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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 COMMISSION FILE NO. 0-23379
DECEMBER 31, 1997
I.C. ISAACS & COMPANY, INC.
(Exact name of registrant as specified in charter)
DELAWARE 52-1377061
(State or other jurisdiction of (IRS employer
incorporation or organization) identification no.)
3840 BANK STREET, BALTIMORE, MARYLAND 21224-2522
(Address of principal executive office) (Zip code)
Registrant's telephone number, including area code: (410) 342-8200
Securities Registered Pursuant to Section 12(b) of the Act:
NONE
Securities Registered Pursuant to Section 12(g) of the Act:
Title of Class:
COMMON STOCK, $.001 PAR VALUE PER SHARE
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes _X_ No ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K [ ].
As of March 26, 1998, the aggregate market value of the outstanding shares
of the Registrant's Common Stock held by non-affiliates was approximately
$39,483,738 based on the average closing price of the Common Stock as reported
by the Nasdaq National Market on March 25, 1998. Determination of affiliate
status for this purpose is not a determination of affiliate status for any other
purpose.
As of March 26, 1998, 8,320,000 shares of Common Stock were outstanding.
DOCUMENT INCORPORATED BY REFERENCE
Specified portions of the definitive Proxy Statement for the 1998 Annual Meeting
of Stockholders of I.C. Isaacs & Company, Inc. are incorporated by reference
into Part III hereof.
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I.C. ISAACS & COMPANY, INC.
FORM 10-K
TABLE OF CONTENTS
PAGE
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PART I
ITEM 1. BUSINESS................................................................................ 1
ITEM 2. PROPERTIES.............................................................................. 19
ITEM 3. LEGAL PROCEEDINGS....................................................................... 20
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..................................... 20
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.................. 21
ITEM 6. SELECTED FINANCIAL DATA................................................................. 22
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS... 24
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA............................................. 32
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.... 32
PART III
*ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY......................................... 32
*ITEM 11. EXECUTIVE COMPENSATION.................................................................. 32
*ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.......................... 32
*ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.......................................... 32
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K........................ 32
SIGNATURES........................................................................................... 36
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* Incorporated by reference from the Registrant's definitive Proxy Statement
for the 1998 Annual Meeting of Stockholders to be held June 16, 1998. The
Proxy Statement will be filed not later than 120 days after the end of the
fiscal year covered by this Annual Report on Form 10-K.
"BOSS-Registered Trademark-," "Lord Isaacs-Registered Trademark-," "I. C.
Isaacs-Registered Trademark-," "Pizzazz-Registered Trademark-" and "I.G.
Design-Registered Trademark-" are trademarks of the Company. All other
trademarks or service marks, including "Girbaud-Registered Trademark-" and
"Marithe and Francois Girbaud-Registered Trademark-" (collectively, "Girbaud")
and "Beverly Hills Polo Club-Registered Trademark-" appearing in this Annual
Report on Form 10-K are the property of their respective owners and are not the
property of the Company.
IMPORTANT INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
THIS ANNUAL REPORT ON FORM 10-K CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE
MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED, AND SECTION
21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. THOSE STATEMENTS INCLUDE
STATEMENTS REGARDING THE INTENT, BELIEF OR CURRENT EXPECTATIONS OF I.C. ISAACS
AND ITS MANAGEMENT. FOR EXAMPLE, STATEMENTS REGARDING THE COMPANY'S ANTICIPATED
GROWTH STRATEGIES, EXPECTATIONS FOR 1998, THE ANTICIPATED COSTS SAVINGS IN
CONNECTION WITH THE CLOSING OF THE NEWTON, MISSISSIPPI FACILITY AND THE
ESTIMATED CHARGE TO FIRST QUARTER 1998 EARNINGS ARE FORWARD-LOOKING STATEMENTS
WHICH ARE SUBJECT TO A VARIETY OF RISKS AND UNCERTAINTIES, MANY OF WHICH ARE
BEYOND THE COMPANY'S CONTROL, WHICH COULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY FROM THOSE CONTEMPLATED IN SUCH FORWARD-LOOKING STATEMENTS, INCLUDING
IN PARTICULAR THE RISKS AND UNCERTAINTIES DESCRIBED UNDER "RISK FACTORS" IN THE
COMPANY'S PROSPECTUS WHICH INCLUDE, AMONG OTHER THINGS (I) CHANGES IN THE
MARKETPLACE FOR THE COMPANY'S PRODUCTS, INCLUDING CUSTOMER TASTES, (II) THE
INTRODUCTION OF NEW PRODUCTS OR PRICING CHANGES BY THE COMPANY'S COMPETITORS,
(III) CHANGES IN THE ECONOMY, AND (IV) TERMINATION OF ONE OR MORE OR ITS
AGREEMENTS FOR USE OF THE BOSS, BEVERLY HILLS POLO CLUB AND GIRBAUD BRAND NAMES
AND IMAGES IN THE MANUFACTURE AND SALE OF THE COMPANY'S PRODUCTS. EXISTING AND
PROSPECTIVE INVESTORS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THESE
FORWARD-LOOKING STATEMENTS, WHICH SPEAK ONLY AS OF THE DATE HEREOF. THE COMPANY
UNDERTAKES NO OBLIGATION TO UPDATE OR REVISE THE INFORMATION CONTAINED IN THIS
ANNUAL REPORT ON FORM 10-K, WHETHER AS A RESULT OF NEW INFORMATION, FUTURE
EVENTS OR CIRCUMSTANCES OR OTHERWISE.
PART I
ITEM 1. BUSINESS
INTRODUCTION
I.C. Isaacs & Company, Inc. (the "Company") is a designer, manufacturer and
marketer of branded sportswear. Founded in 1913, the Company has assembled a
portfolio of brands that addresses distinct fashion segments resulting in a
diverse customer base. The Company offers full lines of sportswear for young
men, women and boys under the BOSS brand in the United States and Puerto Rico
and sportswear for men and women under the Beverly Hills Polo Club brand in the
United States, Puerto Rico and Europe. In February 1998, the Company began
offering collections of men's sportswear under the Girbaud brand in the United
States and Puerto Rico. The Company intends to begin marketing women's
sportswear under the Girbaud brand in the second quarter of 1998 for delivery
during the 1998 holiday season. Through a focused strategy of providing
fashionable, branded merchandise at value prices, the Company has emerged as a
significant fashion source for youthful and contemporary consumers who purchase
sportswear and outerwear through specialty and department stores. The Company
also offers women's sportswear under various other Company-owned brand names as
well as under third-party private labels.
The Company manufactures and markets certain sportswear under the BOSS brand
for sale at specified price points in the United States and Puerto Rico, subject
to a concurrent use agreement. The Company has positioned the BOSS line to
appeal to consumers who desire a fresh, urban, fashion-forward look. Through
creative and innovative marketing, the Company has created powerful brand appeal
for the BOSS line and has become an active influence in young men's fashion. The
BOSS collection has been expanded from an initial line of denim products to a
fully array of sportswear consisting of jeans, tee shirts, sweatshirts, shorts,
knit and woven shirts and outerwear, many of which are characterized by
innovative design, creative graphics and bold uses of color. The Company also
markets a juniors' sportswear line under the BOSS brand for young women, which
includes a full selection of denim products and active sportswear. Net sales of
BOSS sportswear accounted for 74.6% and 72.6% of the Company's net sales in 1997
and 1996, respectively.
The Company manufacturers and markets certain sportswear under the Beverly
Hills Polo Club brand in the United States, Puerto Rico and Europe under an
exclusive license. The Company targets men and women who desire updated
traditional sportswear at competitive prices. To reach a broader demographic
customer base, the Beverly Hills Polo Club collection combines contemporary
design details and innovative fabrics with classic American sportswear styling.
The Beverly Hills Polo Club collection consists primarily of cotton clothing,
including jeans, pants, shorts, knit and woven shirts and outerwear targeting
the active, image-conscious consumer. The Company's Beverly Hills Polo Club line
was introduced in the spring of 1994. Net sales of Beverly Hills Polo Club
sportswear accounted for 15.8% and 12.0% of the Company's net sales in 1997 and
1996, respectively.
In November 1997, the Company acquired an exclusive license to manufacture
and market certain men's sportswear under the Girbaud brand in the United States
and Puerto Rico. In March 1998, the Company acquired an exclusive license to
manufacture and market certain women's sportswear under the Girbaud brand in the
United States and Puerto Rico. The Girbaud brand is an internationally
recognized designer sportswear label with a distinct European influence. By
targeting men who desire contemporary, international fashion, the Girbaud brand
will enable the Company to address another consumer segment within its branded
product portfolio. The Company intends to reposition the Girbaud line with a
broader assortment of products, styles and fabrications reflecting a
contemporary European look. In February 1998, the Company began marketing a fall
collection of men's sportswear under the Girbaud brand including a broad array
of bottoms, tops and outerwear. The Company plans to introduce a women's
sportswear collection under the Girbaud brand in the second quarter of 1998 for
delivery during the 1998 holiday season.
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The Company also manufactures and markets women's sportswear under its own
"I.C. Isaacs," "Lord Isaacs" and "Pizzazz" brand names and under third-party
private labels. The Company intends to continue to manufacture and market this
sportswear for the foreseeable future.
COMPETITIVE STRENGTHS
In the late 1980's, management made a decision to change the Company's
marketing focus from a manufacturing-driven to a brand-driven strategy. As a
result, the Company believes it has developed distinct competitive strengths
which position it for continued success. The Company's key competitive strengths
include:
EMPHASIS ON BRAND IDENTITY. The Company believes that brand identity, as
well as the image and lifestyle that a brand conveys, are important factors that
influence retail purchasing decisions. The Company believes that the BOSS and
Beverly Hills Polo Club brands have developed strong name recognition and
consumer appeal. The Company has consistently positioned the BOSS line to be a
fashion-forward brand with an urban attitude. The word "boss" conveys images of
power and authority, and is commonly used by today's youth as an expression of
excellence. Similarly, the Company believes that the Beverly Hills Polo Club
brand name, together with the accompanying distinctive horse and rider logo,
connotes a "classic American" upscale image with which retail consumers easily
identify. In addition, Girbaud is an internationally recognized designer brand
and is being positioned to appeal to contemporary consumers who desire high
quality, European-influenced fashion. The combination of these brands enables
the Company to offer a broad continuum of designs and products that are
well-recognized by fashion-conscious consumers.
COMBINATION OF FASHION AND VALUE. The Company is able to provide consumers
with fashionable brand name sportswear at affordable prices. The BOSS and
Beverly Hills Polo Club product lines both consistently provide exciting,
fashion-forward products using fresh colors, striking graphic designs, unique
fabrics, unusual trimmings and elaborate embroidery. The Company offers a wide
array of traditional products such as jeans, tee shirts, polo shirts and
sweatshirts that are updated with creative design details and innovative
fabrics. The Company's manufacturing, sourcing and merchandising expertise
enables it to provide its customers with fashion, image-oriented products at
value prices. As a result, BOSS and Beverly Hills Polo Club products typically
sell at retail prices below those of many well known designer brands. The
Company anticipates that its Girbaud line of products will sell at retail prices
below those of many other internationally recognized designer brands.
CREATIVE AND INNOVATIVE MARKETING. The Company has built strong name
recognition and brand image for its BOSS and Beverly Hills Polo Club products
through a coordinated merchandising, advertising and promotion strategy. To
reach its target customers who are image conscious and influenced by fashion,
music and sports, the Company advertises its products using magazines such as
VIBE, SOURCE, SLAM, SPORTSWEAR INTERNATIONAL, GQ AND POV, television shows and
networks including Turner Network Television (TNT), Black Entertainment
Television (BET), MTV: Music Television, Univision, Telemundo and various
amateur and professional sporting events. The Company is also a sponsor of the
Chicago Bulls, New York Knicks, New Jersey Nets, Atlanta Hawks, Detroit Pistons
and Los Angeles Clippers professional basketball teams and promotes the image of
its BOSS and Beverly Hills Polo Club products by providing celebrities with its
branded clothing and featuring its products in television programs and movies.
The Company influences the presentation of those brands and products at the
retail level by providing in-store signage, video advertisements and the
"Shop-in-Shop" concept. The "Shop-in-Shop" concept involves the retailer
grouping of the Company's products in one designated area and complementing the
presentation of the Company's products with signage and fixturing to enhance the
visibility of the brand. The Company intends to market its Girbaud line of
products following a similar strategy.
FLEXIBLE MANUFACTURING AND SOURCING. The Company believes that its ability
to source products from its United States facilities and third party foreign and
domestic manufacturers provides it with significant manufacturing flexibility.
The Company presently operates three manufacturing facilities in the United
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States for the production of bottoms. See "ITEM 2. Properties." In addition, the
Company contracts for the manufacture of its products through third party
foreign and domestic manufacturers. Currently, the Company utilizes
approximately 50 factories in more than 10 countries including China, Hong Kong,
Korea, Mexico, the Philippines, Taiwan and the United States. See
"--Manufacturing and Product Sourcing." The Company achieves rapid delivery
capability by producing jeans in its own manufacturing facilities and tee shirts
at domestic contractors. In addition, the Company gains a significant cost
advantage by utilizing factories in Mexico and Asia for the manufacture of
innovative and labor intensive products that typically cannot be produced
competitively in the United States. The Company does not have long-term
contracts with any manufacturers, and most of the Company's manufacturers supply
the Company on a non-exclusive basis pursuant to purchase orders. This
combination of manufacturing and sourcing capabilities enhances the Company's
production flexibility and capacity while effectively enabling it to control the
timing, quality and pricing of its products.
GROWTH STRATEGY
The Company's growth strategy includes continued capitalization on its
competitive strengths and the implementation of specific strategies for
continued expansion. The Company's principal growth strategies are as follows:
BROADEN PRODUCT OFFERINGS. The Company believes it can effectively broaden
its product offerings through the expansion of products offered under existing
brands as well as the possible addition of new brands. As the BOSS brand has
developed, the Company has shifted its product mix from predominately bottoms to
a broader collection of sportswear, driven by tops and outerwear. This evolution
is consistent with many sportswear companies, which generally sell several tops
for each pair of bottoms. Currently, the Company sells approximately the same
number of units of tops as bottoms, but the Company believes this ratio could
increase to three to four tops for each pair of bottoms sold. The continued
evolution of the product mix provides significant growth opportunities for the
Company's tops segment. The Company is growing its BOSS line by adding new
product categories, such as polo shirts and swimwear, broadening its outerwear
collection and expanding its boys', juniors' and youth lines. Similarly, the
Beverly Hills Polo Club brand includes a number of product lines that are in the
early stages of market penetration, such as outerwear, and a number of potential
product line expansions, such as men's dress shirts. To further develop the
Beverly Hills Polo Club brand, product offerings within the Beverly Hills Polo
Club women's line are also being expanded, and the Company is reorganizing and
increasing its women's sales force. The recent addition of the Girbaud brand
adds a European-influenced designer sportswear brand to the Company's sportswear
lines. The Company intends to offer a full array of men's and women's bottoms,
knit and woven tops and outerwear under the Girbaud brand.
ENHANCE MARKETING PROGRAMS. While the Company believes that its current
marketing strategy is one of its primary competitive strengths, it intends to
continue its efforts to increase net sales by enhancing consumer recognition of
its brand names and images through expanded marketing efforts. The BOSS brand is
currently advertised through a variety of media, including television and print,
while the Beverly Hills Polo Club brand is primarily advertised though print
media. As the Company continues to grow, it plans to use its increased financial
resources to further support and expand the brand exposure for BOSS, Beverly
Hills Polo Club and Girbaud through increased television and print advertising,
and various forms of outdoor advertising such as billboards and signage on buses
and at bus stops. To further differentiate its products at the retail level, the
Company also plans to expand its point-of-sale advertising. Specifically, the
Company intends to build upon its existing programs to provide signage and
posters and to expand its presence in the stores by providing additional
permanently identified free-standing fixtures and presentation services. The
Company also plans to enhance the visibility of its products at the retail level
through the "Shop-in-Shop" concept. The Company believes an expanded
"Shop-in-Shop" program will further stimulate retailers to make longer term
commitments to the Company's products and will encourage each store to carry a
broader array of the Company's products each season.
3
EXPANDED CHANNELS OF DISTRIBUTION. As demand for its sportswear increases,
the Company believes that it can continue to expand and penetrate various
channels of distribution, primarily the department store channel. In recent
years, the Company has expanded its distribution channels beyond the specialty
stores and specialty store chains with its BOSS brand to begin significant
distribution to department store customers. As a result, J.C. Penney Company,
Inc. was the Company's largest customer in 1997 and 1996. Under the BOSS brand,
the Company is also selling to other major department stores including The May
Department Stores Company, Federated Department Stores, Inc. and Dayton Hudson
Corporation. Further penetration of these accounts with the BOSS and Beverly
Hills Polo Club product lines is a primary focus of the Company, and the
recently introduced "Shop-in-Shop" concept should help facilitate this
department store expansion. The Company intends to market the Girbaud line to
specialty stores, specialty store chains and department stores. In addition, the
Company will continue to increase the number of products distributed to
specialty stores and specialty store chains. The Company already sells to over
4,000 specialty stores and specialty store chains and believes that this broad
cross-section of active accounts distinguishes it from many of its competitors.
Utilizing its 44 sales representatives and in-house credit department, the
Company plans to expand the product categories that it sells to the specialty
store channel of distribution.
INCREASE EUROPEAN PRESENCE FOR BEVERLY HILLS POLO CLUB. The Company
believes that it is well positioned to capitalize on the acceptance of the
Beverly Hills Polo Club brand name by continuing to expand its European
sportswear distribution. The classic American sportswear look conveyed by the
Beverly Hills Polo Club line is popular with European youth, due in part to the
proliferation of American entertainment, including music, movies, television
programs and professional sports. The Company is expanding its wholesale and
retail channels of distribution in Europe to meet this increasing demand. The
Company currently has distributors in Belgium, Finland, France, Greece, Italy,
Luxembourg, the Netherlands, Norway, Portugal, Switzerland and the United
Kingdom. To meet the consumer demand for its Beverly Hills Polo Club sportswear,
the Company has been moving to expand its network of wholesale distributors in
Europe and is currently negotiating agreements to add distribution capabilities
in Austria and Germany. Each of the Company's distributors has an agreement with
the Company pursuant to which the distributor is the exclusive distributor of
specified products of the Company within a specified territory. In addition, the
Company has established two franchise stores in Spain, including a showcase
store in Madrid. Discussions are currently underway for several additional
franchise stores in Spain and elsewhere in Europe.
PRODUCTS
The Company's sportswear collections under the BOSS and Beverly Hills Polo
Club brands provide a broad range of product offerings for young men, women and
boys, including a variety of tops, bottoms and outerwear. In February 1998, the
Company began marketing a fall collection of men's sportswear under the Girbaud
brand, including a broad array of bottoms, tops and outerwear. The Company plans
to introduce a women's sportswear collection under the Girbaud brand in the
second quarter of 1998 for delivery during the 1998 holiday season. While these
brands reflect a distinct image and style, each is targeted to consumers who are
seeking high quality, fashionable products at competitive prices. The Company
also manufactures and markets women's sportswear under its own "I.C. Isaacs,"
"Lord Isaacs" and "Pizzazz" brand names as well as under third-party private
labels. Consistent with its focus on branded products, the Company discontinued
its manufacture of men's private label apparel in the fourth quarter
4
of 1996. The following table sets forth, for the periods indicated, the
Company's net sales categorized by brand and product category:
YEAR ENDED DECEMBER 31,
---------------------------------
1995 1996 1997
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(IN THOUSANDS)
MEN'S(1)
BOSS Bottoms............................................... $ 37,234 $ 44,667 $ 54,234
BOSS Tops.................................................. 15,882 29,284 48,094
BOSS Boys.................................................. 3,264 6,736 13,992
Men's BHPC................................................. 5,219 12,226 24,196
Men's Private Label........................................ 4,299 500 129
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Men's net sales.......................................... 65,898 93,413 140,645
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WOMEN'S(1)
BOSS Juniors'.............................................. 5,424 5,413 4,098
Women's BHPC............................................... 1,833 2,043 1,338
Women's Other(2)........................................... 20,116 17,786 15,364
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Women's net sales........................................ 27,373 25,242 20,800
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Total net sales........................................ $ 93,271 $ 118,655 $ 161,445
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(1) The net sales totals incorporate product returns allocated in proportion to
gross sales.
