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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2000
Commission File No. 0-23379
I.C. ISAACS & COMPANY, INC.
(Exact name of registrant as specified in charter)
DELAWARE 52-1377061
(State or other jurisdiction of (IRS employer
incorporation or organization) identification no.)
3840 BANK STREET, BALTIMORE, MARYLAND 21224-2522
(Address of principal executive office) (Zip code)
Registrant's telephone number, including area code: (410) 342-8200
Securities Registered Pursuant to Section 12(b) of the Act:
NONE
Securities Registered Pursuant to Section 12(g) of the Act:
Title of Class:
---------------
COMMON STOCK, $.0001 PAR VALUE PER SHARE
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K.
As of March 30, 2001, the aggregate market value of the outstanding
shares of the Registrant's Common Stock held by non-affiliates was approximately
$4,168,268 based on the average closing price of the Common Stock as reported
by the Nasdaq National Market on March 30, 2001. Determination of affiliate
status for this purpose is not a determination of affiliate status for any other
purpose.
As of March 30, 2001, 7,864,657 shares of Common Stock were
outstanding.
DOCUMENT INCORPORATED BY REFERENCE
Specified portions of the definitive Proxy Statement for the 2001 Annual Meeting
of Stockholders of I.C. Isaacs & Company, Inc. to be held on June 8, 2001 are
incorporated by reference into Part III hereof.
1
I.C. ISAACS & COMPANY, INC.
FORM 10-K
TABLE OF CONTENTS
PAGE
PART I
ITEM 1. BUSINESS 4
ITEM 2. PROPERTIES 15
ITEM 3. LEGAL PROCEEDINGS 16
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 16
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS 17
ITEM 6. SELECTED FINANCIAL DATA 18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 20
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 27
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE 28
PART III
*ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY 28
*ITEM 11. EXECUTIVE COMPENSATION 28
*ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 28
*ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 28
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K 29
SIGNATURES 32
- ---------------
* Incorporated by reference from the Registrant's definitive Proxy Statement for
the 2001 Annual Meeting of Stockholders to be held June 8, 2001. The Proxy
Statement will be filed not later than 120 days after the end of the fiscal
year covered by this Annual Report on Form 10-K.
2
"I. C. Isaacs" and "I.G. Design" are trademarks of the Company. The
Company has filed a federal trademark application for the mark "Urban Expedition
(UBX)." All other trademarks or service marks, including "Girbaud" and "Marithe
and Francois Girbaud" (collectively, "Girbaud"), "BOSS" and "Beverly Hills Polo
Club" appearing in this Annual Report on Form 10-K are the property of their
respective owners and are not the property of the Company.
IMPORTANT INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
THIS ANNUAL REPORT ON FORM 10-K CONTAINS FORWARD-LOOKING STATEMENTS WITHIN
THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED, AND
SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. THOSE
STATEMENTS INCLUDE STATEMENTS REGARDING THE INTENT, BELIEF OR CURRENT
EXPECTATIONS OF THE COMPANY AND ITS MANAGEMENT, INCLUDING THE COMPANY'S
BELIEF REGARDING THE PROMINENCE OF THE GIRBAUD BRAND IN THE COMPANY'S FUTURE,
THE COMPANY'S INTENT WITH RESPECT TO THE DISCONTINUANCE OF THE WOMEN'S
COMPANY-OWNED AND PRIVATE LABEL LINES, AND THE REDUCTION IN THE USE OF
INDEPENDENT CONTRACTORS IN MEXICO, THE COMPANY'S BELIEFS REGARDING THE
EFFECTS OF THE TRANSFER OF SUCH PRODUCTION TO ASIA, THE COMPANY'S
EXPECTATIONS FOR 2001 AND STATEMENTS REGARDING ANTICIPATED AND/OR INTENDED
COST SAVINGS AND ANTICIPATED WORKING CAPITAL NEEDS. WORDS SUCH AS "BELIEVES,"
"ANTICIPATES," "EXPECTS," "INTENDS," "PLANS," AND SIMILAR EXPRESSIONS ARE
INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS BUT ARE NOT THE EXCLUSIVE
MEANS OF IDENTIFYING SUCH STATEMENTS. SUCH STATEMENTS ARE FORWARD-LOOKING
STATEMENTS WHICH ARE SUBJECT TO A VARIETY OF RISKS AND UNCERTAINTIES, MANY OF
WHICH ARE BEYOND THE COMPANY'S CONTROL, WHICH COULD CAUSE ACTUAL RESULTS TO
DIFFER MATERIALLY FROM THOSE CONTEMPLATED IN SUCH FORWARD-LOOKING STATEMENTS,
INCLUDING IN PARTICULAR THE RISKS AND UNCERTAINTIES DESCRIBED UNDER "RISK
FACTORS" IN THE COMPANY'S PROSPECTUS, WHICH INCLUDE, AMONG OTHER THINGS (i)
CHANGES IN THE MARKETPLACE FOR THE COMPANY'S PRODUCTS, INCLUDING CUSTOMER
TASTES, (ii) THE INTRODUCTION OF NEW PRODUCTS OR PRICING CHANGES BY THE
COMPANY'S COMPETITORS, (iii) CHANGES IN THE ECONOMY, AND (iv) TERMINATION OF
ONE OR MORE OF ITS AGREEMENTS FOR USE OF THE BEVERLY HILLS POLO CLUB AND
GIRBAUD BRAND NAMES AND IMAGES IN THE MANUFACTURE AND SALE OF THE COMPANY'S
PRODUCTS. EXISTING AND PROSPECTIVE INVESTORS ARE CAUTIONED NOT TO PLACE UNDUE
RELIANCE ON THESE FORWARD-LOOKING STATEMENTS, WHICH SPEAK ONLY AS OF THE DATE
HEREOF. THE COMPANY UNDERTAKES NO OBLIGATION TO UPDATE OR REVISE THE
INFORMATION CONTAINED IN THIS ANNUAL REPORT ON FORM 10-K, WHETHER AS A RESULT
OF NEW INFORMATION, FUTURE EVENTS OR CIRCUMSTANCES OR OTHERWISE.
3
PART I
ITEM 1. BUSINESS
INTRODUCTION
I.C. Isaacs & Company, Inc. (together with its predecessors, subsidiaries and
affiliated companies, including I.C. Isaacs & Company L.P., the "Company") is
a designer and marketer of branded jeanswear and sportswear. Founded in 1913,
the Company offers collections of men's and women's jeanswear and sportswear
under various labels. The Company offers collections of men's and women's
jeanswear and sportswear under the Girbaud designer brand in the United
States and Puerto Rico and collections of sportswear for men and boys under
the Beverly Hills Polo Club brand in the United States, Puerto Rico and
Europe. In 2000, the Company entered into an agreement for the distribution
of its Girbaud line in Canada. The Company also offers women's pants and
jeans under various Company owned brand names as well as under third party
private labels for sale to major chain stores and catalogs. In 1999, the
Company introduced a collection of men's sportswear under the Company owned
Urban Expedition (UBX) brand in the United States and Europe. During the past
several years, the Company also offered collections of jeanswear and
sportswear for young men and boys under the BOSS brand in the United States
and Puerto Rico. In the fourth quarter of 2000 the Company began negotiations
to terminate its rights under the license agreement for the design and
marketing of the BOSS brand. In the fourth quarter of 2000, the Company
decided that it intended to discontinue production of the women's
Company-owned and private label lines. See and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and Notes 3 and 8
to the Consolidated Financial Statements.
In November 1997, the Company acquired an exclusive license to
manufacture and market certain men's jeanswear and sportswear under the
Girbaud brand in the United States and Puerto Rico. In March 1998, the
Company acquired an exclusive license to manufacture and market certain
women's jeanswear and sportswear under the Girbaud brand in the United States
and Puerto Rico. The Girbaud brand is an internationally recognized designer
label with a distinct European influence. The Company has positioned the
Girbaud line with a broad assortment of products, styles and fabrications
reflecting a contemporary European look. The Company markets a full
collection of men's jeanswear and sportswear under the Girbaud brand. In
August 1998, the Company introduced a women's sportswear collection under the
Girbaud brand, which also includes a wide array of products. In May 2000, the
Company acquired an exclusive license to market certain men's and women's
jeanswear and sportswear under the Girbaud brand in Canada and in December,
2000, it began to make shipments. To date, sales in Canada have been
immaterial. Net sales of Girbaud products accounted for 69.6% and 32.9% of
the Company's sales in 2000 and 1999, respectively. Based on its performance
in 2000 and 1999, the Company believes that the Girbaud brand has established
itself as the dominant part of the Company's future.
The Company markets certain sportswear under the Beverly Hills Polo
Club brand in the United States, Puerto Rico and Europe under an exclusive
license. With its Beverly Hills Polo Club brand, the Company targets men and
boys who desire updated traditional sportswear at competitive prices. The
Company's Beverly Hills Polo Club line was introduced in the spring of 1994.
Net sales of Beverly Hills Polo Club sportswear accounted for 13.4% and 17.3%
of the Company's net sales in 2000 and 1999, respectively.
The Company also markets a limited number of pants and jeans styles
for women under its own "I.C. Isaacs" brand name and under third party
private labels for sales to major chain stores and catalogs. Net sales of
these labels accounted for 3.5% and 6.1% of the Company's net sales in 2000
and 1999, respectively. In the fourth quarter of 2000, the Company decided
that it intended to discontinue production of the women's Company-owned and
private label lines.
4
In 1999, the Company launched a Company owned brand of men's
sportswear, Urban Expedition (UBX) in the United States and Europe. The Company
began shipping UBX products in the first quarter of 2000. Net sales of UBX
sportswear accounted for 2.2% of the Company's net sales in 2000.
Until recently, the Company also manufactured and marketed certain
sportswear under the BOSS brand for sale at specified price points in the
United States and Puerto Rico, subject to a licensing agreement with Ambra,
Inc. ("Ambra"). In October 2000, the Board of Directors authorized the
appropriate officers of the Company to negotiate a termination of the
licensing agreement for use of the BOSS trademark. In March, 2001, the
Company and Ambra executed an agreement to terminate the Company's rights
under the licensing agreement (the "License Rights Termination Agreement").
Under the terms of the License Rights Termination Agreement, the Company
will have until October 31, 2001 to sell, or dispose of, existing BOSS
inventory. Net sales of BOSS sportswear accounted for 11.3% and 43.7% of the
Company's net sales in 2000 and 1999, respectively.
PRODUCTS
The Company's jeanswear and sportswear collections under the
Girbaud, Beverly Hills Polo Club and UBX brands provide a broad range of
product offerings for young men, women and boys, including a variety of tops,
bottoms and outerwear. While each of these brands reflects a distinct image
and style, they are all targeted to consumers who are seeking quality,
fashionable products at competitive prices.
GIRBAUD PRODUCTS
Girbaud is an internationally recognized designer brand. The Company
markets innovative European-inspired men's and women's jeanswear and
sportswear collections under the Girbaud label. The Girbaud collections
include full lines of bottoms consisting of jeans and casual pants in a
variety of fabrications, including denim, stretch denim, cotton twill and
nylon, cotton tee shirts, polo shirts, knit and woven tops, sweaters and
outerwear. Reflecting contemporary European design, each of these collections
is characterized by innovative styling and fabrication and is targeted to
consumers ages 16 to 50. Estimated retail prices range from $20 to $25 for
tee shirts, $50 to $75 for tops and bottoms, $60 to $90 for sweaters and $80
to $200 for outerwear.
BEVERLY HILLS POLO CLUB PRODUCTS
The Beverly Hills Polo Club sportswear products are positioned to be
an updated traditional sportswear brand. The products combine contemporary
design details and innovative fabric with classic American styling. The
Beverly Hills Polo Club line includes a broad array of tops such as tee
shirts, polo shirts, rugby shirts, denim shirts and sweatshirts made
primarily in cotton fabrics such as pique, jersey and jersey fleece. The tops
line is distinguished by innovative use of design, embroidery and fabric
detail. Estimated retail prices range from $19 to $22 for tee shirts, $30 to
$60 for tops and $60 to $120 for outerwear. The collection also includes a
full line of bottoms including denim jeans, twill pants and corduroy casual
pants as well as outerwear. Estimated retail prices for jeans and casual
pants range from $40 to $55 per pair.
URBAN EXPEDITION (UBX) PRODUCTS
The UBX brand is positioned to appeal to consumers seeking an upscale
urban look. This focused line includes denim jeans, shorts, jackets, vests,
printed woven shirts, tee shirts and sweaters. Estimated retail prices range
from $20 to $25 for tee shirts, $20 to $60 for tops and $45 to $60 for jeans.
5
OTHER COMPANY-OWNED AND THIRD-PARTY PRIVATE LABEL PRODUCTS
The Company also produces a limited number of pants and jean styles
for women under its own I.C. Isaacs brands as well as under customers'
private labels for sale to major chain stores and catalogs. These brands
focus on pull-on elastic waist pants and jeans. These pants are designed to
appeal to more mature women looking for basic styling at value prices. The
Company offers pants in a variety of fits, including missy, petite and large
sizes. Estimated retail prices range from $15 to $24. In the fourth quarter
of 2000, the Company decided that it intended to discontinue production of
the women's Company-owned and private label lines.
CUSTOMERS AND SALES
The Company's products are sold in over 2,500 specialty stores,
specialty store chains and department stores. The Company uses both sales
representatives and distributors for the sale of its products. Sales
representatives include employees of the Company as well as independent
contractors. Each of the Company's distributors and non-employee sales
representatives has an agreement with the Company pursuant to which the
distributor or sales representative serves as the exclusive distributor or sales
representative of specified products of the Company within a specified
territory. The Company does not have long-term contracts with any of its
customers. Instead, its customers purchase the Company's products pursuant to
purchase orders and are under no obligation to continue to purchase the
Company's products.
The Company began marketing men's sportswear under the Girbaud brand in
February 1998 and introduced a women's sportswear collection under the Girbaud
brand in the second quarter of 1998. The Company's Girbaud men's products are
being sold to more than 1,300 stores in the United States and Puerto Rico,
including major department stores such as Bloomingdales, Macy's East, Macy's
West, Burdines, Saks, Inc., the May Company and Dayton Hudson, and many
prominent specialty stores such as The Atrium in New York, Fred Segal Santa
Monica, The Buckle, The Lark and Maurices. The Company's Girbaud women's line is
now being sold to more than 600 stores. The Company's Girbaud brand products are
sold and marketed domestically under the direction of an 9-person sales force
headquartered in New York. The Company's Girbaud brand products are sold in
Canada pursuant to an exclusive distribution agreement with Western Glove
Works. The Company began shipments to Canada in December, 2000. To date,
sales in Canada have been immaterial.
The Company's Beverly Hills Polo Club sportswear is sold in the United
States, Puerto Rico and Europe to over 1,000 specialty stores, specialty store
chains and department stores, including J.C. Penney Company, Inc. The Company's
Beverly Hills Polo Club products are sold and marketed under the direction of
its national sales offices in New York. In addition to executive selling based
in New York and Dallas, the Company has a sales force consisting of 11 Beverly
Hills Polo Club sales representatives.
The Company's Beverly Hills Polo Club sportswear is sold in seven
countries in Europe primarily through wholesale distributors, all of whom buy
products directly from the Company. The Company currently has wholesale
distribution arrangements with distributors in France, Germany, Greece,
Norway, Sweden and Switzerland. Under these arrangements, the distributors
purchase goods from the Company's Spanish subsidiary in United States dollars
under irrevocable letters of credit or by prepayment, thereby minimizing the
Company's credit risk. The Company also utilizes sales representatives to
sell directly to stores in Spain. All of those direct sales are secured by a
credit insurance company. The Company has also established two franchise
stores in Spain. To date, sales of the Company's Beverly Hills Polo Club
products in Europe have been immaterial.
The Company began shipping its UBX brand in February 2000. The
Company's UBX products are sold and marketed under the direction of its
national sales office headquartered in New York. The Company's UBX line is
sold in Europe primarily through wholesale distributors, all of whom buy
products directly from the Company. The Company currently has wholesale
distribution arrangements for sales of its UBX brand with distributors in
Austria, Belgium, Denmark, Finland, Germany, The Netherlands, Norway, and
Switzerland and has sales representatives to sell directly to stores in Spain.
The Company-owned branded products and third-party private label
products are sold under the direction of the sales headquarters in New York.
The products are distributed to department stores such as Boscov's; mass
merchandisers and discounters such as Ames Department Stores, Inc.; and
catalogs such as Bedford Fair and Arizona Mail Order Company, Inc.
None of the Company's customers accounted for 10% or more of sales in
2000. The Company's single largest customer in 1999 was J.C. Penney Company,
Inc., which accounted for 14.2% of net sales. No other customer of the Company
accounted for 10.0% or more of net sales in 1999.
6
DESIGN AND MERCHANDISING
The Company's designers and merchandisers travel around the world to
monitor emerging fashion trends and search for styling inspiration and
fabrics. These sources, together with new styling and graphics developed by
the Company's designers, serve as the primary creative influences for the
Company's product lines. In addition, merchandisers and designers involved
with the development of Girbaud products are provided with the Girbaud
collections from Europe twice a year and collaborate with Marithe and
Francois Girbaud and their staff in the development of the Company's Girbaud
product lines for sale in the United States. Merchandisers also regularly
meet with sales management to gain additional market insight and further
refine the products to be consistent with the needs of each of the Company's
markets. The Company's in-house design and product development is carried out
by merchandising departments in New York. Many of the Company's products are
developed using computer-aided design equipment, which allows designers to
view and easily modify images of a new design. The Company currently has 18
people on the design staff in New York City. Design expenditures were
approximately $2.1 million in 1999 and 2000. The Company estimates these
expenses will decrease in 2001.
ADVERTISING AND MARKETING
The Company prides itself on its ability to efficiently utilize its
advertising budget. Although the Company spent approximately $2.0 million or
2.1% of net sales on advertising in 2000, this is a relatively modest
amount as compared with some of its competitors. In 1999, the Company's
expenditures for advertising and marketing activities totaled $2.8 million.
The Company aggressively communicates and reinforces the brand and
image of its Girbaud and Beverly Hills Polo Club products through creative
and innovative advertising and marketing efforts. The Company's advertising
and marketing strategies are directed by its national sales offices and
developed in collaboration with its advertising agencies and, in the case of
Girbaud, with Girbaud's European offices and Paris advertising agency. The
Company's advertising strategy is geared towards its youthful and
contemporary consumers, whose lifestyles are influenced by music, sports and
fashion. The Company has been advertising the Beverly Hills Polo Club brand
since 1994 and the Girbaud brand since 1998. Its advertising campaigns have
evolved from trade magazines to a wide variety of media, including
billboards, fashion magazines, radio and special events.
The Company has a multifaceted marketing campaign for its Girbaud
brand, which includes print advertisement in magazines such as JANE, MARIE
CLAIRE, SPIN, STUFF AND VIBE magazines. The campaign also includes outdoor
advertising point of sale materials and promotions, and celebrity wardrobing.
As a first tier designer brand, Girbaud also presents international runway
shows as well as appearing in major trade shows.
Recognizing that point of sale brand presentation and images are highly
effective, the Company also provides an array of in-store signage, fixtures and
product videos for its Girbaud products. In addition, through the "Shop-in-Shop"
concept, the Company provides key department stores and specialty stores with
both fixtures and visuals to enhance brand recognition and to differentiate
Girbaud products from other branded apparel. The Girbaud "Shop-in-Shops" are
designed to create an environment that is consistent with the image of Girbaud
as a unique designer brand. Currently, approximately 53 stores are using the
"Shop-in-Shop" concept to showcase the Company's Girbaud products.
PRODUCT SOURCING
GENERAL
The Company believes that its sourcing capabilities enable it to
effectively control the timing, quality and pricing of products while providing
customers with increased value. During 2000, the Company used both domestic and
foreign contractors for the production of its products. During 2000,
approximately 20.9% of the Company's purchases of raw materials, labor and
finished goods for its apparel were made in Mexico; approximately 45.5% were
made in Asia; approximately 23.9% were made at third-party facilities in the
United States; and the balance was made at the Company's facilities in the
United States. Approximately 90.3% of the Company's manufacturing and sourcing
in 2000 was done by
7
third parties, all through arrangements with independent contractors. Each of
the Company's independent contractors and independent buying agents has an
agreement with the Company pursuant to which it performs manufacturing or
purchasing services for the Company on a non-exclusive basis. The Company
evaluates its contractors frequently and believes that there are a number of
manufacturers capable of producing products that meet the Company's quality
standards. The Company has the ability to terminate its arrangements with any
of its contractors at any time.
