SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2005
Commission File No. 0-23379
I.C. ISAACS & COMPANY, INC.
(Exact name of registrant as specified in charter)
Delaware 52-1377061
(State or other jurisdiction of (IRS employer
incorporation or organization) identification no.)
3840 Bank Street, Baltimore, Maryland 21224-2522
(Address of principal executive office) (Zip code)
Registrant's telephone number, including area code: (410) 342-8200
Securities Registered Pursuant to Section 12(b) of the Act:
None
Securities Registered Pursuant to Section 12(g) of the Act:
Title of Class:
Common Stock, $.0001 par value per share
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. |_| Yes |X| No
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. |_|
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. |X| Yes |_| 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. |_|
Indicate by check mark if Registrant is an accelerated filer (as defined in Rule
12b-2 of the Act). |_| Yes |X| No
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer |_| Accelerated filer |_| Non-accelerated filer |X|
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Act). |_| Yes |X| No
The aggregate market value of the voting common stock held by non-affiliates of
the Registrant as of the last business day of the Registrant's most recently
completed second fiscal quarter, at June 30, 2005, was approximately $40,565,000
based on the average closing price of the Common Stock as reported by the OTC
Bulletin Board on that day. Solely for purposes of the foregoing calculation all
of the Registrant's directors and officers are deemed to be affiliates. The
Registrant does not have outstanding any non-voting common stock.
As of March 30, 2006, 11,996,485 shares of Common Stock were outstanding.
Document Incorporated by Reference
None
1
I.C. ISAACS & COMPANY, INC.
FORM 10-K
TABLE OF CONTENTS
Page
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PART I
ITEM 1. BUSINESS 4
ITEM 1A RISK FACTORS 10
ITEM 1B UNRESOLVED STAFF COMMENTS 14
ITEM 2. PROPERTIES 14
ITEM 3. LEGAL PROCEEDINGS 14
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 15
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
16
ITEM 6. SELECTED FINANCIAL DATA 17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
19
ITEM 7A. QUANTITATIVE & QUALITATIVE DISCLOSURES ABOUT MARKET RISK 31
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 31
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE 31
ITEM 9A. CONTROLS AND PROCEDURES 31
ITEM 9B. OTHER INFORMATION 32
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY 33
ITEM 11. EXECUTIVE COMPENSATION 40
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 44
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 46
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES 47
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES 48
SIGNATURES 53
2
"I.C. Isaacs" and "I.G. Design" are trademarks of I.C. Isaacs & Company,
Inc. All other trademarks or service marks, including "Girbaud" and "Marithe and
Francois Girbaud", appearing in this Annual Report on Form 10-K are the property
of their respective owners and are not the property of the Company.
The various companies that hold and license the Girbaud trademarks, and
that engage in the design and licensing of Girbaud branded apparel, as well as
the affiliates and associates of those companies, are hereinafter collectively
referred to as "Girbaud."
IMPORTANT INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. Those statements include
statements regarding the intent, belief or current expectations of the Company
and its management, including the Company's belief regarding the prominence of
branded, licensed apparel, in general, and the Girbaud brand, in particular, in
the Company's future, its expectations regarding the renewal of its licenses for
men's and women's sportswear and jeanswear by Girbaud, and its expectations that
substantially all of its net sales will come from sales of Girbaud apparel, the
Company's beliefs regarding the relationship with its employees, the conditions
of its facilities, number of manufacturers capable of supplying the Company with
products that meet the Company's quality standards, the Company's beliefs
regarding its ordering flexibility as a result of transferring production to
Asia, and the basis on which it competes for business, the Company's
environmental obligations and its expectations regarding the Company's product
offerings. Words such as "believes," "anticipates," "expects," "intends,"
"plans," and similar expressions are intended to identify forward-looking
statements but are not the exclusive means of identifying such statements. Such
statements are forward-looking statements which are subject to a variety of
risks and uncertainties, many of which are beyond the Company's control, which
could cause actual results to differ materially from those contemplated in such
forward-looking statements, including in particular the following risks and
uncertainties (i) changes in the marketplace for the Company's products,
including customer tastes, (ii) the introduction of new products or pricing
changes by the Company's competitors, (iii) changes in the economy, and (iv)
termination of one or more of its agreements for use of the Girbaud brand name
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.
Access to Company Reports
Investors may read and copy any document that the Company files under the
Securities and Exchange Act of 1934 (including annual reports on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments
to these reports) at the Securities and Exchange Commission (SEC) Public
Reference Room at 100 F Street, NE, Washington, DC 20549. In addition, the SEC
maintains an internet site at www.sec.gov that contains reports and other
information regarding issuers that can be accessed electronically. The Company
maintains a website at www.icisaacs.com that contains some of the more recent
(but not all of the) 10-K, 10-Q and 8-K reports about the Company that may be
found at the SEC's website.
3
PART I
ITEM 1. BUSINESS
Introduction
I.C. Isaacs & Company, Inc. ("Isaacs"), together with its predecessors and
subsidiaries, including I.C. Isaacs & Company L.P. (the "LP"), and Isaacs
Design, Inc. (collectively the "Company") is a designer and marketer of branded
jeanswear and sportswear. Founded in 1913, the Company offers collections of
men's and women's jeanswear and sportswear under the Marithe and Francois
Girbaud designer brand ("Girbaud brand" or "Girbaud branded") in the United
States and Puerto Rico. The Girbaud brand is an internationally recognized
designer label with a distinct European influence. Sales of Girbaud branded
products accounted for all of the Company's net sales in 2005 and 2004.
Products
The Company has positioned its Girbaud branded line with a broad assortment
of products, styles and fabrications reflecting a contemporary European look.
The Company markets a full collection of men's jeanswear and sportswear under
the Girbaud brand, including a broad array of bottoms, tops and outerwear. The
Company also offers a women's sportswear collection under the Girbaud brand,
which also includes a wide assortment of bottoms, tops and outerwear. These
collections are targeted to consumers who are seeking quality, fashionable
products at competitive prices. Girbaud is an internationally recognized
designer brand. The Company markets innovative European-inspired men's and
women's jeanswear and sportswear collections under the Girbaud brand. The
Company's Girbaud branded collections include full lines of bottoms consisting
of jeans and casual pants in a variety of fabrications, including denim, stretch
denim, cotton twill and nylon, cotton t-shirts, polo shirts, knit and woven
tops, sweaters, outerwear and leather sportswear. Reflecting contemporary
European design, each of these collections is characterized by innovative
styling and fabrication and is targeted to consumers ages 16 to 40. Estimated
retail prices range from $29 to $39 for t-shirts, $49 to $100 for tops and
bottoms, $60 to $128 for sweaters and $80 to $300 for outerwear.
Customers and Sales
The Company's products are sold in approximately 2,100 specialty stores,
specialty store chains and department stores. The Company's Girbaud brand
products are sold and marketed domestically under the direction of a 16 person
sales force headquartered in New York. The Company uses both sales
representatives and distributors for the sale of its products. Sales
representatives include employees of the Company as well as independent
contractors. Each of the Company's non-employee sales representatives has an
agreement with the Company pursuant to which the sales representative serves as
the sales representative of specified products of the Company within a specified
territory. The Company does not have long-term contracts with any of its
customers. Instead, its customers purchase the Company's products pursuant to
purchase orders and are under no obligation to continue to purchase the
Company's products.
The Company began marketing men's sportswear under the Girbaud brand in
early 1998 and introduced a women's sportswear collection under the Girbaud
brand in the second quarter of 1998. The Company's Girbaud men's products are
sold to approximately 1,650 stores in the United States and Puerto Rico,
including major department stores such as Federated Department Stores, Dayton
Hudson, Dillards, Belk Stores and Bon Ton Stores (formerly Carson Pirie Scott),
and many prominent specialty stores. The Company's Girbaud women's line is sold
to approximately 450 stores. None of the Company's customers accounted for 10%
or more of sales in 2005 or 2004. As of December 31, 2005 and 2004, the Company
had one customer that represented 11.4% and 13.1% of accounts receivable,
respectively.
4
Design and Merchandising
The Company's designers and merchandisers are provided with the Girbaud
collections from Europe twice a year and they collaborate with Marithe and
Francois Girbaud and their staff in the development of the Company's Girbaud
branded product lines for sale in the United States. Merchandisers also
regularly meet with sales management to gain additional market insight and
further refine the products to be consistent with the needs of each of the
Company's markets. The Company's in-house design and product development is
carried out by merchandising departments in New York. Many of the Company's
products are developed using computer-aided design equipment, which allows
designers to view and easily modify images of a new design. The Company
currently has 15 people on the design staff in New York City. Design
expenditures were approximately $3.6 million in 2005 and $3.1 million in 2004.
Advertising and Marketing
The Company communicates and reinforces the brand and image of its Girbaud
products through creative and innovative advertising and marketing efforts. The
Company's advertising and marketing strategies are directed by its New York
sales office and developed in collaboration with advertising agencies and with
Girbaud's European offices and Paris advertising agency. The Company's
advertising strategy is geared toward its youthful and contemporary consumers,
whose lifestyles are influenced by music, sports and fashion. Its advertising
campaigns have evolved from trade magazines to a wide variety of media,
including billboards, fashion magazines and special events. In 2005 and 2004,
the Company continued to utilize advertising media to promote its products at
moderate levels of spending. The Company's advertising and promotional
expenditures were approximately $1.6 million, or 1.9% of net sales, in 2005 and
$1.8 million, or 2.2% of net sales, in 2004.
Product Sourcing
General
The manufacturing and sourcing of the Company's products in 2005 was
predominately done by foreign independent contractors. Each of the Company's
independent contractors and independent buying agents has an agreement with the
Company whereby it performs manufacturing or purchasing services for the Company
on a non-exclusive basis. The Company evaluates its contractors frequently and
believes that there are a number of manufacturers capable of producing products
that meet the Company's quality standards. The Company's production requirements
account for a significant portion of many of its contractors' production
capacity. The Company has the ability to terminate its arrangements with each of
its contractors at any time. A change in suppliers, however, could cause a delay
in manufacturing and a possible loss of sales which could adversely affect
operating results.
Asia and Africa
Virtually all of the Company's sportswear products other than t-shirts are
produced by approximately 17 different manufacturers in nine countries in Asia
and 2 manufacturers in Africa. During 2005, three of the Company's Asian
contractors accounted for approximately 42%, 8% and 4%, respectively, of the
Company's total unit production and its two African contractors accounted for
approximately 9% of the Company's total unit production. The Company has well
established relationships with many of its contractors; however, it is not bound
by any long term contracts or minimum purchase agreements. The Company retains
independent buying agents in various countries in Asia and Africa to assist in
selecting and overseeing independent manufacturers, sourcing fabric, trim and
other materials and monitoring quotas. Independent buying agents also perform
quality control functions on behalf of the Company, including inspecting
materials and manufactured products prior to accepting delivery. The sourcing
and merchandising staffs in the Company's New York offices oversee Asian and
African fabric and product development, apparel manufacturing, price negotiation
and quality control, as well as the research and development of new Asian
sources of supply. Asian and African production represented approximately 72%
and 9% of the Company's total unit production in 2005 respectively. Purchasing
from these contractors requires the Company to estimate sales and issue purchase
orders for inventory well in advance of receiving firm orders from its
5
customers. A risk to the Company is that its estimates may differ from actual
orders. If this happens, the Company may miss sales because it did not order
enough, or it may have to sell excess inventory at reduced prices.
The Company 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 in Asia. 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.
United States and Mexico
The Company utilizes a supplier in Mexico to provide both full service
packaging services for finished T-shirts and to drop ships T-shirt blanks
directly to various independent contractors within the United States to be
screen printed, embroidered or both, before being sent to the Company as a
finished product to fulfill orders. T-shirt production represented approximately
19% of the Company's total unit production in 2005. During 2005, one of the
Company's domestic contractors accounted for approximately 16% of the Company's
total unit production. The Company also utilizes two other factories in Mexico
to produce sportswear products other than t-shirts which represents
approximately 2% of its total unit production.
Warehousing and Distribution
The Company services its United States customers utilizing a 70,000 square
foot Company-owned and operated distribution center in Milford, Delaware. The
Company has established a computerized "Warehouse Management System" with
real-time internal tracking information and the ability to provide its customers
with electronically transmitted "Advance Shipping Notices." The accuracy of
shipments is increased by the ability to scan coded garments at the packing
operation. This process also provides for computerized routing and customer
invoicing. The vast majority of shipments are handled by UPS, common carriers or
parcel post.
Quality Control
The Company's quality control program is designed to ensure that all of the
Company's products meet its high quality standards. Visits are made by the
Company's agents to outside contractors to ensure compliance with the Company's
quality standards. Audits are also performed by quality control personnel at the
Milford, Delaware distribution center on all categories of incoming merchandise.
All garments produced for the Company must be produced in accordance with
the Company's specifications. The Company's import quality control program is
designed to ensure that 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
some 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 factories to conduct these
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. Historically, the Company has taken greater markdowns of its inventory
sell-offs in the second and fourth quarters. The Company generally receives
orders for its products up to five months prior to the time the products are
delivered to stores. The backlog of orders at any given time is affected by a
number of factors, including seasonality, weather conditions, scheduling of
manufacturing and shipment of products. As the time of the shipment of products
may vary from year to year, the results for any particular quarter may not be
6
indicative of the results for the full year. The Company had unfilled orders of
$17.4 million at December 31, 2005 compared to $27.4 million at December 31,
2004. The planned exit from women's urban department stores, combined with the
exit from various underperforming men's department stores as well as the timing
of inventory receipts and shipments of orders is reflected in the reduced order
backlog.
Licenses and Other Rights Agreements
Girbaud Domestic Licenses
In November 1997, the Company entered into an exclusive license agreement
(the "Girbaud Men's Agreement") with Girbaud Design, Inc. and its affiliate
Wurzburg Holding S.A. ("Wurzburg") to manufacture and market men's jeanswear,
casualwear and outerwear under the Girbaud brand and certain related trademarks
(the "Girbaud Marks") in all channels of distribution in the United States,
including Puerto Rico and the U.S. Virgin Islands. In March 1998, the Girbaud
Men's Agreement was amended and restated to include active influenced sportswear
as a licensed product category and to name Latitude Licensing Corp. as the
licensor ( "Latitude"). Also in March 1998, the Company entered into an
exclusive license agreement (the "Girbaud Women's Agreement" and, together with
the Girbaud Men's Agreement, the "Girbaud Agreements") with Latitude to
manufacture and market women's jeanswear, casualwear and outerwear, including
active influenced sportswear, under the Girbaud Marks in all channels of
distribution in the United States, including Puerto Rico and the U.S. Virgin
Islands. The Girbaud Agreements, as amended, include the right to manufacture
the licensed products in a number of foreign countries through 2007.
The terms of the Girbaud Agreements will expire at the end of 2007. The
Company has the option to extend the terms of either or both of the Girbaud
Agreements through the end of 2011. The Girbaud Agreements generally allow the
Company to use the Girbaud Marks on apparel designed by or for the Company or
based on designs and styles previously associated with the Girbaud brand,
subject to quality control by Latitude over the final designs of the products,
marketing and advertising material and manufacturing premises. The Girbaud
Agreements provide that they may be terminated by Latitude upon the occurrence
of certain events, including, but not limited to, a breach by the Company of
certain obligations under the agreements that remain uncured following certain
specified grace periods.
Under the Girbaud Men's Agreement as amended the Company is required to
make royalty payments to Latitude 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 obligated to pay the
greater of actual royalties earned or minimum guaranteed annual royalties of
$3,000,000 through 2007. On a monthly basis during the term, the Company is
obligated to pay 8.3% of the minimum guaranteed royalties for that year. On a
quarterly basis during the term, the Company is required to pay the amount that
the actual royalties exceed the total minimum guaranteed royalties for that
quarter. The Company is required to spend the greater of an amount equal to 3%
of Girbaud men's net sales or a minimum of $500,000 in advertising and related
expenses promoting the men's Girbaud brand products in each year through the
term of the Girbaud men's agreement. The Company has agreed to increase the
minimum annual amount of these expenditures under the Girbaud Men's Agreement by
$200,000 in each of the years 2007, 2008 and 2009 in order to, among other
things, facilitate and support a repositioning of the Girbaud brand for better
store distribution.