(2) Includes Company-owned brands and third-party private labels.
BOSS PRODUCTS
The BOSS brand is a full sportswear line characterized by innovative
fabrication, creative graphics and bold uses of color. BOSS products appeal to
young men, young women and boys, who want a fresh, fashion-forward look with an
urban attitude at a competitive price. As the line has expanded and matured, the
demographics of BOSS customers have expanded beyond their urban base to include
fashion-conscious young consumers across the United States. Over the past three
years, the Company has placed increased emphasis on expansion of the top's
segment, and it anticipates that this segment will continue to be the fastest
growing category of products in the BOSS collection.
BOTTOMS
The Company's BOSS products began as a line of high-quality jeans and other
denim casual wear. The bottoms line currently consists of a wide variety of
denim jeans in a broad array of colors, designs and styles together with
corduroy and twill pants. Many of the BOSS jeans feature elements such as unique
pocket treatments, innovative trim and embroidered logos. The Company maintains
its own washing facilities, which allow it to create a variety of washes for its
denim products. The Company identified an underserved niche in the young men's
market for fashion jeans at moderate price points as compared with many designer
jeans, which retail for $60 and up per pair. The estimated retail price for the
Company's jeans is between $35 and $50 per pair. In the spring of 1997, the
Company expanded its product offerings by introducing a swimwear collection.
Estimated retail prices for swimwear range from $30 to $40.
TOPS AND OUTERWEAR
The BOSS young men's line includes a variety of tops, tee shirts and
outerwear. The BOSS tops collection consists of a range of products including
cotton tee shirts, polo shirts, cotton pique shirts, novelty knit tops and
fleece sweatshirts. These products utilize unique combinations of textured
polyester fabrications, as well as a broad array of appliqued logos and
innovative graphics. The styling of many of the BOSS tops is influenced by
sports clothing and uniforms and conveys an energetic, youthful attitude. The
5
Company has expanded its outerwear line, which includes a variety of products
including nylon jackets and downfilled parkas. The estimated retail prices range
from $19 to $22 for tee shirts, $30 to $55 for tops and $50 to $100 for
outerwear products.
BOYS', YOUTH AND JUNIORS' (YOUNG WOMEN)
The Company complements its BOSS young men's line with BOSS boys' and youth
lines, which are targeted to appeal to boys ages 4 to 7 and youth ages 8 to 16.
The BOSS boys' and youth product lines are substantially similar to the young
men's line and include jeans, tee shirts, tops, sweatshirts and outerwear.
Because the boys' market is more price conscious, some of the styles use less
expensive fabrication and design detail. The boys' and youth lines typically
sell at retail prices approximately 10% to 20% below the young men's line.
The BOSS juniors' line is the female counterpart to the BOSS young men's
line and is targeted to appeal to fashion-conscious girls and women ages 16 to
25. The BOSS juniors' collection maintains its own identity as contemporary
sportswear with an urban attitude. The product line includes denim jeans, tee
shirts, skirts, tops and jackets. Many of these styles are characterized by
close-fitting designs utilizing textured fabrics and bold colors. The estimated
retail prices for the juniors' line range from $15 to $20 for tee shirts, $25 to
$50 for tops, $30 to $45 for jeans and $30 to $75 for outerwear.
BEVERLY HILLS POLO CLUB PRODUCTS
The Beverly Hills Polo Club sportswear products are positioned to be an
updated traditional sportswear brand. The products combine contemporary design
details and innovative fabric with classic American styling. With a broader
demographic appeal than the BOSS brand, Beverly Hills Polo Club products are
targeted to appeal to consumers 16 years and older. Today, the Beverly Hills
Polo Club name and accompanying horse and rider logo symbolize quality,
traditional sportswear at competitive prices.
TOPS AND OUTERWEAR
The Company has merchandised the Beverly Hills Polo Club men's line to place
more emphasis on tops, including a full line of tee shirts, polo shirts, rugby
shirts, denim shirts and sweatshirts made primarily in cotton fabrics such as
pique, jersey and jersey fleece. While classic in styling, the tops line is
distinguished by innovative use of design, embroidery and fabric detail. The
collections also include more contemporary styles and a broader array of novelty
fabrics as well as product offerings such as woven shirts and outerwear,
including jackets and downfilled parkas. In 1998, the Company intends to
introduce a new line of men's dress shirts. Estimated retail prices range from
$19 to $22 for tee shirts, $30 to $60 for tops and $60 to $120 for outerwear.
BOTTOMS
While the primary focus of the Beverly Hills Polo Club men's line has been
on tops, the collection also includes a full line of bottoms consisting of denim
jeans, twill pants and corduroy casual pants. While somewhat more conservative
in styling compared to the BOSS line, the Beverly Hills Polo Club bottoms line
combines classic styling with unique trim, embroidery and pocket treatments.
Estimated retail prices for jeans and casual pants range from $40 to $55 per
pair.
WOMEN'S
The Company's Beverly Hills Polo Club women's sportswear line has a focus
similar to that of the men's sportswear line. It targets active image-conscious
women 16 years and older and combines classic American styling with distinctive
design detail and fabrication. The product offerings include tee shirts, polo
shirts, denim shirts, jeans and casual pants. The collection also includes many
activewear items which utilize a variety of fabrics and graphic elements.
Estimated retail prices range from $18 to $20 for tee shirts, $30 to $60 for
tops and $40 to $55 for bottoms.
6
GIRBAUD PRODUCTS
The Girbaud brand is an internationally recognized designer sportswear
label. The Company's collection of Girbaud products will include a full line of
bottoms consisting of jeans and casual pants in a variety of fabrications
including denim, stretch denim, cotton twill and nylon. The Girbaud tops
collection will include cotton tee shirts, polo shirts, knit and woven tops,
sweaters and outerwear. Reflecting European design, each of these collections
will be characterized by innovative styling and fabrication and will be targeted
to consumers ages 16 to 40. In February 1998, the Company began marketing a fall
collection of men's sportswear under the Girbaud brand. Estimated retail prices
range from $20 to $25 for tee shirts, $50 to $75 for tops and bottoms, $60 to
$90 for sweaters and $80 to $200 for outerwear products. The Company plans to
introduce a women's sportswear collection under the Girbaud brand in the second
quarter of 1998 for delivery during the 1998 holiday season.
COMPANY-OWNED AND THIRD-PARTY PRIVATE LABEL PRODUCTS
The Company also produces sportswear for women under its own brands,
including "I.C. Isaacs," "Lord Isaacs" and "Pizzazz," as well as under
customers' private labels. These brands focus on pull-on elastic waist pants and
belted trousers in cotton, bleached and stonewashed denim, blended polyester and
rayon. These pants are designed to appeal to more mature women looking for basic
styling at value prices. The Company offers pants in a variety of fits including
missy, petite and large sizes. Color-coordinated tops and sweaters in cotton,
acrylic, blended polyester rayon and ramie cottons complete the mix. Estimated
retail prices range from $13 to $50 for bottoms and $20 to $60 for tops.
CUSTOMERS AND SALES
The Company's products are sold in over 4,000 specialty stores, specialty
store chains and department stores. The Company uses both sales representatives
and distributors for the sale of its products. Sales representatives includes
employees of the Company as well as independent contractors. Each of the
Company's distributors and non-employee sales representatives has an agreement
with the Company pursuant to which they serve as the exclusive distributor or
sales representative of specified products of the Company within a specified
territory. The Company does not have long-term contracts with any of its
customers. Instead, its customers purchase the Company's products pursuant to
purchase orders and are under no obligation to continue to purchase the
Company's products. The Company's BOSS products are sold throughout the United
States and Puerto Rico in over 1,500 specialty stores and specialty store
chains, such as Fine's and Miller's Outpost. The Company's newest level of
distribution is to department stores, and its single largest customer in 1997
was J.C. Penney Company, Inc., which accounted for 14.0% of net sales. No other
customer of the Company accounted for 10.0% or more of net sales in 1997. Other
department store customers include Federated Department Stores, Inc., The May
Department Stores Company and Dayton Hudson Corporation. The Company's BOSS
products are sold and marketed under the direction of its national sales office
headquartered in New York. In addition to executive selling based in New York
and Dallas, the Company has 18 commissioned sales representatives who work out
of regional showrooms throughout the United States and Puerto Rico. The Company
considers its professional sales force to be one of its major assets and one of
the principal reasons why it has been successful in establishing relationships
with department stores and thousands of specialty stores and specialty store
chains.
The Company's Beverly Hills Polo Club sportswear is sold in the United
States, Puerto Rico and Europe. Although the Company is only in its third year
of distribution of Beverly Hills Polo Club sportswear, the products are sold to
over 1,000 specialty stores, specialty store chains and department stores, such
as J.C. Penney Company, Inc. and Maurice's. The Company's Beverly Hills Polo
Club products are sold and marketed under the direction of its men's and women's
national sales offices in New York. In addition to executive selling based in
New York and Dallas, the Company has a sales force consisting of 14 sales
representatives for its line of men's sportswear and 11 sales representatives
for its line of women's sportswear.
7
The Company's Beverly Hills Polo Club sportswear has recently begun to be
sold throughout Europe through wholesale distributors, all of whom buy products
directly from the Company. The Company currently has wholesale distribution
arrangements with distributors in Belgium, Finland, France, Greece, Italy,
Luxembourg, the Netherlands, Norway, Portugal, Switzerland and the United
Kingdom and is negotiating agreements with distributors in Austria and Germany.
Under these arrangements, the distributors purchase goods from the Company's
Spanish subsidiary in United States dollars under irrevocable letters of credit
or by prepayment, thereby minimizing the Company's credit risk. In addition, the
Company has established three franchise stores in Spain, including a showcase
store in Madrid. Discussions are currently underway for several additional
franchise stores in Spain and elsewhere in Europe.
In February 1998, the Company began marketing a fall collection of men's
sportswear under the Girbaud brand. The Company plans to introduce a women's
sportswear collection under the Girbaud brand in the second quarter of 1998 for
delivery during the 1998 holiday season. The Company's Girbaud brand products
are sold and marketed under the direction of a newly created sales force to be
headquartered in New York.
The Company-owned branded products and third-party private label products
are sold under the direction of the women's sales headquarters in New York and
by 15 commissioned sales representatives throughout the United States. The
products are distributed to department stores such as Dayton Hudson Corporation,
Mercantile Stores Company, Inc. and Sears Roebuck and Co.; mass merchandisers
and discounters such as Hills Department Store Company and Ames Department
Stores, Inc.; catalogs such as National Wholesale Co., Inc. and Arizona Mail
Order Company, Inc., and approximately 1,500 specialty stores nationwide.
DESIGN AND MERCHANDISING
The Company's designers and merchandisers travel around the world to monitor
emerging fashion trends and search for styling inspiration and fabrics. These
sources, together with new styling and graphics developed by the Company's
designers, serve as the primary creative influences for the Company's product
lines. In addition, designers and merchandisers regularly meet with sales
management to gain additional market insight and further refine the products to
be consistent with the needs of each of the Company's markets. The Company's
in-house design and product development is carried out by merchandising
departments in New York. Many of the Company's products are developed using
computer-aided design equipment, which allows designers to view and easily
modify images of a new design. From 1994 to 1997, the Company's design staff
grew from 6 to 13 people. The Company currently has 18 people on the design
staff in New York City and it expects an increase to 22 people by the end of
1998. Design expenditures incurred were approximately $1.9 million for 1997. The
Company estimates that design expenditures will be approximately $2.2 million in
1998.
ADVERTISING AND MARKETING
The Company prides itself on its ability to efficiently utilize its
advertising budget. Although the Company has increased its expenditures on
advertising to approximately $3.9 million or 2.4% of net sales in 1997, this is
still a relatively modest amount as compared with some of its competitors. In
1996 and 1997, the Company's expenditures for advertising and marketing
activities totaled $2.5 million and $3.9 million, respectively. As the Company
continues to grow, it plans to use its increased financial resources to further
support and expand the brand exposure for each of its brands.
The Company aggressively communicates and reinforces the brand and image of
its BOSS and Beverly Hills Polo Club products through creative and innovative
advertising and marketing efforts. The Company's advertising and marketing
strategies are directed by its national sales offices and developed in
collaboration with its advertising agency. The Company's advertising strategy is
geared towards its youthful consumers whose lifestyles are influenced by music,
sports and fashion. The Company has been advertising the BOSS brand since 1992
and the Beverly Hills Polo Club brand since 1994, and its advertising
8
campaigns have evolved from trade magazines to a wide variety of media,
including billboards, television, fashion magazines and professional sports
endorsements.
Print advertisements for the BOSS brand appear regularly in VIBE, SOURCE,
SLAM AND SPORTSWEAR INTERNATIONAL magazines, while television advertisements
appear on various networks including Turner Network Television (TNT), Black
Entertainment Television (BET), MTV: Music Television, Univision, the Madison
Square Garden (MSG) Network and Telemundo. Advertisements for the BOSS brand
also appear on a variety of outdoor advertising media, including billboards and
bus stops. Print advertisements for the Beverly Hills Polo Club brand are
targeted to appeal to a broader demographic base and appear in magazines such as
GQ AND POV. Television advertisements for the Beverly Hills Polo Club brand have
appeared on the Fox Sports Network, TNT and MSG. The Company's products can also
be seen on some of today's most visible sports and music celebrities, whose
attitude and image are captured by the BOSS and Beverly Hills Polo Club brands.
In addition, the Company is a sponsor of selected professional basketball teams,
including the Chicago Bulls, New York Knicks, New Jersey Nets, Atlanta Hawks,
Detroit Pistons and Los Angeles Clippers.
Recognizing that point of sale advertising is highly effective, the Company
provides an array of in-store signage, fixtures and product videos for both BOSS
and Beverly Hills Polo Club products. In addition, through the "Shop-in-Shop"
concept, the Company seeks to enhance brand recognition and to differentiate its
products from other branded apparel by creating an environment that is
consistent with the image of its products. For example, J.C. Penney Company,
Inc. currently has approximately 250 stores using the "Shop-in-Shop" concept to
showcase BOSS young men's products and approximately 75 stores using the
"Shop-in-Shop" concept to showcase Beverly Hills Polo Club men's merchandise.
The Company plans to expand the "Shop-in-Shop" program to build longer term
commitments with retailers and enable retailers to carry a broader array of the
product lines each season.
The Company intends to advertise and market its Girbaud line of products
following a similar strategy including the use of a variety of print and
television advertisements as well as the use of the "Shop-in-Shop" concept.
MANUFACTURING AND PRODUCT SOURCING
GENERAL
The Company believes that its flexible manufacturing and sourcing
capabilities enable it to effectively control the timing, quality and pricing of
products while providing customers with increased value. The Company uses its
own facilities as well as both domestic and foreign contractors for the
production of its products. During 1997, approximately 15% of the Company's
purchases of raw materials, labor and finished goods for its apparel were made
in Mexico; approximately 30% were made in Asia; approximately 27% were made at
third-party facilities in the United States; and the balance was made at the
Company's facilities in the United States. Approximately 72% of the Company's
manufacturing and sourcing in 1997 was done by third parties, all through
arrangements with independent contractors. Each of the Company's independent
contractors and independent buying agents has an agreement with the Company
pursuant to which they perform manufacturing or purchasing services for the
Company on a non-exclusive basis. The Company evaluates its contractors
frequently and believes that there are a number of manufacturers capable of
producing products that meet the Company's quality standards. The Company
represents all or a significant portion of many of its contractors' production
and has the ability to terminate its arrangements with any of its contractors at
any time. The Company is applying a similar manufacturing and product sourcing
strategy with respect to its Girbaud line of products.
UNITED STATES AND MEXICO
The Company presently operates three manufacturing facilities in the United
States and currently utilizes seven contractors in the United States and three
in Mexico. The majority of the production in these facilities is of bottoms and
tee shirts. The Company produces approximately 50% of its bottoms (slacks,
jeans, shorts and skirts) in three Company-operated manufacturing facilities in
Mississippi, which combine
9
to employ approximately 720 people. The Company's facilities utilize a level of
automation that enables the Company to competitively price its products and
maintain the flexibility necessary to meet its customers' changing demands.
The Company intends to close its Newton, Mississippi, manufacturing plant
during the second quarter of 1998. The majority of the production in this
facility is of jeans. Some of this production will be transferred to third party
independent contractor facilities in Mexico where the Company currently has
jeans manufactured. The Company anticipates that a charge in the range of $0.2
million to $0.3 million will be made against earnings for the first quarter of
1998 as a result of closing the plant. The Company anticipates annual cost
savings in the range of $0.3 million to $0.6 million after the transfer of
production to Mexico as a result of lower labor and overhead costs.
The Company safeguards its manufacturing capacity by utilizing contractors
in both the United States and Mexico to produce the same product lines. The
Company has established ongoing relationships with all of these contractors but
is not bound by written agreements to continue to do business with any of them.
The Company also uses a variety of contractors in both the United States and
Mexico as needed for value added functions such as embroidery, screen printing
and laundering. Seasonal fluctuations in production requirements are
accommodated by adjusting contracted quantities, while maintaining more
consistent levels of production in Company-operated facilities. All contractors
in the United States and Mexico are selected and managed by the Company's
manufacturing staff in Mississippi and Mexico.
The Company uses a variety of raw materials, principally consisting of woven
fabrics including denim, cotton, polyrayons and various trim items. While the
Company must make commitments for a significant portion of its fabric purchases
in advance of sales, the Company's risk is reduced because a substantial portion
of the Company's products are sewn in basic denim which is widely available.
ASIA
In addition to the Company's domestic and Mexican pant and tee shirt
production facilities, the balance of the Company's sportswear products is
produced by approximately 50 different manufacturers in more than 10 countries.
Virtually all of the Company's products other than pants and tee shirts are
produced in Asia, but none of the Asian contractors engaged by the Company
accounted for more than 10.0% of the Company's total production in 1997. The
Company has well established relationships with many of its contractors,
although it does not have written agreements with them. The Company retains
independent buying agents in various countries in Asia to assist in selecting
and overseeing independent manufacturers, sourcing fabric, trim and other
materials and monitoring quotas. Independent buying agents also perform quality
control functions on behalf of the Company including inspecting materials and
manufactured products prior to accepting delivery. The sourcing and
merchandising staffs in the Company's New York offices oversee all aspects of
Asian fabric and product development, apparel manufacturing, price negotiation
and quality control, as well as the research and development of new Asian
sources of supply.
The Company seeks to achieve the most efficient means for the timely
delivery of its high quality products. With rare exceptions, the Company does
not purchase fabrics but instead negotiates a finished garment price from its
contractors. The contractor must then purchase the approved fabric as part of
the package. Orders are generally placed after the Company has received customer
orders, and delivery of finished goods to customers generally occurs 90 to 150
days after placement of the order. All of the Company's products manufactured
abroad are paid for in United States dollars. Accordingly, the Company does not
engage in any currency hedging transactions. During the last several years, the
volume of the Company's products produced in Asia has increased dramatically,
and this trend is likely to continue in the future.
WAREHOUSING AND DISTRIBUTION
The Company has serviced its United States customers for the last 38 years
utilizing a Company-owned and operated distribution center in Milford, Delaware.
This primary facility has been expanded
10
during that time, resulting in its present size of approximately 70,000 square
feet. Over the last few years, the Company has leased additional space in the
Milford area to accommodate increased capacity requirements fueled by growth in
sales. The Company is in the process of establishing a computerized "Warehouse
Management System" with real-time internal tracking information and the ability
to provide its customers with electronically transmitted "Advance Shipping
Notices." The accuracy of shipments is increased by the ability to scan coded
garments at the packing operation. This process also provides for computerized
routing and customer invoicing. The vast majority of shipments are handled by
UPS, common carriers or parcel post.
The Company believes that its increased distribution requirements as a
result of rapid growth can be better met by consolidating its warehousing and
distribution functions into a new 150,000 square foot facility to be located in
Milford, Delaware. Consolidating all the receiving, stocking, packing and
shipping functions in one facility should result in improved management control
and less redundancy in supervision and operational functions. The Company
believes that its engineering plan for the new facility will provide the
capacity to accommodate substantial growth and will reduce labor costs and
improve response times. The Company believes that construction of this facility
should begin in 1998 at an estimated cost of approximately $6.0 million to be
financed through a mortgage loan. In order to ensure against the possibility of
any disruption in the flow of goods to its customers, the Company plans to
occupy the new facility in phases.