8
UNITED STATES AND MEXICO
In the second quarter of 2000 the Company announced that it intended
to close its last company-owned manufacturing facility in Raleigh,
Mississippi. This closure, which occurred in the third quarter of 2000,
resulted in a charge against earnings of $0.2 million in the second quarter.
The production in this facility was transferred to third party
independent contractor facilities in Mexico. In 2000, the Company produced
approximately 9.7% of its bottoms (slacks, jeans, shorts and skirts) at this
facility. In the fourth quarter of 2000, the Company decided to
dramatically reduce the use of independent contractors' facilities in Mexico
by the end of the second quarter of 2001. In 2000, the Company utilized
independent contractors in Mexico for approximately 20.9% of total
production. The production of these independent contractors in Mexico will be
transferred to independent contractors in Asia. By moving most of this
production to Asia, where the Company generally purchases the bottoms as
finished goods, the Company believes it will obtain greater flexibility of
quantities and styles ordered. This decision resulted in the termination of
certain employees who will be paid severance in the first and second quarters
of 2001. This severance resulted in a charge against earnings of $0.2 million
in the fourth quarter of 2000. The Company uses a variety of contractors in
the United States as needed for value added functions such as embroidery and
screen printing of T-shirts.
ASIA
The majority of the Company's sportswear products are produced by
approximately 21 different manufacturers in 6 countries in Asia. Virtually all
of the Company's products other than pants and tee shirts are produced in Asia,
but none of the Asian contractors engaged by the Company accounted for more than
10.0% of the Company's total production in 2000. The Company has well
established relationships with many of its contractors, although it does not
have written agreements with them. The Company retains independent buying agents
in various countries in Asia to assist in selecting and overseeing independent
manufacturers, sourcing fabric, trim and other materials and monitoring quotas.
Independent buying agents also perform quality control functions on behalf of
the Company, including inspecting materials and manufactured products prior to
accepting delivery. The sourcing and merchandising staffs in the Company's New
York offices oversee Asian fabric and product development, apparel
manufacturing, price negotiation and quality control, as well as the research
and development of new Asian sources of supply.
The Company seeks to achieve the most efficient means for the timely
delivery of its high quality products. With rare exceptions, the Company does
not purchase fabrics but instead negotiates a finished garment price from its
contractors. The contractor must then purchase the approved fabric as part of
the package. All of the Company's products manufactured abroad are paid for in
United States dollars. Accordingly, the Company does not engage in any currency
hedging transactions. During the last several years, the percentage of the
Company's products produced in Asia has increased dramatically, and will
represent the majority of all products produced for the Company in 2001.
WAREHOUSING AND DISTRIBUTION
The Company services its United States customers utilizing a 70,000
square foot Company-owned and operated distribution center in Milford, Delaware.
The Company has established a computerized "Warehouse Management System" with
real-time internal tracking information and the ability to provide its customers
with electronically transmitted "Advance Shipping Notices." The accuracy of
shipments is increased by the ability to scan coded garments at the packing
operation. This process also provides for computerized routing and customer
invoicing. The vast majority of shipments are handled by UPS, common carriers or
parcel post. The Company also has a warehouse in Carthage, Mississippi.
The Company currently services its European customers through a
contractual arrangement with a distribution center in Barcelona, Spain, where
the Company maintains its European headquarters.
9
QUALITY CONTROL
The Company's quality control program is designed to ensure that all of
the Company's products meet its high quality standards. Frequent visits are made
by the quality control staff to all outside contractors to ensure compliance
with the Company's quality standards. Audits are also performed by quality
control personnel at the Milford, Delaware distribution center on all categories
of incoming merchandise.
All garments produced for the Company in Asia must be produced in
accordance with the Company's specifications. The Company's import quality
control program is designed to ensure that all of the Company's products meet
its high quality standards. The Company monitors the quality of fabrics prior to
the production of garments and inspects prototypes of products before production
runs are commenced. In many cases, the Company requires its agents or
manufacturers to submit fabric to an independent outside laboratory for testing
prior to production. The Company requires each agent to perform both in-line and
final quality control checks during and after production before the garments
leave the contractor. Personnel from the Company's New York office also visit
Asia to conduct inspections.
BACKLOG AND SEASONALITY
The Company's business is impacted by the general seasonal trends
that are characteristic of the apparel and retail industries. In the
Company's segment of the apparel industry, sales are generally higher in the
first and third quarters. The Company generally receives orders for its
products three to five months prior to the time the products are delivered to
the stores. As of December 31, 2000, the Company had unfilled orders of
approximately $32.0 million, compared to approximately $29.0 million of such
orders as of December 31, 1999. The Company expects to fill substantially all
of these orders in 2001. The backlog of orders at any given time is affected
by a number of factors, including seasonality, weather conditions, scheduling
of manufacturing and shipment of products. During 2000, increased demand for
the Company's Girbaud products resulted in the improvement in backlog. All
such orders are subject to cancellation for various reasons such as late
delivery. Accordingly, a comparison of backlogs of orders from period to
period is not necessarily meaningful and may not be indicative of eventual
actual shipments.
LICENSES AND OTHER RIGHTS AGREEMENTS
The Company's business is heavily dependent upon its use of the
Girbaud brand name and image and, to a lesser extent, the Beverly Hills Polo
Club brand names and images, which are in turn dependent upon the existence
and continuation of certain licenses as described below.
GIRBAUD LICENSES
GIRBAUD DOMESTIC LICENSES
In November 1997, the Company entered into an exclusive license
agreement (the "Girbaud Men's Agreement") with Girbaud Design, Inc. and its
affiliate Wurzburg Holding S.A. ("Wurzburg") to manufacture and market men's
jeanswear, casualwear and outerwear under the Girbaud brand and certain related
trademarks (the "Girbaud Marks") in all channels of distribution in the United
States, including Puerto Rico and the U.S. Virgin Islands. In March 1998, the
Girbaud Men's Agreement was amended and restated to include active influenced
sportswear as a licensed product category and to name Latitude Licensing Corp.
as the licensor (the "Licensor"). Also in March 1998, the Company entered into
an exclusive license agreement (the "Girbaud Women's Agreement" and, together
with the Girbaud Men's Agreement, the "Girbaud Agreements") with the Licensor to
manufacture and market women's jeanswear, casualwear and outerwear, including
active influenced sportswear, under the Girbaud Marks in all channels of
distribution in the United States, including Puerto Rico and the U.S. Virgin
Islands. The Girbaud Agreements include the right to manufacture the licensed
products in a number of foreign countries, and both had initial terms of two
years. The Girbaud Agreements have been extended until December 31, 2002, upon
which date the Company will have the option to renew the agreements for an
additional five years. The Girbaud Agreements generally allow the Company to use
the Girbaud Marks on apparel designed by or for the Company or based on designs
and styles previously associated with the Girbaud brand, subject to quality
control by the Licensor over the final designs of the products, marketing and
advertising material and manufacturing premises. The Girbaud Agreements provide
that they may be terminated by the Licensor upon the occurrence of certain
events, including, but not limited to, a breach by the Company of any obligation
under the agreements that remains uncured following certain specified grace
periods.
10
Under the Girbaud Men's Agreement the Company is required to make
payments to the Licensor in an amount equal to 6.25% of the Company's net sales
of regular licensed merchandise and 3.0% in the case of certain irregular and
closeout licensed merchandise. The Company was subject to guaranteed minimum
annual royalty payments of $2.0 million in 2000, and is subject to guaranteed
minimum annual royalty payments of $2.5 million in 2001 and $3.0 million each
year from 2002 through 2007. On a monthly basis during the term, the Company is
obligated to pay 8.3% of the minimum guaranteed royalties for that year. On a
quarterly basis during the term, the Company is required to pay the amount that
the actual royalties exceed the total minimum guaranteed royalties for that
quarter. The Company is required to spend at least $500,000 in advertising men's
Girbaud brand products each year through the term of the Girbaud Men's
Agreement.
Under the Girbaud Women's Agreement the Company is required to make
payments to the Licensor in an amount equal to 6.25% of the Company's net sales
of regular licensed merchandise and 3.0% in the case of certain irregular and
closeout licensed merchandise. The Company was subject to guaranteed minimum
annual royalty payments of $800,000 in 2000, and is subject to guaranteed
minimum annual royalty payments of $1.0 million in 2001 and $1.5 million each
year from 2002 through 2007. On a monthly basis during the term, the Company is
obligated to pay 8.3% of the minimum guaranteed royalties for that year. On a
yearly basis, the Company is required to pay the amount that the actual
royalties exceed the total minimum guaranteed royalties for that year. The
Company is required to spend at least $400,000 in advertising women's Girbaud
brand products in each year through the term of the Girbaud Women's Agreement.
In addition, over the term of the Girbaud Women's Agreement the Company is
required to contribute $190,000 per year to the Licensor's advertising and
promotional expenditures for the Girbaud brand.
The Girbaud Women's Agreement initially required the Company to open a
Girbaud flagship store for the sale of the Company's Girbaud men's and women's
lines and other Girbaud licensed merchandise in New York City by the end of
1998. In December 1998, the Girbaud Women's Agreement was amended to defer this
requirement for one year and to provide that the Company would spend an
additional $1.8 million on enhanced sales and marketing in 1999. In August,
1999, the Company issued 500,000 shares of restricted common stock to Latitude
Licensing Corp. in connection with an amendment of the Girbaud Women's Agreement
to further defer the obligation to open a Girbaud retail store. Under the new
agreement, if the Company has not signed a lease agreement for a Girbaud retail
store by July 31, 2002, it will become obligated to pay Latitude Licensing Corp.
an additional $500,000 in royalties.
In November 1998, the Company entered into amendments (the "Girbaud
Amendments") to the Girbaud Agreements allowing distribution through an
approved distributor in selected countries in Central and South America and
the Caribbean. The Girbaud Amendments are effective until November 12, 2001
or until expiration of the Girbaud Agreements, whichever is earlier. In the
event that the Company does not achieve more than 75% of target sales levels
in any Central or South American or Caribbean country, its license to
distribute Girbaud products in that country will become non-exclusive
effective starting the following year. The Company did not achieve more than
75% or more of target sales levels in 1999 or 2000. To date, sales to the
region have been immaterial.
In May 2000, the Company entered into an exclusive distribution
agreement for Girbaud men's and women's jeanswear and sportswear products in
Canada. The Company will sell to Western Glove Works ("Distributor") Girbaud
products produced in Mexico or the United States at cost plus 12.0%, which is
less than its normal profit margins on sales of comparable products to the
Company's retail customers. For products purchased by the Distributor from
overseas, the Distributor will pay a distributor's fee equal to 6.75% of net
sales to the Company. Under the agreement, the Distributor will pay a royalty
fee equal to 6.25% of net sales to the Company, which will in turn pay the
royalty to Latitude Licensing Corp. The initial term of the agreement expires
on December 31, 2001. The Distributor may renew the agreement for six
additional one-year terms. The minimum sales level for calendar 2001 is
$1,600,000 (Canadian Dollars), which results in a minimum distribution fee
payable to the Company of $48,000 (Canadian Dollars). There were no minimum
sales levels or distribution fees for calendar year 2000.
In January 2000, the Company entered into a global sourcing
agreement with G.I. Promotions to act as a non-exclusive sourcing agent to
licensees of the Marithe & Francois Girbaud trademark for the manufacture of
Girbaud jeanswear and sportswear. The global sourcing agreement extends until
December 31, 2003 and provides that the Company shall net a facilitation fee
of 5.0% of the total FOB pricing for each order shipped to licensees under
the agreement. Also in January 2000, the Company entered into a license
agreement with Wurzburg. The license has a term of three years and provides
that the Company shall pay Wurzburg a royalty of 1.0% of the total FOB
pricing for each order shipped to a licensee under the global sourcing
agreement.
11
BEVERLY HILLS POLO CLUB LICENSES
BEVERLY HILLS POLO CLUB DOMESTIC LICENSES
Since 1993, the Company has had an exclusive wholesale licensing
agreement (the "BHPC Agreement") with BHPC Marketing, Inc. for the manufacture
and promotion of certain men's sportswear bearing the registered trademark
Beverly Hills Polo Club with an accompanying horse and rider design (the "BHPC
Trademark") for sale to moderate or better department stores and specialty
stores in the United States and its possessions, including Puerto Rico. Under
the BHPC Agreement, the Company may sell up to 25.0% of its total volume to
warehouse clubs. The licenses generally allow the Company to use the BHPC
Trademark on sportswear designed by or for the Company, subject to a quality
approval process for marketing and advertising materials, manufacturing premises
and products bearing the trademark. Under the license, the Company is required
to make payments to the licensor in an amount equal to 5.0% of the Company's net
invoiced sales of licensed merchandise and to spend an amount equal to 1.0% of
net invoiced sales of such merchandise in advertising for the licensed products.
Under the license, the Company pays a monthly royalty equal to the greater of
8.3% of the guaranteed minimum annual royalty or the actual royalty earned by
the licensor in the preceding month.
Under the BHPC Agreement, the Company has been granted an exclusive
license to use the BHPC Trademark in connection with menswear fashions made of
materials other than silk in the following categories: denim sportswear,
outerwear, knit and woven shirts, knit and woven casual pants and shorts,
sweaters, basic and fashion fleece tops and bottoms, overalls and shortalls,
knit tops (including tee shirts and polo shirts), swimwear and warm-ups. The
BHPC Agreement has a three year term expiring December 31, 2001 and is renewable
at the option of the Company, provided the Company is not in breach thereof at
the time renewal notice is given, for a three-year period commencing January 1,
2002 through December 31, 2004.
The Company was subject to a guaranteed payment of $636,000 in 2000
and is subject to a guaranteed payment of $586,000 in 2001. Guaranteed
minimum annual royalties and guaranteed annual net shipments for the current
term and the renewal term are equal to the greater of (i) 80.0% of the
immediately preceding contract year's actual royalties and net shipments or
(ii) the previous year's guaranteed minimum royalty and guaranteed net
shipments.
The BHPC Agreement may be terminated by the licensor upon the
occurrence of certain events, including but not limited to the following: (i) a
breach by the Company of any obligation under the agreement that remains uncured
within 30 days following the receipt of written notice of such breach, (ii) the
Company becomes insolvent, is the subject of a petition in bankruptcy or
otherwise enters into any composition with its creditors, including
reorganization, or (iii) the Company has committed three breaches of the
agreement, in which case no right to cure the breach is afforded to the Company.
During the term of the BHPC Agreement, the Company is prohibited from
manufacturing or otherwise distributing any merchandise under a brand name which
closely resembles the BHPC Trademark and from using on non-Beverly Hills Polo
Club products any graphic, style or design which closely resembles any items
supplied to the Company by the licensor. In addition, the rights of the Company
under the BHPC Agreement are subject to the terms of a Settlement Agreement and
Consent Judgment between the licensor and Polo Fashions, Inc., which imposes
certain restrictions on the licensor's manner of use and advertising of the BHPC
Trademark, including a prohibition on the use of the words "Polo" and "Polo
Club" alone on any item of apparel. The Company believes that the BHPC
Trademark, as licensed to the Company, complies with those restrictions.
12
In May 1998, the Company entered into an exclusive license (the
"BHPC Boys' Agreement") to manufacture and market boys' sportswear, including
knit and woven shirts, cotton and cotton mixed pants (excluding tailored
pants), jeans, shorts, swim shorts and sports outerwear, under the Beverly
Hills Polo Club brand in the United States and Puerto Rico. Under the terms
of the BHPC Boys' Agreement, the Company must pay the licensor of the BHPC
Trademark royalties equal to 5.0% of net shipments by the Company of licensed
products. The Company was subject to guaranteed minimum annual royalties of
$75,000 in 2000 and is subject to minimum annual royalties of $100,000 in the
year 2001. The BHPC Boys' Agreement has an initial term of three years, and
is renewable at the option of the Company, provided the Company is not in
breach thereof at the time the renewal notice is given, until December 31,
2004.
BEVERLY HILLS POLO CLUB INTERNATIONAL LICENSES
On August 15, 1996, I.C. Issacs Europe, S.L., a Spanish limited
corporation and wholly-owned subsidiary of the Company, entered into retail
and wholesale license agreements (collectively, the "International
Agreements") for use of the Beverly Hills Polo Club trademark in Europe. The
International Agreements, as amended, provide certain exclusive rights to use
the Beverly Hills Polo Club trademark for men's sportswear in all countries
in Europe for an initial term of three years ended December 31, 1999,
renewable at the Company's option, provided the Company is not in breach
thereof at the time the renewal notice is given, through five consecutive
extensions ending December 31, 2007. The International Agreements are subject
to substantially the same terms as the BHPC Agreements described above. The
Agreements were amended July 31, 2000 to reduce certain royalty payments and
increase the amount the Company is required to spend in advertising the BHPC
line. For the period beginning January 1, 2000 and ending June 30, 2000, no
guaranteed minimum annual royalties or guaranteed net shipment volumes
applied; for the period beginning July 1, 2000 and ending December 31, 2000,
the royalty rate was 3.0% of wholesale sales of BHPC products including
purchases of BHPC products by Beverly Hills Polo Club retail stores in Europe
("Wholesale Purchases") and no guaranteed annual royalties applied; for the
period beginning January 1, 2001 and ending December 31, 2001, the royalty
rate is 3.0% of Wholesale Purchases, and the guaranteed annual royalty shall
be $120,000; for the period beginning January 1, 2002 and ending December 31,
2004, the royalty rate shall be 3.0% of Wholesale Purchases, the guaranteed
annual royalty shall be $120,000 and the Company shall be subject to the
guaranteed net shipment volumes in effect immediately prior to the amendment
dated March 1, 1999. For the period beginning January 1, 2000 and ending
December 31, 2001, the Company is required to spend an amount equal to 4.0%
of Wholesale Purchases in advertising the BHPC line. During each of 2002,
2003 and 2004, the Company is required to spend an amount equal to 4.0% of
Wholesale Purchases in advertising the BHPC line.
13
BOSS
Until March 15, 2001, the Company was permitted to manufacture,
distribute, market and sell, within specific wholesale price points, certain
categories of apparel for men, women and children under the BOSS brand
pursuant to a license agreement with Ambra, Inc. ("Ambra") (the "BOSS License
Agreement").
In March, 2001, the Company executed the License Rights Termination
Agreement, which terminated its rights under the BOSS License Agreement. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and Notes 3 and 8 to the Consolidated Financial Statements.
The minimum royalty payments associated with the BOSS License
Agreement were $2.9 million and $3.2 million in 1999 and 2000, respectively,
and would have been $3.2 million, $2.6 million and $2.1 million in 2001, 2002
and 2003, respectively.
CREDIT CONTROL
The Company manages its own credit and collection functions and has
never used a factoring service or outside credit insurance. The Company sells to
approximately 2,500 accounts throughout the United States and Puerto Rico. All
of the functions necessary to service this large volume of accounts are handled
by the Company's in-house credit department in Baltimore, Maryland. The Company
extends credit to its customers. Accordingly, the Company may have significant
risk in collecting accounts receivable from its customers. The Company has
credit policies and procedures which it uses to minimize exposure to credit
losses. The Company currently employs five people in its credit department and
believes that managing its own credit gives it unique flexibility as to which
customers the Company should sell and how much business it should do with each.
The Company obtains and periodically updates information regarding the financial
condition and credit histories of customers. The Company's collection personnel
evaluate this information and, if appropriate, establish a line of credit.
Credit personnel track payment activity for each customer using customized
computer software and directly contact customers with receivable balances
outstanding beyond 30 days. If these collection efforts are unsuccessful, the
Company may discontinue merchandise shipments until the outstanding balance is
paid. Ultimately, the Company may engage an outside collection organization to
collect past due accounts. Timely contact with customers has been effective in
reducing credit losses to an immaterial amount. In 1999 and 2000, the Company's
credit losses were $1.7 million and $0.9 million, respectively and
actual credit losses as a percentage of net sales were 2.0% and 0.9%,
respectively.
COMPETITION
The apparel industry is highly competitive and fragmented and is
subject to rapidly changing consumer demands and preferences. The Company
believes that its continued success depends in large part upon its ability to
anticipate, gauge and respond to changing consumer demands and fashion trends
in a timely manner and upon the continued appeal to consumers of the Girbaud,
Beverly Hills Polo Club and UBX brands. The Company competes with numerous
apparel brands and distributors (including Calvin Klein, DKNY, Guess?, MECCA,
PHAT Farm, Polo Jeans, Tommy Jeans, and Nautica). Many of the Company's
competitors have greater financial resources than the Company. Although the
level and nature of competition differ among its product categories, the
Company believes that it competes on the basis of its brand image, quality of
design and value pricing. The Company continued to experience intense
competition in 2000 from many established and new competitors at both the
specialty store and department store channels of distribution. Under the BHPC
Agreements and the Girbaud Agreements, certain third parties have retained
the right to produce, distribute, advertise and sell, and to authorize others
to produce, distribute, advertise and sell certain garments that are similar
to some of the Company's products. Any such production, distribution,
advertisement or sale of such
14
garments by such licensor or another authorized party could have a material
adverse effect on the Company's financial condition or results of operations.