Under the Girbaud Women's Agreement as amended, the Company is required to
make royalty payments to Latitude in an amount equal to 6.25% of net sales of
regular licensed merchandise and 3.0% of certain irregular and closeout licensed
merchandise. The Company is obligated to pay the greater of actual royalties
earned or minimum guaranteed annual royalties of $1,500,000 through 2007. On a
monthly basis during the term, the Company is obligated to pay 8.3% of the
minimum guaranteed royalties for that year. On a yearly basis, the Company is
required to pay the amount that the actual royalties exceed the total minimum
guaranteed royalties for that year. The Company is required to spend the greater
of an amount equal to 3% of Girbaud women's net sales or a minimum of $400,000
in advertising and related expenses promoting the women's Girbaud brand products
in each year through the term of the Girbaud Women's Agreement. The Company has
7
agreed to increase the minimum annual amount of these expenditures under the
Girbaud Women's Agreement by $200,000 in each of the years 2007, 2008 and 2009
in order to, among other things, facilitate and support a repositioning of the
Girbaud brand for better store distribution. In addition, over the term of the
Girbaud Women's Agreement the Company is required to contribute $190,000 per
year to Latitude's advertising and promotional expenditures for the Girbaud
brand.
During each of the six years ended December 31, 2005, the amounts of
advertising and related expenses incurred by the Company in marketing the
Girbaud brand products were less than the amounts required under the agreements.
In each of the various amendments to the men's and women's license agreements
which were executed in 2002 - 2004, Latitude and the Company confirmed to one
another that neither party was in default to the other in the performance of any
of the obligations owed by either of them to the other. On March 29, 2006,
Latitude also waived the Company's failure to spend the minimum amounts required
under the men's and women's license agreements in 2005.
The Company is obligated to pay a minimum of $6.5 million during 2006 in
the form of minimum royalty payments, fashion show and advertising and
promotional expenses pursuant to the Girbaud Agreements and in subordinated note
payments. In 2006, the Company expects that substantially all of its net sales
will come from apparel manufactured under the licenses granted pursuant to the
Girbaud Agreements.
In connection with the refinancing of the Company's credit facility in
December 2004, Latitude and the Company agreed to defer approximately $2.3
million of the 2004 minimum and additional royalty payments to 2005. In 2005,
all 2004 deferred royalty payments were paid in full and all 2005 royalty
payments were paid when they became due. In 2005, the Company made royalty
payments of $7.1 million.
Licensor Ownership
In 2002, Textile Investment International S.A. ("Textile"), an affiliate of
Latitude, acquired 666,667 shares of common stock, preferred stock which it
converted into 3,300,000 shares of common stock and a note payable issued by the
Company, from a former licensor. As a result of those transactions, Textile and
Wurzburg (which owned 582,500 shares of the Company's common stock prior to the
transactions) own approximately 38% of the common stock of the Company
outstanding as of the date of filing of this Report.
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 1,100 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
extends credit to its customers. Accordingly, the Company may have significant
risk in collecting accounts receivable from its customers. The Company has
credit policies and procedures which it uses to minimize exposure to credit
losses. The Company currently employs three people in its credit department and
believes that managing its own credit gives it unique flexibility as to which
customers the Company should sell and how much business it should do with each.
The Company obtains and periodically updates information regarding the financial
condition and credit histories of customers. The Company's collection personnel
evaluate this information and, if appropriate, establish a line of credit.
Credit personnel track payment activity for each customer using customized
computer software and directly contact customers with receivable balances
outstanding beyond 30 days. If these collection efforts are unsuccessful, the
Company may discontinue merchandise shipments until the outstanding balance is
paid. Ultimately, the Company may engage an outside collection organization to
collect past due accounts. Timely contact with customers has been effective in
minimizing the Company's credit losses.
8
Competition
The apparel industry is highly competitive and fragmented. The Company
competes against numerous apparel brands and distributors.
Principal competitive factors include:
o developing quality products with consistent fits, finishes, fabrics
and style;
o anticipating and responding to changing consumer demands in a timely
manner;
o Providing compelling value in our products for the price;
o continuing to generate competitive margins and inventory turns for our
retail customers by providing timely delivery; and
o providing strong effective marketing support.
The Company believes its competitive strengths lie in the quality of its design
and its ability to provide compelling value for products.
Management Information Systems
The Company believes that information processing is essential to
maintaining its competitive position. The Company's systems provide, among other
things, comprehensive order processing, production, accounting and management
information for the marketing, selling, production and distribution functions of
the Company's business. The Company's software programs allow it to track, among
other things, orders, production schedules, inventory and sales of its products.
The programs include centralized management information systems, which provide
the various operating departments with financial, sales, inventory and
distribution related information. The Company is able to ship orders received
via electronic data interchange, from inventory on hand, to certain customers
within 24 to 72 hours from the time of order receipt.
Employees
As of the date of filing of this Report, the Company had approximately 110
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.
9
ITEM 1A. RISK FACTORS
An investment in the Company's common stock involves risks. Investors
should read and carefully consider the following risk factors in addition to all
other information in this Report before making an investment in the Company's
common stock.
Because the Company has a history of losses and fluctuating operating results,
it can not assure prospective investors that it will operate profitably or will
generate positive cash flow in the future.
Although the Company has operated profitably since the end of 2003, that
has not always been the case. During the five year period ended December 31,
2003, it incurred aggregate losses of approximately $37,000,000. The Company's
operating results in the future may be subject to significant fluctuations due
to many factors not within the Company's control, such as demand for the
Company's products, and the level of competition and general economic
conditions.
If the Company fails to identify and respond appropriately to changing consumer
demands and fashion trends, consumer acceptance of its products could be
adversely affected and that could have a material adverse effect on the
Company's financial condition and results of operations.
The apparel industry is highly competitive, fragmented and 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 Girbaud brand name. The Company competes
with numerous apparel manufacturers and distributors, many of which have greater
financial resources than it possesses. The Company's products also compete with
a substantial number of designer and non-designer lines. Although the level and
nature of competition differ among the Company's product categories, the Company
believes that it competes primarily on the basis of brand image, quality of
design and value pricing. Increased competition by existing and future
competitors could result in reductions in sales or prices of the Company's
products, which could have a material adverse effect on the Company's financial
condition and results of operations. In addition, there is no assurance that it
will be able to introduce competitive lines of Girbaud branded or other products
or that such products will achieve market acceptance. The apparel industry
historically has been subject to substantial cyclical variations, and a
recession in the general economy or uncertainties regarding future economic
prospects that affect consumer spending habits could have a material adverse
effect on the Company's financial condition or results of operations.
The Company is completely dependent upon licenses granted to it by an affiliate
of the Company's controlling stockholders for all of the revenues that it
generates. The Company's inability to renew those licenses upon terms that it
would consider to be commercially reasonable could place it in a materially
adverse position financially and operationally.
The Company's business is completely dependent upon the Company's use of
the Girbaud brand names and images, which are in turn dependent upon the
existence and continuation of two license agreements granted to it by Latitude.
Latitude is an affiliate of Wurzburg and Textile. Those two companies, which are
wholly owned by Francois Girbaud and Marithe Bachellerie, collectively own
approximately 38% of the Company's common stock. The Company's licenses for use
of the Girbaud brand names and images are limited to certain specified products
in the United States, Puerto Rico and the U.S. Virgin Islands, extend through
December 31, 2007, and may be renewed through December 31, 2011. There can be no
assurance that the Company will be able to retain the right to use the Girbaud
brand names and images or enter into comparable arrangements upon the expiration
of the current agreements. In addition, each of the Company's Girbaud license
agreements contains provisions that, under certain circumstances (not all of
which are under the Company's control), could permit Latitude to terminate the
agreements. Such provisions include, among other things (i) a default in the
payment of certain amounts payable under the applicable agreement that continues
beyond the specified grace period and (ii) the failure to comply with the
covenants contained in the applicable agreement. Any termination of these
10
agreements would result in loss of the Company's rights to use the Girbaud brand
names and images and would have a material adverse effect on the Company's
financial condition and results of operations.
Because the Company extends credit to its customers, it is subject to the risks
inherent in ordering and paying for goods before it receives any payment for
them.
The Company extends credit to its customers based on an evaluation of each
customer's financial condition and credit history and, due to growth, continues
to experience increases in the amount of the Company's outstanding accounts
receivable. In 2005 and 2004, the Company's provision for doubtful accounts were
$1.0 million and $0.4 million, respectively, and as a percentage of net sales
were 1.2% and 0.5%, respectively. Its accounts receivable write-offs as a
percentage of net sales during each of those periods were 0.8% and 0.3%,
respectively. There can be no assurance that the Company's credit losses will
continue at these levels. The failure to accurately assess the credit risk from
the Company's customers, changes in overall economic conditions and other
factors could cause the Company's credit losses to increase, which could have a
material adverse effect on the Company's financial condition or results of
operations.
The Company's dependence on unaffiliated manufacturers for the production of all
of the products that it sells makes it susceptible to financial and
customer-related problems that could arise from shipment delays and product
quality issues.
All of the Company's manufacturing and sourcing needs are currently met
through domestic and foreign independent contractors. The Company currently
contracts with approximately 20 manufacturers in 11 countries. The Company does
not have long-term contracts with any manufacturers and most of those
manufacturers supply the Company on a non-exclusive basis pursuant to purchase
orders. During 2005 and 2004, approximately 81% of the Company's total unit
production came from Asia and Africa, and approximately 19% of the Company's
total unit production came from the US and Mexico. The inability of a
manufacturer to ship the Company's products in a timely manner or to meet the
Company's quality standards could adversely affect the Company's ability to
deliver products to its customers in a timely manner. Delays in delivery caused
by manufacturing delays, disruption in services of delivery carriers or other
factors could result in cancellations of orders, refusals to accept deliveries
or a reduction in purchase prices, any of which could have a material adverse
effect on the Company's financial condition or results of operations.
The Company's complete reliance on foreign sourcing of its goods also subjects
it to financial and customer-related problems that could arise from trade
disputes and disruptions in the countries in which the Company's contractors are
located.
The Company's operations may be affected adversely by political instability
resulting in the disruption of trade with the countries in which its contractors
are located, the imposition of additional regulations relating to imports, the
imposition of additional duties, tariff and other charges on imports,
significant fluctuations in the value of the dollar against foreign currencies
or restrictions on the transfer of funds. Such factors have not previously had a
material adverse effect on the Company's financial condition or results of
operations but there can be no assurance that such will remain the case in the
future.
The Company's imported products are subject to United States customs
duties, which comprise a material portion of the cost of the merchandise. A
substantial increase in customs duties could have a material adverse effect on
its financial condition or results of operations. The United States or the
countries in which the Company's products are produced may, from time to time,
impose new quotas, duties, tariffs or other restrictions, or adversely adjust
prevailing quota, duty or tariff levels, any of which could have a material
adverse effect on the Company's financial condition or results of operations.
The Company's policy is to notify the Company's independent manufacturers
through the Company's agents of the expectation that such manufacturers operate
in compliance with applicable laws and regulations. While the Company's policies
promote ethical business practices and the Company's staff periodically visits
and monitors the operations of its independent manufacturers, the Company does
not control such manufacturers or their labor practices. The violation of labor
11
or other laws by an independent manufacturer or the divergence of an independent
manufacturer's labor practices from those generally accepted as ethical in the
United States could have a material adverse effect on the Company's financial
condition or results of operations.
The seasonality of the Company's business, periodic changes in customer tastes
and quarterly fluctuations in the Company's sales require it to make predictions
about consumer demands for the Company's products that can turn out to be wrong.
The Company's financial condition can be materially adversely affected when that
occurs.
The Company's business is subject to significant seasonal and quarterly
fluctuations that are characteristic of the apparel and retail industries. The
Company's backlog of orders and overall results of operations may fluctuate from
quarter to quarter as a result of, among other things, variations in the timing
of product orders by customers, weather conditions that may affect purchases at
the wholesale and retail levels, the amount and timing of shipments, advertising
and marketing expenditures and increases in the number of employees and overhead
to support growth. 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. Errors by the Company
in predicting customer acceptance or consumer demand for its products might
result in significant unrecoupable expenditures on inventory that could
materially adversely affect the Company's financial condition or its operating
results.
Because the Company is effectively controlled by two stockholders affiliated
with the Company's licensor, it may be difficult for the Company's other
investors to influence or implement changes in governance and control of the
company.
Wurzburg and Textile, both of whom are affiliated with Latitude, the
company that has licensed the Company's use of the Girbaud trademarks, brand
names and images, beneficially own an aggregate of approximately 38% of the
Company's outstanding common stock. Such concentration of ownership, together
with the anti-takeover effects of certain provisions of the Company's Amended
and Restated Certificate of Incorporation (the "Restated Certificate") and
Amended and Restated By-laws (the "Restated By-laws"), may have the effect of
delaying or preventing a change in control of the company.
Various anti-takeover provisions of the Company's Restated Certificate of
Incorporation and Restated By-laws may impact upon an investor's ability to
maximize his investment in the Company's common stock.
The Company's Restated Certificate and Restated By-laws include provisions
that may have the effect of discouraging a non-negotiated takeover of the
company and preventing certain changes of control. These provisions, among other
things (i) permit the Company's Board of Directors, without further stockholder
approval, to issue up to 5.0 million shares of preferred stock with rights and
preferences determined by the Board of Directors at the time of issuance, (ii)
require a 66.7% vote of the Company's stockholders to approve any amendment,
addition or termination of the Restated By-laws and (iii) restrict the ability
of stockholders to call special meetings of the stockholders, nominate
individuals for election to the Board of Directors or submit stockholder
proposals. The provisions of the Restated Certificate and the Restated By-laws
might, therefore, have the effect of inhibiting stockholders' ability to realize
the maximum value for their shares of common stock that might otherwise be
realized because of a merger or other event affecting the control of the
company.
The Company's stock may be a penny stock. Trading of the Company's stock may be
restricted by the SEC's penny stock regulations which may limit a stockholder's
ability to buy and sell the Company's stock.
Although the price of the Company's stock has recently traded above $5.00
per share, during most of the past several years, the Company's stock has fallen
within the SEC's definition of a penny stock. The SEC has adopted Rule 15g-9
which generally defines "penny stock" to be any equity security that has a
market price (as defined) less than $5.00 per share or an exercise price of less
12
than $5.00 per share, subject to certain exceptions. As of the date of filing of
this Report, the Company's securities are covered by the penny stock rules,
which impose additional sales practice requirements on broker-dealers who sell
to persons other than established customers and "accredited investors". The term
"accredited investor" refers generally to institutions with assets in excess of
$5,000,000 or individuals with a net worth in excess of $1,000,000 or annual
income exceeding $200,000 or $300,000 jointly with their spouse. The penny stock
rules require a broker-dealer, prior to a transaction in a penny stock not
otherwise exempt from the rules, to deliver a standardized risk disclosure
document in a form prepared by the SEC which provides information about penny
stocks and the nature and level of risks in the penny stock market. The
broker-dealer also must provide the customer with current bid and offer
quotations for the penny stock, the compensation of the broker-dealer and its
salesperson in the transaction and monthly account statements showing the market
value of each penny stock held in the customer's account. The bid and offer
quotations, and the broker-dealer and salesperson compensation information, must
be given to the customer orally or in writing prior to effecting the transaction
and must be given to the customer in writing before or with the customer's
confirmation. In addition, the penny stock rules require that prior to a
transaction in a penny stock not otherwise exempt from these rules, the
broker-dealer must make a special written determination that the penny stock is
a suitable investment for the purchaser and receive the purchaser's written
agreement to the transaction. These disclosure requirements may have the effect
of reducing the level of trading activity in the secondary market for the stock
that is subject to these penny stock rules. Consequently, these penny stock
rules may affect the ability of broker-dealers to trade the Company's
securities. The Company believes that, in the past, the penny stock rules have
discouraged investor interest in and have limited the marketability of the
Company's common stock.
NASD sales practice requirements may also limit a stockholder's ability to buy
and sell the Company's stock.
In addition to the "penny stock" rules described above, the NASD has
adopted rules that require that in recommending an investment to a customer, a
broker-dealer must have reasonable grounds for believing that the investment is
suitable for that customer. Prior to recommending speculative low priced
securities to their non-institutional customers, broker-dealers must make
reasonable efforts to obtain information about the customer's financial status,
tax status, investment objectives and other information. Under interpretations
of these rules, the NASD believes that there is a high probability that
speculative low priced securities will not be suitable for at least some
customers. The NASD requirements make it more difficult for broker-dealers to
recommend that their customers buy the Company's common stock, which may limit
your ability to buy and sell the Company's stock and have an adverse effect on
the market for the Company's shares.