The Company currently services its European customers through a contractual
arrangement with a distribution center in Barcelona, Spain, where the Company
maintains its European headquarters.
QUALITY CONTROL
The Company's quality control program is designed to ensure that all of the
Company's products meet its high quality standards. The quality of piece goods
is monitored prior to garments being produced, and prototypes of each product
are inspected and approved before production runs are commenced.
The goods produced by Company-operated facilities, as well as by United
States and Mexican contractors, undergo continual audits by quality personnel
during production. The quality control efforts of Company-operated facilities
are directed and coordinated by the Company's Quality Control Manager located in
Mississippi. Frequent visits are made by the Quality Control Manager and other
support staff to all outside contractors to ensure compliance with the Company's
rigorous quality standards. Audits are also performed by quality personnel at
the Milford, Delaware distribution center on all categories of incoming
merchandise. The Company employs a full-time staff of 43 persons dedicated to
the quality control efforts of its United States and Mexican production.
All garments produced for the Company in Asia must be produced in accordance
with the Company's specifications. The Company's import quality control program
is designed to ensure that all of the Company's products meet its high quality
standards. The Company monitors the quality of fabrics prior to the production
of garments and inspects prototypes of products before production runs are
commenced. In many cases, the Company requires its agents or manufacturers to
submit fabric to an independent outside laboratory for testing prior to
production. The Company requires each agent to perform both in-line and final
quality control checks during and after production before the garments leave the
contractor. Personnel from the Company's New York office also visit Asia to
conduct inspections.
BACKLOG AND SEASONALITY
The Company's business is impacted by the general seasonal trends that are
characteristic of the apparel and retail industries. In the Company's segment of
the apparel industry, sales are generally higher in the first and third
quarters. The Company generally receives orders for its products three to five
months prior to the time the products are delivered to the stores. As of
December 31, 1997, the Company had unfilled orders of approximately $46.0
million, compared to approximately $68.0 million of such orders as of December
31, 1996. The Company expects to fill substantially all of these orders in 1998.
The backlog of orders at any given time is affected by a number of factors,
including seasonality, weather conditions,
11
scheduling of manufacturing and shipment of products. These factors, combined
with continued sluggishness in the retail apparel market, principally at the
specialty store level, resulted in customers buying goods closer to market needs
and contributed to the decrease in backlog from December 31, 1996 to December
31, 1997. All such orders are subject to cancellation for causes such as late
delivery. Accordingly, a comparison of backlogs of orders from period to period
is not necessarily meaningful and may not be indicative of eventual actual
shipments.
LICENSES AND OTHER RIGHTS AGREEMENTS
The Company's business is heavily dependent upon its use of the BOSS,
Beverly Hills Polo Club and Girbaud brand names and images, which are in turn
dependent upon the existence and continuation of certain licenses and other
rights agreements as described below.
BOSS TRADEMARK RIGHTS
In 1990, the Company obtained a license from Brookhurst to use the
registered trademark BOSS in the United States and Puerto Rico in connection
with certain items of sportswear for men and women. Brookhurst and its
predecessors had utilized the BOSS trademark since the late nineteenth century.
In February 1993, the owner of the "HUGO BOSS" trademark filed suit against
the licensor of the "BOSS" trademark in the United States and several licensees,
including the Company. The complaint alleged trademark infringement related to
use of the "BOSS" and "HUGO BOSS" trademarks. However, the complaint did not
challenge the exclusive right of the Company to use the "BOSS" trademark in
connection with the manufacture and sale of certain clothing as set forth in its
exclusive license agreement. The Company executed certain agreements in November
1997 which resulted in the settlement (the "Settlement") of the BOSS trademark
litigation. See "ITEM 3. Legal Proceedings." As part of the Settlement, the
Company borrowed $11.25 million to finance the acquisition of certain BOSS
trademark rights. This obligation is evidenced by a secured limited recourse
promissory note which matures on December 31, 2007 (the "Note").
As part of the Settlement, Brookhurst (i) sold its BOSS trademark rights
worldwide (excluding Mexico), goodwill and registrations to the Company, (ii)
assigned its rights with respect to the BOSS trademark under certain agreements
with third parties (the rights under (i) and (ii) above referred to collectively
as the "BOSS Trademark Rights") to the Company and (iii) agreed to cease using
the BOSS brand name and image (except for a limited sell-off of certain uniforms
and samples bearing the BOSS mark). As part of the Settlement, the Company sold
its foreign BOSS trademark rights and its rights under related agreements
acquired from Brookhurst (the "BOSS Foreign Trademark Rights") to Ambra, Inc., a
wholly-owned subsidiary of Hugo Boss AG ("Ambra"). Neither Hugo Boss nor Ambra
is affiliated with Brookhurst or the Company. The Company also entered into a
foreign manufacturing rights agreement with Ambra (the "Foreign Rights
Agreement") under which the Company obtained a license to manufacture apparel in
certain foreign countries for sale in the United States using the BOSS brand
name and image. The Company retained its ownership of domestic BOSS Trademark
Rights ("Domestic BOSS Trademark Rights") subject to a concurrent use agreement
with Hugo Boss (the "Concurrent Use Agreement'). Subject to the terms of the
Concurrent Use Agreement, Hugo Boss retained the right to manufacture and market
sportswear and other products using the BOSS name. In the event Hugo Boss
manufactures and markets sportswear products which the Company is permitted to
manufacture and market under the Concurrent Use Agreement, Hugo Boss must sell
such products at or above specified wholesale price points in the United States
and Puerto Rico, which are generally higher than the price points of the
Company. Although there is some degree of overlap in the wholesale price points
of the Company and Hugo Boss under the Concurrent Use Agreement, the Company
does not currently sell or intend to sell BOSS brand sportswear within those
overlapping price points and does not anticipate any material adverse effect on
the Company's financial condition or results of operations if Hugo Boss were to
manufacture and market sportswear within those overlapping price points.
12
Under the agreements entered into in connection with the Settlement, the
Company's BOSS rights were expanded to allow broader product offerings and
additional Company control over styling, advertising and distribution. In
addition to the categories of apparel which the Company was permitted to
manufacture, distribute, market and sell under its previous license agreement
with Brookhurst, under the Settlement, the Company acquired the right to
manufacture, distribute, market and sell, within specified wholesale price
points, the following categories of apparel under the BOSS brand in a specified
microgramma style (the "BOSS Logotype"): swimwear, jogging suits, polo shirts
and belts (as parts of garments). The Company may use the BOSS trademark in
forms other than the BOSS Logotype with the prior approval of the other parties
to the agreements. The Company is prohibited from using the BOSS brand name or
image on footwear, formal and tailored clothing, leather clothing, body wear,
underwear, intimate apparel, loungewear, sleepwear and robes, clothing designed
for the primary purpose of engaging in skiing, tennis, motor sports, windsurfing
and any non-apparel items. The Concurrent Use Agreement sets forth specific
parameters governing the use by the Company of the BOSS Logotype with respect to
advertising, wholesale pricing points and the size, location, appearance, style
and coloring of the trademark on different product categories and advertising,
and generally requires that the Company use the phrase "BOSS by I.G. Design" on
its BOSS products. No material adverse effect on the Company's financial
condition or results of operations is expected as a result of the Concurrent Use
Agreement.
Under the Foreign Rights Agreement, the Company continues to have the right
to manufacture BOSS apparel in foreign countries, including those in which the
Company is currently manufacturing BOSS apparel and several additional
countries. No significant changes are anticipated with respect to the Company's
foreign manufacturing activities and therefore no material adverse effect on the
Company's financial condition or results of operations is expected. The Foreign
Rights Agreement will terminate on December 31, 2001, but may be extended, at
the Company's option, through December 31, 2007.
Under the Foreign Rights Agreement, the Company will pay annual royalties of
12.5%: (i) on the first $32.0 million of net sales attributable to apparel
manufactured in those foreign countries in which the Company currently
manufactures or will manufacture BOSS products ("Territory Net Sales") for each
of the first four years of the agreement; (ii) on the first $20.0 million in
Territory Net Sales for year five of the agreement; and (iii) on the first $16.0
million of Territory Net Sales in years six through ten of the agreement. The
base royalties on such amounts of Territory Net Sales would increase to as much
as 19.5% upon any prepayment of the Note. For the first four years of the
agreement, an aggregate additional royalty of 5.0% is payable annually on
Territory Net Sales from $84.0 million to approximately $105.3 million and an
aggregate additional royalty of 4.0% is payable annually on Territory Net Sales
of $158.0 million and up. Additional royalties in years five through ten of the
agreement increase for certain corresponding sales levels. The Company is
required (i) to generate minimum annual Territory Net Sales of at least $32.0
million for each of the first four years of the agreement, $20.0 million for the
fifth year of the agreement and $16.0 million for each of years six through ten
of the agreement and (ii) to pay annual royalties on such sales based on the
percentages described above. The Company's Territory Net Sales for any given
year under the agreement must equal at least 95.0% of total net sales
attributable to BOSS apparel manufactured worldwide. To the extent that the
Company does not achieve the required Territory Net Sales, the Company will have
the right, in order to avoid termination of the agreement, to pay royalties as
if such Territory Net Sales had been achieved. In the event that the Company's
cumulative payment of royalties under the Foreign Rights Agreement and interest
paid under the Note exceed: (i) $16.0 million paid at any time during the first
four years of the agreement, (ii) $6.5 million paid at any time during years
five through seven of the agreement, (iii) $6.0 million paid at any time during
years eight through ten of the agreement, or (iv) $26.0 million paid at any time
during the entire term of the agreement, the requirement to generate minimum
annual Territory Net Sales, as described above, terminates and the Company shall
continue to pay royalties based on the percentages described above.
The Foreign Rights Agreement may be terminated by the licensor upon the
occurrence of certain events, including, but not limited to (i) a material
breach by the Company after expiration of the applicable grace period, (ii)
certain events of bankruptcy, insolvency or assignment for the benefit of all
creditors
13
relating to the Company or the appointment of a receiver or trustee for the
Company (a "Bankruptcy Event"), (iii) certain specified changes in the control
of the ownership of the Company and (iv) certain uncured breaches by the
Company's foreign manufacturers of the terms of the agreements. In addition to
terminating the agreement, the licensor may require the Company to pay on an
accelerated basis all royalties due under certain sales assumptions through the
then current term of the agreement upon the occurrence of certain events,
including, but not limited to (i) the failure of the Company to pay royalties
when due or to meet certain minimum sales requirements, (ii) the failure of the
Company to manufacture products in certain foreign countries, (iii) the sale of
the licensed products outside the United States, (iv) certain attempts by the
Company to create or establish trademark rights in the word BOSS in its own name
anywhere outside of the United States, (v) the willful and material breach of
the agreement and (vi) the occurrence of a Bankruptcy Event. The Company's
rights to use the BOSS name will terminate upon exercise of the Option (as
hereinafter defined) or upon earlier termination of any of the other agreements.
Any termination of the Company's rights to use the BOSS name would have a
material adverse effect on the Company's financial condition and results of
operations.
Ambra holds an option dated November 5, 1997 to purchase the Domestic BOSS
Trademark Rights from the Company (the "Option") for an amount equal to the
original principal amount of the Note at any time between November 5, 2006 and
December 31, 2007 or earlier upon (i) certain breaches of the Concurrent Use
Agreement, (ii) an event of default under the Note or (iii) termination for any
reason of the Foreign Rights Agreement.
BEVERLY HILLS POLO CLUB LICENSES
Beverly Hills Polo Club Domestic Licenses
Since 1993, the Company has had exclusive wholesale licensing agreements
(collectively, the "BHPC Agreements") with BHPC Marketing, Inc. for the
manufacture and promotion of certain men's and women's sportswear bearing the
registered trademark Beverly Hills Polo Club with an accompanying horse and
rider design (the "BHPC Trademark") for sale to moderate or better department
stores and specialty stores in the United States and its possessions, including
Puerto Rico. Under the BHPC Agreements, the Company may sell up to 25.0% of its
total volume for each of the men's and women's categories to warehouse clubs.
The licenses generally allow the Company to use the BHPC Trademark on sportswear
designed by or for the Company, subject to a quality approval process for
marketing and advertising materials, manufacturing premises and products bearing
the trademark. Under each of these licenses, as amended through April 1997, the
Company is required to make payments to the licensor in an amount equal to 5.0%
of the Company's net invoiced sales of licensed merchandise and to spend an
amount equal to 1.0% of net invoiced sales of such merchandise in advertising
for the licensed products. Under each license, the Company pays a monthly
royalty equal to the greater of 8.3% of the guaranteed minimum annual royalty or
the actual royalty earned by the licensor in the preceding month.
Under the Beverly Hills Polo Club men's agreement (the "Men's Agreement")
the Company has been granted an exclusive license to use the BHPC Trademark in
connection with menswear fashions made of materials other than silk in the
following categories: denim sportswear, outerwear, knit, woven and dress shirts,
knit and woven casual pants and shorts, sweaters, basic and fashion fleece tops
and bottoms, overalls and shortalls, knit tops (including tee shirts and polo
shirts), swimwear and warm-ups. The Men's Agreement has an initial term expiring
December 31, 1998 and is renewable at the option of the Company, provided the
Company is not in breach thereof at the time renewal notice is given, for two
consecutive three-year periods commencing January 1, 1999 through December 31,
2004.
The Company's payment of royalties under the Men's Agreement is subject to a
guaranteed minimum royalty of $400,000 for the contract year ending December 31,
1998. Guaranteed minimum annual royalty payments of $300,000 and $350,000, which
were required for the contract years ending December 31, 1996 and December 31,
1997, respectively, were exceeded by the Company. Notwithstanding its term, the
Men's Agreement may be terminated by the licensor in the event the Company fails
to make net shipments of products for the contract year ending December 31, 1998
in the amount of $8.0 million. Guaranteed
14
minimum annual royalties and guaranteed annual net shipments for each of the
renewal terms will be the greater of (i) 80.0% of the immediately preceding
contract year's actual royalties and net shipments or (ii) the previous year's
guaranteed minimum royalty and guaranteed net shipments.
The Beverly Hills Polo Club women's agreement (the "Women's Agreement")
grants the Company the right to use the BHPC Trademark in connection with
women's, missy, junior, petite and large size coordinated sportswear, sweaters,
sweater dresses, sweater suits, basic fleeced tops and bottoms, basic tee
shirts, basic polo shirts, warm ups in knit and woven fabrics and women's tennis
and golf-related shorts sets, skort sets and pant sets in knit and woven
fabrics. The Women's Agreement has an initial term expiring December 31, 1998
and is renewable at the option of the Company, provided the Company is not in
breach thereof at the time renewal notice is given, for two consecutive
three-year periods commencing January 1, 1999 through December 31, 2004.
The Company's payment of royalties under the Women's Agreement is subject to
a guaranteed minimum annual royalty of $150,000 for the contract year ending
December 31, 1998. A guaranteed minimum annual royalty payment of $100,000,
which was required for the contract year ending December 31, 1997, was exceeded
by the Company. No guaranteed minimum annual royalty payment was required for
the contract year ending December 31, 1996. Notwithstanding the term of the
Women's Agreement, the women's license may be terminated by the licensor in the
event the Company fails to make net shipments of products for the contract year
ending December 31, 1998 in the amount of $3.0 million. Guaranteed minimum
annual royalties and guaranteed annual net shipments for each of the renewal
terms will be the greater of (i) 80.0% of the immediately preceding contract
year's actual royalties and net shipments or (ii) the previous year's guaranteed
minimum royalty and guaranteed net shipments.
Each of the Men's and the Women's Agreements may be terminated by the
licensor upon the occurrence of certain events, including but not limited to the
following: (i) a breach by the Company of any obligation under the agreement
that remains uncured within 30 days following the receipt of written notice of
such breach, (ii) the Company becomes insolvent, is the subject of a petition in
bankruptcy or otherwise enters into any composition with its creditors,
including reorganization, or (iii) the Company has committed three breaches of
the agreement, in which case no right to cure the breach is afforded to the
Company.
During the term of the Beverly Hills Polo Club domestic Men's and Women's
Agreements, the Company is prohibited from manufacturing or otherwise
distributing any merchandise under a brand name which closely resembles the BHPC
Trademark and from using on non-Beverly Hills Polo Club products any graphic,
style or design which closely resembles any items supplied to the Company by the
licensor. In addition, the rights of the Company under the Men's and Women's
Agreements are subject to the terms of a Settlement Agreement and Consent
Judgment between the licensor and Polo Fashions, Inc., which imposes certain
restrictions on the licensor's manner of use and advertising of the BHPC
Trademark, including a prohibition on the use of the words "Polo" and "Polo
Club" alone on any item of apparel The Company believes that the BHPC Trademark,
as licensed to the Company, complies with those restrictions.
Beverly Hills Polo Club International Licenses
On August 15, 1996, I.C. Isaacs Europe, S.L., a Spanish limited corporation
and wholly-owned subsidiary of the Company, entered into retail and wholesale
license agreements (collectively, the "International Agreements") for use of the
BHPC Trademark in Europe. The International Agreements, as amended through April
28, 1997, provide certain exclusive rights to use the BHPC Trademark in all
countries in Europe for an initial term of three years ending December 31, 1999,
renewable at the Company's option through two consecutive three-year extensions
ending December 31, 2004. The International Agreements are subject to
substantially the same terms and conditions as the BHPC Agreements described
above.
The international retail agreement (the "Retail Agreement") grants the
Company the right to use the BHPC Trademark in connection with the manufacture
and sale through authorized Beverly Hills Polo Club retail stores and franchise
stores in Europe of the following categories of products: (i) men's pants, woven
15
shirts, knit shirts, jeans, shorts, sweaters and outerwear (excluding dress
shirts and suits); (ii) women's slacks, skirts, dresses, sweaters, outerwear,
blouses and jeans; and (iii) all other products licensed by the Beverly Hills
Polo Club licensor to other third parties (which must be purchased by the
Company from the authorized third-party licensees). The Retail Agreement
excludes dress shirts and suits. Under the Retail Agreement, the Company is
required to pay the licensor royalties equal to (i) 4.0% of the wholesale
purchases by the Company of Beverly Hills Polo Club products sold to Beverly
Hills Polo Club retail stores and (ii) 2.0% of retail sales of licensed products
by Beverly Hills Polo Club retail stores. The Company is subject to guaranteed
minimum annual royalty payments of $40,000 in 1998 and $64,000 in 1999 and
guaranteed net shipment volumes of $0.5 million in 1998 and $0.8 million in
1999. The Retail Agreement is subject to applicable franchising laws in Europe
and, as a result, the licensor may terminate the agreement if the Company is
unable to obtain any necessary governmental approval or to make any necessary
governmental filings within four months from the date of the first franchise
agreement.
The international wholesale agreement (the "Wholesale Agreement") grants the
Company the right to use the BHPC Trademark in connection with the manufacture
and sale at wholesale, for distribution to department stores and specialty
stores in Europe, of the following categories of products: (i) men's apparel
(excluding suits, ties, underwear, shoes and full length rainwear); and (ii)
women's apparel (excluding hosiery, intimate apparel, business suits, underwear,
accessories, shoes and full length rainwear). Under the Wholesale Agreement, the
Company is required to pay the licensor a royalty equal to 6.0% of net shipments
by the Company of licensed products directly to authorized Beverly Hills Polo
Club distributors or to retail stores. The Wholesale Agreement imposes
guaranteed minimum annual royalty payments of $120,000 in 1998 and $240,000 in
1999 and guaranteed net shipment volumes of $2.0 million in 1998 and $4.0
million in 1999.
GIRBAUD LICENSES
In November 1997, the Company entered into an exclusive license agreement
(the "Girbaud Men's Agreement") with Girbaud Design, Inc. and its affiliate
Wurzburg Holding S.A. to manufacture and market men's jeanswear, casualwear and
outerwear under the Girbaud brand and certain related trademarks (the "Girbaud
Marks") in all channels of distribution in the United States, including Puerto
Rico and the U.S. Virgin Islands. In March 1998, the Girbaud Men's Agreement was
amended and restated to include active influenced sportswear as a licensed
product category and to name Latitude Licensing Corp. as the licensor (the
"Licensor"). Also in March 1998, the Company entered into an exclusive license
agreement (the "Girbaud Women's Agreement") with the Licensor to manufacture and
market women's jeanswear, casualwear and outerwear, including active influenced
sportswear, under the Girbaud Marks in all channels of distribution in the
United States, including Puerto Rico and the U.S. Virgin Islands. Both
Agreements include the right to manufacture the licensed products in a number of
foreign countries and both have initial terms of two years and may be extended
at the option of the Company for up to a total of ten years. The Agreements
generally allow the Company to use the Girbaud Marks on apparel designed by or
for the Company or based on designs and styles previously associated with the
Girbaud brand, subject to quality control by the Licensor over the final designs
of the products, marketing and advertising material and manufacturing premises.