MANAGEMENT INFORMATION SYSTEMS
The Company believes that advanced information processing is essential
to maintaining its competitive position. The Company's systems provide, among
other things, comprehensive order processing, production, accounting and
management information for the marketing, selling, manufacturing, retailing and
distribution functions of the Company's business. The Company's software
programs allow it to track, among other things, orders, manufacturing schedules,
inventory and sales of its products. The programs include centralized management
information systems, which provide the various operating departments with
financial, sales, inventory and distribution related information. Via electronic
data interchange, the Company is able to ship orders, from inventory on hand, to
certain customers within 24 to 72 hours from the time of order receipt.
EMPLOYEES
The Company believes that its employees are one of its most valuable
resources. As of March 31, 2001, the Company had approximately 150 full-time
employees. The Company is not a party to any labor agreements, and none of its
employees is represented by a labor union. The Company considers its
relationship with its employees to be good and has not experienced any material
interruption of its operations due to labor disputes.
ENVIRONMENTAL MATTERS
The Company is subject to federal, state and local laws, regulations
and ordinances that (i) govern activities or operations that may have adverse
environmental effects (such as emissions to air, discharges to water, and the
generation, handling, storage and disposal of solid and hazardous wastes) or
(ii) impose liability for the costs of clean up or other remediation of
contaminated property, including damages from spills, disposals or other
releases of hazardous substances or wastes, in certain circumstances without
regard to fault. Certain of the Company's operations routinely involve the
handling of chemicals and waste, some of which are or may become regulated as
hazardous substances. The Company has not incurred any significant expenditures
or liabilities for environmental matters. Although the Company believes that its
environmental obligations will not have a material adverse effect on its
financial condition or results of operations, environmental compliance matters
are subject to inherent risks and uncertainties.
ITEM 2. PROPERTIES
Certain information concerning the Company's principal facilities is
set forth below:
LEASED OR APPROXIMATE AREA IN
LOCATION OWNED USE SQUARE FEET
- -------- ---------- --- -------------------
Baltimore, MD Owned Administrative Headquarters and Office Facilities 40,000
New York, NY Leased Sales, Merchandising, Marketing and Sourcing Headquarters 10,100
Barcelona, Spain Leased European Headquarters 2,000
Milford, DE Owned Distribution Center 70,000
Carthage, MS Leased Warehouse 110,000
Raleigh, MS Leased Warehouse 90,000
The Company also has regional sales offices, all of which are
leased, in the following cities: Dallas, Texas; Miami, Florida; Los Angeles,
California; Philadelphia, Pennsylvania;
15
and Santurce, Puerto Rico. The Company believes that its existing facilities
are well maintained and in good operating condition. See "ITEM 1.
Business--Warehousing and Distribution" and Note 8 of Notes to Consolidated
Financial Statements for further information.
In the first quarter of 1999, the Company closed its Carthage,
Mississippi manufacturing facility and now uses the facility as a warehouse.
In the third quarter of 2000, the Company closed its Raleigh, Mississippi
manufacturing facility. The production in this facility, the majority of
which was jeans, was transferred to third party independent contractors'
facilities in Mexico.
ITEM 3. LEGAL PROCEEDINGS
The Company and certain of its current and former officers and
directors have been named as defendants in three putative class actions filed
in United States District Court for the District of Maryland. The first of
the actions was filed on November 10, 1999 by Leo Bial and Robert W. Hampton.
The three actions, which have been consolidated with Mr. Bial as the
first-named plaintiff, purport to have been brought on behalf of all persons
(other than the defendants and their affiliates) who purchased the Company's
stock between December 17, 1997 and November 11, 1998. The plaintiffs allege
that the registration statement and prospectus issued in connection with the
Company's initial public offering, completed in December 1997, contained
materially false and misleading statements, which artificially inflated the
price of the Company's stock during the class period. Specifically, the
complaints allege violations of Sections 11, 12(a)(2) and 15 of the
Securities Act of 1933. The plaintiffs seek recision, damages, costs and
expenses, including attorneys' fees and experts' fees, and such other relief
as may be just and proper. The Company believes that the plaintiffs'
allegations are without merit and intends to defend the cases vigorously.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of 2000, there were no matters submitted to a
vote of the Company's stockholders.
16
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The market for the Company's Common Stock is not an exchange but is
established by the National Association of Securities Dealers' Automated
Quotation System. As of March 30, 2001, the Company had approximately 1,000
holders of record of the Company's Common Stock.
The Company's Common Stock trades on the Nasdaq National Market
under the Symbol "ISAC." The reported last sale price of the Common Stock on
the Nasdaq National Market on March 30, 2001 was $0.53. The following table
sets forth for the periods indicated the high and low closing sale prices for
the Common Stock reported by the Nasdaq National Market:
2000 1999
-------------------------------------------------
QUARTER ENDED HIGH LOW HIGH LOW
- ------------- ---- --- ---- ---
March 31 $3.00 $1.3125 $1.50 $1.25
June 30 $3.00 $1.375 $1.125 $1.0938
September 30 $2.375 $1.25 $1.375 $1.375
December 31 $1.75 $0.375 $1.4688 $1.4375
Since November 1998, the Company's Common Stock has been closing at
prices between $0.375 and $3.00. In order to maintain its listing on the Nasdaq
National Market, a stock must have a minimum bid price of $1.00. There can be no
assurances that the Company's Common Stock will maintain a minimum bid price of
$1.00 or more in the future or that it will not be delisted from the Nasdaq
National Market.
On January 31, 2001, the Company was notified by Nasdaq that it had
failed to comply with Nasdaq's National Market maintenance standards and if
it failed to regain compliance on or before May 1, 2001, Nasdaq would
initiate a delisting proceeding with respect to the Company's stock.
The Company anticipates that all earnings of the Company will be
retained for the foreseeable future for use in the operation of the Company's
business. Any future determination as to the payment of dividends will be at the
discretion of the Company's Board of Directors and will depend upon the
Company's results of operations, financial condition, restrictions in the
Company's credit facilities and other factors deemed relevant by the Board of
Directors.
On May 15, 1997, the Board of Directors of the Company and the
Company's stockholders adopted the 1997 Omnibus Stock Plan (the "Plan"). The
purpose of the Plan is to promote the long-term growth and profitability of the
Company by providing key people with incentives to improve stockholder value and
contribute to the growth and financial success of the Company, and by enabling
the Company to attract, retain and reward the best-available persons for
positions of substantial responsibility. The maximum number of shares of Common
Stock that could be issued with respect to awards granted under the Plan was
500,000. The Board of Directors approved an increase in the shares of Common
Stock that may be issued with respect to awards granted under the Plan to an
aggregate of 1.1 million shares, which increase was approved by the Company's
stockholders at the 1999 annual meeting of stockholders (the "Annual Meeting").
The Plan is administered by the Compensation Committee of the Board of
Directors. Participation in the Plan will be open to all employees, officers,
directors and consultants of the Company or any of its affiliates, as may be
selected by the Compensation Committee from time to time. The Plan allows for
stock options, stock appreciation rights, stock awards, phantom stock awards and
performance awards to be granted. The Compensation Committee will determine the
prices, vesting schedules, expiration dates and other material conditions upon
which such awards may be exercised. Through December 31, 2000, the Company had
granted stock options under the Plan exercisable upon vesting for an aggregate
of 1,020,250 stock options. The weighted average exercise price of such options
is $1.52 per share. Through December 31, 2000, none of those stock options had
been exercised. The issuance of such stock options was exempt from the
registration requirements of the Securities Act of 1933, as amended, pursuant to
Section 4(2) thereunder. The
17
Company previously filed a Registration Statement on Form S-8 (the "Form S-8")
to register shares of Common Stock issuable pursuant to awards granted under the
Plan.
In November 1999 and May 2000, the Company issued an aggregate of
3.3 million shares of Series A Convertible Preferred Stock, par value $.001,
of the Company to Ambra. Except as set forth below, the Series A Convertible
Preferred Stock has all of the same preferences, rights and voting powers as
the common stock. The preferred stock is not entitled to vote on any matters
to be voted upon by the stockholders of the Company, except that the holders
of the preferred stock are entitled to vote as a separate class, and the vote
of a majority of the outstanding shares of preferred stock is required for
the creation of an equity security senior to the preferred stock or the
amendment of the certificate of incorporation or by-laws of the Company to
the detriment of the holders of the preferred stock. The preferred stock has
a liquidation preference of $1.00 per share plus any declared but unpaid
dividends on the preferred stock. The Company may redeem, from March 15, 2001
to June 30, 2002, any or all of the preferred stock (i) at any time prior to
July 1, 2002, at a redemption price of $1.00 per share (ii) at any time from
July 1, 2002, through December 31, 2002, for the greater of $1.00 per share
or an amount equal to the market value of the number of shares of common
stock that the holder of the preferred stock would have held had the shares
of preferred stock to be redeemed been converted into common stock
immediately prior to such redemption. Upon the occurrence of an event of
default under the $7.2 million note issued by the Company to Ambra in
connection with the License Rights Termination Agreement, Ambra may demand a
redemption of the preferred stock at a redemption price of $1.00 per share.
The preferred stock is convertible by Ambra from January 1, 2003,
through December 31, 2006, into (at Ambra's election), (i) a promissory note
of the Company at an amount equal to the number of shares of preferred stock
converted multiplied by $1.00, carrying interest at a rate of 12% per annum
and payable over a term of 21 months or (ii) common stock of the Company at a
1:1 conversion ratio. For financial reporting purposes, the preferred stock
will be considered redeemable preferred stock and will be classified outside
of stockholders' equity.
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data set forth below have been derived from the
consolidated financial statements of the Company and the related notes thereto.
The statement of operations data for the years ended December 31, 1998, 1999 and
2000 and the balance sheet data as of December 31, 1999 and 2000 are derived
from the consolidated financial statements of the Company which have been
audited by BDO Seidman, LLP, independent certified public accountants, included
elsewhere herein. The statement of operations data for the years ended December
31, 1996 and 1997 and the balance sheet data as of December 31, 1996, 1997 and
1998 are derived from the consolidated financial statements of the Company,
which have been audited but are not contained herein. The following selected
financial data should be read in conjunction with the Company's consolidated
financial statements and the related notes thereto and "Management's Discussion
and Analysis of Financial Condition and Results of Operations," which are
included elsewhere herein.
18
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------------
1996 1997 1998 1999 2000
-------------- -------------- ------------- ------------- --------------
STATEMENT OF INCOME DATA: (IN THOUSANDS EXCEPT PER SHARE DATA)
Net sales $118,655 $161,446 $113,721 $84,525 $97,253
Cost of sales 84,421 109,694 90,661 61,694 68,161
-------------- -------------- ------------- ------------- --------------
Gross profit 34,234 51,752 23,060 22,831 29,092
Selling expenses 11,898 16,236 16,983 12,799 14,554
License fees 4,817 7,577 6,020 7,002 8,353
Distribution and shipping expenses 2,669 4,307 3,900 2,863 3,242
General and administrative expenses 6,243 7,546 9,999 8,056 7,786
Termination of license agreement -- -- -- -- 8,068
Provision for severance -- -- 526 750 385
Impairment of intangibles -- -- -- -- 743
Recovery of legal fees (718) (117) -- -- --
-------------- -------------- ------------- ------------- --------------
Operating income (loss) 9,325 16,203 (14,368) (8,639) (14,039)
Interest, net 1,365 2,372 1,455 1,628 1,332
Other income (expense) 85 3 381 165 76
Minority interest (82) (135) -- -- --
-------------- -------------- ------------- ------------- --------------
Income (loss) before income taxes 7,963 13,699 (15,442) (10,102) (15,295)
Income tax (provision)/benefit -- 1,349 (1,351) (110) 48
-------------- -------------- ------------- ------------- --------------
Net income (loss) $7,963 $15,048 $(16,793) $(10,212) $(15,247)
Basic and diluted net income
(loss) per share (1) $1.99 $3.68 $(2.15) $(1.47) $(2.00)
Weighted average common
shares outstanding 4,000 4,094 7,810 6,935 7,639
PRO FORMA STATEMENT OF INCOME DATA:
Income before income taxes 7,963 13,699
Income tax provision (2) (3,265) (5,617)
-------------- --------------
Net income $4,698 $8,082
============== ==============
Basic and diluted net income per share $0.95 $1.62
============== ==============
Weighted average common
shares outstanding 4,930 5,001
AS OF DECEMBER 31,
------------------------------------------------------------------------------
1996 1997 1998 1999 2000
------------- ------------ ------------ ------------ ---------------
BALANCE SHEET DATA:
Working capital $16,274 $45,940 $31,577 $22,610 $16,777
Total assets 37,257 73,443 59,046 40,435 36,430
Total debt 7,796 11,609 13,848 3,651 14,813
Redeemable preferred stock -- -- -- 2,000 3,300
Stockholders' equity 19,393 52,496 37,313 27,751 13,503
- -----------
(1) Historical earnings per share does not reflect a provision for income
taxes as the Company had been taxed as an S corporation for the years
ended December 31, 1996 and the majority of 1997.
(2) Reflects pro forma provision for income taxes as if the Company had
been taxed as a C Corporation for the years ended December 31, 1996 and
1997.
19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction
with the "Selected Financial Data" and the Company's consolidated financial
statements and the related notes thereto, which are included elsewhere herein.
OVERVIEW
During its first 77 years, the Company became one of the leading
manufacturers of pants, trousers and jeans in the United States. The Company was
able to utilize its fabric sourcing and manufacturing expertise to build a well
known franchise in the men's and women's bottoms segment of the apparel
industry. In this period, the Company's marketing efforts were typically driven
by its manufacturing capabilities, and branding was limited to Company-owned
brands and third-party private labels.
In the late 1980's, management made a decision to change the Company's
marketing focus from a manufacturing-driven to a brand-driven strategy. This
fundamental shift within the Company reflected senior management's belief that
the American sportswear market would be dominated by recognized brands with
clearly established images. Management also concluded that increasing market
share would go to those companies that were market-driven and able to service
their customers with diversified manufacturing and sourcing capabilities.
Recognizing its strength in bottoms manufacturing, in 1990 the Company entered
into a license agreement for the use of the BOSS brand name on men's denim
apparel and on all types of juniors' sportswear for the young women's market. In
the fall of 1993, the Company entered into license agreements for the use of the
Beverly Hills Polo Club brand name on men's sportswear in the United States and
Puerto Rico. License rights were expanded to include Europe in 1996.
In November 1997, the Company acquired an exclusive license to
manufacture and market certain men's jeanswear and sportswear under the
Girbaud brand in the United States and Puerto Rico. The Girbaud brand is an
internationally recognized designer sportswear label with a distinct European
influence. The Company has positioned the Girbaud men's line with a broad
assortment of products, styles and fabrications reflecting a contemporary
European look. The Company began marketing a fall men's collection under the
Girbaud brand in February 1998. In March 1998, the Company entered into an
exclusive license agreement to manufacture and market certain women's
jeanswear and sportswear under the Girbaud brand in the United States and
Puerto Rico. The Company began marketing women's sportswear under the Girbaud
brand in the second quarter of 1998. The Company has positioned the Girbaud
women's line with a broad assortment of contemporary sportswear and jeanswear
products. Under the Girbaud men's license agreement, the Company is required
to spend at least $500,000 in advertising for the men's Girbaud brand in each
year through the term of the agreement. Under the Girbaud women's license
agreement, the Company is required to spend at least $400,000 in advertising
for the women's Girbaud brand in each year through the term of the agreement.
In addition, the Company is required to contribute $190,000 per year to the
licensor's advertising and promotional expenditures for the Girbaud brand. In
December 1998, the Girbaud women's license agreement was amended to provide
that the Company would spend an additional $1.8 million in sales and
marketing of the brand in 1999. Minimum royalty payments began in the first
quarter of 1998.
In May 2000, the Company entered into an exclusive distribution
agreement for Girbaud men's and women's jeanswear and sportswear products in
Canada. The Company will sell to Western Glove Works ("Distributor") Girbaud
20
products produced in Mexico or the Unites States at cost plus 12.0%, which is
less than its normal profit margins on sales of comparable products to the
Company's retail customers. For products purchased by the Distributor from
overseas, the Distributor will pay a distributor's fee equal to 6.75% of net
sales to the Company. Under the agreement, the Distributor will pay a royalty
fee equal to 6.25% of net sales to the Company, which will in turn pay the
royalty to Latitude Licensing Corp. The initial term of the agreement expires
on December 31, 2001. The Distributor may renew the agreement for six
additional one-year terms. The minimum sales level for calendar 2001 is
$1,600,000 (Canadian Dollars), which results in a minimum distribution fee
payable to the Company of $48,000 (Canadian Dollars). There are no minimum
sales levels or distribution fees for calendar year 2000. The Company began
shipments to Canada in December, 2000. To date, sales to Canada have been
immaterial.
In September 1999, the Company introduced a collection of men's
sportswear under the Company-owned Urban Expedition ("UBX") brand in the
United States and Europe. Sales of the Urban Expedition brand have been
immaterial to date.
The Company also manufactures and markets a limited number of pants and
jeans styles for women under its own "I.C. Isaacs" brand name and under
third-party private labels for sale to major chain stores and catalogs.
In the fourth quarter of 2000, the Company decided that it intended to
discontinue production of the women's Company-owned and private label lines.
By the end of the 1990's, the Company had completed its strategic
repositioning from a manufacturing-driven company to a marketing and
brand-driven company. Through a strategy of providing fashionable, branded
merchandise, the Company has become a fashion influence for youthful and
contemporary consumers who purchase jeanswear and sportswear through
specialty and department stores. The Company's brand-driven market strategy
is evidenced by the increase of licensed, branded apparel as a percentage of
the Company's net sales. In 2000, the Girbaud, Beverly Hills Polo Club and
BOSS brands comprised 69.6%, 13.4% and 11.3% of net sales, respectively.
Concurrently with this strategy, the Company has also shifted its product mix
from predominately bottoms to a full array of sportswear, including tops and
outerwear. In the fourth quarter of 2000, the Company decided to dramatically
reduce the use of independent contractors' facilities in Mexico by the end of
the second quarter of 2001. The reduced production of these independent
contractors in Mexico will be transferred to independent contractors in Asia.
By moving this production to Asia, whereby the Company generally purchases
the item as a finished good, the Company believes it will obtain greater
flexibility of quantities and styles ordered. The Company has also expanded
its branded lines to include sportswear for boys and youth. The Company has
terminated its rights under the license for use of the BOSS brand and intends
to focus its efforts on its more profitable lines. Historically, the Company
has recognized markdowns for specific unsold inventory in the second and
fourth quarters. These specific markdowns are reflected in cost of sales and
the related gross margins at the conclusion of the appropriate selling season.
TERMINATION OF BOSS LICENSE AGREEMENT
In October 1999, the Company, Ambra Inc. ("Ambra") and Hugo Boss A.G. ("Hugo
Boss") entered into certain agreements including (i) a license agreement (the
"BOSS License Agreement") granting the Company rights to manufacture and sell
apparel using the BOSS brand name and (ii) an agreement pursuant to which the
Company issued to Ambra aggregate of 3.3 million shares of Series A Convertible
Preferred Stock, par value $.0001 per share, of the Company (the "Preferred
Stock") and 666,667 shares of common stock, par value $.0001, of the Company.
The BOSS License Agreement had an initial term through December 31, 2003 and
carried minimum annual royalties of approximately $3.2 million in each of
2000 and 2001, $2.6 million in 2002 and $2.1 million in 2003. The Preferred
Stock was redeemable at the option of the Company any time and from time to
time and at the option of Ambra upon the occurrence of certain acceleration
events under the BOSS License Agreement, in either case at a redemption price
of $1.00 per share. Any and all unredeemed shares of Preferred Stock were
convertible, at the option of the holder, for a 60 day period beginning
October 1, 2003, into a promissory note of the Company in a principal amount
equal to $1.00 multiplied by the total number of shares of Preferred Stock
being converted, with interest thereafter at an annual interest rate of 12%,
payable in four quarterly installments beginning January 1, 2004.