Trading on the OTC Bulletin Board may be sporadic because it is not a stock
exchange, and stockholders may have difficulty reselling their shares.
The Company's common stock is quoted on the OTC Bulletin Board. Trading in
stock quoted on the OTC Bulletin Board is often thin and characterized by wide
fluctuations in trading prices, due to many factors that may have little to do
with the Company's operations or business prospects. Moreover, the OTC Bulletin
Board is not a stock exchange, and trading of securities on the OTC Bulletin
Board is often more sporadic than the trading of securities listed on a
quotation system like Nasdaq or a stock exchange like the New York Stock
Exchange.
Investors may experience dilution of their ownership interests and the Company's
stock price may be adversely affected due to its future issuance of common or
preferred stock, or securities that are convertible into, exchangeable for or
exercisable for shares of common or preferred stock.
The Company may in the future issue previously authorized and unissued
securities, resulting in the dilution of the ownership interests of its present
stockholders. The Company is currently authorized to issue 50 million shares of
common stock and 5 million shares of preferred stock with such designations,
preferences and rights as may be determined by the Company's board of directors.
As of the date of filing of this Report, 11,996,485 shares of common stock were
outstanding. In addition, the Company reserved:
13
o 2,200,000 shares of common stock for issuance pursuant to the
Company's Amended and Restated Omnibus Stock Plan, of which 655,433
shares have been issued, 1,174,167 shares underlying outstanding
options and 370,400 shares remain available for future grants, and
o 450,000 shares of common stock for issuance pursuant to the Company's
2005 Non-Employee Directors Stock Option Plan, none of which have been
issued and options to purchase 120,000 shares are outstanding.
The potential issuance of additional shares of the Company's common and
preferred stock, as well as securities convertible into, exchangeable for or
exercisable for shares of the Company's common or preferred stock, may create
downward pressure on the trading price of the Company's common stock. The
Company may also issue additional shares of common stock or other securities
that are convertible into, exchangeable for or exercisable for common or
preferred stock in connection with the hiring of personnel, future acquisitions,
future issuances of the Company's securities for capital raising purposes or for
other business purposes. Future sales of substantial amounts of the Company's
common or preferred stock, or the perception that sales could occur, could have
a material adverse effect on the price of the Company's common stock.
ITEM 1B UNRESOLVED STAFF COMMENTS
None
14
ITEM 2. PROPERTIES
Certain information concerning the Company's principal facilities is set
forth below:
Leased or Approximate Area
Location Owned Use in Square Feet
- ------------------- ----------- --------------------------------------- -----------------
Administrative Headquarters and Office
Baltimore, MD Owned Facilities 40,000
Management, Sales, Merchandising,
New York, NY Leased Marketing and Sourcing 13,500
Milford, DE Owned Distribution Center 70,000
The Company believes that its existing facilities are well maintained and
in good operating condition. See "ITEM 1. Business--Warehousing and
Distribution".
ITEM 3. LEGAL PROCEEDINGS
On February 14, 2006, without admitting or denying any liability, the
Company settled the arbitration proceedings commenced against it and its wholly
owned subsidiary, I.C. Isaacs & Company, L.P. (the "L.P.") by a former
executive. Pursuant to the settlement, the Company paid the sum of $1.75 million
in February 2006 and recorded this settlement as a charge to expense in the
fourth quarter of 2005.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of 2005, there were no matters submitted to a
vote of the Company's stockholders.
15
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 the OTC
Bulletin Board, an established quotation service regulated by the National
Association of Securities Dealers. As of the date of filing of this Report, the
Company had approximately 1,000 beneficial holders of its common stock.
Shares of the Company's common stock are traded on the OTC Bulletin Board
under the ticker symbol "ISAC.OB". The reported last sale price of the common
stock on the OTC Bulletin Board on March 28, 2006 was $4.95. The table below
sets forth the high and low bid prices of the Company's common stock for the
periods indicated, as quoted by the OTC Bulletin Board Research Service. Such
quotations reflect inter-dealer prices, without retail markup, markdown or
commission, and may not represent actual transactions.
Quarter Ended High Low High Low
- ------------- ---- --- ---- ---
2005 2004
--------------------------------------------------------------
March 31 $8.33 $3.98 $1.01 $0.70
June 30 $8.00 $5.50 $1.35 $0.36
September 30 $6.95 $5.13 $3.60 $1.07
December 31 $5.25 $4.00 $4.55 $2.65
The Company anticipates that all of its earnings will be retained for the
foreseeable future for use in the operation of its 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 its 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 Plan was
amended and restated pursuant to authority granted by the Company's stockholders
at the 2003 annual meeting of stockholders to increase the shares of Common
Stock that may be issued with respect to awards granted under the Plan to an
aggregate of 2.2 million shares. The Plan is administered by the Compensation
Committee of the Board of Directors. Participation in the Plan is open to all
employees, officers, directors and consultants of the Company or any of its
affiliates, as may be selected by the Compensation Committee from time to time.
The Plan allows for stock options, stock appreciation rights, stock awards,
phantom stock awards and performance awards to be granted. The Compensation
Committee will determine the prices, vesting schedules, expiration dates and
other material conditions upon which such awards may be exercised. As of
December 31, 2005, options to purchase 1,174,167 shares remained outstanding
with a weighted average exercise price of $1.96 per share. Through December 31,
2005, options to purchase 655,433 shares had been exercised at a weighted
average exercise price of $0.97 per share. As of December 31, 2005, options to
purchase 370,400 shares remain available for future grants. The issuance of such
stock options was exempt from the registration requirements of the Securities
Act of 1933, as amended, pursuant to Section 4(2) thereunder. The Company
previously filed a Registration Statement on Form S-8 to register the shares of
its common stock issuable pursuant to awards granted under the Plan.
In June 2005, the Board of Directors of the Company and the Company's
stockholders adopted Non-Employee Directors Stock Option Plan (the "Directors
Plan") non-employee directors receive automatic grants of options to purchase
common stock in amounts that are specified by such plan. The exercise prices of
all options granted under the Directors Plan are fixed at 100% of the market
price of the common stock on each grant date. The Company has reserved 450,000
shares of common stock for issuance under the Directors Plan. Options to
purchase 120,000 shares of common stock with a weighted average exercise price
of $5.60 per share were granted under the Directors Plan during 2005, all of
which were outstanding and unexercised at December 31, 2005.
16
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data set forth below and on the following page have
been derived from the consolidated financial statements of the Company and the
related notes thereto. The statement of operations data for the years ended
December 31, 2005, 2004 and 2003 and the balance sheet data as of December 31,
2005 and 2004 are derived from the consolidated financial statements of the
Company which have been audited by BDO Seidman, LLP, independent registered
public accountants, included elsewhere herein. The statement of operations data
for the years ended December 31, 2002 and 2001 and the balance sheet data as of
December 31, 2003, 2002 and 2001 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.
As of December 31,
----------------------------------------------------------------
2005 2004 2003 2002 2001
----------- ----------- ------------ ------------ ------------
Balance Sheet Data: (in thousands)
Working capital $13,086 $8,595 $4,578 $6,154 $11,154
Total assets 27,143 27,833 20,090 22,448 22,333
Total debt 4,620 6,781 10,782 11,588 6,841
Redeemable preferred stock -- -- -- -- 3,300
Stockholders' equity 13,144 12,154 5,547 7,242 8,816
17
Year Ended December 31,
-----------------------------------------------------------------------
2005 2004 2003 2002 2001
----------- ----------- ------------ ------------ ------------
Statement of Operations Data: (in thousands except per share data)
Net sales $83,289 $80,649 $64,305 $63,521 $81,189
Cost of sales 49,070 49,583 43,706 41,776 55,108
----------- ----------- ------------ ------------ ------------
Gross profit 34,219 31,066 20,599 21,745 26,081
Selling expenses 10,834 10,413 9,525 11,486 11,246
License fees 5,114 5,330 4,163 5,018 5,211
Distribution and shipping expenses 2,247 1,968 2,062 2,393 2,976
General and administrative expenses 8,604 7,532 5,244 7,115 7,374
Litigation settlement 1,750 -- -- -- --
Loss on sale of property -- -- (415) -- --
----------- ----------- ------------ ------------ ------------
Operating income (loss) 5,670 5,823 (810) (4,267) (726)
Interest, net (436) (729) (1,009) (657) (1,307)
Loss from sale of property -- -- (415) -- --
Other income (expense) -- 26 124 (39) (149)
----------- ----------- ------------ ------------ ------------
Income (loss) from continuing
operations before income taxes 5,234 5,120 (1,695) (4,963) (2,182)
Income tax benefit, net 1,178 1,045 -- -- --
----------- ----------- ------------ ------------ ------------
Income (loss) from continuing
operations 6,412 6,165 (1,695) (4,963) (2,182)
----------- ----------- ------------ ------------ ------------
Loss from operations of
discontinued subsidiary -- -- -- -- (1,310)
Loss from sale of discontinued
subsidiary -- -- -- -- (1,182)
----------- ----------- ------------ ------------ ------------
Loss from discontinued operations -- -- -- -- (2,492)
----------- ----------- ------------ ------------ ------------
Net income (loss) 6,412 6,165 (1,695) (4,963) (4,674)
----------- ----------- ------------ ------------ ------------
Preferred stock deemed dividend -- -- -- (596) --
----------- ----------- ------------ ------------ ------------
Net income (loss) attributable to
common stockholders $6,412 $6,165 $(1,695) $(5,559) $(4,674)
=========== =========== ============ ============ ============
Basic income (loss) per share from
continuing operations $0.55 $0.55 $(0.15) $(0.61) $(0.28)
Basic loss per share from
discontinued operations -- -- -- -- (0.32)
Preferred stock deemed dividend -- -- -- (0.07) --
----------- ----------- ------------ ------------ ------------
Basic income (loss) per share $0.55 $0.55 $(0.15) $( 0.68) $( 0.60)
=========== =========== ============ ============ ============
Basic weighted average common
shares outstanding 11,729 11,264 11,135 8,160 7,854
Diluted income (loss) per share $0.48 $0.46 $( 0.15) $( 0.68) $( 0.60)
=========== =========== ============ ============ ============
Diluted weighted average common
shares outstanding 13,397 13,355 11,135 8,160 7,854
Basic and diluted loss per share are the same for the years 2000 through
2003 as dilutive securities were excluded from the computation of net loss per
share as their inclusion would have been anti-dilutive.
The Statement of Operations Data includes a one time charge of $1.75
million to settle an arbitration proceeding commenced against the Company by a
former executive of the Company.
18
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
The Company, which operates in one business segment, is a designer and
marketer of branded jeanswear and sportswear. The Company offers collections of
Girbaud branded jeanswear and sportswear for men and women in the United States,
Puerto Rico and the US Virgin Islands. The Girbaud brand is an internationally
recognized designer label with a distinct European influence. The Company has
positioned its Girbaud brand line with a broad assortment of products, styles
and fabrications reflecting a contemporary European look. The Company markets a
full collection of men's and women's jeanswear and sportswear under the Girbaud
brand, including a broad array of bottoms, tops and outerwear. The Company
focuses its efforts on the Girbaud brand exclusively which provided all its net
sales in 2005, 2004 and 2003.
Critical Accounting Policies and Estimates
The Company's significant accounting policies are more fully described in
its Summary of Accounting Policies set forth in the Company's consolidated
financial statements and the notes thereto which accompany this Report. The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions in certain circumstances that affect amounts reported in the
accompanying financial statements and related notes. In preparing these
financial statements, management has made its best estimates and judgments of
certain amounts included in the financial statements, giving due consideration
to materiality. The Company does not believe there is a great likelihood that
materially different amounts would be reported related to the accounting
policies described below; however, application of these accounting policies
involves the exercise of judgment and the use of assumptions as to future
uncertainties and, as a result, actual results could differ from these
estimates.
The Company evaluates the adequacy of its allowance for doubtful accounts
at the end of each quarter. In performing this evaluation, the Company analyzes
the payment history of its significant past due accounts, subsequent cash
collections on these accounts and comparative accounts receivable aging
statistics. Based on this information, along with consideration of the general
strength of the economy, the Company develops what it considers to be a
reasonable estimate of the uncollectible amounts included in accounts
receivable. This estimate involves significant judgment by the management of the
Company. Actual uncollectible amounts may differ from the Company's estimate.
Net revenue is recognized upon the transfer of title and risk of ownership
to customers. Revenue is recorded net of discounts, as well as provisions for
estimated returns and allowances. On a seasonal basis, the Company negotiates
price adjustments with its retail customers as sales incentives. The Company
estimates the cost of such adjustments on an ongoing basis considering
historical trends, projected seasonal results and an evaluation of current
economic conditions. These costs, which have been recorded as a reduction to net
revenue, were $3,710,000, $3,777,000 and $1,920,000 for the years ended December
31, 2005, 2004 and 2003, respectively.
Sales are recognized upon shipment of products. Allowances for estimated
returns are provided by the Company when sales are recorded by reviewing trends
and returns on a historical basis. Shipping and handling fees billed to
customers are classified in net sales in the consolidated statements of
operations. Shipping and handling costs incurred are classified in distribution
and shipping in the consolidated statements of operations.
19
The Company includes in cost of goods sold all costs and expenses related
to obtaining merchandise incurred prior to the receipt of finished goods at the
Company's distribution facilities. These costs include, but are not limited to,
product cost, inbound freight charges, purchasing and receiving costs,
inspection costs, warehousing costs and internal transfer costs, as well as
insurance, duties, brokers' fees and consolidators' fees. The Company includes
in selling, general and administrative expenses costs incurred subsequent to the
receipt of finished goods at its distribution facilities, such as the cost of
picking and packing goods for delivery to customers. In addition, selling,
general and administrative expenses include product design costs, selling and
store service costs, marketing expenses and general and administrative expenses.
The Company estimates inventory markdowns based on customer orders sold
below its inventory cost that will be shipped in the following period and
estimates an amount for similar unsold inventory at period end. The Company
analyzes recent sales and gross margins on unsold inventory in further
estimating inventory markdowns. These specific markdowns are reflected in cost
of sales and the related gross margins at the conclusion of the appropriate
selling season. This estimate involves significant judgment by the management of
the Company. Actual gross margins on sales of excess inventory may differ from
the Company's estimate.
Results of Operations
Year Ended December 31,
----------------------------------------
2005 2004 2003
----------- ---------- -----------
Net sales 100.0% 100.0% 100.0%
Cost of sales 58.9% 61.5% 68.0%
----------- ---------- -----------
Gross profit 41.1% 38.5% 32.0%
----------- ---------- -----------
Selling expenses 13.0% 12.9% 14.8%
License fees 6.1% 6.6% 6.5%
Distribution and shipping expenses 2.6% 2.5% 3.3%
General and administrative expenses 10.3% 9.3% 8.1%
Litigation settlement 2.2% -- --
Loss on sale of property -- -- 0.6%
----------- ---------- -----------
Operating income (loss) 6.9% 7.2% (1.3%)
=========== ========== ===========
Year Ended December 31, 2005 Compared to Year Ended December 31, 2004 Net sales
and gross profit.
Net sales increased 3.3% to $83.3 million in 2005 from $80.6 million in
2004. Net sales of the Girbaud men's product line increased $3.5 million, or
5.3%, to $69.3 million, while net sales of the Girbaud women's product line
decreased $0.8 million, or 5.4%, to $14.0 million.
Gross profit increased 10.0% to $34.2 million in 2005 from $31.1 million in
2004. Gross margin, or gross profit as a percentage of net sales, increased to
41.1% from 38.5% over the same period.
Gross units sold increased 19.4% to 4.3 million units in 2005 compared to
3.6 million units in 2004. Gross sales (sales before adjustment for returns and
allowances) increased 2.8% to $91.1 million in 2005 compared to $88.6 million in
2004. The related gross margins on these sales (unadjusted for returns and
allowances) increased $1.6 million to $38.6 million in 2005 from $37.0 million
in 2004. Returns and allowances decreased to 8.6% of gross sales in 2005 from
9.0% in 2004 based on the increase in sales during 2005.