Both Agreements provide that they may be terminated by the Licensor upon the
occurrence of certain events, including, but not limited to, a breach by the
Company of any obligation under the Agreement that remains uncured following
certain specified grace periods.
Under the Girbaud Men's Agreement the Company is required to make payments
to the Licensor in an amount equal to 6.25% of the Company's net sales of
regular licensed merchandise and 3.0% in the case of certain irregular and
closeout licensed merchandise. The Company is subject to guaranteed minimum
annual royalty payments of $1.2 million in 1998, $1.5 million in 1999, $2.0
million in 2000, $2.5 million in 2001 and $3.0 million each year from 2002
through 2007. On a quarterly basis during the term, commencing with the first
quarter of 1998, the Company is obligated to pay the greater of (i) actual
royalties earned by the Licensor under the license or (ii) 8.3% of the minimum
guaranteed royalties for
16
that year. The Company is required to spend at least $350,000 in advertising
men's Girbaud brand products in 1998 and $500,000 each year thereafter while the
Girbaud Men's Agreement is in effect.
Under the Girbaud Women's Agreement the Company paid a one-time license
acquisition fee in the amount of $600,000 and is required to make payments to
the Licensor in an amount equal to 6.25% of the Company's net sales of regular
licensed merchandise and 3.0% in the case of certain irregular and closeout
licensed merchandise. The Company is subject to guaranteed minimum annual
royalty payments of $700,000 in 1999, $800,000 in 2000, $1.0 million in 2001 and
$1.5 million each year from 2002 through 2007. On a quarterly basis during the
term, commencing with the first quarter of 1999, the Company is obligated to pay
the greater of (i) actual royalties earned by the Licensor under the license or
(ii) 8.3% of the minimum guaranteed royalties for that year. The Company is
required to spend at least $550,000 in advertising women's Girbaud brand
products in 1998 and $400,000 each year thereafter while the Girbaud Women's
Agreement is in effect. In addition, over the term of the Girbaud Women's
Agreement the Company is required to contribute $190,000 per year to the
Licensor's advertising and promotional expenditures for the Girbaud brand.
CREDIT CONTROL
The Company manages its own credit and collection functions and has never
used a factoring service or outside credit insurance. The Company sells to
approximately 4,100 accounts throughout the United States and Puerto Rico. All
of the functions necessary to service this large volume of accounts are handled
by the Company's in-house credit department in Baltimore, Maryland. The Company
currently employs eight people in its credit department and believes that
managing its own credit gives it unique flexibility as to which customers the
Company should sell and how much business it should do with each. The Company
obtains and periodically updates information regarding the financial condition
and credit histories of customers. Credit personnel evaluate this information
and, if appropriate, establish a line of credit. Credit personnel track payment
activity for each customer using customized computer software and directly
contact customers with receivable balances outstanding beyond 30 days. Under
certain circumstances, the Company may discontinue merchandise shipments until
the outstanding balance is paid. Ultimately, the Company may determine to engage
an outside collection organization to collect past due accounts. The Company
believes this provides a selling advantage over those competitors who factor
their receivables. In 1997, the Company's credit losses were $1.2 million and
the Company's actual credit losses as a percentage of net sales were less than
three-quarters of one percent.
COMPETITION
The apparel industry is highly competitive and fragmented and is subject to
rapidly changing consumer demands and preferences. The Company believes that its
success depends in large part upon its ability to anticipate, gauge and respond
to changing consumer demands and fashion trends in a timely manner and upon the
continued appeal to consumers of the BOSS, Beverly Hills Polo Club and Girbaud
brands. The Company competes with numerous apparel brands and distributors
(including Calvin Klein, DKNY, Fila, FUBU, Guess?, Tommy Hilfiger, JNCO and
Nautica). Many of the Company's competitors have greater financial resources
than the Company. Although the level and nature of competition differ among its
product categories, the Company believes that it competes on the basis of its
brand image, quality of design and value pricing. In addition, under the
Concurrent Use Agreement, the BHPC Agreements and the Girbaud Agreement, certain
third parties have retained the right to produce, distribute, advertise and
sell, and to authorize others to produce, distribute, advertise and sell certain
garments that are similar to some of the Company's products, including, in the
case of the BOSS brand, similar garments using the BOSS name at generally higher
wholesale price points. Any such production, distribution, advertisement or sale
of such garments by such licensor or another authorized party could have a
material adverse effect on the Company's financial condition or results of
operations.
17
MANAGEMENT INFORMATION SYSTEMS
The Company believes that advanced information processing is essential to
maintaining its competitive position. The Company is currently upgrading systems
to be year 2000 compliant and to allow areas of the business to be more
pro-active to customer requirements, to improve internal communication flow, to
increase process efficiency and to support management decisions. The Company's
systems provide, among other things, comprehensive order processing, production,
accounting and management information for the marketing, selling, manufacturing,
retailing and distribution functions of the Company's business. The Company's
software program allows it to track, among other things, orders, manufacturing
schedules, inventory and sales of its products. The program includes centralized
management information systems, which provide the various operating departments
with financial, sales, inventory and distribution related information. Via
electronic data interchange, the Company is able to ship orders to certain
customers within 24 to 72 hours from the time of order receipt.
EMPLOYEES
The Company believes that its employees are one of its most valuable
resources. As of December 31, 1997, the Company had approximately 930 full-time
employees. The Company is not a party to any labor agreements, and none of its
employees is represented by a labor union. The Company considers its
relationship with its employees to be good and has not experienced any material
interruption of its operations due to labor disputes.
ENVIRONMENTAL MATTERS
The Company is subject to federal, state and local laws, regulations and
ordinances that (i) govern activities or operations that may have adverse
environmental effects (such as emissions to air, discharges to water, and the
generation, handling, storage and disposal of solid and hazardous wastes) or
(ii) impose liability for the costs of clean up or other remediation of
contaminated property, including damages from spills, disposals or other
releases of hazardous substances or wastes, in certain circumstances without
regard to fault. Certain of the Company's operations routinely involve the
handling of chemicals and waste, some of which are or may become regulated as
hazardous substances. The Company has not incurred any significant expenditures
or liabilities for environmental matters. Although the Company believes that its
environmental obligations will not have a material adverse effect on its
financial condition or results of operations, environmental compliance matters
are subject to inherent risks and uncertainties.
18
ITEM 2. PROPERTIES
Certain information concerning the Company's principal facilities is set
forth below:
APPROXIMATE AREA
LEASED OR IN
LOCATION OWNED USE SQUARE FEET
- ----------------------------------------- ----------- ----------------------------------------- ----------------
Baltimore, MD............................ Owned Administrative Headquarters and Office 40,000
Facilities
New York, NY............................. Leased Sales, Merchandising, Marketing and 9,725
Sourcing Headquarters
New York, NY............................. Leased Sales, Marketing and Sourcing 4,300
Headquarters
Barcelona, Spain......................... Leased European Headquarters 2,000
Milford, DE.............................. Owned Distribution Center 70,000
Newton, MS............................... Leased Manufacturing Plant 101,000
Carthage, MS............................. Leased Manufacturing Plant 110,000
Raleigh, MS.............................. Leased Manufacturing Plant 90,000
The Company also has regional sales offices, all of which are leased, in the
following cities: Atlanta, Georgia; Dallas, Texas; Miami, Florida; Seattle,
Washington; Los Angeles, California; Philadelphia, Pennsylvania; Boston,
Massachusetts; Minneapolis, Minnesota; Charlotte, North Carolina; and Santurce,
Puerto Rico. The Company believes that its existing facilities are well
maintained and in good operating condition. The Company also believes that its
increased distribution requirements can be better met by consolidating its
warehousing and distribution functions into a new 150,000 square foot facility
to be located in Milford, Delaware. See "ITEM 1. Business--Warehousing and
Distribution" and Note 7 of Notes to Consolidated Financial Statements for
further information.
The Company intends to close its Newton, Mississippi, manufacturing plant
during the second quarter of 1998. The majority of the production in this
facility is of jeans. Some of this production will be transferred to third party
independent contractor facilities in Mexico where the Company currently has
jeans manufactured. The Company anticipates that a charge in the range of $0.2
million to $0.3 million will be made against earnings for the first quarter of
1998 as a result of closing the plant. The Company anticipates annual cost
savings in the range of $0.3 million to $0.6 million after the transfer of
production to Mexico as a result of lower labor and overhead costs.
The Girbaud Women's Agreement requires the Company to open a Girbaud
flagship store in Manhattan, New York City, with a target selling space of no
less than approximately 7,800 square feet. The Company intends to open the store
in the SoHo neighborhood of New York City by the end of 1998. The store will
offer both sportswear manufactured under the Girbaud Men's Agreement and the
Girbaud Women's Agreement as well as products from the Girbaud European
collections.
19
ITEM 3. LEGAL PROCEEDINGS
In November 1997, the Company entered into a Settlement of litigation
involving use of the BOSS trademark. The original complaint was filed in the
United States District Court for the Southern District of New York on February
11, 1993 by Hugo Boss Fashions, Inc., International Fashions Apparel Corporation
and Hugo Boss and sought injunctive relief and compensatory damages for
misappropriation, infringement of trademark rights, unfair competition,
dilution, use of name with intent to deceive, violations under the Lanham Act,
breach of contract and tortious interference with contractual relations. The
original complaint named Brookhurst, Boss Sportswear (USA), Inc. and the Company
as defendants and was subsequently amended to add Boss Golf Company, Inc. The
defendants filed a counterclaim against the plaintiffs alleging trademark
infringement and related matters arising out of the plaintiffs' use of the BOSS
trademark. In November 1997, the parties entered into the Settlement pursuant to
which the Company will continue to be able to use the BOSS brand name and image
in connection with the manufacture of BOSS brand apparel in the United States
and certain foreign countries, subject to the terms of the Concurrent Use
Agreement, for distribution in the United States and Puerto Rico. Although its
insurance carrier paid approximately $650,000 pursuant to the Settlement, the
Company did not admit any liability and such payment was made based on the cost
of litigation rather than any assessment of the Company's potential liability in
the suit.
From time to time the Company is a party to various claims, complaints and
other legal actions that have arisen in the ordinary course of business. The
Company is not presently aware of any such legal proceedings which, in the
aggregate, it believes would have a material adverse effect on the Company's
financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of 1997, there were no matters submitted to a vote
of the Company's stockholders except as follows:
(1) On December 18, 1997, the Company's stockholders acted by unanimous
written consent to approve the issuance of shares of Common Stock in the
Company's initial public offering.
(2) On December 22, 1997, the Company's stockholders acted by unanimous
written consent to approve the revocation of the Company's S election in
connection with the Company's initial public offering.
20
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The market for the Company's Common Stock is not an exchange but is
established by the National Association of Securities Dealers' Automated
Quotation System. At December 31, 1997 there were approximately 50 holders of
record of the Company's Common Stock.
The Company's Common Stock began trading on the Nasdaq National Market
System under the Symbol "ISAC" effective December 18, 1997. Prior to that date,
there was no public market for the Common Stock. The reported last sale price of
the Common Stock on the Nasdaq National Market on March 25, 1998 was $7 1/32.
The following table sets forth for the periods indicated the high and low sale
prices for the Common Stock reported by the Nasdaq National Market:
1997 HIGH LOW
- --------------------------------------------------------------------------- --------- ---------
Fourth Quarter (from December 18, 1997).................................... $ 10 3/16 $ 10.00
From January 1, 1993 until its initial public offering, the Company elected
to be treated for federal and state income tax purposes as an S corporation. As
a result, the Company's stockholders, rather than the Company, have been taxed
directly on the earnings of the Company for federal and certain state income tax
purposes, whether or not such earnings were distributed. In 1997, the Company
made cash distributions to its stockholders in the amount of $15.8 million,
which were to be used to fund the stockholders' tax obligations as a result of
the Company's status as an S corporation.
One day prior to the consummation of the transactions related to the
Company's initial public offering, the Company's S Corporation status was
terminated (the "S Termination Date"). On the S Termination Date the Company
declared a dividend distribution to the stockholders of record of the Company,
including certain officers and directors of the Company, in the aggregate amount
of approximately $9.3 million, which represented a portion of the earned but
undistributed S corporation earnings of the Company prior to its initial public
offering (the "S Corporation Distribution"). The Company does not anticipate any
subsequent distribution of the remaining earned but undistributed S corporation
earnings of the Company. Only stockholders of record as of the S Termination
Date participated in the S Corporation Distribution. The S Corporation
Distribution was paid on the date of consummation of the transactions relating
to the initial public offering.
The Company anticipates that all earnings of the Company will be retained
for the foreseeable future for use in the operation of the Company's business.
Any future determination as to the payment of dividends will be at the
discretion of the Company's Board of Directors and will depend upon the
Company's results of operations, financial condition, restrictions in the
Company's credit facilities and other factors deemed relevant by the Board of
Directors.
On May 15, 1997, the Board of Directors of the Company and the Company's
stockholders adopted the 1997 Omnibus Stock Plan (the "Plan"). The purpose of
the Plan is to promote the long-term growth and profitability of the Company by
providing key people with incentives to improve stockholder value and contribute
to the growth and financial success of the Company, and by enabling the Company
to attract, retain and reward the best-available persons for positions of
substantial responsibility. The maximum number of shares of Common Stock that
may be issued with respect to awards granted under the Plan is 500,000. The Plan
is administered by the Compensation Committee of the Board of Directors.
Participation in the Plan will be open to all employees, officers, directors and
consultants of the Company or any of its affiliates, as may be selected by the
Compensation Committee from time to time. The Plan allows for stock options,
stock appreciation rights, stock awards, phantom stock awards and performance
awards to be granted. The Compensation Committee will determine the prices,
vesting schedules, expiration dates
21
and other material conditions upon which such awards may be exercised. To date,
no stock options or other awards have been granted under the Plan.
The Company's Registration Statement on Form S-1 (File No. 333-37155), filed
in order to accomplish its initial public offering of its Common Stock
(including shares issued upon the partial exercise of the underwriters'
over-allotment option, the "Offering"), was declared effective by the Securities
and Exchange Commission on December 17, 1997 and closed on December 23, 1997.
The over-allotment option was partially exercised on January 22, 1998 for
520,000 shares of Common Stock. The managing underwriter for the Offering was
The Robinson-Humphrey Company, LLC. The aggregate amount registered in the
Offering, including the full over-allotment option, totaled 4,370,000 shares.
The aggregate price of the Offering amount registered totaled $43.7 million at
the initial public offering price of $10.00 per share. A total of 4,320,000
shares were sold in the Offering representing an aggregate offering price of
$43.2 million at the initial public offering price of $10.00 per share.
The net proceeds received by the Company from the Offering were
approximately $38.7 million, at the initial public offering price of $10.00 per
share and after deducting the underwriting discount and offering expenses paid
by the Company. The Company used such net proceeds as follows: (i) to repay
$19.5 million of the Company's outstanding borrowings under its credit
facilities; and (ii) to pay the S Corporation Distribution of $9.3 million. The
remaining proceeds will be used for general corporate and working capital
purposes. Pending application of the remaining net proceeds from the Offering as
described above, the Company has invested the net proceeds in short-term,
interest bearing instruments or other investment grade securities.
The aggregate expenses paid by the Company in the Offering, including
aggregate underwriting discounts and commissions of $3.0 million, were
approximately $4.5 million.
Each of the three following transactions was exempt from the registration
requirements of the Securities Act of 1933, as amended (the "Securities Act"),
in reliance on Section 3(a)(9) and/or Section 4(2) of the Securities Act on the
basis that such transaction was solely with existing security holders and/or did
not involve a public offering. No underwriters were involved in connection with
any of the following transactions:
(1) On January 17, 1997, the Company issued 24,699 shares of Common Stock to
Thomas P. Ormandy, an executive officer of the Company, for $39,485 cash.
(2) On September 2, 1997, the Company issued 5,746 shares of Common Stock to
existing stockholders of the Company in consideration of the cancellation of
stock certificates that had been issued at a time when the Company did not
have a sufficient number of authorized shares of Common Stock.
(3) Immediately prior to the consummation of the Offering the Company effected a
246.9898-for-1 stock split pursuant to which it issued an aggregate of 4.0
million shares of Common Stock to the Company's existing stockholders.
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data set forth below have been derived from the
consolidated financial statements of the Company and the related notes thereto.
The statement of income data for the years ended December 31, 1995, 1996 and
1997 and the balance sheet data as of December 31, 1996 and 1997 are derived
from the consolidated financial statements of the Company which have been
audited by BDO Seidman, LLP, independent certified public accountants, included
elsewhere herein. The statement of income data for the years ended December 31,
1993 and 1994 and the balance sheet data as of December 31, 1993, 1994 and 1995
are derived from the consolidated financial statements of the Company, which
have been audited but are not contained herein. The following selected financial
data should be read in conjunction with the Company's consolidated financial
statements and the related notes thereto and "Management's Discussion and
Analysis of Financial Condition and Results of Operations," which are included
elsewhere herein.
22
YEAR ENDED DECEMBER 31,
-------------------------------------------------------
1993 1994 1995 1996 1997
--------- --------- --------- ---------- ----------
(IN THOUSANDS EXCEPT PER SHARE DATA)
STATEMENT OF INCOME DATA:
Net sales......................................................... $ 72,414 $ 85,298 $ 93,271 $ 118,655 $ 161,446
Cost of sales..................................................... 54,880 62,216 68,530 84,421 109,694
--------- --------- --------- ---------- ----------
Gross profit.................................................... 17,534 23,082 24,741 34,234 51,752
Selling expenses.................................................. 6,853 7,462 8,927 11,898 16,236
License fees...................................................... 2,182 3,012 3,174 4,817 7,577
Distribution and shipping expenses................................ 4,276 2,046 2,379 2,669 4,307
General and administrative expenses............................... 1,903 5,813 5,787 6,243 7,546
Recovery of legal fees............................................ -- -- -- (718) (117)
--------- --------- --------- ---------- ----------
Operating income................................................ 2,320 4,749 4,474 9,325 16,203
Interest, net..................................................... 1,260 1,191 1,247 1,365 2,372
Other income (expense) (1)........................................ 1,215 1,235 (3) 85 3
Minority interest................................................. -- (53) (33) (82) (135)
--------- --------- --------- ---------- ----------
Income before extraordinary item and income taxes................. 2,275 4,740 3,191 7,963 13,699
Extraordinary item (2)............................................ -- 389 -- -- --
--------- --------- --------- ---------- ----------
Income before income taxes........................................ 2,275 5,129 3,191 7,963 13,699
Income tax benefit................................................ -- -- -- -- 1,349
--------- --------- --------- ---------- ----------
Net income...................................................... $ 2,275 $ 5,129 $ 3,191 $ 7,963 $ 15,048
--------- --------- --------- ---------- ----------
--------- --------- --------- ---------- ----------
Basic and diluted net income per share (3)........................ $ 0.57 $ 1.29 $ 0.80 $ 1.99 $ 3.68
--------- --------- --------- ---------- ----------
--------- --------- --------- ---------- ----------
Weighted average common shares outstanding........................ 4,000 3,988 3,988 4,000 4,094
PRO FORMA STATEMENT OF INCOME DATA:
Income before income taxes........................................ 2,275 5,129 3,191 7,963 13,699
Income tax provision (4).......................................... 933 2,103 1,308 3,265 5,617
--------- --------- --------- ---------- ----------
Net income...................................................... $ 1,342 $ 3,026 $ 1,883 $ 4,698 $ 8,082
--------- --------- --------- ---------- ----------
--------- --------- --------- ---------- ----------
Basic and diluted net income per share............................ $ 0.95 $ 1.62
---------- ----------
---------- ----------
Weighted average common shares outstanding........................ 4,930 5,001
AS OF DECEMBER 31,
-----------------------------------------------------
1993 1994 1995 1996 1997
--------- --------- --------- --------- ---------
(IN THOUSANDS)
BALANCE SHEET DATA:
Working capital............................................. $ 6,787 $ 10,035 $ 10,807 $ 16,274 $ 46,636
Total assets................................................ 27,201 30,103 31,764 37,257 73,443
Total debt.................................................. 9,405 8,798 8,645 7,796 11,609
Stockholders' equity........................................ 10,824 14,428 14,645 19,393 52,496
- ------------------------
(1) Includes income from settlement of license disputes of $1.5 million and $1.2
million in 1993 and 1994, respectively.