In October 2000, the Board of Directors of the Company authorized the
appropriate officers of the Company to negotiate a termination of the Boss
License Agreement. In March 2001, the Company, Ambra and Hugo Boss executed
an agreement to terminate the Company's rights under the BOSS License
Agreement (the "License Rights Termination Agreement"). Pursuant to the
License Rights Termination Agreement, (i) the Company issued to Ambra a
subordinated secured promissory note (the "Note") of the Company in the
principal amount of $7.2 million, with principal and interest at an annual
rate of 8% payable in twenty-four (24) quarterly installments in the amount
of (a) $205,500 each through December 31, 2001, (b) $420,000 each from March
31, 2002 through September 30, 2006 and (c) $407,085.57 on December 31, 2006;
(ii) the Company's rights under the BOSS License Agreement (and the Company's
obligation to pay any royalties thereunder) were terminated; (iii) the
Company agreed to sell or dispose of existing BOSS inventory by October 31,
2001; and (iv) the Preferred Stock will be (a) redeemable by the Company
until June 30, 2002 for $1.00 per share, (b) redeemable by the Company from
July 1, 2002 through December 31, 2002 for the greater of $1.00 per share or
an amount equal to the market value of the number of shares of common stock
which the holder of the Preferred Stock would have held had the shares of
Preferred Stock being redeemed been converted to common stock immediately
prior to such redemption; (c) redeemable by Ambra at any time upon an event
of default under the Note; and (d) convertible by Ambra from January 1, 2003
through December 31, 2006 into (at Ambra's election): (x) a subordinated
secured promissory note of the Company in the amount equal to the number of
shares of Preferred Stock converted multiplied by $1.00, carrying an interest
rate of 12% per annum and payable over a term of twenty-one (21) months or
(y) common stock of the Company at a 1:1 conversion ratio. The Company also
executed a security agreement in favor of Ambra and agreed to grant a
mortgage or deed of trust on the Company's real estate in Milford, Delaware
and Baltimore, Maryland as security for the Company's obligations under the
Note.
21
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
----------------------------------------
1998 1999 2000
----------- ----------- -----------
Net sales 100.0% 100.0% 100.0%
Cost of sales 79.7 73.0 70.1
----------- ----------- -----------
Gross profit 20.3 27.0 29.9
----------- ----------- -----------
Selling expenses 14.9 15.1 15.0
License fees 5.3 8.3 8.6
Distribution and shipping expenses 3.4 3.4 3.3
General and administrative expenses 9.3 10.4 9.1
Termination of licensing agreement -- -- 8.3
----------- ----------- -----------
Operating loss (12.6%) (10.2%) (14.4%)
=========== =========== ===========
YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999
NET SALES.
Net sales increased 15.1% to $97.3 million in 2000 from $84.5
million in 1999. The increase was primarily due to growth in both the men's
and women's Girbaud lines offset by continued declines in the BOSS, Beverly
Hills Polo Club and Company-owned and private label brands. Net sales of
Girbaud men's sportswear increased $34.8 million or 152.6% to $57.6 million.
Net sales of Girbaud women's sportswear increased $5.2 million or 104.0% to
$10.2 million. The Company began shipping its UBX line in the first quarter
of 2000 and shipped $2.1 million in 2000 of UBX. Net sales of BOSS sportswear
decreased $26.0 million or 70.3% to $11.0 million. Net sales of Beverly Hills
Club sportswear decreased $1.6 million or 11.0% to $13.0 million. Net sales
of Company-owned brands and private label brands decreased $1.8 million or
34.6% to $3.4 million in 2000. Due to the termination of the BOSS license
agreement, sales of BOSS sportswear will be insignificant in 2001.
GROSS PROFIT.
Gross profit increased 27.6% to $29.1 million in 2000 from $22.8
million in 1999. Gross profit as a percentage of net sales increased to 29.9%
from 27.0% over the same period. The increase in gross profit as a percentage
of net sales was primarily due to increased sales of Girbaud jeanswear and
sportswear at higher margins than those realized on sales of BOSS and Beverly
Hills Polo Club sportswear. In an effort to continue to decrease inventory
levels and to generate cash, a significant amount of sales were made in 1999
and 2000 to a mass retailer at gross profit margins significantly below the
margins on goods that are sold to department and specialty stores. This
adversely affected the overall gross margin. In addition, the Company had an
inventory valuation allowance of $1.0 million at December 31, 2000 to
properly reflect unsold inventory at its net realizable value. Such inventory
valuation allowance included Girbaud, BOSS and Beverly Hills Polo Club
products. The Company had an inventory valuation allowance of $2.3 million at
December 31, 1999. The Company monitors inventory levels, by product
category, weekly to help identify inventory shortages as well as excess
inventory. Personnel look at recent sales data and order backlog to help
identify slow moving inventory items. Further, sales managers continually
discuss product turnover and sales forecasts with sales personnel to aid in
identifying product shortages and overages. Based on the information
22
available, the Company believes the inventory valuation provisions were
appropriate at December 31, 1999 and 2000, respectively.
SELLING, DISTRIBUTION, GENERAL AND ADMINISTRATIVE EXPENSES.
Selling, distribution, general and administrative ("SG&A") expenses
increased 9.0% to $26.7 million in 2000 from $24.5 million in 1999. As a
percentage of net sales, SG&A expenses decreased to 27.4% from 29.0% over the
same period. The decrease in SG&A as a percentage of net sales in a period of
increasing expense was due to the significant increase in net sales. Selling
expenses increased 13.7% to $14.6 million from $12.8 million due to increased
commissions to the Company's salespersons and increases in promotional costs.
Distribution and shipping expenses increased from $2.9 million in 1999 to
$3.2 million in 2000 due to increased personnel and wages at the Company's
distribution facility to cover the increase in merchandise shipments. General
and administrative expenses decreased 3.4% to $7.8 million due to the
elimination, in October 1999, of amortization expense related to the BOSS
trademark. Therefore, no amortization expense related to the trademark was
recorded by the Company in 2000. The provision for severance decreased 48.7%
in 2000 to $0.4 million. In 1999 the Company's Chief Operating Officer
resigned resulting in a provision for severance of $0.8 million and in 2000
the Company recorded a provision for severance related to a plant closing
which totaled $0.4 million. The Company recorded an impairment of intangibles
for $0.7 million in 2000 related to the goodwill associated with the
women's Company-owned and private label lines.
LICENSE FEES.
License fees increased $1.4 million to $8.4 million in 2000 from $7.0
million in 1999. As a percentage of net sales license fees increased from 8.3%
to 8.6%. The increase in license fees as a percentage of net sales is primarily
due to higher royalties for Girbaud offset somewhat by reductions in the minimum
royalties under the BOSS license agreement that was in effect for all of 2000.
TERMINATION OF LICENSE AGREEMENT.
In connection with the termination of its rights under the BOSS
License Agreement, the Company recorded a note payable of $7.2 million and
wrote off the remaining deferred royalty expense of $0.7 million and other
BOSS related assets of $0.2 million as a charge against earnings totaling
$8.1 million in the fourth quarter of 2000.
OPERATING LOSS.
Operating loss increased 62.8% to $14.0 million in 2000 from $8.6
million in 1999. The decline in performance is due to the termination of the
BOSS License Agreement offset by higher gross margins at increased sales volumes
coupled with a reduction in operating expenses, as explained above.
INTEREST EXPENSE.
Interest expense decreased $0.3 million to $1.3 million in 2000. The
decrease in interest expense is primarily due to the elimination of interest
expense in the third quarter of 1999 on the $11.25 million note payable
associated with the purchase of the BOSS trademark in November 1997, offset by
increased borrowings under the Company's asset-based revolving line of credit.
Interest income earned in 1999 and 2000 was insignificant.
INCOME TAXES.
The Company recorded an income tax benefit of $48,000 in 2000 related
to an overaccrual of state taxes in 1999. The Company recorded income tax
expense of $0.1 million in 1999 related to state taxes.
23
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
NET SALES.
Net sales decreased 25.7% to $84.5 million in 1999 from $113.7 million
in 1998. The decline was primarily due to continued decreases in the BOSS and
Beverly Hills Polo Club men's lines offset by increases in both the men's and
women's Girbaud lines. Net sales of BOSS sportswear decreased $46.4 million or
55.6% to $37.0 million. Net sales of Beverly Hills Club sportswear decreased
$2.0 million or 12.0% to $14.6 million. Net sales of Girbaud men's sportswear
increased $18.2 million or 395.7% to $22.8 million. Net sales of Girbaud women's
sportswear increased $4.9 million to $5.0 million. The Company began shipping
the men's Girbaud product line in the second quarter of 1998 and the women's
Girbaud line in the fourth quarter of 1998. Net sales of Company-owned brands
and private label brands decreased 42.2% to $5.2 million in 1999. The Company
did not begin shipping its UBX line until February of 2000.
GROSS PROFIT.
Gross profit decreased 1.3% to $22.8 million in 1999 from $23.1 million
in 1998. Gross profit as a percentage of net sales increased from 20.3% to 27.0%
over the same period. The overall gross profit in dollars remained roughly
consistent with the prior year even in a time of a major decline in sales. The
increase in gross profit as a percentage of net sales was primarily due to
increased sales of Girbaud jeanswear and sportswear at higher margins than those
realized on sales of BOSS and Beverly Hills Polo Club sportswear. In an effort
to continue to decrease inventory levels, a significant amount of sales were
made in 1999 to a mass retailer at gross profit margins significantly below the
margins on goods that are sold to department and specialty stores. This
adversely affected the overall gross margin. In addition, the Company had an
inventory valuation allowance of $2.3 million at December 31, 1999 to properly
reflect unsold inventory at its net realizable value. Such inventory valuation
allowance included Girbaud, BOSS and Beverly Hills Polo Club products. The
Company had an inventory valuation allowance of $5.5 million at December 31,
1998. The Company monitors inventory levels, by product category, weekly to help
identify inventory shortages as well as excess inventory. Personnel look at
recent sales data and order backlog to help identify slow moving inventory
items. Further, sales managers continually discuss product turnover and sales
forecasts with sales personnel to aid in identifying product shortages and
overages. Based on the information available, the Company believes the inventory
valuation provisions were appropriate at December 31, 1998 and 1999,
respectively.
SELLING, DISTRIBUTION, GENERAL AND ADMINISTRATIVE EXPENSES.
Selling, distribution, general and administrative ("SG&A") expenses
decreased 22.0% to $24.5 million in 1999 from $31.4 million in 1998. As a
percentage of net sales, SG&A expenses increased to 29.0% from 27.6% over the
same period due to lower net sales and a provision for severance offset somewhat
by decreases in advertising expenditures, lower selling expenses and lower
commissions to the Company's salespersons. Advertising expenditures declined
$2.9 million to $2.8 million as the Company reduced targeted advertising
campaigns for BOSS and Beverly Hills Polo Club. The Company's advertising
expenditures for the Girbaud brand approximated $1.5 million in 1999 and 1998.
The Company was required to spend $0.9 million in advertising as well as $1.8
million on sales and marketing for the women's and men's Girbaud brands in 1999.
In 1999, expenditures on the Company's Urban Expedition (UBX) line were
immaterial. Distribution and shipping expenses decreased $1.0 million to $2.9
due primarily to a reduction in personnel and wages at the Company's Milford,
Delaware distribution facility due to decreased merchandise shipments. General
and administrative expenses decreased $1.9 million to $8.1 million due to
reductions in personnel in the second half of 1999 coupled with a reduction in
bad debt expense and a decrease in amortization expense offset somewhat by
increases in outside professional fees. In the second quarter of 1999, the
Company's President and Chief Operating Officer resigned resulting in a
provision for severance of $0.8 million. In 1998, the Company recorded a
provision for severance associated with plant closures of $0.5 million.
LICENSE FEES.
License fees increased $1.0 million to $7.0 million in 1999 from $6.0
million in 1998. As a percentage of net sales license fees increased from 5.3%
to 8.3%. The increase in license fees as a percentage of net sales is primarily
due to
24
increases in the minimum royalties for Girbaud and lower net sales offset
somewhat by reductions in the minimum royalties under the BOSS license
agreement.
OPERATING LOSS.
Operating loss decreased 40.3% to $8.6 million in 1999 from $14.4
million in 1998. The improvement was due to higher gross margins at reduced
sales volumes coupled with a reduction in operating expenses, as explained
above.
INTEREST EXPENSE.
Interest expense increased $0.1 million to $1.6 million in 1999. The
increase in interest expense is primarily due to increased borrowings under the
Company's asset-based revolving line of credit, offset by the elimination, in
the third quarter, of interest expense on the $11.25 million note payable
associated with the purchase of the BOSS trademark in November 1997. The Company
repaid its asset-based revolving line of credit with the proceeds from its
initial public offering completed in December 1997. As a result, borrowings for
the first six months of 1998 were insignificant and the Company earned $0.3
million in interest income from investing its excess cash in 1998. Interest
income earned in 1999 was insignificant.
INCOME TAXES.
The Company recorded income tax expense of $0.1 million in 1999 related
to state taxes. In 1998 the Company recorded an income tax benefit of $0.2
million to recognize a tax benefit for the carryback of net operating losses to
recover income taxes paid during 1997. The Company wrote off a deferred tax
asset of $1.5 million during the fourth quarter of 1998 due to the uncertainty
surrounding the amount of taxable income to be generated in 1999.
LIQUIDITY AND CAPITAL RESOURCES
The Company has relied primarily on internally generated funds,
trade credit and asset based borrowings to finance its operations. The
Company's capital requirements primarily result from working capital needed
to support increases in inventory and accounts receivable. The Company's
working capital decreased significantly during 2000 compared to 1999,
primarily due to the 2000 net loss. As of December 31, 2000, the Company had
cash, including temporary investments, of $0.8 million and working capital of
$16.8 million compared to $1.2 million and $22.6 million, respectively, as of
December 31, 1999. In connection with the License Rights Termination
Agreement, the Company eliminated the minimum royalty payments due Ambra in
2001 through 2003. These were, prior to the termination, $3.2 million, $2.6
million and $2.1 million that would otherwise have been in 2001, 2002 and
2003, respectively. Net of the principal and interest payments on the Note,
the Company will save approximately $2.4 million, $0.9 million and $0.4
million in 2001, 2002 and 2003, respectively.
OPERATING CASH FLOW.
Cash used in operations totaled $4.2 million in 2000 compared to
cash provided by operations of $0.4 million in 1999. Negative cash flow in
2000 is due to the increase in the net loss, a significant increase in
accounts receivable related to increased sales and a decrease in accounts
payable. These amounts were somewhat offset by non-cash expenses related to
the License Rights Termination Agreement, depreciation and amortization,
impairment of intangibles and a decrease in inventory. Cash used in investing
activities during 2000 totaled $0.7 million and was used for the purchase of
fixtures for the Girbaud Shop-in-Shop stores, show exhibits and computer
equipment of $1.1 million offset by $0.4 million in proceeds from the sale of
machinery and equipment from the closing of the Company's manufacturing
facility in Raleigh, Mississippi. Cash used in financing activities totaled
$4.5 million resulting primarily from proceeds from borrowings under the
revolving line of credit and increases in checks issued against future
deposits.
Inventories decreased $3.9 million from December 31, 1999 to December
31, 2000, compared to a decrease of $4.9 million from December 31, 1998 to
December 31, 1999. The decrease in 2000 was the result of a $2.6 million
25
reduction in BOSS inventory related to a decrease in quantities purchased to
meet sales levels. The change in 1999 was due to the sale of excess BOSS and
Beverly Hills Polo Club inventory on hand at December 31, 1998. During 2000,
BOSS sales have continued to decline. At December 31, 2000, the Company had an
inventory valuation allowance of $1.0 million related to unsold inventory
compared to $2.3 million at December 31, 1999. Such inventory valuation
allowance included Girbaud, Beverly Hills Polo Club and BOSS products.
Capital expenditures were $1.1 million in 2000 compared to $0.8 million
in 1999. The Company's capital expenditures were primarily for the purchase of
fixtures for the Girbaud Shop-in-Shop stores, show exhibits and computer
equipment of $1.1 million offset by $0.4 million in proceeds from the sale of
machinery and equipment from the closing of the Company's manufacturing facility
in Raleigh, Mississippi. The Company does not currently have commitments for
significant capital expenditures in 2001.
CREDIT FACILITIES
The Company has an asset-based revolving line of credit (the
"Agreement") with Congress Financial Corporation ("Congress"). As of December
31, 2000 the Company had $7.6 million in outstanding borrowings under the
Agreement compared to $3.6 million as of December 31, 1999. In March 1999,
the Company amended the Agreement to extend the term of the Agreement through
December 31, 2000. In December 2000, the Agreement was further amended to
extend the term through March 31, 2001. In March 2001, the Agreement was
further amended to extend the term through December 31, 2002. The amended
Agreement provides that the Company may borrow up to (i) 80.0% of net
eligible accounts receivable and a portion of inventory, as defined in the
agreement less (ii) a $1.0 million special availability reserve. Borrowings
under the Agreement may not exceed $25.0 million (including outstanding
letters of credit which are limited to $6.0 million from May 1 to September
30 of each year and $4.0 million for the remainder of each year) and bear
interest at the lenders prime rate of interest plus 1.0%. Outstanding letters
of credit approximated $2.1 million at December 31, 2000. In connection with
the March 1999 amendment, the Company paid Congress a financing fee of
$125,000, one half of which was paid at the time of closing and the other
half of which was paid on June 30, 2000. The financing fee was amortized over
21 months. In connection with the March 2001 amendment, the Company will pay
Congress a financing fee of $150,000, one half of which was paid at the time
of closing and the other half of which shall be payable on September 1, 2001.
Under the terms of the Agreement, as amended, the Company is required to
maintain minimum levels of working capital and tangible net worth. The
Company was in violation of both of these covenants at December 31, 2000 and
obtained a waiver from Congress. In connection with the amendment in March
2001, Congress reduced the minimum levels of working capital and tangible net
worth, effective January 1, 2001. There can be no assurances that the Company
will not be in violation of the net worth covenant during 2001 or thereafter.
The Company extends credit to its customers. Accordingly, the Company
may have significant risk in collecting accounts receivable from its customers.
The Company has credit policies and procedures which it uses to minimize
exposure to credit losses. The Company's collection personnel regularly contact
customers with receivable balances outstanding beyond 30 days to expedite
collection. If these collection efforts are unsuccessful, the Company may
discontinue merchandise shipments until the outstanding balance is paid.
Ultimately, the Company may engage an outside collection organization to collect
past due accounts. Timely contact with customers has been effective in reducing
credit losses. In 1999 and 2000, the Company's credit losses were $1.7 million
and $0.9 million, respectively and the Company's actual credit losses as a
percentage of net sales were 2.0% and 0.9%, respectively.
The Company believes that current levels of cash and cash equivalents
($0.8 million at December 31, 2000) together with cash from operations and funds
available under its Agreement, will be sufficient to meet its capital
requirements for the next 12 months.
BACKLOG AND SEASONALITY
The Company's business is impacted by the general seasonal trends that
are characteristic of the apparel and retail industries. In the Company's
segment of the apparel industry, sales are generally higher in the first and
third quarters. Historically, the Company has taken greater markdowns in the
second and fourth quarters. The Company generally receives orders for its
products three to five months prior to the time the products are delivered to
stores. As of December 31, 2000 the Company has unfilled orders of approximately
$32.0 million, compared to $29.0 million of such orders as of December 31, 1999.
The backlog of orders at any given time is affected by a number of factors,
including
26
seasonality, weather conditions, scheduling of manufacturing and shipment of
products. As the time of the shipment of products may vary from year to year,
the results for any particular quarter may not be indicative of the results for
the full year.
INFLATION
The Company does not believe that the relatively moderate rates of
inflation experienced in the United States over the last year have had a
significant effect on its net sales or profitability. Although higher rates of
inflation have been experienced in a number of foreign countries in which the
Company's products are manufactured, the Company does not believe that they have
had a material effect on the Company's net sales or profitability.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments" ("SFAS 133"). SFAS 133 established accounting and reporting
standards for derivative instruments and for hedging activities. SFAS 133
requires that an entity recognize all derivatives as either assets or
liabilities and measure those instruments at fair market value. Under certain
circumstances, a portion of the derivative's gain or loss is initially reported
as a component of other comprehensive income and subsequently reclassified into
income when the transaction effects earnings. For a derivative not designated as
a hedging instrument, the gain or loss is recognized in income in the period of
change. SFAS 133 is effective for fiscal quarters of years beginning after June
15, 2000 and requires application prospectively. Presently, the Company does not
use derivative instruments either in hedging activities or as investments.
Accordingly, the adoption of SFAS 133 had no impact on its financial position or
results of operations.