20
The main contributing factors to the increase in gross sales, gross profit
and gross margin were as follows:
o Unit sales of goods sold at regular prices - Unit sales of goods sold
at regular prices (both T-Shirts and Jeans & Tops) remained relatively
unchanged at 2.6 million units in 2005 and 2004. Whereas these unit
sales volumes of regular priced merchandise remained relatively
unchanged, the resulting gross sales and the related gross profit and
gross margins were as follows:
o an 8.1% or $6.0 million decrease to $68.3 million in the
sales dollar volume of regular priced merchandise during
2005 (from $74.3 million in 2004);
o an 8.5% increase to 52.4% in gross profit margins (before
adjustments for returns and allowances) during 2005 (from
48.3% in 2004) as a result of the Company raising its
initial markups on its products in the second half of 2004,
and which, despite the reduced sales dollar volume, resulted
in only a slight decrease of 0.3% or $0.1 million to $35.8
million in gross profit during 2005 (from $35.9 million in
2004).
o Unit sales of goods sold at in-season promotional prices and off-price
liquidations - An increase of 70.0% in unit sales of goods sold at
in-season promotional prices and off-price liquidations (both T-Shirts
and Jeans & Tops) to 1.7 million units in 2005 compared to 1.0 million
units in 2004. This was due to the liquidation of unsold inventory as
the Company realigned its sales planning and product procurement
processes. The Company believes that the restructuring of this aspect
of its business is mostly complete and, going forward, expects lower
end of season inventory liquidations. The increase in unit volumes of
merchandise sold at in-season promotional prices and off-price
liquidations translated into resulting gross sales and related gross
profit and gross margins as follows:
o a 60.6% or $8.6 million increase to $22.8 million in the
sales dollar volume of goods sold at in-season promotional
prices and off-price liquidations (from $14.2 million in
2004);
o an increase to 12.7% in gross profit margins during 2005
(from 7.7% in 2004) which, coupled with the increased dollar
sales volumes of these goods, resulted in an increase of
163.6% or $1.8 million to $2.9 million in gross profit
during 2005 (from $1.1 million in 2004).
Comparison of the relative changes in sales of T-Shirts, on the
one hand, and Jeans & Tops on the other, revealed, the following:
o Gross unit sales of T-Shirts at regular prices (average selling price
of $12-$16 per unit) increased to 0.8 million units in 2005 compared
to 0.7 million in 2004 and represented a $0.5 million increase in
goods sold at regular prices in 2005. The gross margin associated with
these sales increased to 55.6% in 2005 compared to 51.8% in 2004 and
represented a gross profit increase of $0.7 million in 2005 over 2004.
o Gross unit sales of Jeans & Tops at regular prices (average selling
price of $28-$34 per unit) decreased by 5.3% to 1.8 million units in
2005 compared to 1.9 million units in 2004, and represented a $6.6
million decrease in goods sold at regular prices in 2005 over the
sales of those products made at regular prices in 2004. The gross
margin associated with these sales increased to 51.8% in 2005 compared
to 47.6% in 2004 and represented a decrease in gross profit of 2.7% or
$29.3 in 2005 compared to $30.1 million in 2004.
21
Selling, Distribution, General and Administrative Expenses.
Operating expenses increased 13.1% to $28.5 million in 2005 from $25.2
million in 2004. As a percentage of net sales, operating expenses increased to
34.2% from 31.3% over the same period. As the result of the settlement of an
arbitration proceeding commenced against the Company by a former executive, the
Company recorded as operating expense a $1.8 million charge during 2005. The
remaining increase in operating expenses resulted primarily from higher selling
expenses, higher shipping expenses associated with the increase in units
shipped, and an increase in administrative expenses. These increases were
partially offset by a decrease in license fees which primarily resulted from the
increase in off-price discount sales.
Selling expenses increased $0.4 million to $10.8 million in 2005 primarily
as a result of higher design expenses and commissions. Design expense increased
to $3.6 million in 2005 compared to $3.1 million in 2004 primarily as a result
of increased personnel costs and sample expense. In 2005, the Company completed
the plan it had commenced in 2004 to reorganize its design department for better
internal stability. The Company expects its sample expense to return to more
reasonable levels in 2006 and future years. Commission expense increased to $2.9
million in 2005 compared to $2.8 million in 2004 as a result of greater net
sales. Advertising and promotional related expenses decreased to $1.6 million in
2005 compared to $1.8 million in 2004. The Company is required to spend the
greater of an amount equal to 3% of Girbaud net sales or $0.9 million in
advertising and related expenses promoting the Girbaud brand products in each
year of the terms of the Girbaud agreements. During each of the six years ended
December 31, 2005, the amounts of advertising and related expenses incurred by
the Company in marketing the Girbaud brand products were less than the amounts
required under the agreements. In each of the various amendments to the men's
and women's license agreements which were executed in 2002 - 2004, Latitude and
the Company confirmed to one another that neither party was in default to the
other in the performance of any of the obligations owed by either of them to the
other. On March 29, 2006, Latitude also waived the Company's failure to spend
the minimum amounts required under the men's and women's license agreements in
2005.
License fees decreased $0.2 million to $5.1 million in 2005 from $5.3
million in 2004. As a percentage of net sales, license fees decreased to 6.1% in
2005 compared to 6.6% in 2004. The decrease in license fees as a percentage of
net sales was primarily due to the increase in product sales of in-season
promotional prices and off-price liquidations which generate lower license fees
than sales of regular priced merchandise. Distribution and shipping increased
$0.2 million to $2.2 million in 2005 from $2.0 million in 2004 as a result of
higher shipping expenses associated with the increase in units shipped. General
and administrative expenses increased 14.7% to $8.6 million in 2005 from $7.5
million in 2004. The increase was mainly attributable to an increase in
provisions provided for bad debt and additional legal expenses associated with
the arbitration. The provision for doubtful accounts was $1.0 million in 2005
compared to $0.5 million in 2004. Legal fees were $0.8 million in 2005 compared
to $0.4 million in 2004.
Operating Income.
Operating income remained relatively unchanged at $5.7 million in 2005
compared to $5.8 million in 2004 as the increase in gross profit was offset by
the increase in selling, distribution, general and administrative expenses.
Interest Expense.
Interest expense decreased to $0.4 million in 2005 from $0.7 million in
2004 as a result of decreased borrowings under the Company's revolving credit
facility as a result of the Company's ability to finance its operations through
internally generated funding.
Income Taxes.
As of December 31, 2005, the Company had net operating loss carryforwards
of approximately $34.7 million, which begin to expire in 2014. In years prior to
2004, no tax benefit was allowed due to the uncertainty of the Company's ability
22
to generate future taxable income at that time. As a result of the income the
Company generated in 2005 and 2004, the Company's management reevaluated its net
operating losses and the related valuation reserves and has recognized a net
income tax benefit of $1.2 million in 2005.
Year Ended December 31, 2004 Compared to Year Ended December 31, 2003 Net Sales
and gross profit.
Net sales increased 25.3% to $80.6 million in 2004 from $64.3 million in
2003. Net sales of the Girbaud men's product line increased $10.4 million, or
18.8%, to $65.8 million while the Girbaud women's product line increased $5.9
million, or 66.3%, to $14.8 million.
Gross profit increased 51.0% to $31.1 million in 2004 from $20.6 million in
2003. Gross margin, or gross profit as a percentage of net sales, increased to
38.5% from 32.0% over the same period. Higher gross profit and gross margins
were due to better product performance, improved delivery to retailers and a
higher percentage of sales to customers at full price in 2004, a year during
which unit sales of off-price goods as a percentage of total sales decreased
significantly to 19%, compared to 33% for 2003. Beginning with shipments in the
third quarter of 2004, the Company's management raised the selling prices of its
products in order to increase its gross margin to a level that it viewed as
being consistent with other companies in the industry. In the absence of further
price increases (which management does not expect to implement in the
foreseeable future), it is not likely that gross profit and gross margin will
increase in 2005 and future years as significantly, if at all, as the gross
profit and gross margin changes that occurred in 2004 due to the price increases
discussed below.
Gross units sold remained relatively unchanged at 3.6 million units in 2004
and 2003. Gross sales (sales before adjustment for returns and allowances)
increased 29.3% to $88.6 million in 2004 compared to $68.5 million in 2003. The
related gross margins on these sales (unadjusted for returns and allowances)
increased $12.5 million to $37.0 million in 2004 from $24.5 million in 2003.
Returns and allowances increased to 9.0% of gross sales in 2004 from 6.1% in
2003 as the Company provided more price adjustments to its retail stores in 2004
compared to 2003. The main contributing factors to the increase in gross sales,
gross profit and gross margin notwithstanding the comparatively unchanged unit
volume of sales were as follows:
o Increases in the unit and dollar volumes of goods sold at regular
prices - An increase of 23.8% in unit sales of goods sold at regular
prices (both T-Shirts and Jeans & Tops) to 2.6 million units in 2004
compared to 2.1 million units in 2003. That increase in unit volumes
of regular priced merchandise resulted in
o a 43.2% or $22.4 million increase (from $51.9 million in
2003) in the dollar volume of sales of regular priced
merchandise;
o a 51.5% or $12.2 million increase in gross profit (from
$23.7 million in 2003); and
o a 2.6% increase to 48.3% in gross profit margins (from 45.7%
in 2003).
o Reductions in the unit and dollar volumes of goods sold at in-season
promotional prices and off-price liquidations - A decrease of 33.3% in
unit sales of goods sold at in-season promotional prices and off-price
liquidations (both T-Shirts and Jeans & Tops) to 1.0 million units in
2004 compared to 1.5 million units in 2003. That reduction in unit
volumes of merchandise sold at in-season promotional prices and
off-price liquidations translated into
o a 14.5% or $2.4 million decrease (from $16.6 million in
2003) in the dollar volumes of those sales;
o an 37.5% or $0.3 million increase in gross profit (from $0.8
million in 2003; and
23
o a 2.9% increase to 7.7% in gross profit margins (from 4.8%
in 2003).
o A price increase in the second half of 2004. The Company increased the
selling prices of all of its merchandise by approximately 5% (on
average) during the second half of 2004. This resulted in an increase
in sales (which is included in the increase of dollar volume increases
discussed above) and in gross profit of approximately $2.2 million in
2004.
Comparison of the relative changes in sales of T-Shirts, on the one hand,
and Jeans & Tops on the other, revealed, the following:
o Gross unit sales of T-Shirts at regular prices (average selling price
of $12-$15 per unit) remained relatively unchanged at 0.7 million
units in 2004 and 2003 and represented $1.8 million of the total
increase in goods sold at regular prices in 2004. The gross margin
associated with these sales increased to 51.8% in 2004 compared to
46.8% in 2003 and represented a gross profit increase of $1.4 million
in 2004 over 2003.
o Gross unit sales of Jeans & Tops at regular prices (average selling
price of $28-$33 per unit) increased by 35.7% to 1.9 million units in
2004 compared to 1.4 million units in 2003, and represented $20.6
million of the total increase in goods sold at regular prices in 2004
over the sales of those products made at regular prices in 2003. The
gross margin associated with these sales increased to 47.6% in 2004
compared to 45.4% in 2003 and represented a gross profit increase of
$10.8 million in 2004 over 2003.
Selling, Distribution, General and Administrative Expenses.
Operating expenses increased 20.0% to $25.2 million in 2004 from $21.0
million in 2003. As a percentage of net sales, operating expenses decreased
slightly to 31.3% from 32.7% over the same period. The increase in operating
expenses resulted primarily from higher selling expenses and licensing fees
associated with higher sales as well as an increase in administrative expenses.
Selling expenses increased $0.9 million to $10.4 million in 2004 primarily as a
result of higher commissions earned on higher net sales. Commission expense was
$2.8 million in 2004 compared to $2.2 million in 2003. Sales salaries increased
$0.3 million to $1.2 million in 2004 over 2003. Advertising and promotional
related expenses remained relatively unchanged at $1.8 million in 2004 and 2003.
License fees increased $1.1 million to $5.3 million in 2004 from $4.2 million in
2003. As a percentage of net sales, license fees remained relatively unchanged
at 6.6% compared to 6.5% during the same periods. The increase in license fees
was primarily due to the increase in net sales levels resulting in royalty
payment obligations in excess of the 2004 minimum guaranteed royalty payments.
Distribution and shipping decreased $0.1 million to $2.0 million in 2004 from
$2.1 million in 2003. General and administrative expenses increased 44.2% to
$7.5 million in 2004 from $5.2 million in 2003. The increase was attributable to
an increase in personnel and related costs in 2004. The increase in personnel
costs was the result of a $1.0 million increase in salaries associated with the
restructuring of the Company's management in 2003 and bonuses paid or accrued of
$1.3 million based on the Company's 2004 performance.
Operating Income.
Operating income was $5.8 million in 2004 compared to an operating loss of
$0.8 million in 2003. This improvement was due to the overall increases in sales
and in the gross profit margin and was partially offset by the higher operating
expenses as noted above.
Interest Expense.
Interest expense decreased 30.0% to $0.7 million in 2004 from $1.0 million
in 2003 as a result of decreased borrowings under the Company's revolving credit
facility. The decrease in borrowings was the result of improved cash flow due to
increased accounts receivable and inventory turnover. Interest income earned in
2004 and 2003 was insignificant.
24
Income Taxes.
As of December 31, 2004, the Company had net operating loss carryforwards
of approximately $41.3 million, which begin to expire in 2013. In prior years,
no tax benefit was allowed due to the uncertainty of the Company's ability to
generate future taxable income at that time. As a result of the income the
Company generated in 2004, the Company's management reevaluated its net
operating losses and the related valuation reserves and has recognized a net
income tax benefit of $1.0 million in 2004.
Liquidity and Capital Resources
The Company has relied primarily on asset based borrowings, trade credit
and internally generated funds to finance its operations. The Company increased
its accounts receivable $5.5 million and decreased its inventory $3.0 during
2005. Accounts payable and accrued liabilities decreased $1.3 million during
2005. Cash and cash equivalents held by the Company decreased to $0.9 million at
December 31, 2005 compared to $1.0 million at December 31, 2004 while its
working capital increased to $13.1 million at December 31, 2005 from $8.6
million at December 31, 2004. A decrease in demand for the Company's products
could have a material adverse effect on the Company's working capital.
Cash Flow.
Cash provided by operations totaled $2.7 million in 2005 compared to $6.2
million in 2004. The decrease in 2005 was due primarily to the increases in
accounts receivable plus the decreases in accounts payable and other liabilities
(which included pay down of $2.3 million of deferred royalty payments) partially
offset by a decrease in inventories. Inventories decreased $3.0 million from
December 31, 2004 to December 31, 2005, compared to an increase of $4.5 million
from December 31, 2003 to December 31, 2004.
Cash used in investing activities totaled $1.3 million in 2005 and $1.9
million in 2004 and, for both years, was mainly due to capital improvements
associated with the new offices and showrooms in New York. Cash used in
financing activities totaled $1.5 million and $4.1 million in 2005 and 2004
respectively. In 2005, cash used in financing activities primarily resulted from
the principal payments on long term debt of $1.9 million and revolving line of
credit of $0.2 million partially offset by an increase in overdrafts of $0.4
million and cash received on issuance of common stock of $0.2 million.
Credit Facilities
On December 30, 2004, the Company entered into a three year credit facility
(the "Credit Facility") with Wachovia Bank, National Association ("Wachovia").
The Credit Facility provides that the Company may borrow, using as collateral,
up to 85% of eligible accounts receivable and a portion of eligible inventory,
both as defined by the Credit Facility. Borrowings under the Credit Facility may
not exceed $25.0 million including outstanding letters of credit which are
limited to $8.0 million at any one time. There were approximately $1.8 million
of outstanding letters of credit at December 31, 2005. The Company's
availability at December 31, 2005 was approximately $7.8 million. The Credit
Facility accords to the Company the right, at its election, to borrow these
amounts as either Prime Rate Loans or LIBOR Loans. Prime Rate Loans bear
interest at the prime rate plus the applicable margin in effect from time to
time. LIBOR Loans are limited to three in total, must be a minimum of $1,000,000
each and in integral multiples of $500,000 in excess of that amount, and bear
interest at the LIBOR rate plus the applicable margin in effect from time to
time. The applicable margins, as defined by the Credit Facility, fluctuate from
0.00% to 0.75% for the Prime Loans and 2.00% to 2.75% for LIBOR Loans. The
applicable margins are inversely affected by fluctuations in the amount of
"excess availability" - the unused portion of the amount available under the
facility - which are in staggered increments from less then $2.5 million to $7.5
million. The Prime Rate and the LIBOR Rate were 7.00% and 4.82% respectively at
December 31, 2005. All the amounts borrowed under the Credit Facility at
December 31, 2005 were Prime Rate Loans and the effective rate was 7.25% at that
time. Starting in 2005, the Credit Facility also required the Company to comply
with certain covenants expressed as fixed charge coverage ratios and tangible
liability to net worth ratios. As collateral security for its obligations under
the Credit Facility, Isaacs and the LP granted a first priority security
25
interest in all of their respective assets to Wachovia. In January and February
2006, the Company was in violation of the fixed charge coverage ratio covenant
of the Credit Facility and has received a waiver from Wachovia for these
violations. The Company can not assure its investors with regard to its ability
to comply with its covenant obligations under the Credit Facility in the future.
