technical Assistance Agreement This is Amendment No. 1 to the Trademark License and Technical Assistance Agreement dated November 1, 1997 by and between Latitude Licensing Corp. ("Licensor") and I.C. Isaacs & Co. L.P. covering men's Products (the "Agreement"). Capitalized terms used herein have the meaning ascribed to them in the Agreement unless otherwise indicated. For good and valuable consideration, the receipt of which is hereby acknowledged, the parties agree to amend the Agreement as follows: 1. The parties hereby acknowledge the Girbaud Design, Inc. has assigned the Agreement to Latitude Licensing Corp. 2. Paragraph 1.1(a) is amended to include the following sentence at the end of the paragraph and as a part thereof. 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. 3. Paragraph 2.1 of the Agreement is hereby amended by the addition of the following sentence at the end of that paragraph: In addition Licensee shall have the option to renew this agreement for an additional term of five years commencing on January 1, 2003 and ending on December 31, 2007. 4. Paragraph 5.2 of the Agreement is hereby amended by adding the following to the Minimum Royalties table set forth therein: 2003 $3,000,000 2004 $3,000,000 2005 $3,000,000 2006 $3,000,000 2007 $3,000,000
5. Except as expressly modified herein, the terms of the Agreement remain in effect. 6. This Amendment is effective as of March 1, 1998. 1 LATITUDE LICENSING CORP. By: /S/ Ramon Girbaud ---------------------------- Title: ---------------------------- Date: 3/4/98 --------------------------- I.C. ISAACS & CO., L.P. By: I.C. ISAACS & CO., INC. ---------------------------- General Partner By: /S/ ROBERT J. ARNOT --------------------- Title: Chairman & Co-CEO Date: MARCH 4, 1998 --------------------------- 2 EX-10.57 17 EX-10.57 EXHIBIT 10.57 AMENDMENT NO. 3 TO THE TRADEMARK LICENSE AND TECHNICAL ASSISTANCE AGREEMENT COVERING WOMEN'S PRODUCTS This Amendment No. 3 is dated December 23, 1998 and amends the Trademark License and Technical Assistance Agreement for Women's Collections dated January 15, 1998 by and between Latitude Licensing Corp. and I.C. Isaacs & Co., L.P. covering Women's Products (the "Agreements"). Two previous amendments in June 18, 1998 and November 12, 1998 have been entered into. Capitalized terms used herein have the meaning ascribed to them in the Agreement unless otherwise indicated. WHEREAS, the Parties have agreed, in order to focus their resources on certain necessary marketing expenses, to postpone the opening of the Flagship store for one year. For good and valuable consideration, the receipt of which is hereby acknowledged, the parties agree to amend the Agreement as follows: 1. In addition to the advertising promotional, marketing and trade show expenses described in the Agreement, the Licensee shall hire Mr. Danny Gladstone to be in charge of the sales and marketing, and spend the amounts as listed and described in Appendix A attached hereto and made a part hereof (the "Additional Marketing Expenses"). The amounts detailed for each category of expenses within the Appendix A list shall be allowed to vary, so long as the total amount of the expenses shall remain the minimum amount actually spent according to Appendix A by the Licensee. 2. At an intermediate time in 1999, at the Licensor's request and, for the final account, by February 15, 2000, the Licensee shall account to the Licensor for the detailed spending of the Additional Marketing Expenses and shall provide the Licensor with a certified statement of the expenses actually incurred during the previous months or during the preceding calendar year, as the case may be. Said statements shall be signed by a duly authorized officer of the Licensee and be certified by said officer as true and accurate. 3. The Licensor, independently from its audit's right as provided in Article 11.2 of the Agreement, shall have the opinion to examine and audit said expenses, at an intermediate time in 1999 and, again, by February 28, 2000. In the event that the final audit or examination of Licensee's books, records and documents reveals an underspending of the Additional Marketing Expenses, the Licensee shall immediately pay to Licensor the amount by which the actual expenses fell short of the minimum required. 4. As a consideration for the Additional Marketing Expenses to be incurred in 1999, Paragraph 8.9(a) is amended to postpone the requirement to sign a lease agreement for the flagship store by one (1) year. 1 5. This Amendment is effective starting December 23, 1998. 6. Except for the terms amended by this Amendment, the Agreement as existing until the execution of the Amendment shall continue in full force and effect. Dated: December 23, 1998 LATITUDE LICENSING CORP. I.C. ISAACS & CO., L.P. By: /S/ Antoine Feidt By: /S/ Robert J. Arnot ----------------------------- ---------------------------- Name: Antoine Feidt Name: Robert J. Arnot Title: Representative Title: Chairman & CEO 2 APPENDIX A Budget for Additional Marketing and Sales Expenses in 1999 * TOTAL $1,770,000 - ------------------------------------------------- ------------------------------
Plus margin support with major department stores for up to $300,000. - ---------- *Text omitted pursuant to a request for confidential treatment and filed separately with the Securities and Exchange Commission. 3 EX-23.01 18 EX-23.01 Exhibit 23.01 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Board of Directors I.C. Isaacs & Company, Inc. We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (333-63871) of our report dated February 26, 1999, except for Note 3 which is as of March 19, 1999, relating to the consolidated financial statements and schedule of I.C. Isaacs & Company, Inc. appearing in the Company's Annual Report on Form 10-K for the year ended December 31, 1998. BDO Seidman, LLP Washington, D.C. March 26, 1999 EX-27 19 EXHIBIT 27
5 12-MOS 12-MOS 12-MOS DEC-31-1998 DEC-31-1997 DEC-31-1996 DEC-31-1998 DEC-31-1997 DEC-31-1996 1,345,595 7,422,067 0 0 0 0 16,257,501 24,205,077 0 (1,353,000) (1,185,000) 0 23,121,971 23,936,226 0 42,053,872 55,450,806 0 16,608,462 16,177,954 0 (13,360,816) 13,499,266 0 59,046,143 73,442,721 0 10,476,813 9,510,676 0 0 0 0 0 0 0 0 0 0 834 782 0 37,312,238 52,495,141 0 59,046,143 73,442,721 0 113,720,799 161,445,362 118,655,253 113,720,799 161,445,362 118,655,253 90,660,582 109,693,828 84,421,651 128,088,318 145,242,520 109,330,384 0 0 0 1,594,925 1,739,865 1,193,693 1,454,748 2,372,132 1,365,163 (15,441,549) 13,698,984 7,962,659 1,351,000 (1,349,000) 0 (16,792,549) 15,047,984 7,962,659 0 0 0 0 0 0 0 0 0 (16,792,549) 15,047,984 7,962,659 (2.15) 3.68 1.99 (2.15) 3.68 1.99
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