In March 2000, the FASB issued interpretation No. 44 ("FIN 44"),
"Accounting for Certain Transactions Involving Stock Compensation, an
Interpretation of APB Opinion No. 25". FIN 44 clarifies the application of
APB Opinion No. 25 for (a) the definition of employee for purposes of
applying APB Opinion No. 25, (b) the criteria for determining whether a plan
qualifies as a noncompensatory plan, (c) the accounting consequences of
various modifications to the previously fixed stock option or award, and (d)
the accounting for an exchange of stock compensation awards in a business
combination. FIN 44 is effective July 2, 2000 but certain conclusions cover
specific events that occur after either December 15, 1998 or January 12,
2000. The adoption of FIN 44 did not have an affect on the Company's
financial statements.
In December 1999, the Securities and Exchange Commission ("SEC")
issued Staff Accounting Bulletin No. 101 which summarizes certain of the SEC
staff's views in applying generally accepted accounting principles to revenue
recognition in financial statements. The Company adopted Staff Accounting
Bulletin No. 101 effective October 1, 2000. The adoption of this guidance did
not have a material impact on the Company's results of operations or
financial position, however, the guidance may impact the way in which the
Company will account for future transactions.
ITEM 7-A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's principal market risk results from changes in floating
interest rates on short-term debt. The Company does not use interest rate swap
agreements to mitigate the risk of adverse changes in the prime interest rate.
However, the impact of a 100 basis point change in interest rates affecting the
Company's short-term debt would not be material to the net loss, cash flow or
working capital. The Company does not hold long-term interest sensitive assets
and therefore is not exposed to interest rate fluctuations for its assets. The
Company does not hold or purchase any derivative financial instruments for
trading purposes.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the Company and the report of
independent certified public accountants thereon are set forth on pages 33
through 54 hereof.
27
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The information appearing in the Company's Definitive Proxy
Statement prepared in connection with the 2001 Annual Meeting of Stockholders
(the "Proxy Statement") under the captions "Proposal 1 :Election of Class I
Directors" and "Principal Executive Officers of the Company Who Are Not Also
Directors" is incorporated herein by reference. The Proxy Statement will be
filed not later than 120 days after the end of the fiscal year covered by
this annual report on Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
The information appearing in the Proxy Statement under the caption
"Executive Compensation" is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information appearing in the Proxy Statement under the caption
"Security Ownership Of Certain Beneficial Owners and Management" is incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information appearing in the Proxy Statement under the caption
"Certain Relationships And Related Transactions" is incorporated herein by
reference.
28
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)1. Financial Statements. The following financial statements, related notes
and the Report of Independent Auditors, are included in response to Item 8
hereof:
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Report of Independent Certified Public Accountants 33
Consolidated Balance Sheets at December 31, 1999 and 2000 34
Consolidated Statements of Operations for the years ended December 31, 1998, 1999 and 2000 35
Consolidated Statements of Stockholders' Equity for the years ended December 31, 1998, 1999 and 2000 36
Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1999 and 2000 37
Summary of Accounting Policies 38
Notes to Consolidated Financial Statements 42
(a)2. Financial Statements Schedules. The following is a list of all financial
statements schedules filed herewith:
Schedule II-Valuation and Qualifying Accounts
Schedules other than those listed above have been omitted because they
are not required or are not applicable, or the required information has been
included in the Consolidated Financial Statements or the Notes thereto.
(a)3. Exhibits (numbered in accordance with Item 601 of Regulation S-K). See
accompanying Index to Exhibits. The following is a list of Exhibits filed
herewith:
3.04 Certificate of Amendment to Certificate of Designation dated
March 15, 2001
10.83 License Rights Termination Agreement dated March 15, 2001 by
and between Ambra Inc., Hugo Boss AG, I.C. Isaacs & Company
L.P. and I.C. Isaacs & Company, Inc.
10.84 Subordinated Secured Promissory Note dated March 15, 2001
10.85 Security Agreement dated March 15, 2001 by and between I.C.
Isaacs & Company L.P and Ambra Inc.
10.86 Amendment No. 1 dated March 15, 2001 to Shareholders'
Agreement by and between I.C. Isaacs & Company, Inc. and
Ambra Inc.
10.87 Twenty-second Amendment to Financing Agreements dated
March 15, 2001
23.01 Consent of BDO Seidman, LLP
(b) Reports on Form 8-K:
None.
29
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULES
I.C. Isaacs & Company, Inc.
The audits referred to in our report to I.C. Isaacs & Company, Inc.
dated March 2, 2001, except for Notes 3 and 8, which are as of March 29, 2001,
which is contained in Item 8 of this Form 10-K, include the audit of the
financial statement schedule listed in the accompanying index for the each of
the three years in the period ended December 31, 2000. This financial statement
schedule is the responsibility of the Company's management. Our responsibility
is to express an opinion on the financial statement schedule based on our
audits.
In our opinion, such schedule presents fairly, in all material
respects, the information set forth therein.
BDO SEIDMAN, LLP
Washington, D.C.
March 2, 2001, except for
Notes 3 and 8, which are
as of March 29, 2001
30
SCHEDULE II
I. C. ISAACS & COMPANY, INC.
VALUATION AND QUALIFYING ACCOUNTS
BALANCE CHARGED TO
BEGINNING OF COSTS AND BALANCE AT END
DESCRIPTION THE YEAR EXPENSES DEDUCTION OF YEAR
----------------- ----------------- ---------------- ----------------
Year Ended December 31, 1998
Allowance for doubtful accounts $ 1,185,000 $ 1,595,000 $ (1,427,000) $ 1,353,000
Reserve for sales returns and discounts 177,000 6,733,000 (6,814,000) 96,000
Year Ended December 31, 1999
Allowance for doubtful accounts 1,353,000 1,023,000 (1,651,000) 725,000
Reserve for sales returns and discounts 96,000 4,278,000 (4,221,000) 153,000
Year Ended December 31, 2000
Allowance for doubtful accounts 725,000 837,000 (932,000) 630,000
Reserve for sales returns and discounts 153,000 6,005,000 (5,928,000) 230,000
================= ================ ================ =================
31
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
I.C. ISAACS & COMPANY, INC.
(REGISTRANT)
By: /s/ Robert J. Arnot
---------------------------
Robert J. Arnot
CHAIRMAN OF THE BOARD
AND CHIEF EXECUTIVE OFFICER
Date: March 30, 2001
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
---------- ----- ----
/s/ ROBERT J. ARNOT Chairman of the Board and Chief Executive Officer, March 30, 2001
-------------------- President and Director (Principal Executive Officer)
Robert J. Arnot
/s/ EUGENE C. WIELEPSKI Vice President and Chief Financial Officer and Director March 30, 2001
----------------------- (Principal Financial and Accounting Officer)
Eugene C. Wielepski
/s/ DANIEL GLADSTONE Director March 30, 2001
-----------------------
Daniel Gladstone
/s/ JON HECHLER Director March 30, 2001
-----------------------
Jon Hechler
/s/ RONALD S. SCHMIDT Director March 30, 2001
-----------------------
Ronald S. Schmidt
/s/ THOMAS P. ORMANDY Director March 30, 2001
-----------------------
Thomas P. Ormandy
/s/ NEAL J. FOX Director March 30, 2001
-----------------------
Neal J. Fox
/s/ ANTHONY J. MARTERIE Director March 30, 2001
-----------------------
Anthony J. Marterie
32
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
I.C. Isaacs & Company, Inc.
Baltimore, Maryland
We have audited the accompanying consolidated balance sheets of I.C.
Isaacs & Company, Inc. and subsidiaries as of December 31, 1999 and 2000 and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 2000. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of I.C. Isaacs
& Company, Inc. and subsidiaries at December 31, 1999 and 2000 and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 2000 in conformity with accounting principles
generally accepted in the United States of America.
BDO SEIDMAN, LLP
Washington, D.C.
March 2, 2001, except for
Notes 3 and 8, which are
as of March 29, 2001
33
I.C. ISAACS & COMPANY, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
--------------------------------------
1999 2000
---- ----
ASSETS
Current
Cash, including temporary investments of $512,000 and $203,000 $ 1,193,093 $ 847,644
Accounts receivable, less allowance for doubtful
accounts of $725,000 and $630,000 (Note 3) 10,950,550 13,618,127
Inventories (Notes 1 and 3) 18,201,323 14,307,339
Prepaid expenses and other 293,524 446,644
Refundable income taxes 356,265 342,822
----------------- ------------------
Total current assets 30,994,755 29,562,576
Property, plant and equipment, at cost, less accumulated depreciation and
amortization (Notes 2) 3,304,512 3,156,967
Trademark and licenses, less accumulated amortization of $307,210 and $636,514
(Note 8) 1,042,790 713,486
Goodwill, less accumulated amortization of $1,660,650 and $2,652,100 991,450 --
Deferred royalty expense, less accumulated amortization of $88,287 and
$1,147,750 (Note 8) 1,059,463 --
Other assets (Note 9) 3,042,261 2,996,715
----------------- ------------------
$ 40,435,231 $ 36,429,744
================= ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current
Checks issued against future deposits $ 294,089 $ 845,344
Current maturities of long-term debt and revolving line of credit
(Note 3) 3,644,470 7,972,022
Current maturities of capital lease obligations (Note 3) 6,258 --
Accounts payable 1,923,458 1,135,007
Accrued expenses and other current liabilities (Note 4) 2,380,476 2,733,703
Accrued compensation 135,790 99,221
----------------- ------------------
Total current liabilities 8,384,541 12,785,297
------------------ ------------------
Long-term debt (Note 3) -- 6,841,087
Liability under licensing agreement (Notes 6 and 8) 2,300,000 --
Redeemable preferred stock (Notes 6 and 8) 2,000,000 3,300,000
Commitments and contingencies (Notes 3, 8 and 9)
STOCKHOLDERS' EQUITY (Notes 6, 7 and 8)
Preferred stock; $.0001 par value; 5,000,000 shares authorized, none
outstanding -- --
Common stock; $.0001 par value; 50,000,000 shares authorized; 8,344,699 and
9,011,366 shares issued; 7,197,990 and 7,864,657 shares outstanding 834 901
Additional paid-in capital 38,674,998 39,674,931
Accumulated deficit (8,615,112) (23,862,442)
Treasury stock, at cost (1,146,709 shares) (2,310,030) (2,310,030)
----------------- ------------------
Total stockholders' equity 27,750,690 13,503,360
----------------- ------------------
$ 40,435,231 $ 36,429,744
================= ==================
See accompanying summary of accounting policies and notes to consolidated
financial statements.
34
I.C. ISAACS & COMPANY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31,
-------------------------------------------------------------
1998 1999 2000
------------------- ------------------ ------------------
Net sales $ 113,720,799 $ 84,525,372 $ 97,253,569
Cost of sales 90,660,582 61,694,122 68,161,225
------------------- ------------------- ------------------
Gross profit 23,060,217 22,831,250 29,092,344
------------------- ------------------- ------------------
Operating Expenses
Selling 16,982,794 12,798,641 14,554,006
License fees (Note 8) 6,020,196 7,001,902 8,352,827
Distribution and shipping 3,899,917 2,863,502 3,241,894
General and administrative 9,998,503 8,056,199 7,786,057
Termination of license agreement (Note 8) -- -- 8,067,908
Provision for severance (Note 8) 526,326 750,000 385,314
Impairment of intangibles (Note 8) -- -- 743,590
------------------- ------------------- ------------------
Total operating expenses 37,427,736 31,470,244 43,131,596
------------------- ------------------- ------------------
Operating loss (14,367,519) (8,638,994) (14,039,252)
------------------- ------------------- ------------------
Other income (expense)
Interest, net of interest income of $252,392, $27,339
and $18,668 (1,454,748) (1,628,183) (1,332,328)
Other, net 380,718 164,795 76,250
------------------- ------------------- ------------------
Total other expense (1,074,030) (1,463,388) (1,256,078)
------------------- ------------------- ------------------
Loss before income taxes (15,441,549) (10,102,382) (15,295,330)
Income tax (provision) benefit (Note 5) (1,351,000) (110,000) 48,000
------------------- ------------------- ------------------
Net loss $(16,792,549) $(10,212,382) $(15,247,330)
=================== =================== ==================
Basic and diluted net loss per share $(2.15) $(1.47) $(2.00)
Weighted average common shares outstanding 7,809,540 6,935,005 7,638,792
See accompanying summary of accounting policies and notes to consolidated
financial statements.
35
I.C. ISAACS & COMPANY, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
PREFERRED STOCK COMMON STOCK ADDITIONAL
-------------------- ---------------------- PAID-IN
SHARES AMOUNT SHARES AMOUNT CAPITAL
--------- --------- ---------- --------- ---------------
Balance, at December 31, 1997 -- -- 7,824,699 $782 $ 34,120,190
Net loss -- -- -- -- --
Issuance of stock options to
non-employee directors -- -- -- -- 30,000
Purchase of treasury stock -- -- -- -- --
Issuance of common stock -- -- 520,000 52 4,774,808
------- -------- --------- ------- ------------
Balance, at December 31, 1998 -- -- 8,344,699 834 38,924,998
Net loss -- -- -- -- --
Purchase of treasury stock -- -- -- -- --
Issuance of treasury stock -- -- -- -- (250,000)
------- -------- --------- ------- ------------
Balance, at December 31, 1999 -- -- 8,344,699 834 38,674,998
Net loss -- -- -- -- --
Issuance of common stock -- -- 666,667 67 999,933
------- -------- --------- ------- ------------
Balance, at December 31, 2000 -- -- 9,011,366 $901 $ 39,674,931
======== ======== ========= ======= ============
ACCUMULATED TREASURY
DEFICIT STOCK TOTAL
-------------- ------------ ------------
Balance, at December 31, 1997 $ 18,389,819 $ (14,868) $ 52,495,923
Net loss (16,792,549) -- (16,792,549)
Issuance of stock options to
non-employee directors -- -- 30,000
Purchase of treasury stock -- (3,195,162) (3,195,162)
Issuance of common stock -- -- 4,774,860
------------ ----------- ------------
Balance, at December 31, 1998 1,597,270 (3,210,030) 37,313,072
Net loss (10,212,382) -- (10,212,382)
Purchase of treasury stock -- (100,000) (100,000)
Issuance of treasury stock -- 1,000,000 750,000
------------ ----------- ------------
Balance, at December 31, 1999 (8,615,112) (2,310,030) 27,750,690
Net loss (15,247,330) -- (15,247,330)
Issuance of common stock -- -- 1,000,000
------------ ----------- ------------
Balance, at December 31, 2000 $(23,862,442) $(2,310,030) $ 13,503,360
============ =========== ============
See accompanying summary of accounting policies and notes to consolidated
financial statements.
36
I.C. ISAACS & COMPANY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
------------------------------------------------------
1998 1999 2000
---------------- ---------------- --------------
Operating Activities
Net loss $(16,792,549) $(10,212,382) $(15,247,330)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities
Deferred income taxes 1,505,000 -- --
Provision for doubtful accounts 1,594,925 1,022,828 837,275
Write off of accounts receivable (1,426,925) (1,650,828) (932,275)
Provision for sales returns and discounts 6,733,208 4,277,845 6,004,743
Sales returns and discounts (6,814,537) (4,221,184) (5,927,743)
Depreciation and amortization 2,640,279 2,150,841 1,770,751
Impairment of intangibles -- -- 743,590
Gain on sale of assets (68,895) (288,788) (135,364)
Termination of license agreement -- -- 8,067,908
Compensation expense on stock options 30,000 7,264 10,500
(Increase) decrease in assets
Accounts receivable 8,028,905 4,525,290 (2,649,577)
Inventories 814,255 4,920,648 3,893,984
Prepaid expenses and other 190,081 588,830 (98,904)
Refundable income taxes (1,799,450) 1,443,185 13,443
Other assets (1,140,683) (965,513) (25,887)
Increase (decrease) in liabilities
Accounts payable (2,665,781) (2,378,249) (788,451)
Accrued expenses and other current liabilities 94,941 1,294,907 342,727
Accrued compensation (25,536) (73,983) (36,569)
Income taxes payable (156,000) -- --
------------ ------------ ------------
Cash provided by (used in) operating activities (9,258,762) 440,711 (4,157,179)
------------ ------------ ------------
Investing Activities
Proceeds from sale of assets 188,067 288,788 366,402
Capital expenditures (1,524,124) (767,032) (1,068,308)
Acquisition of license (600,000) -- --
------------ ------------ ------------
Cash used in investing activities (1,936,057) (478,244) (701,906)
------------ ------------ ------------
Financing Activities
Checks issued against future deposits 1,298,929 (1,004,840) 551,255
Issuance of common stock 4,774,860 -- --
Purchase of treasury stock (3,195,162) (100,000) --
Principal payments on debt (172,515) (179,864) (6,258)
Principal proceeds from debt 2,412,235 1,232,235 3,968,639
Deferred financing costs -- (62,500) --
------------ ------------ ------------
Cash provided by (used in) financing activities 5,118,347 (114,969) 4,513,636
------------ ------------ ------------
Decrease in cash and cash equivalents (6,076,472) (152,502) (345,449)
Cash and Cash Equivalents, at beginning of year 7,422,067 1,345,595 1,193,093
------------ ------------ ------------
Cash and Cash Equivalents, at end of year $ 1,345,595 $ 1,193,093 $ 847,644
============ ============ ============
See accompanying summary of accounting policies and notes to consolidated
financial statements.
37
I.C. ISAACS & COMPANY, INC.
SUMMARY OF ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of I. C.
Isaacs & Company, Inc. ("ICI"), I.C. Isaacs Europe, S.L. ("Isaacs Europe"), I.C.
Isaacs & Company, L.P. (the "Partnership"), Isaacs Design, Inc. ("Design") and
I.C. Isaacs Far East Ltd. (collectively the "Company"). The Company established
Isaacs Europe in July 1996 as the exclusive licensee of Beverly Hills Polo Club
sportswear in Europe. Isaacs Europe and I.C. Isaacs Far East Ltd. did not have
any significant revenue or expenses in 1998, 1999 and 2000. All intercompany
balances and transactions have been eliminated.
BUSINESS DESCRIPTION
The Company, which operates in one business segment, designs and
markets branded jeanswear and sportswear. The Company offers collections of
jeanswear and sportswear for men and women under the Marithe and Francois
Girbaud(R) brand in the United States, Puerto Rico and Canada and for men and
boys under the Beverly Hills Polo Club(R) brand in the United States, Puerto
Rico and Europe. The Company also offered collections of jeanswear and
sportswear for young men and boys under the BOSS brand in the United States
and Puerto Rico. In the fourth quarter of 2000, the Company terminated the
licensing agreement for use of the BOSS trademark and will discontinue the
manufacture and sale of this apparel. (See Note 8). The Company also marketed
women's pants and jeans under various other Company-owned brand names and
under third-party private labels. In the fourth quarter of 2000, the Company
decided that it intended to discontinue production of the women's
Company-owned and private label lines. In 1999, the Company began a focused
line of sportswear under its new Urban Expedition (UBX) brand in the United
States and Europe. Sales of this sportswear were insignificant in 2000.
RISKS AND UNCERTAINTIES
The apparel industry is highly competitive. The Company competes
with many companies, including larger, well capitalized companies which have
sought to increase market share through massive consumer advertising and
price reductions. The Company continues to experience increased competition
from many established and new competitors at both the department store and
specialty store channels of distribution. The Company continues to redesign
its jeanswear and sportswear lines in an effort to be competitive and
compatible with changing consumer tastes. Also, the Company has developed and
implemented new marketing initiatives to promote each of its brands,
including "shop-in-shops" for its Girbaud brand. A risk to the Company is
that such a strategy may lead to continued pressure on profit margins. In the
past several years, many of the Company's competitors have switched much of
their apparel manufacturing from the United States to foreign locations such
as Mexico, the Dominican Republic and throughout Asia. As competitors lower
production costs, it gives them greater flexibility to lower prices. Over the
last several years, the Company also switched its production to contractors
outside the United States to reduce costs. In 2000, the Company closed its
last manufacturing facility in the United States and decided it intended to
dramatically reduce the use of independent contractor's facilities in Mexico.
In 2001, the Company will begin importing most of its inventory as finished
goods from contractors in Asia. This shift in purchasing will require the
Company to estimate sales and issue purchase orders for inventory well in
advance of receiving firm orders from its customers. A risk to the Company is
that its estimates may differ from actual orders. If this happens, the
Company may miss sales because it did not order enough, or it may have to
sell excess inventory at reduced prices.
The Company faces other risks inherent in the apparel industry. These
risks include changes in fashion trends and related consumer acceptance and the
continuing consolidation in the retail segment of the apparel industry. The
Company's ability, or inability, to manage these risk factors could influence
future financial and operating results.
38
USE OF ESTIMATES
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make certain estimates and
assumptions, particularly regarding valuation of accounts receivable and
inventory, recognition of liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements. Actual results could differ
from those estimates.