On May 6, 2002, Textile, an affiliate of Latitude, the licensor of the
Company, acquired a note that the Company had issued to a former licensor. On
May 21, 2002, Textile exchanged that note for an amended and restated note in
the amount of $6,557,909 bearing interest at the rate of 8% per annum, (the
"Replacement Note"). The Replacement Note, which subordinated Textile's rights
under the note to the rights of the holder of a revolving line of credit in
existence prior to the Credit Facility with Wachovia, deferred the original
note's principal payments and extended the maturity date of the note until
December 31, 2007. In connection with the execution of the Credit Facility, the
Replacement Note was further amended and restated to subordinate Textile's
rights to the rights of Wachovia under the Credit Facility (the "Amended and
Restated Replacement Note" and together with the Replacement Note, the "Textile
Notes"). Pursuant to the subordination provisions of the Textile Notes, the
Company was obligated to defer the payments that otherwise would have been due
thereunder during each calendar quarter commencing with the quarter ended
December 31, 2002 and continuing through March 31, 2005. Also, pursuant to the
provisions of the Textile Notes, the non-payment and deferral of those payments
did not constitute a default thereunder. Pursuant to amendments to the Girbaud
Agreements executed in December 2004, the payment of approximately $2.3 million
of minimum and additional royalties that otherwise would have been payable in
2004 was deferred, and the payment thereof became due and payable during the 18
month period which commenced in June 2005 (see Note 8 to the audited financial
statements appearing elsewhere in this Report). Pursuant to an intercreditor and
subordination agreement entered into by Wachovia and Textile in connection with
the consummation of the Credit Facility, Textile was permitted to elect to
authorize the Company to defer the payment of quarterly amounts that otherwise
would have been due and payable under the Amended and Restated Replacement Note
and apply such amount in payment of deferred royalties under the licensing
agreements. As of June 30, 2005, all 2004 deferred royalty payments were paid in
full. The obligations under the Textile Notes have been classified as current or
long-term based upon the respective original due dates of the quarterly payments
specified in the Replacement Note or the Amended and Restated Replacement Note,
as the case may be. Accordingly, each deferred quarterly payment has been
classified as current even though the payment thereof may not be made until a
future year. As allowed under the Credit Facility, the Company resumed making
payments on the Textile Notes in the third quarter of 2005 and made a total of
$2,090,000 in principle and interest payments on those notes in 2005.
Following is a schedule of the current and non-current portion of the
Textile Notes' principal and accrued interest payments due as of December 31,
2005:
Accrued interest and principal payments related to Accrued Principal
the Textile Notes at December 31, 2005: Interest Payments
------------------ -----------------
Deferred note payments $ 1,312,134 $ 1,427,866
Principal note payments (current) -- 1,465,262
------------------ -----------------
Subtotal current 1,312,134 2,893,128
Principal note payments (non-current) -- 1,726,466
------------------ -----------------
Total current & non-current $ 1,312,134 $ 4,619,594
================== =================
The Company extends credit to its customers. Accordingly, the Company may
have significant risk in collecting accounts receivable from its customers. The
Company has credit policies and procedures which it uses to minimize exposure to
credit losses. The Company's collection personnel regularly contact customers
with receivable balances outstanding beyond 30 days to expedite collection. If
these collection efforts are unsuccessful, the Company may discontinue
merchandise shipments until the outstanding balance is paid. Ultimately, the
Company may engage an outside collection organization to collect past due
accounts. Timely contact with customers has been effective in minimizing its
credit losses. In 2005 and 2004, the Company's account receivable write-off's
were $0.5 million and $0.2 million, respectively, and as a percentage of net
sales were 0.8% and 0.3%, respectively.
26
The Company had the following contractual obligations and commercial
commitments as of December 31, 2005:
Schedule of contractual obligations:
Payments Due By Period
--------------------------------------------------------------------------------
Total Less than 1 1-3 years 4-5 years After 5 years
year
-------------- -------------- --------------- ---------------- -----------------
Revolving line of
credit $ -- $ -- $ -- $ -- $ --
Long term debt (*) 6,238,690 4,420,000 1,818,690 -- --
Operating leases 4,390,641 519,665 929,131 910,353 2,031,492
Employment agreements 2,563,500 1,296,500 1,267,000 -- --
Girbaud license
obligations 9,388,265 4,888,265 4,500,000 -- --
Girbaud fashion shows 825,000 525,000 300,000 -- --
Girbaud creative &
advertising fees 410,000 220,000 190,000 -- --
Promotional expense
license requirement 2,200,000 900,000 1,300,000 -- --
------------- ------------- -------------- --------------- ----------------
Total contractual
cash obligations $ 26,016,096 $ 12,769,430 $ 10,304,821 $ 910,353 $ 2,031,492
============= ============= ============== =============== ================
(*) Includes principal and accrued interest payments due as of December 31,
2005 as well as interest to accrue through the maturity date of the
note payable.
Schedule of commercial commitments:
Amount of Commitment Expiration Per Period
Total Less than 1 1-3 years 4-5 years After 5 years
year
-------------- -------------- --------------- ---------------- -----------------
Line of credit *
(including letters
of credit) $ 25,000,000 $ 25,000,000 $ -- $ -- $ --
------------- ------------- -------------- --------------- ----------------
Total commercial
commitments $ 25,000,000 $ 25,000,000 $ -- $ -- $ --
============= ============= ============== =============== ================
(*) At December 31, 2005, the Company had no borrowings under the Credit
Facility other than outstanding letters of credit of approximately $1.8
million.
The Company believes that current levels of cash and cash equivalents ($0.9
million at December 31, 2005) together with cash from operations and funds
available under its Credit Facility will be sufficient to meet its capital
requirements for the next 12 months.
Inflation
The Company does not believe that the relatively moderate rates of
inflation experienced in the United States over the last year have had a
significant effect on its net sales or profitability. Although higher rates of
inflation have been experienced in a number of foreign countries in which the
Company's products are manufactured, the Company does not believe that they have
had a material effect on the Company's net sales or profitability.
27
Recent Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board, or FASB, issued
Statement No. 123(R), Share-Based Payment, or SFAS 123(R), which is a revision
of SFAS 123. SFAS 123(R) requires all share-based payments to employees and
directors to be recognized in the financial statements based on their fair
values, using prescribed option-pricing models. SFAS 123(R) is effective for
public companies for annual periods beginning after June 15, 2005. Accordingly,
the Company adopted SFAS 123(R) with effect on January 1, 2006. From and after
that date, pro forma disclosure will no longer be an alternative to financial
statement recognition. Accordingly, the adoption of SFAS 123(R)'s fair value
method may have a significant impact on the Company's results of operations. The
impact of adoption of SFAS 123(R) and its approximated impact on prior periods
had the Company adopted SFAS 123(R) in prior periods, is further described in
the disclosures included in the Summary of Accounting Policies - Stock Options.
SFAS 123(R) also requires the benefits of tax deductions in excess of recognized
compensation cost to be reported as a financing cash flow, rather than as an
operating cash flow as required under current literature. This requirement will
reduce net operating cash flows and increase net financing cash flows in periods
after adoption.
In May 2005, The FASB issued Statement No. 154, Accounting Changes and
Error Corrections, a Replacement of APB Opinion No. 20 and FASB Statement No. 3,
or SFAS 154. SFAS 154, effective for accounting changes and corrections of
errors made in fiscal years beginning after December 15, 2005, replaces APB
Opinion No. 20, Accounting Changes, and Statement No. 3, Reporting Accounting
Changes in Interim Financial Statements, and changes the requirements for the
accounting for and reporting of a change in accounting principle. SFAS 154
applies to all voluntary changes in accounting principle and also applies to
changes required by an accounting pronouncement in the unusual instance that the
pronouncement does not include specific transition provisions. When a
pronouncement includes specific transition provisions, those provisions should
be followed. SFAS 154 requires retrospective application (the application of a
different accounting principle to prior accounting periods as if that principle
had always been used) to prior periods' financial statements of changes in
accounting principle, unless it is impracticable to determine either the
period-specific effects or the cumulative effect of the change. The Company does
not believe SFAS 154 will have a material effect on its financial statements.
In May 2005, The FASB released FASB Interpretation No. 47, or FIN 47,
Accounting for Conditional Asset Retirement Obligations, an interpretation of
FASB Statement No. 143. FIN 47 is effective for fiscal years ending after
December 15, 2005 and clarifies that the term conditional asset retirement
obligation as used in FASB Statement No. 143, Accounting for Asset Retirement
Obligations, refers to a legal obligation to perform an asset retirement
activity in which the timing and (or) method of settlement are conditional on a
future event that may or may not be within the control of the entity. The
obligation to perform the asset retirement activity is unconditional even though
uncertainty exists about the timing and (or) method of settlement. Thus, the
timing and (or) method of settlement may be conditional on a future event.
Accordingly, an entity is required to recognize a liability for the fair value
of a conditional asset retirement obligation if the fair value of the liability
can be reasonably estimated. The fair value of a liability for the conditional
asset retirement obligation should be recognized when incurred, generally upon
acquisition, construction, or development and (or) through the normal operation
of the asset. Uncertainty about the timing and (or) method of settlement of a
conditional asset retirement obligation should be factored into the measurement
of the liability when sufficient information exists. Statement 143 acknowledges
that in some cases, sufficient information may not be available to reasonably
estimate the fair value of an asset retirement obligation. This Interpretation
also clarifies when an entity would have sufficient information to reasonably
estimate the fair value of an asset retirement obligation. FIN 47 did not have
an effect on the Company's financial statements.
In February 2006, the FASB issued FASB Statement No. 155, "Accounting for
Certain Hybrid Financial Instruments" (SFAS155) , which nullifies and amends
various accounting guidance relating to accounting for derivative instruments
and securitization transactions. In general, these changes will reduce the
28
operational complexity associated with bifurcating embedded derivatives, and
increase the number of beneficial interests in securitization transactions. This
statement is effective for all financial instruments acquired or issued after
the beginning of our first fiscal year that begins after September 15, 2006.
Because we do not have any material derivative instruments or securitization
transactions, we believe there will be no material impact on our financial
condition, results of operations or cash flows upon adoption.
29
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's principal market risk results from changes in floating
interest rates on short-term debt. The Company does not use interest rate swap
agreements to mitigate the risk of adverse changes in the prime interest rate.
The impact of a 100 basis point change in interest rates affecting the Company's
short-term debt would not be material to the Company's income, cash flow or
working capital. The Company does not hold long-term interest sensitive assets
and therefore is not exposed to interest rate fluctuations for its assets. The
Company does not hold or purchase any derivative financial instruments for
trading purposes.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the Company and the report of the
independent registered public accounting firm thereon are set forth on pages F-1
through F-22 hereof.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
In accordance with management's responsibilities for establishing and
maintaining adequate internal control over the Company's financial reporting,
the Company maintains disclosure controls and procedures that are designed to
provide reasonable assurance that:
o information required to be disclosed in the Company's Exchange Act
reports
o is recorded, processed, summarized and reported within the time
periods specified in the SEC's rules and forms,
o is accumulated and communicated to the Company's management,
including its Chief Executive Officer and Chief Financial
Officer, as appropriate, to allow timely decisions regarding
required disclosure,
o the Company's transactions are properly authorized;
o the Company's assets are safeguarded against unauthorized or improper
use; and
o the Company's transactions are properly recorded and reported,
all to permit the preparation of the Company's financial statements in
conformity with generally accepted accounting principles.
The Company conducted an evaluation, under the supervision and with the
participation of the Company's management, including its Chief Executive Officer
and Chief Financial Officer, of the effectiveness of the design and operation of
the Company's disclosure controls and procedures as of the end of the period
covered by this Report on Form 10-K. Among other matters, the Company sought by
that evaluation to determine whether there were any significant deficiencies or
material weaknesses in the Company's disclosure controls and procedures, and
whether it had identified any acts of fraud involving personnel who have a
significant role in the implementation of those controls and procedures.
Based upon that evaluation, the Company's CEO and CFO have concluded that,
the Company's disclosure controls and procedures were effective to provide
reasonable assurance that information required to be disclosed in the Company's
Exchange Act reports is recorded, processed, summarized and reported within the
time periods specified by the SEC, and that material information relating to the
Company and its consolidated subsidiaries is made known to management, including
the Company's CEO and CFO, particularly during the period when the Company's
periodic reports are being prepared.
There were no changes in the Company's internal controls over financial
reporting during the fourth quarter of 2005 that materially affected, or that
30
were reasonably likely to materially affect, the Company's internal control over
financial reporting.
ITEM 9B. OTHER INFORMATION
None.
31
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The Board of Directors is currently composed of nine directors. The
Company's directors are elected to serve for terms that expire at each annual
meeting of stockholders and when their respective successors are duly elected
and shall have qualified. The following table sets forth certain information
about the Company's current directors:
Peter J. Rizzo Mr. Rizzo has worked within the
Age 53 apparel industry during the past 27
Chief Executive Officer of the Company years. He became the Company's
Director since February 2004 Chief Executive Officer in
December, 2003, and was appointed
to the Board in February 2004.
During the two years prior to
joining the Company, Mr. Rizzo was
a consultant to the Neiman Marcus
Group. He was President and Vice
Chairman of Bergdorf Goodman from
1999 to 2002. From 1997 to 1999 ,
he served as President of Polo
Retail at Polo Ralph Lauren. From
1978 to 1997, he was Executive Vice
President and Head Merchant of
Barneys New York.
Olivier Bachellerie Mr. Bachellerie has served since
Age: 45 1997 as President and Director
Director since 2002 General of GI Promotion and
President and Director General of GI Cravatatakiller S.A., and as
Promotion and Cravatatakiller S.A. President of Fashion Services of
America, Inc., each of which is
beneficially owned by Marithe
Bachellerie and Francois Girbaud.
Mr. Bachellerie is the son of
Marithe Bachellerie, who together
with Mr. Girbaud, indirectly own
and possess the right to vote
approximately 38% of the Company's
outstanding shares of common stock.
Rene Faltz Mr. Faltz has practiced law in the
Age: 52 Grand Duchy of Luxembourg since
Director since 2002 1976. He has been with Cabinet
Senior Partner, Cabinet D'Avocats D'Avocats Rene Faltz since March
Rene Faltz 2000 after leaving the firm of
Faltz & Kremer. Mr. Faltz is one of
the Managing Directors of, and
serves as counsel to, several
companies that, since 2002, have
been beneficially owned by Marithe
Bachellerie and Francois Girbaud in
connection with the conduct of
their business activities as
designers and marketers of clothing
and other items bearing the various
Girbaud trademarks.
Neal J. Fox Mr. Fox has held senior management
Age: 71 positions at Neiman Marcus,
Director since 1998 Bergdorf Goodman and I. Magnin.
Consultant From 1983 to 1988, he was employed
by Garfinkel's, Raleigh & Co., or
its predecessor, most recently as
Chairman and Chief Executive
Officer, and was also a principal
shareholder of that company. From
1989 through March 1999, Mr. Fox
served as the President and Chief
Executive Officer of Sulka, an
international menswear retailer. In
1999, Mr. Fox founded NJF
Associates, Incorporated, a
consulting firm specializing in
brand management and business
development for the apparel,
accessories and luxury goods
32
industries. Mr. Fox served as a
director of Today's Man, a 30 unit
menswear retailer. In March, 2003,
Today's Man filed a petition under
Chapter 11 of the US Bankruptcy
Code.
Francois Girbaud Mr. Girbaud, an internationally
Age: 61 renowned designer and manufacturer
Director since 2004 of clothing, and licensor of
clothing designs and trademarks for
more than 25 years, became one of
the Company's directors in October
2004 Pursuant to agreements that
the Company has with companies
co-owned directly or indirectly by
Mr. Girbaud and Marithe
Bachellerie, the Company licenses
the Girbaud trademarks and designs
for use in the manufacture and sale
of various items of clothing in
North America.
Jon Hechler Mr. Hechler was employed by Ira J.