(2) In connection with the early extinguishment of certain debt, the Company
recorded an extraordinary gain of $0.4 million in 1994.
(3) Historical earnings per share does not reflect a provision for income taxes
as the Company had been taxed as an S corporation for the years ended
December 31, 1993, 1994, 1995, 1996 and the majority of 1997.
(4) Reflects pro forma provision for income taxes as if the Company had been
taxed as a C corporation for the years ended December 31, 1993, 1994, 1995,
1996 and 1997.
23
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
"Selected Financial Data" and the Company's consolidated financial statements
and the related notes thereto, which are included elsewhere herein.
OVERVIEW
During its first 77 years, the Company became one of the leading
manufacturers of pants, trousers and jeans in the United States. The Company was
able to utilize its fabric sourcing and manufacturing expertise to build a well
known franchise in the men's and women's bottoms segment of the apparel
industry. In this period, the Company's marketing efforts were typically driven
by its manufacturing capabilities, and branding was limited to Company-owned
brands and third-party private labels.
In the late 1980's, management made a decision to change the Company's
marketing focus from a manufacturing-driven to a brand-driven strategy. This
fundamental shift within the Company reflected senior management's belief that
the American sportswear market would be dominated by recognized brands with
clearly established images. Management also concluded that increasing market
share would go to those companies that were market-driven and able to service
their customers with diversified manufacturing and sourcing capabilities.
Recognizing its strength in bottoms manufacturing, in 1990 the Company entered
into a license agreement for the exclusive use of the BOSS brand name on men's
denim apparel and on all types of juniors sportswear for the young women's
market. In 1994, the Company expanded its license agreement to include use of
the BOSS brand name on men's, women's, boys' and youth sportswear in the United
States and Puerto Rico. In 1997, the Company's rights to manufacture and market
BOSS sportswear were further expanded to allow broader product offerings and
significant Company control over styling, advertising and distribution. In the
fall of 1993, the Company entered into license agreements for the use of the
Beverly Hills Polo Club brand name on men's and women's sportswear in the United
States and Puerto Rico. License rights were expanded to include Europe in 1996
and to include men's dress shirts in 1997.
In November 1997, the Company acquired an exclusive license to manufacture
and market certain men's sportswear under the Girbaud brand in the United States
and Puerto Rico. Over the last ten years, the Girbaud brand was manufactured and
marketed in the United States under license by VF Corp. The Girbaud brand is an
internationally recognized designer sportswear label with a distinct European
influence. By targeting men who desire contemporary international fashion, the
Girbaud brand will enable the Company to address another consumer segment within
its branded product portfolio. The Company is positioning the Girbaud men's line
with a broader assortment of products, styles and fabrications reflecting a
contemporary European look. The Company began marketing a fall men's collection
under the Girbaud brand in February 1998. The Company anticipates that it will
incur approximately $600,000 in startup costs related to the implementation of
the Girbaud brand, including, but not limited to, expenditures for additional
office and showroom space and costs related to adding merchandising and sales
personnel. In March 1998, the Company entered into an exclusive license
agreement to manufacture and market certain women's sportswear under the Girbaud
brand in the United States and Puerto Rico. The Company intends to begin
marketing women's sportswear under the Girbaud brand in the second quarter of
1998 for delivery during the 1998 holiday season. The Company intends to
reposition the Girbaud women's line with a broader assortment of products,
styles and fabrications. The Company paid an initial license fee of $600,000.
Also, in 1998 the Company is required to spend at least $550,000 in advertising
for the women's Girbaud brand and at least $350,000 in advertising for the men's
Girbaud brand. In addition, the Company is required to contribute $190,000 per
year to the licensor's advertising and promotional expenditures for the Girbaud
brand. Minimum royalty payments begin in the first quarter of 1998. See "ITEM
1. Business--Licenses and Other Rights Agreements."
24
The Company also manufactures and markets women's sportswear under its own
"I.C. Isaacs," "Lord Isaacs" and "Pizzazz" brand names and under third-party
private labels. The Company intends to continue to manufacture and market this
sportswear for the foreseeable future. See "ITEM 1. Business--Licenses and Other
Rights Agreements."
Over the past three years, the Company has completed its strategic
repositioning from a manufacturing-driven company to a marketing and
brand-driven company. Through a focused strategy of providing fashionable,
branded merchandise at value prices, the Company has emerged as a significant
fashion influence for youthful and contemporary consumers who purchase
sportswear through specialty and department stores. The Company's brand-driven
market strategy is evidenced by the increase of licensed, branded apparel as a
percentage of the Company's net sales. In 1997, the BOSS and Beverly Hills Polo
Club brands comprised 74.6% and 15.8% of net sales, respectively. Concurrently
with this strategy, the Company has also shifted its product mix from
predominately bottoms to a full array of sportswear, including tops and
outerwear. As a result, net sales of the BOSS tops and outerwear lines have
nearly tripled since 1995 to approximately $48 million in 1997. The Company has
also expanded its branded lines to include sportswear for boys, youth and
juniors. Historically, the Company has recognized markdowns for specific unsold
inventory in the second and fourth quarters. These specific markdowns are
reflected in cost of sales and the related gross margins at the conclusion of
the appropriate selling season. The following table sets forth, for the periods
indicated, the Company's net sales categorized by brand and product category:
YEAR ENDED DECEMBER 31,
---------------------------------
1995 1996 1997
--------- ---------- ----------
(IN THOUSANDS)
MEN'S(1)
BOSS Bottoms......................................................... $ 37,234 $ 44,667 $ 54,234
BOSS Tops............................................................ 15,882 29,284 48,094
BOSS BOYS'........................................................... 3,264 6,736 13,992
Men's BHPC........................................................... 5,219 12,226 24,196
Men's Private Label.................................................. 4,299 500 129
--------- ---------- ----------
Men's net sales.................................................... 65,898 93,413 140,645
--------- ---------- ----------
WOMEN'S(1)
BOSS Juniors'........................................................ 5,424 5,413 4,098
Women's BHPC......................................................... 1,833 2,043 1,338
Women's Other(2)..................................................... 20,116 17,786 15,364
--------- ---------- ----------
Women's net sales.................................................. 27,373 25,242 20,800
--------- ---------- ----------
Total net sales.................................................... $ 93,271 $ 118,655 $ 161,445
--------- ---------- ----------
--------- ---------- ----------
- ------------------------
(1) The net sales totals incorporate product returns allocated in proportion to
gross sales.
(2) Includes Company-owned brands and third-party private labels.
25
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage
relationship to net sales of certain items in the Company's consolidated
statements of income for the periods shown below:
YEAR ENDED DECEMBER 31,
-----------------------------------
1995 1996(1) 1997(1)
--------- ----------- -----------
Net sales.................................................................... 100.0% 100.0% 100.0%
Cost of sales................................................................ 73.5 71.1 67.9
--------- ----- -----
Gross profit................................................................. 26.5 28.9 32.1
Selling expenses............................................................. 9.5 10.0 10.1
License fees................................................................. 3.4 4.1 4.7
Distribution and shipping expenses........................................... 2.6 2.2 2.7
General and administrative expenses.......................................... 6.2 4.7 4.6
--------- ----- -----
Operating income............................................................. 4.8% 7.9% 10.0%
--------- ----- -----
--------- ----- -----
- ------------------------
(1) General and administrative expenses have been reduced to reflect the receipt
in 1996 and 1997 of approximately $0.7 million and $0.1 million,
respectively, related to an agreement with the Company's insurance carrier
to reimburse it for legal fees associated with litigation billed in prior
years.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
NET SALES. Net sales increased 36.0% to $161.4 million in 1997 from $118.7
million in 1996. Substantially all of this increase was due to higher volume
shipments of BOSS and Beverly Hills Polo Club sportswear. Net sales of BOSS
sportswear increased $34.3 million or 39.8% to $120.4 million primarily driven
by strong growth in the men's tops, boys' and youth segments. Net sales of the
BOSS tops segment were $48.1 million in 1997 versus $29.3 million in 1996. Net
sales of Beverly Hills Polo Club sportswear increased $11.3 million or 79.0% to
$25.6 million over the same period, primarily driven by strong growth in the
men's business. The increases in net sales were partially offset by weaker than
expected performance in the fourth quarter of 1997 principally attributable to
sluggishness in the retail apparel market, primarily at the specialty store
level. The Company has noted that in recent periods apparel retailers have been
buying goods closer to market needs which may negatively affect results in the
first half of 1998. International sales were insignificant in 1997.
GROSS PROFIT. Gross Profit increased 51.5% to $51.8 million in 1997 from
$34.2 million in 1996. Gross profit as a percentage of net sales increased to
32.1% in 1997 from 28.9% in 1996. The increase in gross profit was due in part
to the expansion of the BOSS tops product line, which typically carries a higher
gross margin than the bottoms product line. In addition, the tops line had
improved gross margins due to reduced costs on imported tops resulting from
volume purchase discounts. Also, the continued shift of production of denim
bottoms from the United States to Mexico and the accompanying decrease in labor
and overhead costs contributed to the improved gross margin. The Company's
improved gross margin was also a result of increased sales of products at full
margin, particularly in the first quarter, offset somewhat by markdowns taken in
the second quarter related to unsold spring and summer goods.
SELLING, DISTRIBUTION, GENERAL AND ADMINISTRATIVE EXPENSES. Selling,
distribution, general and administrative ("SG&A") expenses increased 39.3% to
$28.0 million in 1997 from $20.1 million in 1996. As a percentage of net sales,
SG&A expenses increased to 17.4% from 16.9% in 1996 as the Company continued to
increase investment in its organizational structure and personnel to support
growth and expanded advertising. Selling expenses increased $4.3 million to
$16.2 million in 1997 as a result of higher commissions to the Company's
salespersons and higher advertising expenditures which increased $1.4 million to
$3.9 million as the Company continued to focus on enhancing the identity and
image of its
26
brands through increased media exposure. Distribution and shipping expenses
increased $1.6 million to $4.3 million due to higher unit shipments and
increased overtime costs. The Company opted to incur additional overtime wages
rather than adding personnel to process the increase in unit shipments. General
and administrative expenses increased $1.3 million to $7.5 million due to salary
increases for existing employees and salaries and costs associated with the
hiring of new management and administrative personnel.
LICENSE FEES. License fees increased $2.8 million to $7.6 million in 1997
from $4.8 million in 1996. As a percentage of net sales, license fees increased
to 4.7% from 4.1%. This increase was due to greater sales growth of non-denim
branded products, which have higher royalty rates than other branded products.
The Company believes that its license fees will increase as the percentage of
net sales of branded products increases.
OPERATING INCOME. Operating income increased 74.2% to $16.2 million or
10.0% of net sales in 1997, from $9.3 million or 7.9% of net sales in 1996. This
increase resulted primarily from the increase in net sales and gross profit
margins.
INTEREST EXPENSE. Interest expense increased $1.0 million to $2.4 million
in 1997 due to an increase in working capital borrowing requirements. In 1997
the average debt balance was $17.1 million, with an average effective interest
rate of 9.5%. In 1996, the average debt balance was $9.8 million with an average
effective interest rate of 9.25%.
INCOME TAXES. The Company recorded a net income tax benefit of $1.3 million
in the fourth quarter of 1997. Prior to its initial public offering, the
Company's earnings were not subject to federal, state and local income taxes. In
connection with its initial public offering, the Company became subject to such
taxes, and as a result, recorded a deferred tax asset and a corresponding tax
benefit of approximately $1.5 million in conjunction with termination of its
Subchapter S Corporation status in December 1997. This income tax benefit was
offset somewhat by a current provision for income taxes of $0.2 million which
was recorded for the period December 23, 1997 to December 31, 1997. The Company
expects an effective tax rate of approximately 41% in 1998.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
NET SALES. Net sales increased 27.2% to $118.7 million in 1996 from $93.3
million in 1995. Substantially all of the increase in net sales was due to
greater unit volume shipments of both the BOSS and Beverly Hills Polo Club
sportswear lines. Net sales of BOSS sportswear increased 39.3% to $86.1 million
in 1996 from $61.8 million in 1995. The volume increase in BOSS sportswear was
primarily driven by strong growth in the tops segment, continued strength of the
jeans segment and, to a lesser extent, growth in the boys' and youth segments.
Net sales of BOSS tops and outerwear nearly doubled from $15.9 million in 1995
to $29.3 million in 1996, as a result of the Company's continued product
expansion and increased consumer acceptance and demand. The BOSS bottoms segment
also showed strong growth, as net sales increased 20.2% in 1996 to $44.7
million. Net sales of Beverly Hills Polo Club sportswear increased 101.4% to
$14.3 million during the same period primarily driven by strong growth in the
men's segment. This success was due in part to increased acceptance of the
product after its first full year of sales and the ongoing reconfiguration of
the Company's Beverly Hills Polo Club sales force to more effectively market to
specialty store customers. These increases in net sales were partially offset by
a decline in sales of the Company's men's private label collection and women's
Company-owned and private label collections as the Company continued to place
more emphasis on branded labels. The Company discontinued the men's private
label collection in 1996 due to unsatisfactory gross margins relative to BOSS
and Beverly Hills Polo Club sportswear. The Company did not incur any material
costs in connection with the discontinuation. International sales were
insignificant in 1996.
27
GROSS PROFIT. Gross profit increased 38.5% to $34.2 million in 1996 from
$24.7 million in 1995. Gross profit as a percentage of net sales increased to
28.9% in 1996 from 26.5% in 1995. The increase in gross margin was primarily due
to the expansion of the BOSS tops product line as a percentage of total net
sales. The tops line had a higher gross margin due to reduced costs on imported
tops resulting from volume purchase discounts. Also, the continued shift of
production of denim bottoms from the United Sates to Mexico and accompanying
decrease in labor and overhead costs contributed to the improved gross margin.
SELLING, DISTRIBUTION, GENERAL AND ADMINISTRATIVE EXPENSES. SG&A expenses
increased 17.5% to $20.1 million in 1996 from $17.1 million in 1995. As a
percentage of net sales SG&A expenses decreased to 16.9% in 1996 from 18.3% in
1995. This improvement reflects overall declines in SG&A expenses resulting from
cost containment efforts in certain expense areas and expense leverage
associated with the Company's growth. Selling expense increased $3.0 million to
$11.9 million over the same period, as a result of higher commissions to the
Company's salespersons and higher advertising expenditures which increased $1.0
million to $2.5 million as the Company initiated an advertising campaign to
promote the BOSS brand. Distribution and shipping expenses increased $0.3
million to $2.7 million due to higher unit shipments and overtime wages for
employees at the Company's distribution center. The Company opted to incur
additional overtime wages rather than adding personnel to process the increase
in unit shipments. General and administrative expenses increased $0.4 million to
$6.2 million during the same period primarily due to higher data processing
expenses.
LICENSE FEES. License fees increased $1.6 million to $4.8 million in 1996
from $3.2 million in 1995. As a percentage of net sales, license fees increased
to 4.1% from 3.4%. License fees increased at a rate in excess of the growth in
net sales due to the increase in sales of non-denim branded products.
OPERATING INCOME. Operating income increased 106.7% to $9.3 million or 7.9%
of net sales in 1996, from $4.5 million or 4.8% of net sales in 1995. This
increase primarily resulted from the increase in net sales and gross profit
margins as well as the receipt of approximately $0.7 million related to an
agreement with the Company's insurance carrier to reimburse it for legal fees
associated with litigation billed in prior years.
INTEREST EXPENSE. Interest expense increased to $1.4 million in 1996 from
$1.2 million in 1995 due to an increase in working capital borrowing
requirements which was partially offset by a reduction in borrowing costs. For
1996, the average outstanding short-term debt balance was $9.8 million, with an
average effective interest rate of 9.25%. For 1995, the average balance was $8.5
million, with an average effective interest rate of 9.88%.
LIQUIDITY AND CAPITAL RESOURCES
The Company has relied primarily on internally generated funds, trade credit
and asset-based borrowings to finance its operations and expansion. The
Company's capital requirements primarily result from working capital needed to
support increases in inventory and accounts receivable.
OPERATING CASH FLOW
Cash used by operations totaled $1.5 million in 1997 due to a significant
increase in accounts receivable and inventory which resulted from higher sales
of BOSS and Beverly Hills Polo Club sportswear. This was partially offset by
slightly higher levels of accounts payable and significantly improved operating
results. Cash used for investing activities totaled $1.1 million for 1997 and
was used primarily for the purchase of machinery for the Company's factories.
Cash provided by financing activities totaled $9.1 million for 1997. Upon
completion of it's initial public offering, the Company received net proceeds of
$33.9 million. This was used to retire the revolving line of credit and term
loan totaling approximately $19.5 million and to fund the final distribution to
the stockholders of the Subchapter S corporation of $9.3 million.
28
Accounts receivable and inventories increased $6.5 million and $9.8 million,
respectively, from December 31, 1996 to December 31, 1997 due to higher sales of
BOSS and Beverly Hills Polo Club sportswear and higher levels of finished goods.
The increase in accounts receivable was greater than the increase in sales due
to lower than expected cash collections beginning in May and periodically
through December 1997. Also, the increase in the finished goods inventories was
greater than the increase in sales due to growth in imported merchandise for
which the Company pays via letters of credit prior to delivery in the United
Sates. The Company manages its inventory levels by scheduling production and
purchases of imported inventory to meet firm purchase orders.
Capital expenditures were $1.1 million for the year ended December 31, 1997
and $0.7 million in both 1996 and 1995. The Company's capital expenditures were
comprised primarily of purchases of computer equipment and sewing machinery for
its domestic factories. The Company anticipates that capital expenditures will
be approximately $7.0 to $8.0 million in 1998, primarily related to the
construction of a new 150,000 square foot distribution center in Milford,
Delaware to be financed through a mortgage loan. Also, the Company expects to
spend approximately $0.5 million to upgrade its computer software to ensure year
2000 compliance. The Company expects conversion of its primary software programs
to be completed in November 1998 with testing to follow in early 1999. Recently,
the Company purchased new versions of two secondary software programs which have
been updated for year 2000 compliance. There is one remaining secondary software
program in which a decision to upgrade or outsource the processing entirely
needs to be made. Management will make this decision 1998. The Company does not
currently have commitments for any other material capital expenditures in 1998.
However, as part of the Company's expanded relationship with Girbaud, by the end
of 1998 the Company intends to open a Girbaud flagship store in Manhattan, New
York City, with a target selling space of no less than approximately 7,800
square feet. The Company intends to lease the required space for the store. At
this time the Company cannot determine the amount of capital expenditures that
may be required to appropriately fixture the store or, if it ultimately decided
to do so, to construct the store. See "ITEM 2. Properties."
A significant portion of the Company's fixed assets are located at its
manufacturing facilities in Mississippi. In February 1998, the Company announced
that it intends to close its Newton, Mississippi manufacturing facility. This
closure will occur during the second quarter of 1998, resulting in a charge in
the range of $0.2 million to $0.3 million against earnings in the first quarter
of 1998. The production in this facility, the majority of which is jeans, will
be transferred to third party independent contractors facilities in Mexico where
the Company currently has jeans manufactured. The Company anticipates annual
cost savings in the range of $0.3 million to $0.6 million after the transfer of
production to Mexico as a result of lower labor and overhead costs.
As of December 31, 1997 the Company had no borrowings under its revolving
line of credit and term loan facility compared to $7.2 million as of December
31, 1996.
Because of the Company's treatment as an S corporation for federal and state
income tax purposes, the Company has provided funds to its stockholders for the
payment of income taxes on the earnings of the Company. Accordingly, the Company
made cash distributions to its stockholders in the amounts of $2.9 million, $3.2
million and $15.8 million in 1995, 1996 and 1997, respectively. Concurrently
with completing its initial public offering the Company terminated its
Subchapter S Corporation status.