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially expose the Company to
concentrations of credit risk consist primarily of trade accounts receivable.
The Company's customer base is not concentrated in any specific geographic
region, but is concentrated in the retail industry. For the years ended December
31, 1998, 1999 and 2000 sales to one customer were $29,840,195, $12,012,202 and
$5,528,436. These amounts constitute 26.2%, 14.2% and 5.7% of total sales,
respectively. The Company establishes an allowance for doubtful accounts based
upon factors surrounding the credit risk of specific customers, historical
trends and other information. The Company's actual credit losses as a percentage
of net sales were 1.3%, 2.0% and 1.0% for the years ended December 31, 1998,
1999 and 2000, respectively.
The Company is also subject to concentrations of credit risk with
respect to its cash and cash equivalents, which it minimizes by placing these
funds with high-quality institutions. The Company is exposed to credit losses
in the event of nonperformance by the counterparties to letter of credit
agreements, but it does not expect any financial institutions to fail to meet
their obligation given their high credit rating.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is
determined by the first-in, first-out (FIFO) method.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Depreciation is
computed over the estimated useful lives of the assets by both straight-line and
accelerated methods. Leasehold improvements are amortized using the
straight-line method over the life of the lease.
GOODWILL
The Company has recorded goodwill based on the excess of purchase
price over net assets acquired. The Company analyzes the operating income of
the women's Company-owned and private label lines in relation to the goodwill
amortization on a quarterly basis for evidence of impairment. During the year
ended December 31, 1998, management determined that the reduction in sales
had significantly impacted the operating income of the women's Company-owned
and private label lines and that an impairment of the goodwill associated
with the lines occurred. In response, for the year ended December 31, 1998
management recorded a write down of $435,000 and reduced the life of the
goodwill from 40 years to 20 years. Effective October 1, 1998, the remaining
goodwill was being amortized over 63 months. In the fourth quarter of 2000,
the Company decided that it intended to discontinue production of the women's
Company-owned and private label lines. Accordingly, management determined the
goodwill associated with these lines had been impaired and recorded a write
down of $743,590 in the quarter ended December 31, 2000.
TRADEMARK AND LICENSES
Included in trademark and licenses is the cost of certain licenses
which allow the Company to manufacture and market certain branded apparel. The
Company capitalized the cost of obtaining the trademark and licenses, with the
cost being amortized on a straight-line basis over the initial term of the
trademark or license. The Company accrues royalty expense related to the
licenses at the greater of the specified percentage of sales or the minimum
guaranteed royalty set forth in the license agreements.
39
ASSET IMPAIRMENT
The Company periodically evaluates the carrying value of long-lived
assets when events and circumstances warrant such a review. The carrying value
of a long-lived asset is considered impaired when the anticipated undiscounted
cash flow from such asset is separately identifiable and is less than the
carrying value. In that event, a loss is recognized based on the amount by which
the carrying value exceeds the fair market value of the long-lived asset. Fair
market value is determined primarily using the anticipated cash flows discounted
at a rate commensurate with the risk involved.
REVENUE RECOGNITION
Sales are recognized upon shipment of products. Allowances for
estimated returns are provided when sales are recorded.
ADVERTISING COSTS
Advertising costs, included in selling expenses, are expensed as
incurred and were $5,676,799, $2,796,430 and $1,993,754 for the years ended
December 31, 1998, 1999 and 2000, respectively.
CASH EQUIVALENTS
For purposes of the statements of cash flows, all temporary investments
purchased with a maturity of three months or less are considered to be cash
equivalents.
INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS
109"). Under SFAS 109, deferred taxes are determined using the liability method
which requires the recognition of deferred tax assets and liabilities based on
differences between financial statement and the income tax basis using presently
enacted tax rates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Financial instruments of the Company include long-term debt. Based upon
current borrowing rates available to the Company, estimated fair values of these
financial instruments approximate their recorded amounts.
EARNINGS PER SHARE
Earnings per share is based on the weighted average number of shares of
common stock and dilutive common stock equivalents outstanding. Basic earnings
per share includes no dilution and is computed by dividing income available to
common shareholders by the weighted average number of common shares outstanding
for the period. Diluted earnings per share reflects the potential dilution of
securities that could share in the earnings of an entity. Basic and diluted
earnings per share are the same during 1998, 1999 and 2000 because the impact of
dilutive securities is anti-dilutive. There were outstanding employee stock
options of 346,000, 996,250 and 1,020,250 at December 31, 1998, 1999 and 2000,
respectively. These stock options were excluded from the computation of earnings
per share for their inclusion would have been anti-dilutive.
COMPREHENSIVE INCOME
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" ("SFAS 130"), establishes standards for reporting and
display of comprehensive income, its components and accumulated balances.
Comprehensive income is defined to include all changes in equity except those
resulting from investments by owners and distributions to owners. Among other
disclosures, SFAS 130 requires that all items that are required to be recognized
under current accounting standards as components of comprehensive income be
reported in a financial statement that is
40
displayed with the same prominence as other financial statements. The Company
adopted SFAS 130 during the first quarter of 1998 and has no items of
comprehensive income to report.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments" ("SFAS 133"). SFAS 133 establishes accounting and reporting
standards for derivative instruments and for hedging activities. SFAS 133
requires that an entity recognize all derivatives as either assets or
liabilities and measure those instruments at fair market value. Under certain
circumstances, a portion of the derivative's gain or loss is initially reported
as a component of other comprehensive income and subsequently reclassified into
income when the transaction affects earnings. For a derivative not designated as
a hedging instrument, the gain or loss is recognized in income in the period of
change. SFAS 133 is effective for fiscal quarters of years beginning after June
15, 2000 and requires application prospectively. Presently, the Company does not
use derivative instruments either in hedging activities or as investments.
Accordingly, the adoption of SFAS 133 had no impact on the financial position or
results of operations.
In March 2000, the FASB issued interpretation No. 44 ("FIN 44"),
"Accounting for Certain Transactions Involving Stock Compensation, an
Interpretation of APB Opinion No. 25". FIN 44 clarifies the application of APB
Opinion No. 25 for (a) the definition of employee for purposes of applying APB
Opinion No. 25, (b) the criteria for determining whether a plan qualifies as a
noncompensatory plan, (c) the accounting consequences of various modifications
to the previously fixed stock option or award, and (d) the accounting for an
exchange of stock compensation awards in a business combination. FIN 44 is
effective July 2, 2000 but certain conclusions cover specific events that occur
after either December 15, 1998 or January 12, 2000. The adoption of FIN 44 did
not have an affect on the Company's financial statements.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 which summarizes certain of the SEC staff's
views in applying generally accepted accounting principles to revenue
recognition in financial statements. The Company adopted Staff Accounting
Bulletin No. 101 effective October 1, 2000. The adoption of this guidance did
not have a material impact on the Company's results of operations or financial
position, however, the guidance may impact the way in which the Company will
account for future transactions.
41
I.C. ISAACS & COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. INVENTORIES
Inventories consist of the following:
DECEMBER 31,
------------------------------------
1999 2000
----------------- -----------------
Raw materials $ 1,876,222 $ 2,139,305
Work-in-process 1,009,124 534,867
Finished goods 15,315,977 11,633,167
----------------- -----------------
$ 18,201,323 $ 14,307,339
================= =================
2. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
DECEMBER 31, ESTIMATED
-------------------------------------- USEFUL
1999 2000 LIVES
----------------- ----------------- ---------
Land $ 714,304 $ 714,304
Buildings and improvements 4,141,434 4,144,261 18 years
Machinery, equipment and fixtures 8,587,328 7,142,227 5-7 years
Other 1,581,596 1,563,678 various
----------------- -----------------
15,024,662 13,564,470
Less accumulated depreciation and amortization 11,720,150 10,407,503
----------------- -----------------
$ 3,304,512 $ 3,156,967
================= =================
3. LONG-TERM DEBT
Long-term debt consists of the following:
DECEMBER 31,
-----------------------------------------
1999 2000
------------------ -------------------
Revolving line of credit (a) $ 3,644,470 $ 7,613,109
Notes payable (b) -- 7,200,000
Capital lease obligations 6,258 --
------------------ ----------------
Total 3,650,728 14,813,109
Less current maturities of long-term debt and revolving line of
credit 3,644,470 7,972,022
Less current maturities of capital lease obligations 6,258 --
------------------ ----------------
$ -- $ 6,841,087
================== ================
42
3. LONG-TERM DEBT (CONTINUED)
(a) The Company has an asset-based revolving line of credit (the
"Agreement") with Congress Financial Corporation ("Congress"). As of
December 31, 1999 and 2000 the Company had $3,644,470 and $7,613,109,
respectively, in outstanding borrowings under its revolving line of
credit. In March 1999, the Company amended the Agreement to extend the
term through December 31, 2000. In December 2000, the Agreement was
further amended to extend the term through March 31, 2001. In March
2001, the Agreement was further amended to extend the term through
December 31, 2002. The amended Agreement provides that the Company may
borrow up to 80.0% of net eligible accounts receivable and a portion of
inventory, as defined in the Agreement. Borrowings under the Agreement
may not exceed $25.0 million including outstanding letters of credit
which are limited to $6.0 million from May 1 to September 30 of each
year and $4.0 million for the remainder of each year, and bear
interest at the lender's prime rate of interest plus 1.0%
(effectively 10.5% at December 31, 2000). In connection with amending
the Agreement in March 1999, the Company paid Congress a financing
fee of $125,000, one half of which was paid at the time of closing and
the other half of which was paid on June 30, 2000. The financing fee
was amortized over 21 months, ending December 31, 2000. Outstanding
letters of credit approximated $2.1 million at December 31, 2000. Under
the terms of the Agreement, as amended, the Company is required to
maintain minimum levels of working capital and tangible net worth. The
Company was in violation of both of these covenants at December 31,
2000 and has obtained a waiver through March 31, 2001. In connection
with the amendment in March 2001, Congress reduced the minimum levels
of working capital and tangible net worth.
Average short-term borrowings and the related interest rates are as
follows:
YEAR ENDED DECEMBER 31,
------------------------------------
1999 2000
----------------- ----------------
Borrowings under revolving line of credit $ 3,644,470 $ 7,613,109
Weighted average interest rate 8.35% 10.63%
Maximum month-end balance during year $ 7,066,667 $15,356,405
Average month-end balance during year $ 4,529,241 $10,263,820
(b) Subsequent to December 31, 2000, the Company, in connection with the
termination of the BOSS license agreement, issued a $7,200,000 note
payable to Ambra, Inc. ("Ambra") as consideration for termination. The
note bears interest at 8.0% with interest and principal payable
quarterly through December 31, 2006. The note is subordinated to the
asset-based line of credit and is collateralized by a second
security interest in all of the Company's assets. The termination
expense and this note payable were recorded as of December 31, 2000
as further discussed in Note 8.
At December 31, 2000, long-term debt maturities are as follows:
2001 $ 7,972,022
2002 1,160,134
2003 1,257,135
2004 1,361,202
2005 1,476,059
Thereafter 1,586,557
----------------
$14,813,109
================
43
4. ACCRUED EXPENSES
Accrued expenses consist of the following:
DECEMBER 31,
------------------------------------
1999 2000
----------------- ----------------
Royalties $ 816,069 $ 1,267,150
Selling bonuses 84,000 408,551
Accrued professional fees 100,000 100,000
Severance benefits 525,004 335,318
Payroll tax withholdings 136,216 152,288
Customer credit balances 233,011 300,137
Property taxes 106,812 92,019
Compensation expense 7,263 17,763
Deferred fees 62,500 --
Machine rentals 105,942 --
Income taxes payable 110,000 --
Other 93,659 60,477
----------------- ----------------
$ 2,380,476 $ 2,733,703
================= ================
5. INCOME TAXES
The income tax provision (benefit) consists of the following:
YEAR ENDED DECEMBER 31,
---------------------------------------------------
1998 1999 2000
--------------- --------------- ---------------
Current
Federal $(128,000) $ -- $ --
State and local (26,000) 110,000 (48,000)
--------------- --------------- ---------------
(154,000) 110,000 (48,000)
Deferred -- -- --
Valuation allowance 1,505,000 -- --
--------------- --------------- ---------------
$1,351,000 $ 110,000 $ (48,000)
=============== =============== ===============
44
Deferred income taxes reflect the net effects of temporary
differences between the carrying amounts of assets and liabilities for
financial and income tax reporting purposes. The Company has net operating
loss carry forwards for income tax reporting purposes of approximately
$29,400,000, which will begin to expire in 2013. Significant items comprising
the Company's deferred tax assets and liabilities are as follows:
DECEMBER 31,
-----------------------------------
1999 2000
---------------- ----------------
Net operating loss carry forwards $ 10,223,000 $ 12,647,000
Termination of license agreement -- 3,096,000
Depreciation and amortization 332,000 443,000
Allowance for doubtful accounts 312,000 307,000
Inventory valuation 222,000 162,000
Accrued severance -- 69,000
Contribution carryovers -- 12,000
Other 16,000 21,000
---------------- ----------------
11,105,000 16,757,000
---------------- ----------------
Deferred royalty expense (457,000) (39,000)
---------------- ----------------
Valuation allowance (10,648,000) (16,718,000)
---------------- ----------------
Net deferred tax asset $ -- $ --
================ ================
A reconciliation between the statutory and effective tax rates is
as follows:
YEAR ENDED DECEMBER 31,
-------------------------------------------
1998 1999 2000
---------- ------------ ------------
Federal statutory rate (35.0)% (35.0)% (35.0)%
State and local taxes, net of federal benefit (5.0) (4.0) (4.0)
Nondeductible entertainment expense -- 0.5 1.0
Nondeductible goodwill amortization 3.5 2.7 13.7
Change in valuation allowance 10.0 -- --
Net operating losses not currently available 35.3 37.0 23.6
---------- ------------ ------------
8.8% 1.2% (0.7)%
========== ============ ============
6. STOCKHOLDERS' EQUITY
In June 1998, the Company's Board of Directors authorized a stock
repurchase program. Under this program the Company may repurchase up to
$4,000,000 of its common stock. From inception of the stock repurchase program
through December 31, 2000, the Company purchased 1,622,011 shares at a cost of
$3,295,162. In August 1999, the Company issued 500,000 shares of restricted
common stock out of its treasury shares, in connection with an amendment of the
Girbaud women's license agreement. In November 1999, the Company issued
2,000,000 shares of restricted Series A Redeemable Convertible Preferred Stock
having an estimated fair market value of $2,000,000 in connection with a
restructuring of the licensing arrangement for the use of the BOSS trademark.
Also in connection with such restructuring, in May 2000, the Company issued an
additional 1,300,000 restricted shares of the same series of redeemable
convertible preferred stock having an estimated fair market value of $1,300,000
and 666,667 shares of restricted common stock,
45
which had an aggregate value of $1,000,000 based on the market price of $1.50 at
the time the parties agreed to the transaction. The common stock issued in
connection with the licensing arrangement is subject to certain piggyback
registration rights and, beginning December 15, 2000, certain demand
registration rights.
Except as set forth below, the Series A Convertible Preferred Stock
issued by the Company in November 1999 and May 2000 have all of the same
preferences, rights and voting powers as the common stock. The preferred
stock is not entitled to vote on any matters to be voted upon by the
stockholders' of the Company, except that the holders of the preferred stock
are entitled to vote as a separate class, and the vote of a majority of the
outstanding shares of preferred stock is required for the creation of an
equity security senior to the preferred stock or the amendment of the
certificate of incorporation or by-laws of the Company to the detriment of
the holders of the preferred stock. The preferred stock has a liquidation
preference of $1.00 per share plus any declared but unpaid dividends on the
preferred stock. The Company may redeem, from March 15, 2001 to June 30,
2002, any or all of the preferred stock at a redemption price of $1.00 per
share. From July 1, 2002 to December 31, 2002, the Company may redeem any or
all of the preferred stock at the greater of a redemption price of $1.00 per
share or the current market price of the common stock. From January 1, 2003
to December 31, 2006, any unredeemed preferred stock may be converted, at the
sole discretion of Ambra, into either a promissory note from the Company or
an equal number of shares of common stock. If converted into a promissory
note, the note will bear interest at 12.0% and is payable in two consecutive
quarterly payments of interest, followed by four quarterly payments of
principal and interest. Ambra may redeem the preferred stock at any time upon
a default under the note issued in connection with the termination of the
BOSS license agreement (See Note 8). For financial reporting purposes, the
preferred stock will be considered redeemable preferred stock and will be
classified outside of stockholders' equity.
7. STOCK OPTIONS
In May 1997, the Company adopted the 1997 Omnibus Stock Plan (the
"Plan"). Under the 1997 Omnibus Stock Plan, the Company may grant qualified and
nonqualified stock options, stock appreciation rights, restricted stock or
performance awards, payable in cash or shares of common stock, to selected
employees. The Company has reserved 1,100,000 shares of common stock for
issuance under the 1997 Omnibus Stock Plan. Options vest at the end of the
second year and expire 10 years from the date of grant and upon termination of
employment.
The following table relates to options activity in 1998, 1999 and 2000
under the Plan:
WEIGHTED AVERAGE
NUMBER OF EXERCISE PRICE
SHARES PER SHARE
--------------- ------------------------
Options outstanding at December 31, 1997 -- $--
Granted 351,000 $2.125
Cancelled (5,000) $2.125
--------------- ------------------------
Options outstanding at December 31, 1998 346,000 $2.125
Granted 763,250 $1.358
Cancelled (113,000) $2.125
--------------- ------------------------
Options outstanding at December 31, 1999 996,250 $1.537
Granted 45,000 $1.320
Cancelled (21,000) $1.976
--------------- ------------------------
Options outstanding at December 31, 2000 1,020,250 $1.519
=============== ========================
Options exercisable at December 31, 2000 945,250 $1.468
=============== ========================
46
A summary of stock options outstanding and exercisable as of December 31, 2000
is as follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------------- --------------------------------
WEIGHTED WEIGHTED WEIGHTED
RANGE OF AVERAGE AVERAGE AVERAGE
EXERCISE NUMBER REMAINING EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING LIFE (YEARS) PRICE EXERCISABLE PRICE
-------- ----------- ------------ -------- ----------- --------
$1.06 to $2.125 1,020,250 7.83 $1.519 945,250 $1.468
====================== ============== ============== ============== =============== ==============
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock Based
Compensation" ("SFAS 123"), but applies the intrinsic value method set forth in
Accounting Principles Board Opinion No. 25. For stock options granted to
employees, the Company has estimated the fair value of each option granted using
the Black-Scholes option pricing model with the following assumptions: risk-free
interest rate of 5.01%, 6.08% and 6.70%, expected volatility of 40%, 90% and
65%, expected option life of 5.5, 4.5 and 2.0 years and no dividend payment
expected for 1998, 1999 and 2000, respectively. Using these assumptions, the
fair value of the stock options granted is $1.00, $0.84 and $0.51 for 1998, 1999
and 2000, respectively. There were no adjustments made in calculating the fair
value to account for vesting provisions or for non-transferability or risk of
forfeiture. The weighted average remaining life for options outstanding at
December 31, 2000 is 7.83 years. If the Company had elected to recognize
compensation expense based on the fair value at the grant dates, consistent with
the method prescribed by SFAS No. 123, net loss per share would have been
changed to the pro forma amount indicated below:
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------
1998 1999 2000
--------------------- -------------------- --------------------
Net loss:
As reported $(16,792,549) $(10,212,382) $(15,247,330)
Pro forma (17,108,549) (10,630,632) (15,654,757)
Basic and diluted loss per common share:
As reported $(2.15) $(1.47) $(2.00)
Pro forma (2.19) (1.53) (2.05)
--------------------- -------------------- --------------------
8. COMMITMENTS AND CONTINGENCIES
The Company rents real and personal property under leases expiring at
various dates through 2004. Certain of the leases stipulate payment of real
estate taxes and other occupancy expenses. Minimum annual rental commitments
under noncancellable operating leases in effect at December 31, 2000 are
summarized as follows:
COMPUTER &
TRUCKS & SHOWROOMS & OFFICE
MACHINERY OFFICE SPACE EQUIPMENT TOTAL
---------------- ---------------- ---------------- ----------------
2001 $ 51,960 $ 706,729 $ 148,065 $ 906,754
2002 27,095 391,888 135,370 554,353
2003 9,970 263,539 16,152 289,661
2004 -- -- 13,460 13,460
---------------- ---------------- ---------------- ----------------
$ 89,025 $ 1,362,156 $ 313,047 $ 1,764,228
================ ================ ================ ================
47
Total rent expense is as follows:
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1998 1999 2000
---------------- ---------------- ----------------
Minimum rentals $ 796,367 $ 512,421 $ 556,875
Other lease costs 750,274 820,135 594,234
---------------- ---------------- ----------------
$ 1,546,641 $ 1,332,556 $ 1,151,109
================ ================ ================
In November 1997, the Company, Ambra and Hugo Boss AG ("Hugo Boss")
executed certain agreements including an agreement whereby the Company borrowed
$11,250,000 from Ambra to finance the acquisition of certain BOSS(R) trademark
rights. This obligation was evidenced by a note scheduled to mature on December
31, 2007, which bore interest at 10% per annum, payable quarterly, with
principal payable in full upon maturity. As part of the same transaction, the
Company sold its foreign BOSS trademark rights and related assets to Ambra and
entered into a foreign rights manufacturing agreement (the "Foreign Rights
Agreement") with Ambra, which allowed the Company to manufacture apparel in
certain foreign countries for sale in the United States using the BOSS(R) brand
and image in exchange for an annual royalty payment. The Company retained
ownership of its domestic BOSS(R) trademark rights subject to a concurrent use
agreement with Hugo Boss (the "Concurrent Use Agreement").