Age: 53 Hechler and Associates, an
Director since 1984 investment company, from 1980 to
President, T. Eliot, Inc. 1999. He is President of T. Eliot,
Inc., manufacturer of the Sani
Seat(R) hygienic toilet seat
system.
Robert Stephen Stec Mr. Stec was a Division President
Age: 51 of VF Corporation and had sole
Director since 2002 responsibility for VF's Girbaud
Chairman and Chief Executive Officer of division in the United States from
Lexington Home Brands 1989 through 1993. From 1996 to
1998, he served as President of
London Fog Industries, Inc., a
leading manufacturer and marketer
of branded outerwear. During 1997
and 1998, Mr. Stec served as a
part-time consultant to Girbaud
Design, Inc. and certain of its
affiliates. In 1999, Mr. Stec
served as a consultant to London
Fog for several months. Mr. Stec
has been employed as President and
Chief Executive Officer of
Lexington Home Brands, a leading
branded marketer of home
furnishings, since 1999.
John McCoy II Mr. McCoy has worked within the
Age: 59 apparel industry during the past 38
Director since 2005 years. In 1970, he began working
President of Components by John McCoy, Inc. for Pierre Cardin's sales
operations and held the position of
Executive Vice President--Clothing
when he left that firm in 1977 to
found Fitzgerald by John McCoy, a
US manufacturer of European styled
clothing. In 1985, Mr. McCoy
founded Components by John McCoy,
Inc., a manufacturer and
distributor of luxury clothing
brands, including Gran Sasso,
Mason's, Coast, Moncler, Lenor
Romano and Alfred Dunhill.
33
Principal Executive Officers of the Company Who Are Not Also Directors
The following table sets forth the names and ages of the Company's
principal executive officers who are not directors. The table also provides a
description of the positions of employment held by each of such executives for
at least the past five years.
Jesse de la Rama Mr. de la Rama began his employment
Age: 51 with the Company in March 2004 as
Chief Operating Officer of the Company Vice President of Merchandise
Planning and Retail Development. In
December 2004, he began serving as
the Company's Chief Operating
Officer. Mr. de la Rama engaged in
business during the period from
1997 through February 2004 as a
consultant to the fashion retail
industry and other clients,
including Calvin Klein, Inc.,
Lambertson/Truex and Sotheby's,
Inc., as president of his own
company, Jesse de la Rama, Inc.
Between 1994 and October 1997, Mr.
de la Rama was Senior Vice
President - Retail of Bally of
Switzerland. Between 1979 and
September 1994, he was employed by
Barney's New York and served in
various executive capacities,
including Vice President - Outlet
Division and Warehouse Sales (1992
- 1994) and Vice President -
Merchandise Planning (1983 - 1992).
Gregg A. Holst Mr. Holst began his employment with
Age: 47 the Company in December 2005. Prior
Executive Vice President and Chief to the commencement of his
Financial Officer employment by Registrant's wholly
owned subsidiary, I.C. Iaacs &
Company LP (the "LP"), Mr. Holst
served (from 2003 - December 2005)
as Chief Financial Officer, The
Americas, for BBDO Worldwide, Inc.
During 2000 - 2002, Mr. Holst was
Executive Vice President, Finance
for the Warnaco Group, Inc. From
1992 to 2000, Mr. Holst held
several finance positions with the
General Electric company and prior
to 1992 he was employed in the New
York office of Arthur Andersen &
Co. Mr. Holst is a certified public
accountant.
Directors' Compensation
Directors who are employed by the Company or any of its subsidiaries
receive no compensation for serving on the Board of Directors. Directors who are
not so employed (the "Outside Directors") receive an annual retainer fee of
$10,000 for their services and attendance fees of $750 per Board or committee
meeting attended. The Chairman of the Audit Committee receives an additional
$10,000 for the services he renders in that capacity. All directors are
reimbursed for expenses incurred in connection with attendance at Board or
committee meetings. In addition, members of the Board of Directors are eligible
to participate in the Company's Amended and Restated Omnibus Stock Plan (the
"Plan"). In 2002, Outside Directors were awarded non-qualified stock options to
purchase an aggregate of 210,000 shares of common stock at an exercise price of
$0.58 per share. Those options vested in December 2004. Also, members of the
Board of Directors who are not employees are eligible to participate in the
Non-Employee Directors Stock Option Plan (the "Directors Plan"). Options to
purchase 120,000 shares of common stock at an exercise price of $5.60 per share
were granted and fully vested under the Directors Plan during 2005.
34
Board Committees and Meetings
The Board of Directors currently has standing Audit, Compensation and
Nominating Committees.
The Audit Committee has a written charter approved by the Board. Only
independent directors, as that term is defined by the Marketplace Rules of The
Nasdaq Stock Market, may serve as members of the Audit Committee.
The members of the Audit Committee are Neal J. Fox (Chairman), Jon Hechler
and Robert Stec.
The Audit Committee assists the Board of Directors in its general oversight
of the Company's financial reporting, internal controls and audit functions.
During 2005, the Audit Committee held eight meetings. The Board of Directors has
determined that the Neal J. Fox, the Chairman of the Audit Committee, is an
"audit committee financial expert," as such term is defined under applicable SEC
regulations.
The members of the Compensation Committee are Messrs. Hechler (Chairman),
Fox and Stec.
The Compensation Committee administers the Plan, including the review and
grant of stock options to officers and other employees under the Plan. The
Compensation Committee also reviews and approves various other company
compensation policies and matters, and reviews and approves salaries and other
matters relating to compensation of the executive officers of the company. The
Compensation Committee held eight meetings during 2005.
The members of the Nominating Committee are Messrs. Stec (Chairman), Fox
and Hechler. The Nominating Committee held four meetings in 2005.
The Board of Directors held three meetings during 2005. Each director is
expected to attend each meeting of the Board and the committees on which he
serves. In addition to meetings, the Board and its committees review and act
upon matters through written consent procedures.
Employment Contracts, Termination of Employment And Change In Control
Arrangements
Peter J. Rizzo
- --------------
Peter J. Rizzo, the Company's Chief Executive Officer, is employed by the
LP, pursuant to an employment agreement dated December 9, 2003, which was
amended on October 19, 2004. That agreement, as amended, provides:
o for an initial term that will end on December 9, 2007, and for
automatic one year renewals of the agreement unless either party gives
notice of its non-renewal not later than June 30, 2007 or June 30 of
the then current renewal year;
o for payment of an annual base salary of $500,000 during the initial
term increasing by 10% per year during each one year renewal term, and
incentive compensation provisions, subject to a guaranteed annual
minimum of $175,000, that are based upon the Company's achievement of
pre-determined earnings, cash flow and inventory turns targets;
o for the issuance under the Plan of a five year option to purchase
500,000 shares of common stock at an exercise price of $.95 per share
vesting ratably on December 9, 2004 and December 9, 2005;
35
o for the issuance under the Plan of a ten year option to purchase up to
100,000 shares of common stock at an exercise price of $3.10 per share
on or after December 9, 2007;
o that, as long as the Nominating Committee of the Company's Board
continues to approve Mr. Rizzo as a director, he will be included on
the slate of nominees that the Company will propose for election as
directors throughout the term of his employment agreement;
o that, if (a) Mr. Rizzo is not appointed as Chairman of the Board or he
is removed from that position, (b) his duties as CEO are materially
adversely changed or reduced, (c) his employment is terminated by the
LP without cause or if, as a result of the occurrence of any of the
events described in clauses (a) or (b), he resigns, he will be
entitled to receive the following severance benefits:
o If such termination occurs on or before December 31, 2006, he
will be entitled to receive severance in an aggregate amount
equal to 1.5 times his base salary and incentive compensation for
the immediately preceding year (a minimum of $937,500 up to as
much as $1,275,000),
o If such termination occurs after December 31, 2006, he will be
entitled to receive severance in an aggregate amount equal to his
base salary plus a pro-rata portion of any incentive compensation
that otherwise would have become due and payable to him if his
employment had not been terminated prior to the end of the year
(a minimum of $625,000 up to as much as $850,000) and
o All unvested options granted to Mr. Rizzo under the Plan will
immediately vest in full and will be exercisable by him for a
period of one year after his employment is terminated.
The maximum amount of incentive compensation that Mr. Rizzo may earn in any
year of the initial term and any renewal year is $350,000.
Jesse de la Rama
- ----------------
Jesse de la Rama, the Company's Chief Operating Officer, is employed by the LP,
pursuant to an employment agreement dated March 1, 2004, which was amended on
August 1, 2005. That agreement, as amended, provides:
o for an initial term that will end on February 28, 2006, and for
automatic one year renewals of the agreement unless either party gives
notice of its non-renewal not later than December 31, 2005 or December
31 of the then current renewal year;
o for payment of an annual base salary of $275,000, and incentive
compensation provisions that are based upon the achievement of
pre-determined earnings, cash flow and inventory turns targets;
o for the issuance under the Plan of a five year option to purchase
25,000 shares of common stock at an exercise price of $.86 per share
which shall vest ratably on March 1, 2005, 2006 and 2007;
o for the issuance under the Plan of a ten year option to purchase
75,000 shares of common stock at an exercise price of $6.00 per share
which shall vest ratably on February 10, 2006, 2007 and 2008;
o that, in the event that Mr. de la Rama's employment is terminated
without cause, he shall receive severance payments ranging between
three and 12 months salary depending on the length of his employment
at the time of termination.
36
The maximum amount of incentive compensation that Mr. de la Rama may earn
in 2005 and any renewal year is $175,000.
Gregg A. Holst
- --------------
Gregg A. Holst, the Company's Chief Financial Officer, is employed by the LP,
pursuant to an employment agreement dated December 19, 2005. That agreement
provides:
o for an initial term that will end on December 31, 2008, and for
automatic one year renewals of the agreement unless either party gives
notice of its non-renewal not later than June 30, 2008 or June 30 of
the then current renewal year;
o for payment of an annual base salary of $275,000, a signing bonus of
$50,000 payable in 2006 and incentive compensation provisions, subject
to a guaranteed annual minimum of $96,250, that are based upon the
achievement of pre-determined earnings, cash flow and inventory turns
targets;
o for the issuance under the Plan of a five year option to purchase
100,000 shares of common stock at an exercise price of $4.40 per share
which shall vest ratably on December 27, 2006, 2007 and 2008;
o that, in the event that Mr. Holst's employment is terminated without
cause, he shall receive severance payments ranging between three and
12 months salary depending on the length of his employment at the time
of termination.
The maximum amount of incentive compensation that Mr. Holst may earn in
2006 and any renewal year is $192,500.
Eugene Wielespki
In April 2002, the LP entered into an amended and restated employment
agreement with Eugene Wielepski who was then the Company's Vice President and
Chief Financial Officer. In March 2003, the LP and Mr. Wielepski entered into an
amendment of that agreement. As so amended, the agreement provides:
o that Mr. Wielepski shall serve as Vice President - Finance for an
initial term that will end on May 15, 2006, and for automatic one year
renewals of the agreement unless either party gives notice of its
non-renewal not later than March 16, 2006 or March 16 of the then
current renewal year;
o for payment of a base salary of $180,000 per year;
o for the issuance under the Plan of a fully vested ten year option to
purchase 10,000 shares of common stock at an exercise price of $1.71
per share;
o that, if Mr. Wielepski's employment is terminated without cause after
May 15, 2005, the LP must pay him an amount equal to one year of his
base salary; and
o that, if the LP decides not to renew the agreement, it must pay Mr.
Wielepski an amount equal to one year of his current base salary.
37
In December, 2005, Mr. Wielepski retired after 32 years of service with the
Company.
Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
executive officers, directors and persons who beneficially own more than 10% of
the Company's common stock to file initial reports of ownership and reports of
changes in ownership with the SEC. Such persons are required by SEC regulations
to furnish us with copies of all Section 16(a) forms filed by such persons.
Based solely on the Company's review of the forms furnished to it, the Company
believes that all of those filing requirements were complied with by the
Company's executive officers, directors and holders of 10% or more of its common
stock during 2005, except as follows:
On May 4, 2005, Wurzburg filed an amendment to its initial filing on SEC
Form 3 to disclose that it had inadvertently failed to disclose that it had
purchased 82,500 shares of common stock on February 2, 2000.
Although the conversion by Wurzburg of 3,300,000 shares of the Company's
Series A Convertible Preferred Stock into an equal number of shares of common
stock had been previously disclosed in the Company's Reports on Form 10-K and in
its definitive proxy statements, due to an oversight, such conversion was not
disclosed in any Form 4 or Form 5 filing made by Wurzburg until May 4, 2005.
Although the issuance on September 18, 2002 to Textile of two common stock
purchase warrants entitling it to purchase an aggregate of 500,000 shares of
common stock had been previously disclosed in the Company's Reports on Form 10-K
and in its definitive proxy statements, due to an oversight, such conversion was
not disclosed in any Form 4 or Form 5 filing made by Wurzburg until May 4, 2005.
Codes of Ethics
The Company has adopted a Code of Ethics for Senior Financial Executives
that applies to every employee or officer who holds the office of principal
executive officer, principal financial officer, principal accounting officer,
treasurer or controller, or any person performing similar functions. The Company
also has adopted a Code of Ethics and Business Conduct that applies to each
officer, director and employee of the Company and each of its subsidiaries. A
copy of each of those codes will be provided by the Company without charge to
any person requesting same. All such requests should be sent by first class mail
to I.C. Isaacs & Company, Inc., 3840 Bank Street, Baltimore, Maryland 21224,
Attention - Investor Relations Department.
38
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth certain information regarding the
compensation paid during each of the Company's last three fiscal years to its
Chief Executive Officer and to each of its executive officers other than the
Chief Executive Officer whose total annual salary and bonus amounted to more
than $100,000 and who (except for Mr. Wielepski) were serving as executive
officers at the end of 2005 (collectively, the "Named Executive Officers"). No
compensation that would qualify as payouts pursuant to long-term incentive plans
("LTIP Payouts") or "All Other Compensation" was paid to any of the Named
Executive Officers during the three year period ended on December 31, 2005, and
the Company did not issue any SARs during that period of time.
Summary Compensation Table
Long Term Compensation
Annual Compensation (1) Awards
---------------------------------------------- -----------------------------
Other Annual Restricted Securities
Compensation Stock Underlying
Name and Principal Position Year Salary($) Bonus($) ($) Awards ($) Options (#)
- -------------------------------------------------- --------- ----------- --------- ------------ ------------- --------------
Peter J. Rizzo, CEO 2005 497,307 350,000 151,575 (3) -- --
2004 490,761 -- -- -- 100,000
2003 (2) 28,846 -- -- -- 500,000
Jesse De La Rama, Sr. VP and COO 2005 250,000 54,858 -- -- 75,000
2004 (5) 136,694 -- -- -- 25,000
Gregg A. Holst, Sr. VP and CFO 2005 (6) -- -- -- -- 100,000
Eugene C. Wielepski, Vice President 2005 200,000 40,000 181,504 (3) -- --
2004 181,393 -- -- -- --
2003 184,571 -- -- -- --
Daniel J. Gladstone, Acting CEO (2003), Former
President--Girbaud Division (2002 and 2004) 2005 (7) 114,400 -- -- -- --
2004 340,922 100,000 339,896 (3) -- --
2003 357,091 207,895 -- -- --
2005 -- -- 727,013 (8) -- --
Robert J. Conologue, Former COO and CFO 2004 (4) 315,757 40,000 625,342 (3) -- --
2003 273,828 -- -- -- 375,000
- --------------
(1) The LP also provided various perquisites and other benefits that did not
exceed the lesser of $50,000 or 10% of the aggregate amounts reflected in
the salary and bonus columns for each of the Named Executive Officers.
(2) Mr. Rizzo was only employed for a period of 23 days (from December
9-December 31) in 2003.
(3) Compensation resulting from exercise of Plan Option.
(4) Mr. Conologue's employment was terminated without cause on November 29,
2004.
(5) Mr. de la Rama started his employment on March 1, 2004.
(6) Mr. Holst started his employment on December 27, 2005.
(7) Mr. Gladstone's employment was terminated in April 2005.
(8) Other Annual Compensation resulted from the exercise of Plan Options
($251,243) and severance paid in 2005 ($475,770).
39
Option/SAR Grants in Last Fiscal Year
The Company did not grant any SARs to any of the Named Executive Officers
during the year ended December 31, 2005. The following table sets forth
information regarding grants of options made by the company to the Named
Executive Officers during 2005.