CREDIT FACILITIES
The Company has an asset-based revolving line of credit with Congress
Financial Corporation that allows it to borrow up to $30.0 million based on a
percentage of eligible accounts receivable and inventory. Outstanding borrowings
at December 31, 1995, 1996 and 1997 were $7.2 million, $6.3 million and $0.0
million, respectively. Borrowings under the revolving line of credit bear
interest at the lender's prime rate plus 1.0%. Also, the Company has a term loan
facility with the lender, which allows it to continually borrow up to $1.0
million. Outstanding borrowings under the term loan were $0.3 million, $0.9
million and $0.0
29
million at December 31, 1995, 1996 and 1997, respectively. The Company intends
to enter into a new credit facility in 1998, which will replace the existing
revolving line of credit and term loan facilities. The Company does not expect
to incur material costs in connection with entering into a new credit facility.
In November 1997, the Company borrowed $11.25 million from Ambra to finance
the acquisition of certain BOSS trademark rights. This obligation is evidenced
by a secured limited recourse promissory note which matures on December 31, 2007
(the "Note"). The Note bears interest at 10.0% per annum, payable quarterly;
principal is payable in full upon maturity of the Note, which is collateralized
by the Domestic BOSS Trademark Rights. See "ITEM 1. Business--Licenses and Other
Rights Agreements."
The Company extends credit to its customers. Accordingly, the Company may
have significant risk in collecting accounts receivable from its customers. The
Company has credit policies and procedures which it uses to minimize its
exposure to credit losses. The Company's collection personnel regularly contact
customers with receivable balances outstanding beyond 30 days to expedite
collection. If these collection efforts are unsuccessful, the Company may
discontinue merchandise shipments until the outstanding balance is paid.
Ultimately, the Company may engage an outside collection organization to collect
past due accounts. Timely contact with customers by collection personnel has
been effective in reducing credit losses to an immaterial amount. In 1996 and
1997, the Company's credit losses were $0.9 million and $1.2 million,
respectively. In each of these years, the Company's actual credit losses as a
percentage of net sales has been less than three-quarters of one percent. See
"ITEM 1. Business--Credit Control."
The Company believes that current levels of cash and cash equivalents ($7.4
million at December 31, 1997) plus the $4.8 million received in January 1998
from the partial exercise of the over-allotment option, together with cash from
operations and its existing credit facilities, will be sufficient to meet its
capital requirements for the next 12 months.
SELECTED QUARTERLY RESULTS
The Company's business is impacted by the general seasonal trends that are
characteristic of the apparel and retail industries. In the Company's segment of
the apparel industry, sales are generally higher in the first and third
quarters. Historically, the Company has taken greater markdowns in the second
and fourth quarters. As the timing of the shipment of products may vary from
year to year, the results for any particular quarter may not be indicative of
results for the full year. The Company has not had significant overhead and
other costs generally associated with large seasonal variations.
INFLATION
The Company does not believe that the relatively moderate rates of inflation
experienced in the United States over the last three years have had a
significant effect on its net sales or profitability. Although higher rates of
inflation have been experienced in a number of foreign countries in which the
Company's products are manufactured, the Company does not believe that they have
had a material effect on the Company's net sales or profitability.
IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation ("SFAS 123"). SFAS 123 will begin to affect the Company in 1997
with the establishment of the 1997 Omnibus Stock Plan. The Company will adopt
only the disclosure provisions of SFAS 123 and account for stock-based
compensation using the intrinsic value method set forth in APB Opinion 25.
In March 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, Earnings Per Share ("SFAS 128"). SFAS
128 provides a different method of calculating earnings per share than is
currently used in APB Opinion 15. SFAS 128 provides for the calculation of
30
basic and diluted earnings per share. Basic earnings per share includes no
dilution and is computed by dividing income available to common stockholders by
the weighted average number of common shares outstanding for the period. Diluted
earnings per share reflects the potential dilution of securities that could
share in the earnings of an entity, similar to existing fully diluted earnings
per share. As required by the policies of the Securities and Exchange Commission
(the "Commission"), the Company has treated the shares being sold to fund the S
Corporation Distribution as outstanding prior to the Offering. The Company
adopted the provisions for computing earnings per share set forth in SFAS 128 in
December 1997.
In June 1997, the Financial Accounting Standards Board issue two new
disclosure standards. The Company's results of operations and financial position
will be unaffected by implementation of these new standards.
Statement of Financial Accounting Standards No. 130, Reporting Comprehensive
Income ("SFAS 130"), establishes standards for reporting and display of
comprehensive income, its components and accumulated balances. Comprehensive
income is defined to include all changes in equity except those resulting from
investments by owners and distributions to owners. Among other disclosures, SFAS
130 requires that all items that are required to be recognized under current
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements.
Statement of Financial Accounting Standards No. 131, Disclosure about
Segments of a Business Enterprise ("SFAS 131"), establishes standards for the
way that public enterprises report information about operating segments in
annual financial statements and requires reporting of selected information for
disclosures regarding products and services, geographic areas and major
customers. SFAS 131 defines operating segments as components of an enterprise
about which separate financial information is available and that is evaluated
regularly by the chief operating decision maker in deciding how to allocate
resources and in assessing performance.
Both SFAS 130 and SFAS 131 are effective for financial statements for
periods beginning after December 15, 1997 and require comparative information
for earlier years to be restated. Management believes the impact, if any, would
not be material to the financial statement disclosures.
31
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the Company and the report of
independent certified public accountants thereon are set forth on pages F-1
through F-19 hereof.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The information appearing in the Company's Definitive Proxy Statement
prepared in connection with the 1998 Annual Meeting of Stockholders (the "Proxy
Statement") under the captions "Proposal 1: Election of Class I Directors" and
"Principal Executive Officers of the Company Who Are Not Also Directors" are
incorporated herein by reference. The Proxy Statement will be filed not later
than 120 days after the end of the fiscal year covered by this Annual Report on
Form 10-K.
All executive officers are designated annually by the Board of Directors and
serve at the pleasure of the Board.
ITEM 11. EXECUTIVE COMPENSATION
The information appearing in the Proxy Statement under the caption
"Executive Compensation" is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information appearing in the Proxy Statement under the caption "Security
Ownership of Certain Beneficial Owners and Management" is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information appearing in the Proxy Statement under the caption "Certain
Relationships and Related Transactions" is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)1. Financial Statements. The following financial statements, related
notes and the Report of Independent Auditors, are included in response to Item 8
hereof:
32
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
---------
Report of Independent Certified Public Accountants......................................................... F-2
Consolidated Balance Sheets at December 31, 1996 and 1997.................................................. F-3
Consolidated Statements of Income for the years ended December 31, 1995, 1996 and 1997..................... F-4
Consolidated Statements of Stockholders' Equity for the years ended December 31, 1995, 1996 and 1997....... F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1995, 1996 and 1997................. F-6
Notes to Consolidated Financial Statements................................................................. F-7
(a)2. Financial Statements Schedules. The following is a list of all financial
statement schedules filed herewith:
Schedule II--Valuation and Qualifying Accounts
Schedules other than those listed above have been omitted because they are
not required or are not applicable, or the required information has been
included in the Consolidated Financial Statements or the Notes thereto.
(a)3. Exhibits (numbered in accordance with Item 601 of Regulation S-K). See
accompanying Index to Exhibits. The following is a list of Exhibits filed
herewith:
10.26(a) Girbaud Trademark License and Technical Assistance Agreement dated January 15, 1998
10.26(b) Girbaud Trademark License and Technical Assistance Agreement for Women's Collection
dated March 4, 1998
10.26(c) Cancellation Agreement dated March 4, 1998
10.28 Beverly Hills Polo Club Letter Agreement dated March 18, 1998
10.29 Beverly Hills Polo Club Letter Agreement dated February 27, 1998
10.30 Beverly Hills Polo Club Letter Agreement dated February 27, 1998
27.01 Financial Data Schedule
(b) Reports on Form 8-K. None
33
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE
I.C. Isaacs & Company, Inc.
The audits referred to in our report to I.C. Isaacs & Company, Inc., dated
February 27, 1998 which is contained in Item 8 of this Form 10-K, include the
audit of the financial statement schedule listed in the accompanying index for
each of the three years in the period ended December 31, 1997. This financial
statement schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion on the financial statement schedule
based upon our audits.
In our opinion, such schedule presents fairly, in all material respects, the
information set forth therein.
/s/ BDO Seidman, LLP
Washington, D.C.
February 27, 1998
34
SCHEDULE II
I. C. ISAACS & COMPANY, INC.
VALUATION AND QUALIFYING ACCOUNTS
BALANCE AT CHARGED TO
BEGINNING OF COSTS AND BALANCE AT
YEAR EXPENSES DEDUCTION END OF YEAR
------------ ------------ ------------- -----------
DESCRIPTION
Year ended December 31, 1995
Allowance for doubtful accounts......................... $ 350,000 $ 398,000 $ (398,000) $ 350,000
Reserve for sales returns and discounts................. 445,000 5,104,000 (5,062,000) 487,000
Year ended December 31, 1996
Allowance for doubtful accounts......................... 350,000 1,194,000 (884,000) 660,000
Reserve for sales returns and discounts................. 487,000 5,956,000 (5,634,000) 809,000
Year ended December 31, 1997
Allowance for doubtful accounts......................... 660,000 1,740,000 (1,215,000) 1,185,000
Reserve for sales returns and discounts................. 809,000 10,646,000 (11,278,000) 177,000
35
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
I.C. ISAACS & COMPANY , INC.
(REGISTRANT)
By: /s/ ROBERT J. ARNOT
-----------------------------------------
Robert J. Arnot
CHAIRMAN OF THE BOARD
AND CO-CHIEF EXECUTIVE OFFICER
Date: March 26, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
- ------------------------------ --------------------------- -------------------
Chairman of the Board and
/s/ ROBERT J. ARNOT Co-Chief Executive
- ------------------------------ Officer and Director March 26, 1998
Robert J. Arnot (Principal Executive
Officer)
/s/ GERALD W. LEAR President and Co-Chief
- ------------------------------ Executive Officer and March 26, 1998
Gerald W. Lear Director (Principal
Executive Officer)
Vice President and Chief
/s/ EUGENE C. WIELEPSKI Financial Officer and
- ------------------------------ Director (Principal March 26, 1998
Eugene C. Wielepski Financial and Accounting
Officer)
/s/ IRA J. HECHLER
- ------------------------------ Director March 26, 1998
Ira J. Hechler
/s/ JON HECHLER
- ------------------------------ Director March 26, 1998
Jon Hechler
/s/ RONALD S. SCHMIDT
- ------------------------------ Director March 26, 1998
Ronald S. Schmidt
36
SIGNATURE TITLE DATE
- ------------------------------ --------------------------- -------------------
/s/ GARY B. BRASHERS
- ------------------------------ Director March 26, 1998
Gary B. Brashers
/s/ NEAL J. FOX
- ------------------------------ Director March 26, 1998
Neal J. Fox
/s/ ANTHONY J. MARTERIE
- ------------------------------ Director March 26, 1998
Anthony J. Marterie
37
I.C. ISAACS & COMPANY, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
-----
Report of Independent Certified Public Accountants......................................................... F-2
Consolidated Balance Sheets at December 31, 1996 and 1997.................................................. F-3
Consolidated Statements of Income for the years ended December 31, 1995, 1996 and 1997..................... F-4
Consolidated Statements of Stockholders' Equity for the years ended December 31, 1995, 1996 and 1997....... F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1995, 1996
and 1997................................................................................................. F-6
Notes to Consolidated Financial Statements................................................................. F-7
F-1
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
I.C. Isaacs & Company, Inc.
Baltimore, Maryland
We have audited the accompanying consolidated balance sheets of I.C. Isaacs
& Company, Inc. and subsidiaries as of December 31, 1996 and 1997 and the
related consolidated statements of income, stockholders' equity and cash flows
for each of the three years in the period ended December 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of I.C. Isaacs
& Company, Inc. and subsidiaries at December 31, 1996 and 1997 and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1997 in conformity with generally accepted accounting
principles.
/S/ BDO SEIDMAN, LLP
Washington, D.C.
February 27, 1998
F-2
I.C. ISAACS & COMPANY, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
----------------------------
1996 1997
------------- -------------
ASSETS
Current
Cash, including temporary investments of $368,175 and $6,512,455................. $ 938,799 $ 7,422,067
Accounts receivable, less allowance for doubtful accounts of $660,000 and
$1,185,000 (Note 3)............................................................ 16,582,990 23,020,077
Inventories (Notes 1 and 3)...................................................... 14,090,974 23,936,226
Prepaid expenses and other....................................................... 1,266,655 1,768,792
------------- -------------
Total current assets............................................................... 32,879,418 56,147,162
Property, plant and equipment, at cost, less accumulated depreciation and
amortization (Notes 2 and 3)..................................................... 2,399,822 2,678,688
Trademark, less accumulated amortization of $187,500 (Note 7)...................... -- 11,062,500
Goodwill, less accumulated amortization of $797,265 and $863,505................... 1,854,835 1,788,595
Deferred income taxes (Note 5)..................................................... -- 1,505,000
Other Assets (Note 3).............................................................. 122,565 260,776
------------- -------------
$ 37,256,640 $ 73,442,721
------------- -------------
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current
Checks issued against future deposits............................................ $ 1,150,679 $ --
Current maturities of long-term debt and revolving line of credit
(Note 3)....................................................................... 6,520,418 --
Current maturities of capital lease obligations (Note 3)......................... 216,764 172,515
Accounts payable................................................................. 6,378,310 6,967,488
Accrued expenses and other current liabilities (Note 4).......................... 2,144,277 1,979,364
Accrued compensation............................................................. 194,710 235,309
Income taxes payable............................................................. -- 156,000
------------- -------------
Total current liabilities.......................................................... 16,605,158 9,510,676
Long-term debt (Note 3)
Note payable..................................................................... -- 11,250,000
Term loan........................................................................ 699,994 --
Capital lease obligations........................................................ 358,638 186,122
------------- -------------
Total long-term debt............................................................... 1,058,632 11,436,122
------------- -------------
Minority interest.................................................................. 200,273 --
------------- -------------
Commitments and Contingencies (Notes 3, 4, 7 and 8)
STOCKHOLDERS' EQUITY (NOTE 6):
Preferred stock; $.0001 par value; 5,000,000 shares authorized, none
outstanding.................................................................... -- --
Common stock; $.0001 par value; 50,000,000 shares authorized; 4,024,699 and
7,824,699 shares issued; 4,000,000 and 7,800,000 shares outstanding............ 402 782
Additional paid-in capital....................................................... 266,579 34,120,190
Retained earnings................................................................ 19,140,464 18,389,819
Treasury stock, at cost (24,699 shares).......................................... (14,868) (14,868)
------------- -------------
Total stockholders' equity....................................................... 19,392,577 52,495,923
------------- -------------
$ 37,256,640 $ 73,442,721
------------- -------------
------------- -------------
See accompanying summary of accounting policies and notes to consolidated
financial statements.
F-3
I.C. ISAACS & COMPANY, INC.
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31,
---------------------------------------------
1995 1996 1997
------------- -------------- --------------
Net sales........................................................ $ 93,271,157 $ 118,655,253 $ 161,445,362
Cost of sales.................................................... 68,529,969 84,421,651 109,693,828
------------- -------------- --------------
Gross profit..................................................... 24,741,188 34,233,602 51,751,534
------------- -------------- --------------
Operating expenses
Selling........................................................ 8,926,800 11,897,834 16,235,974
License fees (Note 7).......................................... 3,174,656 4,817,037 7,577,482
Distribution and shipping...................................... 2,378,728 2,669,093 4,306,566
General and administrative..................................... 5,786,524 6,243,327 7,546,105
Recovery of legal fees (Note 7)................................ -- (718,558) (117,435)
------------- -------------- --------------
Total operating expenses......................................... 20,266,708 24,908,733 35,548,692
------------- -------------- --------------
Operating income................................................. 4,474,480 9,324,869 16,202,842
------------- -------------- --------------
Other income (expense)
Interest, net of interest income of $21,099, $18,249
and $16,045.................................................. (1,247,353) (1,365,163) (2,372,132)
Other, net..................................................... (3,178) 84,795 3,001
------------- -------------- --------------
Total other income (expense)..................................... (1,250,531) (1,280,368) (2,369,131)
------------- -------------- --------------
Income before minority interest and income taxes................. 3,223,949 8,044,501 13,833,711
Minority interest................................................ (32,593) (81,842) (134,727)
------------- -------------- --------------
Income before income taxes....................................... 3,191,356 7,962,659 13,698,984
Income tax benefit (Note 5)...................................... -- -- 1,349,000
------------- -------------- --------------
Net income....................................................... $ 3,191,356 $ 7,962,659 $ 15,047,984
------------- -------------- --------------
------------- -------------- --------------
Basic and diluted net income per share........................... $ 0.80 $ 1.99 $ 3.68
Weighted average common shares outstanding....................... 3,987,651 4,000,000 4,093,699
Pro forma financial information:
Income before income taxes, as presented....................... $ 3,191,356 $ 7,962,659 $ 13,698,984
Pro forma provision for income taxes (unaudited)............... 1,308,000 3,265,000 5,617,000
------------- -------------- --------------
Pro forma net income (unaudited)............................... $ 1,883,356 $ 4,697,659 $ 8,081,984
------------- -------------- --------------
------------- -------------- --------------
Pro forma basic and diluted earnings per share (unaudited)..... $ 0.95 $ 1.62
Weighted average shares outstanding............................ 4,930,000 5,000,767
See accompanying summary of accounting policies and notes to consolidated
financial statements.
F-4
I.C. ISAACS & COMPANY, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
PREFERRED STOCK COMMON STOCK ADDITIONAL
------------------------ ---------------------- PAID-IN RETAINED TREASURY
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS STOCK
----------- ----------- --------- ----------- ---------- ----------- -----------
Balance at December 31, 1994............ -- -- 4,024,699 $ 402 $ 247,791 $14,137,214 $ (76,722)
Net income.............................. -- -- -- -- -- 3,191,365 --
Stockholder distributions............... -- -- -- -- -- (2,935,866) --
Sale of treasury stock (24,699
shares)............................... -- -- -- -- 18,788 -- 61,854
----------- ----------- --------- ----- ---------- ----------- -----------
Balance at December 31, 1995............ -- -- 4,024,699 402 266,579 14,392,704 (14,868)
Net income.............................. -- -- -- -- -- 7,962,659 --
Stockholder distributions............... -- -- -- -- -- (3,214,899) --
----------- ----------- --------- ----- ---------- ----------- -----------
Balance at December 31, 1996............ -- -- 4,024,699 402 266,579 19,140,464 (14,868)
Issuance of common stock................ -- -- 3,800,000 380 33,853,611 -- --
Net income.............................. -- -- -- -- -- 15,047,984 --
Stockholder distributions............... -- -- -- -- -- (15,798,629) --
----------- ----------- --------- ----- ---------- ----------- -----------
Balance, at December 31, 1997........... -- -- 7,824,699 $ 782 $34,120,190 $18,389,819 $ (14,868)
----------- ----------- --------- ----- ---------- ----------- -----------
----------- ----------- --------- ----- ---------- ----------- -----------
TOTAL
----------
Balance at December 31, 1994............ $14,308,685
Net income.............................. 3,191,356
Stockholder distributions............... (2,935,866)
Sale of treasury stock (24,699
shares)............................... 80,642
----------
Balance at December 31, 1995............ 14,644,817
Net income.............................. 7,962,659
Stockholder distributions............... (3,214,899)
----------
Balance at December 31, 1996............ 19,392,577
Issuance of common stock................ 33,853,991
Net income.............................. 15,047,984
Stockholder distributions............... (15,798,629)
----------
Balance, at December 31, 1997........... $52,495,923
----------
----------
See accompanying summary of accounting policies and notes to consolidated
financial statements.