On October 22, 1999, the Company, Ambra and Hugo Boss entered into
an agreement to restructure the licensing arrangement for the use of the BOSS
trademark. Pursuant to this agreement, the Company transferred to Ambra
substantially all of its rights in the marks containing the term "BOSS"
throughout the world and agreed to issue, on November 6, 1999, 2,000,000
shares of a newly designated Series A Convertible Preferred Stock having an
estimated fair market value of $2,000,000 in exchange for the cancellation of
the $11,250,000 note. In the same agreement, the Company, Ambra and Hugo Boss
agreed to terminate the Foreign Rights Agreement, the Concurrent Use
Agreement and an option on the part of Ambra to purchase the Company's
domestic BOSS trademark rights, which was originally entered into in November
1997. The Company, Ambra and Hugo Boss also agreed to enter into a license
agreement granting the Company rights to use various trademarks including the
word "BOSS" in the manufacture and domestic sale of specified types of
apparel. Except for the initial term and the minimum annual royalties, the
Company's rights under the new license agreement are substantially similar to
those it previously had. As consideration, together with the royalties
discussed below, for the new license agreement, the Company issued to Ambra,
in May, 2000, 1,300,000 shares of the same series of convertible preferred
stock having an estimated fair market value of $1,300,000 and 666,667 shares
of common stock, which had an aggregate value of $1,000,000 based on the
market price of $1.50 at the time the parties agreed to the transaction. The
license agreement extended through December 31, 2003, with renewal options,
at the option of the Company, through December 31, 2007.
In October 2000, the Board of Directors authorized the appropriate
officers of the Company to negotiate a termination of the license agreement for
the use of the BOSS trademark (the "License Agreement"). In March 2001, the
Company, Ambra and Hugo Boss executed an agreement to terminate the License
Agreement. Pursuant to the agreement, the Company issued to Ambra a note payable
in the amount of $7,200,000. In connection with the termination of the BOSS
license agreement, the Company recorded the note payable and wrote off the
remaining deferred royalty expense of $706,315 and other BOSS related assets of
$161,593 as a charge against earnings totaling $8,067,908 in the fourth quarter
of 2000. The note bears interest at 8.0% with interest and principal payable
quarterly through December 31, 2006. The Company intends to immediately cease
development and production of new BOSS collections and will have through October
31, 2001 to sell and or dispose of existing BOSS inventory. In connection with
this agreement, the $3,300,000 of Series A Convertible Preferred Stock held by
Ambra may be redeemed for cash by the Company through December 31,
2002; thereafter it may be converted into a promissory note from the Company or
common stock at the sole discretion of Ambra (See Note 6).
48
Total license fees on BOSS sportswear sales amounted to $3,746,315,
$2,910,013 and $3,240,000 for the years ended December 31, 1998, 1999 and 2000,
respectively.
The percentage of BOSS sportswear sales to total sales was 74.1%, 43.7%
and 11.3% for the years ended December 31, 1998, 1999 and 2000, respectively.
In November 1997, and as further amended in March 1998, November 1998
and June 2000, the Company entered into an exclusive license agreement with
Latitude Licensing Corp. to manufacture and market men's jeanswear, casual wear,
outerwear and active influenced sportswear under the Girbaud brand and certain
related trademarks in the United States, Puerto Rico, the U.S. Virgin Islands
and Canada. The initial term of the agreement extended through December 31,
1999. The agreement has been extended through December 31, 2002, upon which date
the Company will have the option to renew the agreement for an additional five
years. Under the agreement, the Company is required to make payments to the
licensor in an amount equal to 6.25% of net sales or regular licensed
merchandise and 3.0% of certain irregular and closeout licensed merchandise.
Payments are subject to guaranteed minimum annual royalties as follows:
2001 $2,500,000
2002 $3,000,000
Beginning with the first quarter of 1998, the Company became obligated
to pay the greater of actual royalties earned or the minimum guaranteed
royalties for that year. The Company is required to spend at least $500,000 in
advertising men's Girbaud(R) brand products in each year through the term of the
Girbaud(R) men's agreement.
In March 1998, the Company entered into an exclusive license agreement
with Latitude Licensing Corp. to manufacture and market women's jeanswear,
casual wear and active influenced sportswear under the Girbaud(R) brand and
certain related trademarks in the United States, Puerto Rico and the U.S. Virgin
Islands. The initial term of the agreement extended through December 31, 1999.
The agreement has been extended through December 31, 2002, upon which date the
Company will have the option to renew the agreement for an additional five
years. Under the agreement, the Company is required to make payments to the
licensor in an amount equal to 6.25% of net sales of regular licensed
merchandise and 3.0% of certain irregular and closeout licensed merchandise.
Payments are subject to guaranteed minimum annual royalties as follows:
2001 $1,000,000
2002 $1,500,000
Beginning with the first quarter of 1999, the Company was obligated to
pay the greater of actual royalties earned or the minimum guaranteed royalties
for that year. The Company is required to spend at least $400,000 in advertising
women's Girbaud(R) brand products in each year through the term of the
Girbaud(R) women's agreement. In addition, while the agreement is in effect the
Company is required to pay $190,000 per year to the licensor for advertising and
promotional expenditures related to the Girbaud(R) brand. In December 1998, the
Girbaud(R) women's license agreement was amended to provide that the Company
would spend an additional $1.8 million on sales and marketing in 1999 in
conjunction with a one year deferral of the requirement that the Company open a
Girbaud(R) retail store in New York City. In August 1999, the Company issued
500,000 shares of restricted common stock to Latitude Licensing Corp. in
connection with an amendment of the Girbaud(R) women's license agreement. The
market value of the shares issued, as of the date of issuance, was $750,000 and,
together with the initial license fee of $600,000, is being amortized over the
remaining life of the agreement. Under the amended license agreement, if the
Company has not signed a lease agreement for a Girbaud(R) retail store by July
31, 2002 it will become obligated to pay Latitude Licensing Corp. an additional
$500,000 in royalties.
Total license fees on Girbaud sportswear sales amounted to
$1,200,000, $2,356,669 and $4,328,764 for the years ended December 31, 1998,
1999 and 2000, respectively.
49
The percentage of Girbaud sportswear sales to total sales was 4.1%,
32.9% and 69.6% for the years ended December 31, 1998, 1999 and 2000,
respectively.
In January 2000, the Company entered into a global sourcing agreement
with G.I. Promotions to act as a non-exclusive sourcing agent to licensees of
the Marithe & Francois Girbaud trademark for the manufacture of Girbaud(R)
jeanswear and sportswear. The global sourcing agreement extends until December
31, 2003 and provides that the Company shall net a facilitation fee of 5.0% of
the total FOB pricing for each order shipped to licensees under this agreement.
Also in January 2000, the Company entered into a license agreement with Wurzburg
Holding S.A. ("Wurzburg"). The license has a term of three years and provides
that the Company shall pay Wurzburg a royalty of 1.0% of the total FOB pricing
for each order shipped to a licensee under the global sourcing agreement.
In May 2000, the Company entered into an exclusive distribution
agreement for Girbaud men's and women's jeanswear and sportswear products in
Canada. The Company will sell to Western Glove Works ("Distributor")
Girbaud products produced in Mexico or the United States at cost plus
12.0%, which is less than its normal profit margins on sales of comparable
products to the Company's retail customers. For products purchased by the
Distributor from overseas, the Distributor will pay a distributor's fee equal
to 6.75% of net sales to the Company. Under the agreement, the Distributor
will pay a royalty fee equal to 6.25% of net sales to the Company, which will
in turn pay the royalty to Latitude Licensing Corp. The initial term of the
agreement expires on December 31, 2001. The Distributor may renew the
agreement for six additional one-year terms. The minimum sales level for
calendar 2001 is $1,600,000 (Canadian Dollars), which results in a minimum
distribution fee payable to the Company of $48,000 (Canadian Dollars). There
were no minimum sales levels or distribution fees for calendar year 2000.
Since 1993, the Company has had an exclusive wholesale licensing
arrangement with BHPC Marketing, Inc. for the manufacture and promotion of
certain men's sportswear bearing the registered trademark Beverly Hills Polo
Club. The BHPC men's agreement has a three year term expiring December 31,
2001 with renewal options for a total of nine years. Under the men's agreement
the Company is required to make payments to the licensor in an amount equal to
5.0% of net invoiced sales of licensed products and to spend an amount equal to
1.0% of net invoiced sales of such merchandise in advertising for the licensed
products. Payments are subject to a guaranteed minimum annual royalty of
$586,000 in 2001.
In May 1998, the Company entered into a license agreement with BHPC
Marketing, Inc., to manufacture and market boys knitted and woven shirts, cotton
pants, jeanswear, shorts, swimwear and outerwear under the Beverly Hills Polo
Club brand in the United States and Puerto Rico. The initial term of the
agreement is three years, commencing January 1, 1999, with renewal options for a
total of nine years. Under the boy's agreement the Company was required to make
payments to the licensor in an amount equal to 5.0% of net sales in 1999 and is
subject to a guaranteed minimum annual royalty of $100,000 in 2001.
Total license fees on Beverly Hills Polo Club sportswear sales amounted
to $1,073,989, $803,281 and $774,546 for the years ended December 31, 1998, 1999
and 2000 respectively.
The percentage of Beverly Hills Polo Club sportswear sales to total
sales was 14.6%, 17.3% and 13.4% for the years ended December 31, 1998, 1999 and
2000, respectively.
On August 15, 1996, I.C. Isaacs Europe, S.L., a Spanish limited
corporation and wholly-owned subsidiary of the Company, entered into retail and
wholesale license agreements (collectively, the "International Agreements") for
use of the Beverly Hills Polo Club trademark in Europe. The International
Agreements, as amended, provide certain exclusive rights to use the Beverly
Hills Polo Club trademark for men's sportswear in all countries in Europe for
an initial term of three years ending December 31, 1999, renewable at the
Company's option, provided the Company is not in breach thereof at the time the
renewal notice is given, through five consecutive extensions ending December 31,
2007. This Agreement was amended July 31, 2000 to reduce certain royalty
payments and increased the amount the Company is required to spend in
advertising the BHPC line. For the period beginning January 1, 2000 and
ending June 30, 2000, no guaranteed minimum annual royalties or guaranteed net
shipment volumes applied; for the period beginning July 1, 2000 and ending
December 31, 2000, the royalty rate was 3.0% of wholesale sales of BHPC
products including purchases of
50
BHPC products by Beverly Hills Polo Club retail stores in Europe ("Wholesale
Purchases") and no guaranteed annual royalties applied; for the period beginning
January 1, 2001 and ending December 31, 2001, the royalty rate shall be 3.0% of
Wholesale Purchases, and the guaranteed annual royalty shall be $120,000; for
the period beginning January 1, 2002 and ending December 31, 2004, the royalty
rate shall be 3.0% of Wholesale Purchases, the guaranteed annual royalty shall
be $120,000 and the Company shall be subject to the guaranteed net shipment
volumes in effect immediately prior to the amendment dated March 1, 1999. For
the period beginning January 1, 2000 and ending December 31, 2001, the Company
is required to spend an amount equal to 4.0% of Wholesale Purchases in
advertising the BHPC line. During each of 2002, 2003 and 2004, the Company is
required to spend an amount equal to 4.0% of Wholesale Purchases in advertising
the BHPC line.
The Company is party to employment agreements with four executive
officers as well as a consulting agreement which provide for specified levels of
compensation and certain other benefits. The agreements also provide for
severance payments from the termination date through the expiration date under
certain circumstances.
In the second quarter of 1998, the Company closed its Newton,
Mississippi manufacturing facility. This closure resulted in a charge of $0.2
million against earnings in the first quarter of 1998. The production in this
facility, the majority of which was jeans, was transferred to third party
independent contractor facilities in Mexico. The actual expenses incurred were
not significantly different than the reserve provided by the Company in the
first quarter.
In November 1998, the Company announced that it intended to close its
Carthage, Mississippi manufacturing facility. This closure, which occurred in
the first quarter of 1999, resulted in a charge of $0.3 million against earnings
in the fourth quarter of 1998. The production in this facility, the majority of
which was ladies pants and jeans under the Company's private labels, was
transferred to the remaining Company-owned plant in Raleigh, Mississippi, as
well as to independent contractors in Mexico. The actual expenses incurred were
not significantly different than the reserve provided by the Company in the
fourth quarter of 1998.
In June 1999, the Company's President and Chief Operating Officer
resigned. As part of this action, the Company will pay a total of $700,000 over
the next two years. The Company also transferred a life insurance policy with a
cash surrender value of $50,000 to the former President and Chief Operating
Officer. Also in connection with this resignation, the Company purchased 84,211
shares of common stock of the Company held by this individual at the market
price of $1.19 per share, for a total of $100,000. This individual's options
vested immediately upon his resignation and are exercisable up to the tenth
anniversary of the grant date.
In the second quarter of 2000, the Company announced that it
intended to close its last company-owned manufacturing facility located in
Raleigh, Mississippi. This closure, which occurred in the third quarter of
2000, resulted in a charge against earnings of $0.2 million in the second
quarter. The production in this facility was transferred to third party
independent contractor facilities in Mexico and Asia. The actual expenses
incurred were not significantly different than the reserve provided by the
Company in the second quarter of 2000.
In the fourth quarter of 2000 the Company decided it intended to
dramatically reduce the use of using independent contractors' facilities in
Mexico. This decision resulted in the termination of certain employees who
will be paid severance in the first and second quarters of 2001. This
severance resulted in a charge against earnings of $0.2 million in the fourth
quarter of 2000.
The Company and certain of its current and former officers and
directors have been named as defendants in three putative class actions filed in
United States District Court for the District of Maryland. The first of the
actions was filed on November 10, 1999 by Leo Bial and Robert W. Hampton. The
three actions, which have been consolidated with Mr. Bial as the first-named
plaintiff, purport to have been brought on behalf of all persons (other than the
defendants and their affiliates) who purchased the Company's stock between
December 17, 1997 and November 11, 1998. The plaintiffs alleged that the
registration statement and prospectus used in connection with the Company's
initial public offering, completed in December 1997, contained materially false
and misleading statements, which artificially inflated the price of the
Company's stock during the class period. Specifically, the complaints allege
violations of Sections 11, 12(a)(2) and 15 of the Securities Act of 1933. The
plaintiffs seek rescission, damages, costs and expenses, including attorneys'
fees and
51
experts' fees, and such other relief as may be just and proper. The Company
believes that the plaintiffs' allegations are without merit and intends to
defend the cases vigorously.
9. RETIREMENT PLAN
The Company sponsors a defined benefit pension plan that covers
substantially all employees with more than one year of service. The Company's
policy is to fund pension costs accrued. Contributions to the plan reflect
benefits attributed to employees' service to date, as well as service expected
to be earned in the future. The benefits are based on the number of years of
service and the employee's compensation during the three consecutive complete
years of service prior to or including the year of termination of employment.
Plan assets consist primarily of common stocks, fixed income securities and
cash. The latest available actuarial valuation is as of December 31, 2000.
Pension expense for 1998, 1999 and 2000 was approximately $616,000,
$390,000 and $409,000 respectively, and includes the following components:
YEARS ENDED DECEMBER 31,
-------------------------------------------------------
1998 1999 2000
---------------- ---------------- ----------------
Service cost of current period $ 267,000 $ 207,000 $ 148,000
Interest on the above service cost 20,000 15,000 11,000
---------------- ---------------- ----------------
287,000 222,000 159,000
Interest on the projected benefit obligation 712,000 609,000 541,000
Expected return on plan assets (630,000) (646,000) (577,000)
Amortization of prior service cost 42,000 42,000 42,000
Amortization of transition amount 31,000 31,000 31,000
Amortization of loss 174,000 132,000 213,000
---------------- ---------------- ----------------
Pension cost $ 616,000 $ 390,000 $ 409,000
================ ================ ================
The following table sets forth the Plan's funded status and amounts recognized
at December 31, 1998, 1999 and 2000:
YEARS ENDED DECEMBER 31,
--------------------------------------------------------
1998 1999 2000
---------------- ---------------- ----------------
Vested benefits $ 8,653,000 $ 7,819,000 $ 6,323,000
Nonvested benefits 103,000 110,000 116,000
---------------- ---------------- ----------------
Accumulated benefit obligation 8,756,000 7,929,000 6,439,000
Effect of anticipated future compensation levels and other events 1,655,000 963,000 707,000
---------------- ---------------- ----------------
Projected benefit obligation 10,411,000 8,892,000 7,146,000
---------------- ---------------- ----------------
Fair value of assets held in the plan 9,245,000 9,260,000 7,297,000
---------------- ---------------- ----------------
(Excess)/deficit of projected benefit obligation over plan assets (1,166,000) 368,000 151,000
Unrecognized net loss from past experience different from that assumed 2,519,000 1,868,000 2,569,000
Unrecognized prior service cost 299,000 257,000 154,000
Unamortized liability at transition 62,000 31,000 --
---------------- ---------------- ----------------
Net prepaid periodic pension cost $ 1,714,000 $ 2,524,000 $ 2,874,000
================ ================ ================
52
With respect to the above table, the weighted average discount rate
used to measure the projected benefit obligation was 7.5% for 1998, 1999 and
2000; the rate of increase in future compensation levels is 3%; and the expected
long-term rate of return on assets is 8%. The net prepaid periodic pension cost
is included in other assets in the accompanying consolidated balance sheets.
10. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for interest amounted to $1,689,005,
$1,804,098 and $1,093,284 for 1998, 1999 and 2000, respectively. Cash paid for
income taxes was $1,799,450 in 1998.
Non-cash effect of restructuring BOSS trademark and licensing
arrangement:
1999 2000
------------------ ------------------
Transfer of BOSS(R) trademark $9,093,750 --
Exchange of note payable $11,250,000 --
Issuance of redeemable preferred stock $2,000,000 $1,300,000
Liability to issue preferred and common stock $2,300,000 --
Reduction of accrued royalties $996,000 --
Issuance of treasury stock in connection with an amendment of the Girbaud women's
license agreement
$750,000 --
Issuance of common stock in settlement of BOSS liability -- $1,000,000
11. QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly financial data for 2000 and 1999 is as follows:
Quarter
- ----------------------------------------------------------------------------------------------------------------------------
2000 First Second Third Fourth
- ------------------------------------------------------------------ ------------------ ------------------- ------------------
Net sales $ 24,676,050 $ 23,602,928 $ 31,873,854 $ 17,100,737
Gross profit 8,270,502 6,020,781 10,790,956 4,010,105
Net income (loss) 117,383 (2,822,351) 1,413,442 (13,955,804)
Basic and diluted earnings (loss) per share 0.02 (0.37) 0.18 (1.77)
================================================================== ================== =================== ==================
Quarter
- --------------------------------------------------------------------------------------------------------------------------------
1999 First Second Third Fourth
- ------------------------------------------------------------------ ------------------ ------------------- ------------------
Net sales $ 22,527,838 $ 20,756,858 $ 24,884,949 $ 16,355,727
Gross profit 6,668,429 6,108,381 7,885,468 2,168,972
Net (loss) (2,852,340) (2,192,156) (548,198) (4,619,688)
Basic and diluted (loss) per share (0.42) (0.32) (0.08) (0.66)
=================================================================== ================== =================== ==================
(1) Earnings per share calculations for each of the quarters are based on the
weighted average shares outstanding for each period. The sum of the quarters may
not necessarily be equal to the full year earnings per share amounts.