Individual Grants Potential Realizable
--------------------------------------------- Value at Assumed
Number of Percent of Annual Rates of Stock
Securities Total Exercise Appreciation for
Underlying Options Price Option Term(1)
Options Granted to Per Expiration -----------------------
Name Granted Employees Share Date 5% 10%
- ------------------- ----------- ----------- -------- ------------ ---------- ------------
Jesse De La Rama 75,000 38% $6.00 02-15-15 $ 283,000 $ 717,200
Gregg A. Holst 100,000 51% $4.40 12-27-10 $ 276,700 $ 701,200
(1) In accordance with U.S. Securities and Exchange Commission rules, these
columns show gains that could accrue for the Named Executive Officer's option,
assuming that the market price of the Company's common stock appreciates from
the date of grant over a period of 10 years at an annualized rate of 5% and 10%,
respectively. If the stock price does not increase above the exercise price at
the time of exercise, realized value to the Named Executive Officer from this
option will be zero.
Aggregated Option/SAR Exercises In Last Fiscal Year And
Fiscal Year-End Option/SAR Values
The following table sets forth information concerning the number and value
of unexercised options to purchase the Company's common stock held on December
31, 2005 by the Named Executive Officers.
Number of Securities
Underlying Unexercised Value of Unexercised
Shares Options at In-the-Money Options at
Acquired on Value Fiscal Year-End Fiscal Year-End
Name Exercise Realized Exercisable/Unexercisable Exercisable/Unexercisable
---- -------- -------- ------------------------- -------------------------
Peter J. Rizzo.............. 21,500 $151,575 311,834/266,666 $1,135,100/$755,700
Jesse De La Rama............ -- -- 8,333/91,667 $31,000/$62,000
Gregg A. Holst.............. -- -- 0/100,000 $0/18,900
Eugene Wielepski............ 44,500 $181,504 -- --
Robert J. Conologue......... 43,000 $251,243 -- --
Defined Benefit Pension Plan
The Company maintains a defined benefit pension plan (the "Pension Plan")
for its employees, and the employees of its subsidiaries. The normal retirement
benefit, payable at age 65, is 20.0% of base compensation up to $10,000 plus
39.5% of base compensation over $10,000 and up to a maximum of $75,000, prorated
for service less than 30 years. A reduced benefit is also payable on early
retirement, after attainment of age 55 and completion of 15 years of service.
The Pension Plan also provides disability retirement and death benefits. The
Company pays the full cost of the benefits under the Pension Plan through its
contributions to a trust. The Company's cash contributions to the Pension Plan
during the year ended December 31, 2005 aggregated approximately $315,000.
40
The Pension Plan Table below provides the estimated annual benefits payable
under the Pension Plan upon retirement in specified compensation and years of
service classifications:
Years of Service
-------------------------------------------------------
Remuneration 15 20 25 30 35
------------ -- -- -- -- --
$100,000.......................... $ 13,838 $ 18,451 $ 23,063 $ 27,676 $ 27,676
125,000.......................... 13,838 18,451 23,063 27,676 27,676
150,000.......................... 13,838 18,451 23,063 27,676 27,676
175,000.......................... 13,838 18,451 23,063 27,676 27,676
200,000.......................... 13,838 18,451 23,063 27,676 27,676
225,000.......................... 13,838 18,451 23,063 27,676 27,676
250,000.......................... 13,838 18,451 23,063 27,676 27,676
300,000.......................... 13,838 18,451 23,063 27,676 27,676
400,000.......................... 13,838 18,451 23,063 27,676 27,676
450,000.......................... 13,838 18,451 23,063 27,676 27,676
500,000.......................... 13,838 18,451 23,063 27,676 27,676
The compensation considered in determining benefits under the Pension Plan
(as provided in the column titled "Remuneration") is the annual average
compensation for the five consecutive calendar years producing the highest
average. The compensation considered is limited to $75,000. All amounts of
salary, bonus and other compensation as reported in the Summary Compensation
Table, up to $75,000, are included in compensation considered under the Pension
Plan. The amounts provided in the Pension Plan Table are the benefits payable
per year in equal monthly installments for the life expectancy of the
participants (i.e., straight life annuity amounts). The Pension Plan is
integrated with Social Security, and its benefit formula is as follows: (i)
0.6667% of compensation, multiplied by years of service up to 30 years; plus
(ii) 0.65% of compensation in excess of $10,000 multiplied by years of service
up to 30 years.
The estimated credited years of service for each of the Named Executive
Officers as of January 1, 2005 were as follows:
Estimated
Credited
Name Years of Service
Peter J. Rizzo............................... 2
Jesse De La Rama............................. 2
Gregg A. Holst............................... --
Eugene Wielepski............................. 32
Daniel J. Gladstone.......................... 6
41
Securities Authorized For Issuance Under Equity Compensation Plans
Number of
Number of securities Weighted average securities
to be issued upon exercise price of remaining
exercise of outstanding available
outstanding options, options, warrants for future
Plan Category warrants and rights and rights issuance
- ---------------------------------------------------- --------------------- -------------------- ------------------
Equity compensation plans approved by security
holders (Omnibus Stock Option Plan) 1,174,167 $1.96 370,400
Equity compensation plans approved by security
holders (Directors Stock Option Plan) 120,000 $5.60 330,000
Equity compensation plans not approved by security
holders 0 N/A N/A
Totals 1,294,167 $2.30 700,400
Compensation Committee Interlocks and Insider Participation in Compensation
Decisions
None of the directors serving on the Compensation Committee is an employee
of the Company, and neither the Chief Executive Officer nor any of the Named
Executive Officers has served on the Compensation Committee. No director or
executive officer of the Company is a director or executive officer of any other
corporation that has a director or executive officer who is also a director or
board committee member of the Company.
42
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Set forth below is information concerning the common stock ownership as of
March 28, 2006 by (i) each person who the Company knows owns beneficially 5% or
more of its outstanding common stock, (ii) the Company's Chief Executive Officer
and each of its other "Named Executive Officers," (iii) each director, and (iv)
all of the Company's directors and officers as a group:
Name and Address of Beneficial Owner (1) Shares Beneficially Owned
- ------------------------------------ ---------------------------
Number Percent(2)
------ -------
Wurzburg Holding S.A. (3)..................... 4,549,167 (4) 37.9 %
Peter J. Rizzo................................ 311,834 (5) 2.5
Jesse de la Rama.............................. 41,666 (6) *
Gregg A. Holst ............................... - *
Francois Girbaud (7) 4,564,167 (8) 38.0
Olivier Bachellerie (9)....................... 45,000 (10) *
Rene Faltz (11)............................... 45,000 (10) *
Neal J. Fox................................... 67,000 (12) *
Jon Hechler................................... 226,091 (13) 1.9
Robert Stephen Stec (14)...................... 45,000 (10) *
John McCoy II (15)............................ 15,000 (16) *
All Officers and Directors as a Group (of 10) 5,360,758 (17) 42.4
Mr. Girbaud, Ms. Bachellerie, together with Wurzburg, Latitude and the various
companies that they directly and indirectly control, are collectively referred
to as the "Girbaud Group."
- -----------------
* Less than one percent
(1) All shares are owned beneficially and of record unless indicated otherwise.
Unless otherwise noted, the address of each stockholder is c/o the company,
3840 Bank Street, Baltimore, Maryland 21224.
(2) Based upon 11,996,485 shares outstanding on the date of this report, plus,
where applicable, any shares issuable pursuant to options or warrants
exercisable within 60 days of such date.
(3) The address of this stockholder is 41, Avenue de la Gare, L-1611
Luxembourg.
(4) Includes 3,966,667 shares owned beneficially and of record by this
stockholder's wholly owned subsidiary, Textile Investment International,
S.A..
(5) Includes 311,834 shares that Mr. Rizzo may acquire pursuant to an option
exercisable by him within 60 days of the date of this report.
(6) Includes 41,666 shares that Mr. de la Rama may acquire pursuant to an
option exercisable by him within 60 days of the date of this report.
(7) Mr. Girbaud's address is 8 Rue Du Centre Vevey, Switzerland.
(8) Includes all of the shares owned or controlled by Wurzburg, as to which Mr.
Girbaud, as a controlling shareholder thereof, is deemed to possess all
rights regarding the voting and disposition thereof. Also includes 15,000
shares that Mr. Girbaud may acquire pursuant to an option exercisable by
him within 60 days of the date of this report.
(9) Mr. Bachellerie's address is 15 Rue Louis Blanc, 75010 Paris, France.
(10) Includes 45,000 shares that this person may acquire pursuant to an option
exercisable by him within 60 days of the date of this report.
43
(11) Mr. Faltz's address is 41 Avenue de la Gare, Luxembourg, L-1611, Grand
Duchy of Luxembourg.
(12) Includes 67,000 shares that Mr. Fox may acquire pursuant to options
exercisable by him within 60 days of the date of this report.
(13) Includes 52,000 shares that Mr. Hechler may acquire pursuant to options
exercisable by him within 60 days of the date of this report.
(14) Mr. Stec's address is c/o Lexington Home Brands, 411 South Salisbury
Street, Lexington, NC.
(15) Mr. McCoy's address is c/o Components by John McCoy, Inc., 21 West 55th
Street, New York, NY
(16) Includes 15,000 shares that Mr. McCoy may acquire pursuant to an option
exercisable by him within 60 days of the date of this report
(17) Includes 637,500 shares that may be acquired by Messrs. Rizzo, de la Rama,
Bachellerie, Falz, Fox, Girbaud, Hechler, McCoy and Stec pursuant to
options exercisable by them within 60 days of the date of this report.
44
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In November 1997, the Company entered into Girbaud Men's Agreement with
Girbaud Design, Inc. and its affiliate, Wurzburg, both of which are companies
wholly owned, directly or indirectly, by Francois Girbaud and Marithe
Bachellerie. The Girbaud Men's Agreement granted to the Company the right to
manufacture and market men's jeanswear, casualwear and outwear under the Girbaud
Marks in all channels of distribution in the United States, including Puerto
Rico and the U.S. Virgin Islands. In January and March 1998, the Girbaud Men's
Agreement was amended and restated to name Latitude another member of the
Girbaud Group(1) of companies, as the licensor and to include active influenced
sportswear as a licensed product category. Also in March 1998, the Company
entered into Girbaud Women's Agreement with Latitude to manufacture and market
women's jeanswear, casualwear and outerwear, including active influenced
sportswear, under the Girbaud Marks in all channels of distribution in the
United States including Puerto Rico and the U.S. Virgin Islands. The Girbaud
Agreements, as amended, include the right to manufacture the licensed products
in a number of foreign countries through 2007.
Under the Girbaud Men's Agreement, the Company is required to make payments
to Latitude in an amount equal to 6.25% of its net sales of regular license
merchandise and 3.0% in the case of certain irregular and closeout licensed
merchandise. Except as noted below, the Company is subject to guaranteed minimum
annual royalty payments of $3.0 million each year from 2002 through 2007. The
Company is required to spend the greater of an amount equal to 3% of Girbaud
men's net sales or $500,000 ( increased by $200,000 in 2007, 2008 and 2009) in
advertising and related expenses promoting the men's Girbaud brand products in
each year through the term of the Girbaud Men's Agreement. During 2005, the
Company made royalty payments under the Girbaud Men's Agreement aggregating
approximately $4,931,577 ($1,580,523 of which related to royalty payments that
were due in 2004 but deferred until 2005).
Under the Girbaud Women's Agreement the Company is required to make
payments to Latitude in an amount equal to 6.25% of its net sales of regular
licensed merchandise and 3.0% in the case of certain irregular and closeout
licensed merchandise. Except as noted below, the Company is subject to
guaranteed minimum annual royalty payments of $1.5 million each year from 2002
through 2007. The Company is required to spend the greater of an amount equal to
3% of Girbaud women's net sales of $400,000 (increased by $200,000 in 2007, 2008
and 2009) in advertising and related expenses promoting the women's Girbaud
brand products in each year through the term of the Girbaud Women's Agreement.
In addition, over the term of the Girbaud Women's Agreement the Company is
required to contribute $190,000 per year to Latitude's advertising and
promotional expenditures for the Girbaud brand. During 2005, the Company made
royalty payments to under the Girbaud Women's Agreement aggregating $2,125,000
($750,000 of which related to royalty payments that were due in 2004 but
deferred until 2005).
During each of the six years ended December 31, 2005, the amounts of
advertising and related expenses incurred by the Company in marketing the
Girbaud brand products were less than the amounts required under the agreements.
In each of the various amendments to the men's and women's license agreements
which were executed in 2002 - 2004, Latitude and the Company confirmed to one
another that neither party was in default to the other in the performance of any
of the obligations owed by either of them to the other. On March 29, 2006,
Latitude also waived the Company's failure to spend the minimum amounts required
under the men's and women's license agreements in 2005.
The Company is obligated to pay a minimum of $6.5 million during 2006 in
the form of minimum royalty payments, fashion show and advertising and
promotional expenses pursuant to the Girbaud Agreements. In 2006, the Company
expects that substantially all of its net sales will come from apparel
associated with the Girbaud licenses.
45
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The following table shows the fees that the Company paid or accrued for the
audit and other services provided by BDO Seidman, LLP in 2005 and 2004.
Years Ended
December 31,
--------------------------
--------------------------
2005 2004
---- ----
Audit Fees(1)...................... $ 370,800 $ 249,000
Audit-related fees(2).............. 46,300 51,566
Tax Fees........................... 21,500 15,500
------------ ------------
------------ ------------
Total......................... $ 438,600 $ 316,066
============ ============
- --------------
(1) Includes the audit of the Company's consolidated financial statements and
quarterly reviews of its financial statements and related filings on SEC
Forms 10-K and 10-Q.
(2) Includes consultation regarding accounting and reporting matters, an audit
of the Company's employee benefit plan, and the Company's preparation of
registration statements on SEC Forms S-2.
All audit and audit related services were pre-approved by the Audit
Committee, which concluded that the performance of such services by BDO Seidman,
LLP was compatible with the maintenance of that firm's independence in the
conduct of its auditing functions.
46
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a)1. Financial Statements. The following financial statements, related notes
and the Report of Independent Certified Public Accountants, are included
in response to Item 8 hereof:
Index to Consolidated Financial Statements
Page
----
Report of Independent Registered Public Accounting Firm F-1
Consolidated Balance Sheets at December 31, 2005 and 2004 F-2
Consolidated Statements of Operations for the years ended December 31, 2005,
2004 and 2003 F-3
Consolidated Statements of Stockholders' Equity for the years ended December
31, 2005, 2004 and 2003 F-4
Consolidated Statements of Cash Flows for the years ended December 31, 2005,
2004 and 2003..... F-5
Summary of Accounting Policies F-6 to F10
Notes to Consolidated Financial Statements F-11 to F21
(a)2. Financial Statements Schedules. The following is a list of all financial
statements schedules filed herewith:
Schedule II-Valuation and Qualifying Accounts
Schedules other than those listed above have been omitted because they are
not required or are not applicable, or the required information has been
included in the Consolidated Financial Statements or the Notes thereto.
(a)3. Exhibits (numbered in accordance with Item 601 of Regulation S-K). The
following is a list of Exhibits filed herewith:
Exhibit No. Description
3.01 Amended and Restated Certificate of Incorporation (a copy of
which was filed with the Commission on October 3, 1997 as Exhibit
3.01 to the Company's Registration Statement on Form S-1 (the
"S-1 Registration Statement"), and is hereby incorporated herein
by this reference).
3.02 Amended and Restated By-laws (a copy of which was filed as
Exhibit 3.02 to the S-1 Registration Statement, and is hereby
incorporated herein by this reference).
3.03 Certificate of Designation of the Series A Convertible Preferred
Stock of the Company (a copy of which was filed with the
Commission on November 15, 1999 as Exhibit 3.03 to the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30,
1999, and is hereby incorporated herein by this reference).
3.04 Certificate of Amendment to the Certificate of Designation of the
Series A Convertible Preferred Stock of the Company (a copy of
which was filed with the Commission on April 2, 2001 as Exhibit
3.04 to the Company's Annual Report on Form 10-K for the year
ended December 31, 2000, and is hereby incorporated herein by
this reference).
3.05 Second Certificate of Amendment to the Certificate of Designation
of the Series A Convertible Preferred Stock of the Company (a
copy of which was filed with the Commission on November 14, 2002
as Exhibit 3.05 to the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 2002 (the "September 2002
10-Q"), and is hereby incorporated herein by this reference).