F-5
I.C. ISAACS & COMPANY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
-------------------------------------------
1995 1996 1997
------------- ------------- -------------
Operating Activities
Net income......................................................... $ 3,191,356 $ 7,962,659 $ 15,047,984
Adjustments to reconcile net income to net cash provided by (used in)
operating activities
Deferred income taxes.............................................. -- -- (1,505,000)
Provision for doubtful accounts.................................... 398,451 1,193,693 1,739,865
Write off of accounts receivable................................... (398,451) (883,693) (1,214,865)
Provision for sales returns and discounts.......................... 5,104,266 5,955,658 10,646,418
Sales returns and discounts........................................ (5,062,285) (5,633,525) (11,277,938)
Provision for overcharges.......................................... -- -- 166,150
Depreciation and amortization...................................... 1,477,450 1,359,252 1,123,460
(Gain) loss on sale of assets...................................... 99,116 (71,800) (26,928)
Minority interest.................................................. 32,593 81,842 134,727
(Increase) decrease in assets
Accounts receivable................................................ 886,051 (6,850,073) (6,496,717)
Inventories........................................................ (2,936,042) 232,756 (9,845,252)
Prepaid expenses and other......................................... (161,621) (563,388) (502,137)
Other assets....................................................... -- -- (158,211)
Increase (decrease) in liabilities
Accounts payable................................................... 971,255 1,268,184 589,178
Accrued expenses and other current liabilities..................... 43,334 327,320 (164,913)
Accrued compensation............................................... (44,030) (16,100) 40,599
Income taxes payable............................................... -- -- 156,000
------------- ------------- -------------
Cash provided by (used in) operating activities...................... 3,601,443 4,362,785 (1,547,580)
------------- ------------- -------------
Investing Activities
Proceeds from sale of assets....................................... 13,750 71,800 38,174
Capital expenditures............................................... (669,464) (701,821) (1,104,832)
------------- ------------- -------------
Cash used in investing activities.................................... (655,714) (630,021) (1,066,658)
------------- ------------- -------------
Financing Activities
Checks issued against future deposits.............................. 345,929 (67,153) (1,150,679)
Issuance of common stock........................................... -- -- 33,853,991
Sale of treasury stock............................................. 80,642 -- --
Stockholder distributions.......................................... (2,935,866) (3,214,899) (15,798,629)
Principal payments on debt......................................... (760,618) (1,632,216) (7,437,177)
Principal proceeds from debt....................................... 291,552 783,349 --
Deferred financing costs........................................... -- (75,000) (35,000)
Purchase of minority interest...................................... -- -- (335,000)
------------- ------------- -------------
Cash provided by (used in) financing activities...................... (2,978,361) (4,205,919) 9,097,506
------------- ------------- -------------
Increase (decrease) in cash and cash equivalents..................... (32,632) (473,155) 6,483,268
Cash and Cash Equivalents, at beginning of year...................... 1,444,586 1,411,954 938,799
------------- ------------- -------------
Cash and Cash Equivalents, at end of year............................ $ 1,411,954 $ 938,799 $ 7,422,067
------------- ------------- -------------
------------- ------------- -------------
See accompanying summary of accounting policies and notes to consolidated
financial statements.
F-6
I.C. ISAACS & COMPANY, INC.
SUMMARY OF ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of I. C. Isaacs &
Company, Inc. ("ICI"), I.C. Isaacs Europe, S.L. ("Isaacs Europe"), I.C. Isaacs &
Company, L.P. (the "Partnership"), Isaacs Design, Inc. ("Design") and I. C.
Isaacs Far East (collectively, the "Company"). ICI operates as the general
partner of the Partnership and has a 99.0% ownership interest. The limited
partner with a 1.0% ownership interest was an individual. The Company accounted
for the limited partner's ownership interest as a minority interest in the
accompanying consolidated financial statements. In connection with the initial
public offering of its common stock, ICI purchased the limited partnership
interest, at book value, from the limited partner. The Company established
Isaacs Europe in July 1996 as the exclusive licensee of Beverly Hills Polo Club
sportswear in Europe. Isaacs Europe did not have any significant revenue or
expenses in 1996 or 1997. All intercompany balances and transactions have been
eliminated. ICI terminated its Subchapter S corporation status on December 22,
1997, and became subject to federal, state and local income taxes.
BUSINESS DESCRIPTION
The Company, which operates in one business segment, designs, manufactures
and markets full lines of sportswear for young men, women and boys under the
BOSS brand in the United States and Puerto Rico, and for men and women under the
Beverly Hills Polo Club brand in the United States, Puerto Rico and Europe. In
February 1998, the Company began offering collections of men's sportswear under
the Girbaud brand in the United States and Puerto Rico. The Company intends to
begin marketing women's sportswear under the Girbaud brand in the second quarter
of 1998 for delivery during the 1998 holiday season. The Company also
manufactures and markets women's sportswear under various other Company-owned
brand names as well as under third-party private labels.
INITIAL PUBLIC OFFERING
Effective December 17, 1997, ICI sold 3,800,000 shares of its common stock
in an initial public offering. Net proceeds of the offering, after deducting
underwriting discounts and commissions and professional fees, approximated $33.9
million. Proceeds of the offering were used to retire the revolving line of
credit totaling approximately $19.5 million and to pay the final distribution to
stockholders of the Subchapter S corporation of $9.3 million. The remaining $5.1
million will be used for general corporate purposes. On January 23, 1998, upon
the partial exercise of an over-allotment option, the Company sold an additional
520,000 shares of its common stock and received net proceeds of approximately
$4.8 million. The additional proceeds will be used for general corporate
purposes. The final distribution to the stockholders represented a portion of
the cumulative undistributed S corporation earnings as of December 22, 1997
(termination date of S corporation status).
RISKS AND UNCERTAINTIES
The apparel industry is highly competitive. The Company competes primarily
with larger, well capitalized companies which may seek to increase market share
through price reductions. The risk to the Company is that such a strategy may
ultimately lead to reduced profit margins. In the past several years, many of
the Company's competitors have switched much of their apparel manufacturing from
the United States to foreign locations such as Mexico, the Dominican Republic
and throughout Asia. As competitors lower production costs it gives them greater
flexibility to alter prices. Over the last several years, the
F-7
I.C. ISAACS & COMPANY, INC.
SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
Company has switched a significant portion of its production to contractors
outside the United States to reduce costs. Management believes that it will
continue this strategy for the foreseeable future.
The Company faces other risks inherent in the apparel industry. These risks
include changes in fashion trends and related consumer acceptance and the
continuing consolidation in the retail segment of the apparel industry. The
Company's ability, or inability, to manage these risk factors could influence
future financial and operating results.
USE OF ESTIMATES
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make certain estimates and
assumptions, particularly regarding valuation of accounts receivable and
inventory, recognition of liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements. Actual results could differ
from those estimates.
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially expose the Company to concentrations
of credit risk consist primarily of trade accounts receivable. The Company's
customer base is not concentrated in any specific geographic region, but is
concentrated in the retail industry. For the years ended December 31, 1995,
1996, and 1997 sales to one customer were 19.0%, 13.0% and 14.0% of total sales,
respectively. The significant customer was the same in 1996 and 1997, but was
different in 1995. The Company establishes an allowance for doubtful accounts
based upon factors surrounding the credit risk of specific customers, historical
trends and other information. The Company's actual credit losses as a percentage
of net sales have been less than three-quarters of one percent.
The Company is also subject to concentrations of credit risk with respect to
its cash and cash equivalents, which it minimizes by placing these funds with
high-quality institutions.
The Company is exposed to credit losses in the event of nonperformance by
the counterparties to the letter of credit agreements, but it does not expect
any financial institutions to fail to meet their obligation given their high
credit rating.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined by
the first-in, first-out (FIFO) method.
PROPERTY, PLANT AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed over the
estimated useful lives of the assets by both straight-line and accelerated
methods. Leasehold improvements are amortized using the straight-line method
over the life of the lease.
GOODWILL
The Company has recorded goodwill based on the excess of purchase price over
net assets acquired, and it is being amortized on a straight-line basis over 40
years. The Company analyzes the operating income of the women's Company-owned
and private label line in relation to the goodwill amortization for evidence of
impairment. The Company analyzes only the profitability of this product line
because it is the remaining activity of the business acquired in 1984 which gave
rise to the goodwill.
F-8
I.C. ISAACS & COMPANY, INC.
SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
LICENSES
Included in other assets is the cost of certain licenses which allow the
Company to manufacture and market certain branded apparel. The Company
capitalized the cost of obtaining the licenses, and the cost of the licenses is
being amortized on a straight-line basis over the initial term of the license.
The Company accrues royalty expense related to the licenses at the greater of
the specified percentage of sales or the minimum guaranteed royalty set forth in
the license agreements.
REVENUE RECOGNITION
Sales are recognized upon shipment of products. Allowances for estimated
returns are provided when sales are recorded.
ADVERTISING COSTS
Advertising costs, included in selling expenses, are expensed as incurred
and were $1,498,001, $2,529,109 and $3,867,371 for the years ended December 31,
1995, 1996 and 1997, respectively.
CASH EQUIVALENTS
For purposes of the statements of cash flows, all temporary investments
purchased with a maturity of three months or less are considered to be cash
equivalents.
INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes ("SFAS
109"). Under SFAS 109, deferred taxes are determined using the liability method
which requires the recognition of deferred tax assets and liabilities based on
differences between financial statement and income tax basis using presently
enacted tax rates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Financial instruments of the Company include long-term debt. Based upon
current borrowing rates available to the Company, estimated fair values of these
financial instruments approximate their recorded amounts.
EARNINGS PER SHARE
Pro forma earnings per share for the year ended December 31, 1996 are based
on pro forma net income and the weighted average number of shares of common
stock outstanding (4,000,000) adjusted to include the number of shares (930,000)
sold by the Company which would be necessary to fund the distribution of $9.3
million of previously earned but undistributed Subchapter S corporation
earnings. Pro forma earnings per share for the year ended December 31, 1997 are
based on the weighted average of the above shares outstanding prior to the
initial public offering and 7,800,000 shares for the period subsequent to the
initial public offering.
Supplementary pro forma earnings per share for the year ended December 31,
1996 and 1997 were $.83 and $1.17, respectively. Supplementary earnings per
share for the year ended December 31, 1996 are based upon the weighted average
number of shares of common stock used in the calculation of pro forma net income
per share increased by the sale of 722,041 shares at the initial public offering
price of $10.00 per share, the proceeds of which would be necessary to repay
approximately $7,220,408 of the Company's
F-9
I.C. ISAACS & COMPANY, INC.
SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
term loan and revolving credit facility. Supplementary pro forma earnings per
share for the year ended December 31, 1997 are based on the weighted average of
the above shares increased by 1,950,000 shares related to the repayment of the
term loan and credit facility for the period prior to the initial public
offering and 7,800,000 shares for the period subsequent to the initial public
offering.
RECENT ACCOUNTING PRONOUNCEMENTS
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS 123). SFAS 123 will begin to affect the Company in fiscal
1997 with the establishment of the 1997 Omnibus Stock Plan. The Company will
adopt only the disclosure provisions of SFAS 123 and account for stock-based
compensation using the intrinsic value method set forth in APB Opinion 25.
In March 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, Earnings Per Share ("SFAS 128"). SFAS
128 provides a different method of calculating earnings per share than is
currently used in APB Opinion 15. SFAS 128 provides for the calculation of basic
and diluted earnings per share. Basic earnings per share includes no dilution
and is computed by dividing income available to common stockholders by the
weighted average number of common shares outstanding for the period. Diluted
earnings per share reflects the potential dilution of securities that could
share in the earnings of an entity, similar to existing fully diluted earnings
per share. As required by the policies of the Securities and Exchange Commission
(the "Commission"), the Company has treated the shares being sold to fund the S
Corporation Distribution as outstanding prior to the Offering. The Company
adopted the provisions for computing earnings per share set forth in SFAS 128 in
December 1997. There is no difference in basic and diluted earnings per share.
In June 1997, the Financial Accounting Standards Board issued two new
disclosure standards. The Company's results of operations and financial position
will be unaffected by implementation of these new standards.
Statement of Financial Accounting Standards No. 130, Reporting Comprehensive
Income ("SFAS 130"), establishes standards for reporting and display of
comprehensive income, its components and accumulated balances. Comprehensive
income is defined to include all changes in equity except those resulting from
investments by owners and distributions to owners. Among other disclosures, SFAS
130 requires that all items that are required to be recognized under current
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements.
Statement of Financial Accounting Standards No. 131, Disclosure about
Segments of a Business Enterprise ("SFAS 131"), establishes standards for the
way that public enterprises report information about operating segments in
annual financial statements and requires reporting of selected information about
operating segments in interim financial statements issued to the public. It also
establishes standards for disclosures regarding products and services,
geographic areas and major customers. SFAS 131 defines operating segments as
components of an enterprise about which separate financial information is
available that is evaluated regularly by the chief operating decision maker in
deciding how to allocate resources and in assessing performance.
Both SFAS 130 and SFAS 131 are effective for financial statements for
periods beginning after December 15, 1997 and require comparative information
for earlier years to be restated. Management believes the impact, if any, would
not be material to the financial statement disclosures. Results of operations
and financial position, however, will be unaffected by implementation of these
standards.
F-10
I. C. ISAACS & COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. INVENTORIES
Inventories consist of the following:
DECEMBER 31,
----------------------------
1996 1997
------------- -------------
Raw materials.................................................. $ 3,146,405 $ 4,742,653
Work-in process................................................ 3,345,545 1,864,569
Finished goods................................................. 7,599,024 17,329,004
------------- -------------
$ 14,090,974 $ 23,936,226
------------- -------------
------------- -------------
2. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
DECEMBER 31, ESTIMATED
-------------------------- USEFUL
1996 1997 LIVES
------------ ------------ -----------
Land................................................ $ 185,660 $ 185,660
Building and improvements........................... 5,301,761 5,339,371 18 years
Machinery, equipment and fixtures................... 8,570,577 9,485,268 5-7 years
Other............................................... 1,035,442 1,167,655 various
------------ ------------
15,093,440 16,177,954
Less accumulated depreciation and amortization...... 12,693,618 13,499,266
------------ ------------
$ 2,399,822 $ 2,678,688
------------ ------------
------------ ------------
3. LONG-TERM DEBT
Long-term debt consists of the following:
DECEMBER 31,
---------------------------
1996 1997
------------ -------------
Term loan (a).................................................... $ 899,998 $ --
Revolving line of credit (a)..................................... 6,320,414 --
Notes payable (b)................................................ -- 11,250,000
Capital lease obligations (c).................................... 575,402 358,637
------------ -------------
Total............................................................ $ 7,795,814 $ 11,608,637
Less current maturities of long-term debt and revolving line of
credit......................................................... 6,520,418 --
Less current maturities of capital lease obligations............. 216,764 172,515
------------ -------------
$ 1,058,632 $ 11,436,122
------------ -------------
------------ -------------
(a) The Company has a renewable term loan agreement with a borrowing limit
of $1,000,000. The term loan facility is payable in 60 monthly installments of
$16,667 and is collateralized by property and equipment. The term loan facility
may be renewed for periods of 60 months at the option of the lender.
F-11
I. C. ISAACS & COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. LONG-TERM DEBT (CONTINUED)
The term loan facility bears interest at the prime rate of interest plus 1.0%
(effectively 9.5% at December 31, 1997) and is payable monthly.
The revolving line of credit agreement and letter of credit arrangement
provide that the Company may borrow up to 80% of the net amount of eligible
accounts receivable and a portion of imported inventory, as defined in the
financing agreement. The revolving line of credit expires on June 30, 1998.
Borrowings under the revolving line of credit and outstanding letters of credit
(limited to $10.0 million) may not exceed $30.0 million and bear interest at the
prime rate of interest plus 1.0% (effectively 9.5% at December 31, 1997).
Additional borrowings available under the revolving line of credit and letter of
credit agreements are approximately $23 million at December 31, 1997. Borrowings
under these agreements are collateralized by the Company's accounts receivable
imported inventories and other assets. Outstanding letters of credit
approximated $3.7 million at December 31, 1997. Among the provisions of the
financing agreement are requirements to maintain specified levels of working
capital and net worth. Retained earnings of approximately $8.0 million are
restricted as to the payment of dividends.
Average short-term borrowings and the related interest rates are as follows:
YEAR ENDED DECEMBER 31,
----------------------------
1996 1997
------------- -------------
Borrowing under revolving line of credit....................... $ 6,320,414 $ --
Weighted average interest rate................................. 9.25% 9.50%
Maximum month-end balance during year.......................... 11,024,807 23,192,303
Average balance during the year................................ $ 9,814,896 $ 17,144,863
(b) In November 1997, the Company purchased certain BOSS trademark rights
from Brookhurst, Inc. and issued a $11,250,000 secured limited recourse
promissory note to finance this acquisition. The note bears interest at 10%,
payable quarterly; principal is payable in full on December 31, 2007. The note
is collateralized by the domestic BOSS trademark rights.
(c) The Company leases equipment under various capital leases which are
included in property, plant and equipment for $1,048,037 at December 31, 1996
and 1997. Amortization expense related to assets under capital leases amounted
to $211,512, $191,490, and $169,107 for the years ended December 31, 1995, 1996
and 1997, respectively.
As of December 31, 1997, future net minimum lease payments under capital
leases that have initial or remaining noncancelable lease terms in excess of one
year are as follows:
1998.............................................................. $ 202,827
1999.............................................................. 189,551
2000.............................................................. 6,296
---------
Total minimum lease payments...................................... 398,674
Less: amount representing interest................................ (40,037)
---------
Present value of net minimum lease payments....................... 358,637
Less: current portion............................................. (172,515)
---------
Long-term capital lease obligations............................... $ 186,122
---------
---------
F-12
I. C. ISAACS & COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. ACCRUED EXPENSES
Accrued expenses consist of the following:
DECEMBER 31,
--------------------------
1996 1997
------------ ------------
Royalties......................................................... $ 1,194,637 $ 901,925
Accrued professional fees......................................... 150,000 150,000
Payable to salesmen............................................... 152,701 127,634
Severance agreements.............................................. 103,745 --
Payroll tax withholdings.......................................... 145,736 139,214
Customer credit balances.......................................... 254,244 240,530
Property taxes.................................................... -- 136,700
Accrued interest.................................................. -- 174,401
Other............................................................. 143,214 108,960
------------ ------------
$ 2,144,277 $ 1,979,364
------------ ------------
------------ ------------
5. INCOME TAXES
Concurrently with completing its initial public offering, ICI terminated its
subchapter S corporation status. Therefore, for the years ended December 1995
and 1996 and for the period ended December 22, 1997 (the day prior to completing
the offering) no provision has been made in the accompanying financial
statements for federal and state income taxes since such taxes were the
liability of the stockholders. In connection with the offering, ICI became
subject to federal and state income taxes.
In conjunction with becoming subject to federal and state income taxes, ICI
recorded a deferred tax asset and a corresponding tax benefit of approximately
$1.5 million in accordance with SFAS 109.
The income tax provision (benefit) consists of the following:
YEAR ENDED
DECEMBER 31, 1997
-----------------
Current
Federal.................................................................. $ 128,000
State and local.......................................................... 28,000
-----------------
156,000
Deferred................................................................... (1,505,000)
-----------------
$ (1,349,000)
-----------------
-----------------
F-13
I. C. ISAACS & COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. INCOME TAXES (CONTINUED)
Deferred income taxes reflect the net effects of temporary differences
between the carrying amounts of assets and liabilities for financial and income
tax reporting purposes. Significant items comprising ICI's deferred tax asset
are as follows:
DECEMBER 31, 1997
-----------------
Depreciation............................................................... $ 602,000
Allowance for doubtful accounts............................................ 486,000
Inventory valuation........................................................ 372,000
Other...................................................................... 45,000
-----------------
$ 1,505,000
-----------------
-----------------
The pro forma provision for income taxes represents the income tax
provisions that would have been reported had ICI been subject to federal and
state income taxes for the entire period. The pro forma estimated effective tax
rate was 41.0%.
The pro forma income tax provision consists of the following:
YEARS ENDED DECEMBER 31,
--------------------------
1996 1997
------------ ------------
Current
Federal......................................................... $ 2,900,000 $ 4,796,000
State........................................................... 465,000 1,021,000
------------ ------------
3,365,000 5,817,000
Deferred.......................................................... (100,000) (200,000)
------------ ------------
$ 3,265,000 $ 5,617,000
------------ ------------
------------ ------------
A reconciliation between the statutory and effective tax rates is as
follows:
YEARS ENDED DECEMBER 31,
------------------------
1996 1997
----------- -----------
Federal statutory rate........................................................ 35.0% 35.0%
State and local taxes, net of federal benefit................................. 4.5 5.0
Nondeductible entertainment expense........................................... 1.0 .5
Nondeductible goodwill amortization........................................... .5 .5
--- ---
41.0% 41.0%
--- ---
--- ---
6. STOCK OPTIONS
In May 1997, ICI adopted the 1997 Omnibus Stock Plan. Under the 1997 Omnibus
Stock Plan, ICI may grant qualified and nonqualified stock options, stock
appreciation rights, restricted stock or performance awards, payable in cash or
shares of common stock, to selected employees. The 1997 Omnibus Stock Plan will
be administered by the Board of Directors. The Company has reserved 500,000
shares of common
F-14
I. C. ISAACS & COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. STOCK OPTIONS (CONTINUED)
stock for issuance under the 1997 Omnibus Stock Plan. ICI intends to grant stock
options to selected employees in 1998.