53
During the fourth quarter of 2000, the Company began negotiations to
terminate the BOSS license agreement and recorded a charge against earnings
of $8,067,908, which had the effect of increasing the net loss by $8,067,908
or $1.06 per share. During the fourth quarter ended December 31, 1999, the
Company increased the inventory valuation reserve by $1,000,000, which had
the effect of increasing the net loss by $1,000,000 or $0.14 per share.
54
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
- ----------- ------------------------------------------------------------
*3.01 Amended and Restated Certificate of Incorporation
*3.02 Amended and Restated By-Laws
TRIANGLE
TRIANGLE
TRIANGLE 3.03 Certificate of Designation dated November 5, 1999.
3.04 Certificate of Amendment to Certificate of Designation dated
March 15, 2001
*4.01 Specimen Common Stock Certificate
*10.01(a) Form of Amended and Restated Shareholders' Agreement
*10.01(b) Form of Amendment No. 1 to Amended and Restated
Shareholders' Agreement
*10.02 Employment Agreement dated as of May 15, 1997, between the
Registrant and Robert J. Arnot
*10.03 Employment Agreement dated as of May 15, 1997, between
Registrant and Gerald W. Lear
*10.04 Employment Agreement dated as of May 15, 1997 between
Registrant and Gary B. Brashers
*10.05 Employment Agreement dated as of May 15, 1997, between the
Registrant and Eugene C. Wielepski
*10.06 Employment Agreement dated as of May 15, 1997, between the
Registrant and Thomas Ormandy
*10.07 1997 Omnibus Stock Plan
*10.08(a) Accounts Financing Agreement dated June 16, 1992
*10.08(b) Covenant Supplement to Accounts Financing Agreement dated
June 16, 1992
*10.08(c) Inventory and Equipment Security Agreement Supplement to
Accounts Financing Agreement dated June 16, 1992
*10.08(d) Trade Financing Agreement Supplement to Accounts Financing
Agreement (Security Agreement) dated June 16, 1992
*10.08(e) Amendment to Financing Agreements dated October 30, 1992
*10.08(f) Second Amendment to Financing Agreements dated January 4,
1993
*10.08(g) Third Amendment to Financing Agreements dated March 10, 1993
*10.08(h) Fourth Amendment to Financing Agreements dated May 1, 1993
*10.08(i) Fifth Amendment to Financing Agreements dated January 1,
1994
*10.08(j) Sixth Amendment to Financing Agreements dated September 1,
1993
*10.08(k) Seventh Amendment to Financing Agreements dated August, 1994
EXHIBIT NO. DESCRIPTION
- ----------- ------------------------------------------------------------
*10.08(l) Eighth Amendment to Financing Agreements dated December 31,
1994
*10.08(m) Ninth Amendment to Financing Agreements dated April, 1995
*10.08(n) Tenth Amendment to Financing Agreements dated June 23, 1995
*10.08(o) Eleventh Amendment to Financing Agreements dated January 1,
1996
*10.08(p) Twelfth Amendment to Financing Agreements dated June 25,
1996
*10.08(q) Thirteenth Amendment to Financing Agreements dated August,
1996
*10.08(r) Term Promissory Note dated June, 1996
*10.08(s) Trademark Collateral Assignment and Security Agreement dated
June 16, 1992
*10.09 Form of Indemnification Agreement
*10.10(a) BOSS Worldwide Rights Acquisition Agreement dated September
30, 1997
*10.10(b) Promissory Note dated November 5, 1997
*10.10(c) Guaranty of Promissory Note dated November 5, 1997
*10.10(d) Trademark Assignment dated November 5, 1997
*10.10(e) Trademark Assignment dated November 5, 1997
*10.10(f) Trademark Assignment dated November 5, 1997
*10.10(g) Trademark Assignment dated November 5, 1997
*10.10(h) Assignment and Assumption Agreement dated November 5, 1997
*10.10(i) Escrow Agreement dated November 5, 1997
*10.10(j) Collateral Assignment of Trademarks dated November 5, 1997
*10.10(k) Termination of License Agreement dated November 5, 1997
*10.10(l) Logo Typeface
*10.10(m) Certain Provisions in Settlement Agreement
*10.11(a) Foreign BOSS Rights Acquisition Agreement dated September
30, 1997
*10.11(b) Trademark Assignment dated November 5, 1997
*10.11(c) Assignment and Assumption Agreement dated November 5, 1997
+*10.11(d) Concurrent Use Agreement dated November 5, 1997
+*10.11(e) Foreign Manufacturing Rights Agreement dated November 5,
1997
*10.11(f) Option Agreement dated November 5, 1997
*10.11(g) Secured Limited Recourse Promissory Note dated November 5,
1997
EXHIBIT NO. DESCRIPTION
- ----------- ------------------------------------------------------------
*10.11(h) Note Assumption Agreement dated November 5, 1997
*10.11(i) Guaranty of Promissory Note dated November 5, 1997
*10.11(j) Agreement Regarding Consent to Release and Waiver of
Brookhurst Note Claims dated November 5, 1997
*10.11(k) Certain Provisions in Settlement Agreement
*10.11(l) Indemnification Agreement dated November 5, 1997
*10.12 Uniforms License Agreement dated November 5, 1997
*10.13 Trademark License Agreement Relating to BOSS Golf and Other
Marks dated November 5, 1997
*10.14 Beverly Hills Polo Club Exclusive Domestic License Agreement
dated December 14, 1995
*10.15 Beverly Hills Polo Club Amendment to Exclusive License
Agreement (Men's) dated June 3, 1997
*10.16 Beverly Hills Polo Club Exclusive Domestic License Agreement
dated June 1, 1993
*10.17 Beverly Hills Polo Club Assignment of Licenses (Women's)
dated August 31, 1993
*10.18 Beverly Hills Polo Club Amendment (Women's) dated September
1, 1993
*10.19 Beverly Hills Polo Club Amendment to Exclusive License
Agreement (Women's) dated June 3, 1997
*10.20 Beverly Hills Polo Club Amendment to Exclusive License
Agreement (Men's dated July 29, 1997
*10.21 Beverly Hills Polo Club International Exclusive License
Agreement (Wholesale) dated August 15, 1996
*10.22 Beverly Hills Polo Club Amendment to Exclusive License
Agreement (Wholesale) dated June 3, 1997
*10.23 Beverly Hills Polo Club International Exclusive License
Agreement (Retail) dated August 15, 1996
*10.24 Beverly Hills Polo Club Amendment to International Exclusive
License Agreement (Retail) dated June 3, 1997
*10.25 Beverly Hills Polo Club Amendment to Exclusive License
Agreement dated July 29, 1997
**10.26(a) Girbaud Trademark License and Technical Assistance Agreement
dated January 15, 1998
**10.26(b) Girbaud Trademark License and Technical Assistance Agreement
for Women's Collection dated March 4, 1998
**10.26(c) Cancellation Agreement dated March 4, 1998
*10.27(a) Defined Benefit Pension Plan
*10.27(b) First Amendment to Defined Benefit Pension Plan
**10.28 Beverly Hills Polo Club Letter Agreement dated March 18,
1998
EXHIBIT NO. DESCRIPTION
- ----------- ------------------------------------------------------------
**10.29 Beverly Hills Polo Club Letter Agreement dated February 27,
1998
**10.30 Beverly Hills Polo Club Letter Agreement dated February 27,
1998
***10.31 Beverly Hills Polo Club Exclusive Domestic License Agreement
(Boys) dated April 24, 1998
****10.32 Amendment No. 1 dated June 18, 1998 to Trademark License and
Technical Assistance Agreement for Women's Collections
dated January 15, 1998 by and between I.C. Isaacs & Co.,
L.P. and Latitude Licensing Corp.
****10.33 Fourteenth Amendment to Financing Agreements dated July 31,
1997
****10.34 Fifteenth Amendment to Financing Agreements dated May 1,
1998
*****10.35 Amendment by and between BHPC Marketing, Inc. and I.C.
Isaacs & Company, L.P. dated October 21, 1998 relating to
the Exclusive Domestic License Agreement dated December
14, 1995
*****10.36 Letter Agreement by and between BHPC Marketing, Inc. and
I.C. Isaacs & Company, L.P. dated October 21, 1998
relating to the Exclusive Domestic License Agreement for
Women's BHPC Sportswear dated June 1, 1993
TRIANGLE 10.37 Amended and Restated Omnibus Stock Plan
TRIANGLE 10.38 Amendment by and between BHPC Marketing, Inc. and I.C.
Isaacs Europe, S.L. dated November 12, 1998 relating to
the International Exclusive License Agreement (Wholesale)
dated August 15, 1996
TRIANGLE 10.39 Amendment by and between BHPC Marketing, Inc. and I.C.
Isaacs Europe, S.L. dated November 12, 1998 relating to
the International Exclusive License Agreement (Retail)
dated August 15, 1996
TRIANGLE ++10.40 Amendment No. 1 dated November 12, 1998 to Trademark License
and Technical Assistance Agreement for Men's Collections
dated January 15, 1998 by and between I.C. Isaacs & Co.,
L.P. and Latitude Licensing Corp.
TRIANGLE ++10.41 Amendment No. 2 dated November 12, 1998 to Trademark License
and Technical Assistance Agreement for Women's Collections
dated January 15, 1998 by and between I.C. Isaacs & Co.,
L.P. and Latitude Licensing Corp.
TRIANGLE 10.42 Executive Employment Agreement by and between I.C. Isaacs &
Company, Inc. and Daniel Gladstone dated January 21, 1999
*****10.43 Amendment No. 1 to Employment Agreement by and between I.C.
Isaacs & Company, Inc. and Robert J. Arnot dated August
27, 1998
*****10.44 Amendment No. 1 to Employment Agreement by and between I.C.
Isaacs & Company, Inc. and Gerald W. Lear dated August 27,
1998
*****10.45 Amendment No. 1 to Employment Agreement by and between I.C.
Isaacs & Company, Inc. and Eugene C. Wielepski dated
August 27, 1998
EXHIBIT NO. DESCRIPTION
- ----------- ------------------------------------------------------------
*****10.46 Amendment No. 1 to Employment Agreement by and between I.C.
Isaacs & Company, Inc. and Thomas Ormandy dated August 27,
1998
*****10.47 Consulting Agreement by and between I.C. Isaacs & Company
and Gary Brashers dated August 27, 1998
TRIANGLE 10.48 Amendment No. 2 to Employment Agreement by and between I.C.
Isaacs & Company, Inc. and Robert J. Arnot dated February
11, 1999
TRIANGLE 10.49 Amendment No. 2 to Employment Agreement by and between I.C.
Isaacs & Company, Inc. and Gerald W. Lear dated February
11, 1999
TRIANGLE 10.50 Amendment No. 2 to Employment Agreement by and between I.C.
Isaacs & Company, Inc. and Eugene C. Wielepski dated
February 11, 1999
TRIANGLE 10.51 Amendment No. 2 to Employment Agreement by and between I.C.
Isaacs & Company, Inc. and Thomas Ormandy dated February
11, 1999
TRIANGLE 10.52 Amendment No. 1 to Consulting Agreement by and between I.C.
Isaacs & Company and Gary Brashers dated February 11, 1999
TRIANGLE 10.53 Sixteenth Amendment to Financing Agreements dated March 26,
1999
TRIANGLE 10.54 Amendment by and between BHPC Marketing, Inc. dated March 1,
1999 relating to the International Exclusive License
Agreement (Wholesale) dated August 15, 1996
TRIANGLE 10.55 Amendment by and between BHPC Marketing, Inc. dated March 1,
1999 relating to the International Exclusive License
Agreement (Retail) dated August 15, 1996
TRIANGLE 10.56 Amendment No. 1 dated March 4, 1998 to Trademark License and
Technical Assistance Agreement for Men's Collections by
and between the Company and Latitude Licensing Corp.
TRIANGLE ++10.57 Amendment No. 3 dated December 23, 1998 to Trademark License
and Technical Assistance Agreement for Women's Collections
by and between the Company and Latitude Licensing Corp.
TRIANGLE
TRIANGLE.10.58 Severance and Redemption Agreement dated June 30, 1999 by
and between the Company and Gerald W. Lear.
TRIANGLE
TRIANGLE.10.59 Second Amended and Restated Shareholders' Agreement dated
June 30, 1999.
TRIANGLE
TRIANGLE.10.60 Amendment No. 4 to the Trademark License and Technical
Assistance Agreement Covering Women's Products dated
August 2, 1999.
TRIANGLE
TRIANGLE.10.61 Shareholders' Agreement dated August 9, 1999.
TRIANGLE
TRIANGLE
TRIANGLE.10.62 Agreement dated October 22, 1999 by and among I.C. Isaacs &
Company, Inc., I.C. Isaacs & Company L.P., Ambra Inc. and
Hugo Boss AG.
TRIANGLE
TRIANGLE
TRIANGLE.10.63 Restated and Amended License Rights Agreement dated October
22, 1999 by and among Ambra Inc., Hugo Boss AG and I.C.
Isaacs & Company L.P.
EXHIBIT NO. DESCRIPTION
- ----------- ------------------------------------------------------------
TRIANGLE
TRIANGLE
TRIANGLE.10.64 Shareholders' Agreement dated November 5, 1999 by and
between I.C. Isaacs & Company, Inc. and Ambra Inc.
TRIANGLE
TRIANGLE
TRIANGLE.10.65 Bill of Sale and Assignment of Trademark Rights dated
October 22, 1999 by and between I.C. Isaacs & Company L.P.
and Ambra Inc.
TRIANGLE
TRIANGLE
TRIANGLE.10.66 Assumption of Assumed Agreements dated October 22, 1999 by
and between I.C. Isaacs & Company L.P. and Ambra Inc.
TRIANGLE
TRIANGLE
TRIANGLE
TRIANGLE.10.67 Amendment to International Exclusive License Agreement dated
November 1, 1999 by and between I.C. Isaacs Europe, S.L.
and BHPC Marketing, Inc.
TRIANGLE
TRIANGLE
TRIANGLE
TRIANGLE.10.68 Amendment to International Exclusive License Agreements
dated September 1, 1999 by and between I.C. Isaacs Europe,
S.L. and BHPC Marketing, Inc.
TRIANGLE
TRIANGLE
TRIANGLE
TRIANGLE.10.69 Amendment No. 3 to Employment Agreement dated January 3,
1999 by and between I.C. Isaacs & Company L.P. and Robert
J. Arnot.
TRIANGLE
TRIANGLE
TRIANGLE
TRIANGLE.10.70 Amendment No. 3 to Employment Agreement dated January 3,
1999 by and between I.C. Isaacs & Company L.P. and Eugene
C. Wielepski.
TRIANGLE
TRIANGLE
TRIANGLE
TRIANGLE.10.71 Letter Agreement dated December 31, 1999 by and between I.C.
Isaacs & Company L.P. and G.I. Promotion.
TRIANGLE
TRIANGLE
TRIANGLE
TRIANGLE.10.72 License Agreement effective January 1, 2000 by and between
I.C. Isaacs & Company L.P. and Wurzburg Holding S.A.
TRIANGLE
TRIANGLE
TRIANGLE
TRIANGLE
TRIANGLE.10.73 Girbaud Distribution Agreement Canada dated as of May 15,
2000, between Western Glove Works and I.C Isaacs and
Company L.P.
TRIANGLE
TRIANGLE
TRIANGLE
TRIANGLE
TRIANGLE.10.74 Amendment No. 1 dated as of May 15, 2000, to Girbaud
Distribution Agreement Canada dated as of May 15, 2000,
between Western Glove Works and I.C. Isaacs and Company L.P.
TRIANGLE
TRIANGLE
TRIANGLE
TRIANGLE
TRIANGLE.10.75 Amendment No. 2 dated June 21, 2000, to Trademark License
and Technical Assistance Agreement Covering Men's Products
dated January 15, 1998, by and between Latitude Licensing
Corp. and I.C. Isaacs & Company L.P.
TRIANGLE
TRIANGLE
TRIANGLE
TRIANGLE
TRIANGLE.10.76 Amendment No. 5 dated June 21, 2000, to Trademark License
and Technical Assistance Agreement Covering Women's
Products dated January 15, 1998, by and between Latitude
Licensing Corp. and I.C. Isaacs & Company L.P.
TRIANGLE
TRIANGLE
TRIANGLE
TRIANGLE
TRIANGLE.10.77 Amendment by and between BHPC Marketing, Inc., and I.C
Isaacs Europe, S.L. dated July 31, 2000, relating to the
International Exclusive License Agreements (Wholesale and
Retail) dated August 15, 1996
TRIANGLE
TRIANGLE
TRIANGLE
TRIANGLE
TRIANGLE
TRIANGLE.10.78 Amendment No. 2, dated as of August 25, 2000, to Consulting
Agreement by and between I.C. Isaacs & Company, Inc. and
Gary Brashers.
TRIANGLE
TRIANGLE
TRIANGLE
TRIANGLE
TRIANGLE
TRIANGLE.10.79 Eighteenth Amendment to Financing Agreement, dated as of May
30, 2000.
TRIANGLE
TRIANGLE
TRIANGLE
TRIANGLE
TRIANGLE
TRIANGLE.10.80 Nineteenth Amendment to Financing Agreement, dated June 23,
2000.
EXHIBIT NO. DESCRIPTION
- ----------- ------------------------------------------------------------
TRIANGLE
TRIANGLE
TRIANGLE
TRIANGLE
TRIANGLE
TRIANGLE.10.81 Twentieth Amendment to Financing Agreement, dated as of
November 7, 2000.
TRIANGLE
TRIANGLE
TRIANGLE
TRIANGLE
TRIANGLE
TRIANGLE.10.82 Letter Agreement dated August 9, 2000, by and between I.C.
Isaacs & Company LP and Congress Financial Corporation
relating to Covenant Supplement to the Accounts Financing
Agreement.
10.83 License Rights Termination Agreement dated March 15, 2001 by
and between Ambra Inc., Hugo Boss AG, I.C. Isaacs &
Company L.P. and I.C. Isaacs & Company, Inc.
10.84 Subordinated Secured Promissory Note dated March 15, 2001
10.85 Security Agreement dated March 15, 2001 by and between I.C.
Isaacs & Company, Inc. and Ambra Inc.
10.86 Amendment No. 1 dated March 15, 2001 to Shareholders'
Agreement by and between I.C. Isaacs & Company, Inc. and
Ambra Inc.
10.87 Twenty-second Amendment to Financing Agreements dated March
15, 2001
*21.01 List of Subsidiaries
23.01 Consent of BDO Seidman, LLP
27.01 Financial Data Schedule
- ------------------------
* Previously filed with the Company's Registration Statement on Form S-1
(SEC File No. 333-37155).
** Previously filed with the Company's Annual Report on Form 10-K for the
Year Ended December 31, 1997 (SEC File No. 0-23379).
*** Previously filed with the Company's Quarterly Report on Form 10-Q for the
Quarter Ended March 31, 1998 (SEC File No. 0-23379).
**** Previously filed with the Company's Quarterly Report on Form 10-Q for the
Quarter Ended June 30, 1998 (SEC File No. 0-23379).
***** Previously filed with the Company's Quarterly Report on Form 10-Q for the
Quarter Ended September 30, 1998 (SEC File No. 0-23379).
******Previously filed with the Company's Current Report on Form 8-K dated
August 27, 1998 (SEC File No. 0-23379).
TRIANGLE Previously filed with the Company's Annual Report on Form 10-K for the
Year Ended December 31, 1998 (SEC File No. 0-23379).
TRIANGLE TRIANGLE Previously filed with the Company's Quarterly Report on Form
10-Q for the Quarter Ended June 30, 1999 (SEC File
No. 0-23379).
TRIANGLE TRIANGLE TRIANGLE Previously filed with the Company's Quarterly Report
on Form 10-Q for the Quarter Ended September 30, 1999
(SEC File No. 0-23379).
TRIANGLE TRIANGLE TRIANGLE TRIANGLE. Previously filed with the Company's Annual
Report on Form 10-K for the Year Ended
December 31, 1999 (SEC File No. 0-23379).
TRIANGLE TRIANGLE TRIANGLE TRIANGLE TRIANGLE. Previously filed with the
Company's Quarterly Report on
Form 10-Q for the Quarter Ended
June 30, 2000 (SEC File
No. 0-23379).
TRIANGLE TRIANGLE TRIANGLE TRIANGLE TRIANGLE TRIANGLE. Previously filed with the
Company's Quarterly
Report on Form 10-Q for
the Quarter Ended
September 30, 1999 (SEC
File No. 0-23379).
+ Certain portions of this exhibit have been omitted pursuant to an order
granting confidential treatment and have been filed separately with the
Securities and Exchange Commission.
++ Certain portions of this exhibit have been omitted pursuant to a request for
an order granting confidential treatment and have been filed separately with
the Securities and Exchange Commission.