7. COMMITMENTS AND CONTINGENCIES
The Company rents real and personal property under leases expiring at
various dates through 2003. Certain of the leases stipulate payment of real
estate taxes and other occupancy expenses. Minimum annual rental commitments
under noncancelable operating leases in effect at December 31, 1997 are
summarized as follows:
COMPUTER
TRUCKS SHOWROOMS HARDWARE MACHINERY TOTAL
---------- ------------ ---------- ---------- ------------
1998................................ $ 111,742 $ 484,243 $ 126,252 $ 41,143 $ 763,380
1999................................ 57,720 266,706 48,231 3,654 376,311
2000................................ 57,720 251,743 22,224 -- 331,687
2001................................ 57,720 263,417 5,556 -- 326,693
2002................................ 43,290 262,584 -- -- 305,874
Thereafter.......................... -- 218,820 -- -- 218,820
---------- ------------ ---------- ---------- ------------
$ 328,192 $ 1,743,513 $ 202,263 $ 44,797 $ 2,322,765
---------- ------------ ---------- ---------- ------------
---------- ------------ ---------- ---------- ------------
Total rent expense is as follows:
YEAR ENDED DECEMBER 31,
--------------------------------------
1995 1996 1997
---------- ------------ ------------
Minimum rentals........................................... $ 344,047 $ 773,987 $ 855,347
Other lease costs......................................... 566,533 459,823 463,934
---------- ------------ ------------
$ 910,580 $ 1,233,810 $ 1,349,281
---------- ------------ ------------
---------- ------------ ------------
During 1990, the Company executed a license agreement for the manufacture
and sale of "sportswear" under the "BOSS" trademark. This agreement had an
expiration date in December 1999 with additional options to extend it through
2004. The agreement provided for certain minimum license fees and additional
license fees of 5.0% of denim sales and 6.0% of non-denim sales, as defined.
Total license fees amounted to $2,753,422, $4,209,750 and $6,448,204 for 1995,
1996 and 1997, respectively.
In February 1993, the owner of the "HUGO BOSS" trademark filed suit against
the licensor of the "BOSS" trademark in the United States and several licensees,
including the Company. The complaint alleged trademark infringement related to
use of the "BOSS" and "HUGO BOSS" trademarks. However, the complaint did not
challenge the exclusive right of the Company to use the "BOSS" trademark in
connection with the manufacture and sale of certain clothing as set forth in its
exclusive license agreement.
The Company executed certain agreements in November 1997 which resulted in
the settlement (the "Settlement") of the BOSS trademark litigation described
above. As part of the BOSS litigation settlement, the Company borrowed $11.25
million to finance the acquisition of certain BOSS trademark rights. This
obligation is evidenced by a secured limited recourse promissory note which
matures on December 31, 2007 (the "Note"). The Note bears interest at 10.0% per
annum, payable quarterly; principal is payable in full upon maturity of the
Note, which is collateralized by the domestic BOSS trademark rights.
F-15
I. C. ISAACS & COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. COMMITMENTS AND CONTINGENCIES (CONTINUED)
The Settlement allowed the Company to acquire the domestic rights to the BOSS
trademark for use in the manufacture and sale of apparel, subject to certain
restrictions as set forth in the agreements, and the Company's transfer of the
foreign rights to the BOSS trademark to Ambra, Inc., a wholly-owned subsidiary
of Hugo Boss AG ("Ambra"). The Company also entered into a foreign rights
manufacturing agreement with Ambra under which the Company obtained the license
to manufacture apparel in foreign countries in which the Company is currently
manufacturing BOSS products for sale in the United States and Puerto Rico. Under
the foreign rights agreement, the Company will pay annual royalties of 12.5% on
the first $32.0 million of net sales (the "Minimum Net Sales") attributable to
apparel manufactured in specified foreign countries for each of the first four
years of the agreement; on the first $20.0 million of such net sales in year
five of the agreement and on the first $16.0 million of such net sales in years
six through ten of the agreement. For the first four years of the agreement, an
additional royalty of 5.0% is payable annually on net sales from $84.0 million
to approximately $105.3 million and an additional royalty of 4.0% is payable
annually on net sales in excess of $158.0 million. Additional royalties in years
five through ten of the agreement increase for certain corresponding sales
levels. To the extent that the Company does not achieve the Minimum Net Sales
requirements, it will have the right, in order to avoid termination of the
foreign rights agreement, to pay royalties as if it had achieved such net sales
requirement. The foreign rights agreement has an initial term of four years but
may be extended at the Company's option through December 31, 2007. The domestic
BOSS trademark is subject to an option to purchase from the Company under
conditions set forth in the agreements.
The percentage of BOSS sportswear sales to total sales was 66.3%, 72.2%, and
74.6% for the years ended December 31, 1995, 1996 and 1997, respectively.
Subsequent to September 30, 1997, the Company and one of its insurance
carriers reached an agreement whereby the insurance company will provide
reimbursement for the legal costs associated with the litigation described
above. The Company records the reimbursement when received from the insurance
carrier. As part of this agreement, the Company received $718,558 in 1996 and
$117,435 in 1997.
In September 1993, the Company purchased a license agreement for the
manufacture and sale of certain apparel under the Beverly Hills Polo Club (BHPC)
trademark. The agreement was amended in 1996, expires in December 1998, with
options to extend through 2004. The licensor may terminate the agreement if the
Company does not meet minimum sales requirements as set forth in the agreement.
The agreement provides for minimum annual license fees or license fees of 5% of
sales whichever is greater. Also, the Company is required to spend 1% of annual
sales on product advertising. The license fees were $421,234, $607,287 and
$1,129,278 for 1995, 1996 and 1997, respectively.
In 1996, Isaacs Europe executed an exclusive license for the manufacture and
sale, in Europe, of sportswear under the BHPC trademark. The license agreement
has an initial term of three years with three one-year renewal options. The
agreement provides for minimum annual license fees, beginning in the second
year, or 6% of sales, whichever is greater.
F-16
I. C. ISAACS & COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. COMMITMENTS AND CONTINGENCIES (CONTINUED)
The minimum license fees under the Beverly Hills Polo Club agreements are as
follows:
YEAR ENDING DECEMBER 31,
- ----------------------------------------------------------------------------------
1998.............................................................................. $ 674,000
1999.............................................................................. 304,000
----------
$ 978,000
----------
----------
In November 1997 and as further amended in March 1998, the Company entered
into an exclusive license agreement with Girbaud Design, Inc. and its affiliate
to manufacture and market men's jeanswear, casualwear, outerwear and active
influenced sportswear under the Girbaud brand and certain related trademarks in
the United States, Puerto Rico and the U.S. Virgin Islands. The agreement has an
initial term of two years and may be extended at the option of the Company for
up to a total of ten years. Under the agreement the Company is required to make
payments to the licensor in an amount equal to 6.25% of net sales of regular
licensed merchandise and 3.0% of certain irregular and closeout licensed
merchandise. Payments are subject to guaranteed minimum annual royalties as
follows:
1998............................................................ $1,200,000
1999............................................................ $1,500,000
Beginning with the first quarter of 1998, the Company is obligated to pay
the greater of actual royalties earned or 8.3% of the minimum guaranteed
royalties for that year. The Company is required to spend at least $350,000 in
advertising for the men's Girbaud brand in 1998 and $500,000 each year
thereafter while the agreement is in effect.
Subsequent to December 31, 1997, the Company entered into an exclusive
license agreement with Girbaud Design, Inc. and its affiliate to manufacture and
market women's jeanswear, casualwear and active influenced sportswear under the
Girbaud brand and certain related trademarks in the United States, Puerto Rico
and the U.S. Virgin Islands. The agreement has an initial term of two years and
may be extended at the option of the Company for up to a total of ten years. The
Company paid an initial license fee of $600,000. Under the agreement, the
Company is required to make payments to the licensor in an amount equal to 6.25%
of net sales of regular licensed merchandise and 3.0% of certain irregular and
closeout licensed merchandise. Payments are subject to guaranteed minimum annual
royalties as follows:
1999.............................................................. $ 700,000
2000.............................................................. $ 800,000
Beginning with the first quarter of 1999, the Company is obligated to pay
the greater of actual Royalties earned or 8.3% of the minimum guaranteed
royalties for that year. The Company is required to spend at least $550,000 in
advertising for the women's Girbaud brand in 1998 and $400,000 each year
thereafter while the agreement is in effect. In addition, the Company is
required to contribute $190,000 per year to the licensor's advertising and
promotional expenditures for the Girbaud brand.
The Company is party to employment agreements with five executive officers
which provide for specified levels of compensation and certain other benefits.
The agreements also provide for severance payments from the termination date
through the expiration date under certain circumstances.
F-17
I. C. ISAACS & COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. COMMITMENTS AND CONTINGENCIES (CONTINUED)
In February 1998, the Company announced that it intends to close its Newton,
Mississippi manufacturing facility. This closure will occur during the second
quarter of 1998, resulting in a charge in the range of $200,000 to $300,000 made
against earnings in the first quarter of 1998. The production in this facility,
the majority of which is jeans, will be transferred to third party independent
contractor facilities in Mexico where the Company currently has jeans
manufactured.
During 1998 the Company intends to construct a new distribution center in
Milford, Delaware. The Company anticipates that this new facility will cost
approximately $6.0 million and will be financed through a mortgage loan.
8. RETIREMENT PLAN
The Company sponsors a defined benefit pension plan that covers
substantially all employees with more than one year of service. The Company's
policy is to fund pension costs accrued. Contributions to the plan reflect
benefits attributed to employees' service to date, as well as service expected
to be earned in the future. The benefits are based on the number of years of
service and the employee's compensation during the three consecutive complete
years of service prior to or including the year of termination of employment.
Plan assets consist primarily of common stocks, fixed income securities and
cash. The latest available actuarial valuation is as of December 31, 1997.
Pension expense for 1995, 1996 and 1997 was approximately $310,000, $284,000
and $373,000, respectively, and includes the following components:
YEARS ENDED DECEMBER 31,
----------------------------------
1995 1996 1997
---------- ---------- ----------
Service cost of current period............................................... $ 206,000 $ 193,000 $ 211,000
Interest on the above service costs.......................................... 17,000 15,000 17,000
---------- ---------- ----------
223,000 208,000 228,000
Interest on the projected benefit obligation................................. 485,000 555,000 618,000
Expected return on plan assets............................................... (445,000) (526,000) (566,000)
Amortization of prior service cost........................................... 16,000 16,000 42,000
Amortization of transition amount............................................ 31,000 31,000 31,000
Amortization of loss......................................................... -- -- 20,000
---------- ---------- ----------
Pension cost................................................................. $ 310,000 $ 284,000 $ 373,000
---------- ---------- ----------
---------- ---------- ----------
F-18
I. C. ISAACS & COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. RETIREMENT PLAN (CONTINUED)
The following table sets forth the Plan's funded status and amounts
recognized at December 31, 1995, 1996 and 1997:
YEARS ENDED DECEMBER 31,
----------------------------------------
1995 1996 1997
------------ ------------ ------------
Vested benefits......................................................... $ 5,987,000 $ 6,730,000 $ 7,500,000
Nonvested benefits...................................................... 37,000 56,000 43,000
------------ ------------ ------------
Accumulated benefit obligation.......................................... 6,024,000 6,786,000 7,543,000
Effect of anticipated future compensation levels and other events....... 457,000 862,000 983,000
------------ ------------ ------------
Projected benefit obligation............................................ 6,481,000 7,648,000 8,526,000
------------ ------------ ------------
Fair value of assets held in the plan................................... 6,139,000 7,357,000 7,852,000
------------ ------------ ------------
Excess of projected benefit obligation over plan assets................. (342,000) (291,000) (674,000)
Unrecognized net loss from past experience different from that
assumed............................................................... 344,000 661,000 935,000
Unrecognized prior service cost......................................... 159,000 143,000 342,000
Unamortized liability at transition..................................... 155,000 124,000 93,000
------------ ------------ ------------
Net prepaid periodic pension cost....................................... $ 316,000 $ 637,000 $ 696,000
------------ ------------ ------------
------------ ------------ ------------
With respect to the above table, the weighted average discount rate used to
measure the projected benefit obligation was 8%; the rate of increase in future
compensation levels is 3%; and the expected long-term rate of return on assets
is 8%. The net prepaid periodic pension cost is included in prepaid expenses and
other current assets in the accompanying consolidated balance sheets.
9. FOURTH QUARTER ADJUSTMENT
During the fourth quarter ended December 31, 1997 the Company increased its
allowance for doubtful accounts by $400,000 which had the effect of reducing net
income by $400,000 or $0.08 per share.
10. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for interest amounted to $1,272,794, $1,389,023
and $2,213,776 for 1995, 1996 and 1997, respectively.
During 1995 the Company purchased property and equipment totaling $316,245
by issuing notes payable. During 1997, the Company purchased a trademark
totaling $11,250,000 by issuing a note payable.
F-19
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
- ------------- ---------------------------------------------------------------------------------------------------
*3.01 Amended and Restated Certificate of Incorporation
*3.02 Amended and Restated By-Laws
*4.01 Specimen Common Stock Certificate
*10.01(a) Form of Amended and Restated Shareholders' Agreement
*10.01(b) Form of Amendment No. 1 to Amended and Restated Shareholders' Agreement
*10.02 Employment Agreement dated as of May 15, 1997, between the Registrant and Robert J. Arnot
*10.03 Employment Agreement dated as of May 15, 1997, between Registrant and Gerald W. Lear
*10.04 Employment Agreement dated as of May 15, 1997 between Registrant and Gary B. Brashers
*10.05 Employment Agreement dated as of May 15, 1997, between the Registrant and Eugene C. Wielepski
*10.06 Employment Agreement dated as of May 15, 1997, between the Registrant and Thomas Ormandy
*10.07 1997 Omnibus Stock Plan
*10.08(a) Accounts Financing Agreement dated June 16, 1992
*10.08(b) Covenant Supplement to Accounts Financing Agreement dated June 16, 1992
*10.08(c) Inventory and Equipment Security Agreement Supplement to Accounts Financing Agreement dated June
16, 1992
*10.08(d) Trade Financing Agreement Supplement to Accounts Financing Agreement (Security Agreement) dated
June 16, 1992
*10.08(e) Amendment to Financing Agreements dated October 30, 1992
*10.08(f) Second Amendment to Financing Agreements dated January 4, 1993
*10.08(g) Third Amendment to Financing Agreements dated March 10, 1993
*10.08(h) Fourth Amendment to Financing Agreements dated May 1, 1993
*10.08(i) Fifth Amendment to Financing Agreements dated January 1, 1994
*10.08(j) Sixth Amendment to Financing Agreements dated September 1, 1993
*10.08(k) Seventh Amendment to Financing Agreements dated August, 1994
*10.08(l) Eighth Amendment to Financing Agreements dated December 31, 1994
*10.08(m) Ninth Amendment to Financing Agreements dated April, 1995
*10.08(n) Tenth Amendment to Financing Agreements dated June 23, 1995
*10.08(o) Eleventh Amendment to Financing Agreements dated January 1, 1996
*10.08(p) Twelfth Amendment to Financing Agreements dated June 25, 1996
*10.08(q) Thirteenth Amendment to Financing Agreements dated August, 1996
*10.08(r) Term Promissory Note dated June, 1996
EXHIBIT NO. DESCRIPTION
- ------------- ---------------------------------------------------------------------------------------------------
*10.08(s) Trademark Collateral Assignment and Security Agreement dated June 16, 1992
*10.09 Form of Indemnification Agreement
*10.10(a) BOSS Worldwide Rights Acquisition Agreement dated September 30, 1997
*10.10(b) Promissory Note dated November 5, 1997
*10.10(c) Guaranty of Promissory Note dated November 5, 1997
*10.10(d) Trademark Assignment dated November 5, 1997
*10.10(e) Trademark Assignment dated November 5, 1997
*10.10(f) Trademark Assignment dated November 5, 1997
*10.10(g) Trademark Assignment dated November 5, 1997
*10.10(h) Assignment and Assumption Agreement dated November 5, 1997
*10.10(i) Escrow Agreement dated November 5, 1997
*10.10(j) Collateral Assignment of Trademarks dated November 5, 1997
*10.10(k) Termination of License Agreement dated November 5, 1997
*10.10(l) Logo Typeface
*10.10(m) Certain Provisions in Settlement Agreement
*10.11(a) Foreign BOSS Rights Acquisition Agreement dated September 30, 1997
*10.11(b) Trademark Assignment dated November 5, 1997
*10.11(c) Assignment and Assumption Agreement dated November 5, 1997
+*10.11(d) Concurrent Use Agreement dated November 5, 1997
+*10.11(e) Foreign Manufacturing Rights Agreement dated November 5, 1997
*10.11(f) Option Agreement dated November 5, 1997
*10.11(g) Secured Limited Recourse Promissory Note dated November 5, 1997
*10.11(h) Note Assumption Agreement dated November 5, 1997
*10.11(i) Guaranty of Promissory Note dated November 5, 1997
*10.11(j) Agreement Regarding Consent to Release and Waiver of Brookhurst Note Claims dated November 5, 1997
*10.11(k) Certain Provisions in Settlement Agreement
*10.11(l) Indemnification Agreement dated November 5, 1997
*10.12 Uniforms License Agreement dated November 5, 1997
*10.13 Trademark License Agreement Relating to BOSS Golf and Other Marks dated
November 5, 1997
*10.14 Beverly Hills Polo Club Exclusive Domestic License Agreement dated December 14, 1995
*10.15 Beverly Hills Polo Club Amendment to Exclusive License Agreement (Men's) dated June 3, 1997
*10.16 Beverly Hills Polo Club Exclusive Domestic License Agreement dated June 1, 1993
*10.17 Beverly Hills Polo Club Assignment of Licenses (Women's) dated August 31, 1993
EXHIBIT NO. DESCRIPTION
- ------------- ---------------------------------------------------------------------------------------------------
*10.18 Beverly Hills Polo Club Amendment (Women's) dated September 1, 1993
*10.19 Beverly Hills Polo Club Amendment to Exclusive License Agreement (Women's) dated June 3, 1997
*10.20 Beverly Hills Polo Club Amendment to Exclusive License Agreement (Men's dated July 29, 1997
*10.21 Beverly Hills Polo Club International Exclusive License Agreement (Wholesale) dated August 15, 1996
*10.22 Beverly Hills Polo Club Amendment to Exclusive License Agreement (Wholesale) dated June 3, 1997
*10.23 Beverly Hills Polo Club International Exclusive License Agreement (Retail) dated August 15, 1996
*10.24 Beverly Hills Polo Club Amendment to International Exclusive License Agreement (Retail) dated June
3, 1997
*10.25 Beverly Hills Polo Club Amendment to Exclusive License Agreement dated July 29, 1997
10.26(a) Girbaud Trademark License and Technical Assistance Agreement dated January 15, 1998
10.26(b) Girbaud Trademark License and Technical Assistance Agreement for Women's Collection dated March 4,
1998
10.26(c) Cancellation Agreement dated March 4, 1998
*10.27(a) Defined Benefit Pension Plan
*10.27(b) First Amendment to Defined Benefit Pension Plan
10.28 Beverly Hills Polo Club Letter Agreement dated March 18, 1998
10.29 Beverly Hills Polo Club Letter Agreement dated February 27, 1998
10.30 Beverly Hills Polo Club Letter Agreement dated February 27, 1998
*21.01 List of Subsidiaries
27.01 Financial Data Schedule
- ------------------------
* Previously filed with the Company's Registration Statement on Form S-1 (SEC
File No. 333-37155).
+ Certain portions of this exhibit have been omitted pursuant to an order
granting confidential treatment and have been filed separately with the
Securities and Exchange Commission.