47
3.06 Certificate of Amendment of Amended and Restated Certificate of
Incorporation (a copy of which was filed with the Commission on
August 14, 2003 as Exhibit 3.06 to the Company's Quarterly Report
on Form 10-Q for the quarter ended June 30, 2003 (the "June 2003
10-Q"), and is hereby incorporated herein by this reference).
4.01 Specimen Common Stock Certificate (a copy of which was filed with
the Commission on October 3, 1997 as Exhibit 4.01 to the
Company's Registration Statement on Form S-1 (the "S-1
Registration Statement"), and is hereby incorporated herein by
this reference).
4.02 Warrant No. 1 issued by the Company to Textile Investment
International S.A. ("Textile") for the purchase of 300,000 shares
of Common Stock (a copy of which was filed with the Commission on
November 14, 2002 as Exhibit 4.02 to the September 2002 10-Q, and
is hereby incorporated herein by this reference).
4.03 Warrant No. 2 issued by the Issuer to Textile for the purchase of
200,000 shares of Common Stock (a copy of which was filed as
Exhibit 4.03 to the September 2002 10-Q, and is hereby
incorporated herein by this reference).
4.04 Amended and Restated Omnibus Stock Plan as in effect on June 30,
2003 (a copy of which was filed as Exhibit 4.04 to the June 2003
10-Q, and is hereby incorporated herein by this reference).
4.05 2005 Non-Employee Directors Stock Option Plan (a copy of which
was filed with the Commission on August 10, 2005 as Exhibit 4.05
to Amendment No. 1 to the Company's Registration Statement on
Form S-2 (the "S-2 Amendment"), and is hereby incorporated herein
by this reference).
10.01 Form of Indemnification Agreement (a copy of which was filed as
Exhibit 10.09 to the S-1 Registration Statement, and is hereby
incorporated herein by this reference).
10.02 Girbaud Trademark License and Technical Assistance Agreement
dated November 1, 1997 (a copy of which was filed with the
Commission on November 26, 1997 as Exhibit 10.26 to Amendment No.
2 to the S-1 Registration Statement ("S-1 Amendment 2"), and is
hereby incorporated herein by this reference).
10.03 Defined Benefit Pension Plan (a copy of which was filed with as
Exhibit 10.27(a) to S-1 Amendment No. 2, and is hereby
incorporated herein by this reference).
10.04 First Amendment to Defined Benefit Pension Plan (a copy of which
was filed as Exhibit 10.27(b) to S-1 Amendment 2, and is hereby
incorporated herein by this reference).
10.05 Girbaud Trademark License and Technical Assistance Agreement
dated January 15, 1998 (a copy of which was filed with the
Commission on March 27, 1998 as Exhibit 10.26(a) to the Company's
Annual Report on Form 10-K for the year ended December 31, 1997
(the "1997 10-K"), and is hereby incorporated herein by this
reference).
10.06 Girbaud Trademark License and Technical Assistance Agreement for
Women's Collection dated March 4, 1998 (a copy of which was filed
as Exhibit 10.26(b) to the 1997 10-K, and is hereby incorporated
herein by this reference).
10.07 Amendment No. 1 dated June 18, 1998 to Girbaud Trademark and
Technical Assistance Agreement for Women's Collection (a copy of
which was filed with the Commission on August 12, 1998 as Exhibit
10.32 to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1998, and is hereby incorporated herein by
this reference).
48
10.08 Amendment No. 1 dated November 12, 1998 to Trademark License and
Technical Assistance Agreement for Men's Collections by and
between I.C. Isaacs & Co., L.P. and Latitude Licensing Corp. (a
copy of which was filed with the Commission on March 30, 1999 as
Exhibit 10.40 to the Company's Annual Report on Form 10-K for the
year ended December 31, 1998 (the "1998 10-K"), and is hereby
incorporated herein by this reference).
10.09 Amendment No. 2 dated November 12, 1998 to Trademark License and
Technical Assistance Agreement for Women's Collections by and
between I.C. Isaacs & Co., L.P. and Latitude Licensing Corp. (a
copy of which was filed as Exhibit 10.41 to the 1998 10-K, and is
hereby incorporated herein by this reference).
10.10 Executive Employment Agreement by and between I.C. Isaacs &
Company, Inc. and Daniel Gladstone dated January 21, 1999 (a copy
of which was filed as Exhibit 10.42 to 1998 10-K, and is hereby
incorporated herein by this reference).
10.11 Amendment No. 1 dated March 4, 1998 to Trademark License and
Technical Assistance Agreement for Men's Collections by and
between the Company and Latitude Licensing Corp. (a copy of which
was filed as Exhibit 10.56 to the 1998 10-K, and is hereby
incorporated herein by this reference).
10.12 Amendment No. 3 dated December 23, 1998 to Trademark License and
Technical Assistance Agreement for Women's Collections by and
between the Company and Latitude Licensing Corp. (a copy of which
was filed as Exhibit 10.57 to the 1998 10-K, and is hereby
incorporated herein by this reference).
10.13 Amendment No. 4 to the Trademark License and Technical Assistance
Agreement Covering Women's Products dated August 2, 1999 (a copy
of which was filed with the Commission on August 13, 1999 as
Exhibit 10.60 to the Company's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1999, and is hereby incorporated
herein by this reference).
10.14 Amendment No. 2 dated June 21, 2000, to Trademark License and
Technical Assistance Agreement Covering Men's Products dated
January 15, 1998, by and between Latitude Licensing Corp. and
I.C. Isaacs & Company L.P. 3.03 (a copy of which was filed with
the Commission on August 14, 2000 as Exhibit 10.75 to the
Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 2000 (the "June 2000 10-Q"), and is hereby incorporated
herein by this reference).
10.15 Amendment No. 5 dated June 21, 2000, to Trademark License and
Technical Assistance Agreement Covering Women's Products dated
January 15, 1998, by and between Latitude Licensing Corp. and
I.C. Isaacs & Company L.P. (a copy of which was filed as Exhibit
10.76 to the June 2000 10-Q, and is hereby incorporated herein by
this reference).
10.16 Amendment No.3 to Trademark License and Technical Assistance
Agreement Covering Men's Products Dated May 31, 2001 (a copy of
which was filed with the Commission on April 1, 2002 as Exhibit
10.92 to the Company's Annual Report on Form 10-K for the year
ended December 31, 2001, and is hereby incorporated herein by
this reference).
10.17 Amended and Restated Executive Employment Agreement dated April
17, 2002, by and between the Company and Eugene C. Wielepski (a
copy of which was filed with the Commission on April 22, 2002 as
Exhibit 10.94 to Amendment No. 1 to the Company's Annual Report
on Form 10-K for the year ended December 31, 2001 (the "2001 10-K
Amendment"), and is hereby incorporated herein by this
reference).
10.18 Amended and Restated Executive Employment Agreement dated April
17, 2002, by and between the Company and Daniel J. Gladstone (a
copy of which was filed as Exhibit 10.95 to Amendment No. 1 to
the 2001 10-K Amendment, and is hereby incorporated herein by
this reference).
49
10.19 Amendment No. 4 dated October 2, 2002 to the Trademark License
and Technical Assistance Agreement dated January 15, 2002 by and
between Latitude Licensing Corp. and I.C. Isaacs & Company, L.P.
(a copy of which was filed with the Commission on November 14,
2002 as Exhibit 10.102 to the Company's Quarterly Report on Form
10-Q for the quarter ended September 30, 2002 (the "September
2002 10-Q"), and is hereby incorporated herein by this
reference).
10.20 Amendment No. 6 dated October 2, 2002 to the Trademark License
and Technical Assistance Agreement for Women's Collections dated
October 2, 2002 by and between Latitude Licensing Corp. and I.C.
Isaacs & Company, L.P. (a copy of which was filed as Exhibit
10.103 to the September 2002 10-Q, and is hereby incorporated
herein by this reference).
10.21 Amendment no. 7, dated March 31, 2003 to the Trademark License
and Technical Assistance Agreement for Women's Collections
between Latitude Licensing Corp. and I.C. Isaacs & Company L.P.
(a copy of which was filed with the Commission on April 4, 2003
as Exhibit 10.110 to the Company's Annual Report on Form 10-K for
the year ended December 31, 2002 (the "2002 10-K"), and is hereby
incorporated herein by this reference).
10.22 Amendment no. 5 dated March 31, 2003 to the Trademark License and
Technical Assistance Agreement dated the 1st day of November 1997
by and between Latitude Licensing Corp. and I.C. Isaacs & Company
L.P. (a copy of which was filed as Exhibit 10.111 to the 2002
10-K, and is hereby incorporated herein by this reference).
10.23 Amendment dated as of May 15th, 2003 to the Amended and Restated
Employment Agreement between I.C. Isaacs & Company, L.P. and
Daniel J. Gladstone (a copy of which was filed with the
Commission on May 15, 2003 as Exhibit 10.114 to the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31,
2003 (the "March 2003 10-Q"), and is hereby incorporated herein
by this reference).
10.24 Amendment dated as of March 31st, 2003 to the Amended and
Restated Employment Agreement between I.C. Isaacs & Company, L.P.
and Eugene C. Wielespki (a copy of which was filed as Exhibit
10.115 to the March 2003 10-Q, and is hereby incorporated herein
by this reference).
10.25 Amendment No. 8, dated October 29, 2003 to the Trademark License
and Technical Assistance Agreement for Women's Collections
between Latitude Licensing Corp. and I.C. Isaacs & Company L.P.
(a copy of which was filed with the Commission on November 14,
2003 as Exhibit 10.118 to the Company's Quarterly Report on Form
10-Q for the quarter ended September 30, 2003 (the "September
2003 10-Q"), and is hereby incorporated herein by this
reference).
10.26 Amendment No. 6, dated October 29, 2003 to the Trademark License
and Technical Assistance Agreement dated the 1st day of November
1997 by and between Latitude Licensing Corp. and I.C. Isaacs &
Company L.P. (a copy of which was filed as Exhibit 10.119 to the
September 2003 10-Q, and is hereby incorporated herein by this
reference).
10.27 Amendment dated October 13, 2004 to the Executive Employment
Agreement dated December 9, 2003 by and Between I.C. Isaacs &
Company, L.P. and Peter J. Rizzo (a copy of which was filed with
the Commission as Exhibit 10.120 to the Company's Report on Form
8-K filed on October 22, 2004 (the "October 22, 2004 Form 8-K"),
and is hereby incorporated herein by this reference).
10.28 Executive Employment agreement made as of the 1st day of March
2004, by and between I.C. Isaacs & Company LP and Jesse de la
Rama (a copy of which was filed as Exhibit 10.121 to the October
22, 2004 Form 8-K, and is hereby incorporated herein by this
reference).
50
10.29 Loan and Security Agreement Dated as of December 30, 2004 by and
between I.C. Isaacs & Company, L.P. and Wachovia Bank, National
Association (a copy of which was filed with the Commission as
Exhibit 10.122 to the Company's Report on Form 8-K filed on
January 6, 2005, and is hereby incorporated herein by this
reference).
10.30 Amendment No. 7, dated December 16, 2004, to the Trademark
License and Technical Assistance Agreement dated the 1st day of
November 1997 by and between Latitude Licensing Corp. and I.C.
Isaacs & Company L.P. (a copy of which was filed with the
Commission on March 31, 2005 as Exhibit 10.123 to the Company's
Annual Report on Form 10-K for the year ended December 31, 2004
(the "2004 10-K"), and is hereby incorporated herein by this
reference).
10.31 Amendment No. 9, dated December 16, 2004, to the Trademark
License and Technical Assistance Agreement for Women's
Collections dated March 4, 1998 by and between Latitude Licensing
Corp. and I.C. Isaacs & Company L.P. (a copy of which was filed
as Exhibit 10.124 to the 2004 10-K, and is hereby incorporated
herein by this reference).
10.32 Assignment of warrant to purchase 300,000 shares of the Company's
common stock dated September 28th, 2004 by Textile Investment
International S.A. to Rockbrook Investments SA., and consented to
on April 13, 2005 by the Company (a copy of which was filed as
Exhibit 99.01 to the S-2 Amendment, and is hereby incorporated
herein by this reference).
10.33 Assignment of warrant to purchase 200,000 shares of the Company's
common stock dated September 28th, 2004 by Textile Investment
International S.A. to Rockbrook Investments SA. , and consented
to on April 13, 2005 by the Company (a copy of which was filed as
Exhibit 99.02 to the S-2 Amendment, and is hereby incorporated
herein by this reference).
10.34 Executive Employment Agreement dated December 19, 2005 between
I.C. Isaacs & Company L.P. and Gregg A. Holst (a copy of which
was filed as Exhibit 10.34 to the Company's Report on Form 8-K
filed on December 29, 2005, and is hereby incorporated herein by
this reference).
10.35 Amendment No. 8, dated March 29, 2006, to the Trademark License
and Technical Assistance Agreement dated the 1st day of November
1997 by and between Latitude Licensing Corp. and I.C. Isaacs &
Company L.P.
10.36 Amendment No. 10, dated March 29, 2006, to the Trademark License
and Technical Assistance Agreement for Women's Collections dated
March 4, 1998 by and between Latitude Licensing Corp. and I.C.
Isaacs & Company L.P.
14.01 Code of Ethics for Senior Financial Executives
14.02 Code of Ethics and Business Conduct
21.01 List of Subsidiaries (a copy of which was filed as Exhibit 21.01
to the S-2 Amendment, and is hereby incorporated herein by this
reference).
23.01 Consent of BDO Seidman, LLP
31.01 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002
31.02 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002
32.01 Certification Pursuant to Section 1350 of chapter 63 of Title 18
of the United States Code
51
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/ Peter J. Rizzo
----------------------------------------------
Peter J. Rizzo
Chief Executive Officer
Date: March 31, 2006
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Peter J. Rizzo Chief (Principal) Executive Officer,
- ------------------------------------ Chairman of the Board March 31, 2006
Peter J. Rizzo
/s/ Gregg A. Holst Executive Vice President,
- ------------------------------------ Chief (Principal) Financial Officer March 31, 2006
Gregg A. Holst
Director March [ ], 2006
- ------------------------------------
Olivier Bachellerie
/s/ Rene Faltz Director March 31, 2006
- ------------------------------------
Rene Faltz
/s/ Neal .J. Fox Director March 31, 2006
- ------------------------------------
Neal J. Fox
Director March [ ], 2006
- ------------------------------------
Francois Girbaud
/s/ Jon Hechler Director March 31, 2006
- ------------------------------------
Jon Hechler
/s/ John McCoy II Director March 31, 2006
- ------------------------------------
John McCoy II
/s/ Robert S. Stec Director March 31, 2006
- ------------------------------------
Robert S. Stec
52
Report of Independent Registered Public Accounting Firm
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. as of December 31, 2005 and 2004 and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended December 31, 2005. We have also audited the
schedule listed at Item 15(a)2. These financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and schedule are free of material misstatement. The Company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audits included consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements and schedule, assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall
presentation of the financial statements and schedule. 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. at December 31, 2005 and 2004, and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
2005, in conformity with accounting principles generally accepted in the United
States of America.
Also, in our opinion, the schedule presents fairly, in all material respects,
the information set forth therein.
BDO Seidman, LLP
Bethesda, Maryland
February 24, 2006, except for Note 8
which is as of March 29, 2006
F-1
I.C. Isaacs & Company, Inc.
Consolidated Balance Sheets
December 31,
--------------------------------------
2005 2004
---- ----
Assets
Current
Cash, including temporary investments of $561,000 and $70,000 $ 943,422 $ 1,045,905
Accounts receivable, less allowance for doubtful
accounts of $700,000 and $316,000 (Note 3) 14,829,496 10,015,723
Inventories (Notes 1 and 3) 5,287,483 8,317,437
Deferred tax asset (Note 5) 2,517,000 1,193,000
Prepaid expenses and other 404,151 509,503
----------------- -----------------
Total current assets 23,981,552 21,081,568
Property, plant and equipment, at cost, less accumulated
depreciation and amortization (Note 2) 2,838,627 2,088,233
Other assets (Note 9) 322,656 4,663,109
----------------- -----------------
$27,142,835 $ 27,832,910
================= =================
Liabilities and Stockholders' Equity
Current
Overdrafts $ 447,001 $ --
Current maturities of revolving line of credit
(Note 3) -- 223,283
Current maturities of long-term debt (Note 3) 2,893,128 3,366,180
Accounts payable 2,063,521 3,097,963
Accrued expenses and other current liabilities (Note 4) 5,492,104 5,799,574
----------------- -----------------
Total current liabilities 10,895,754 12,487,000
Long-term debt (Note 3) 1,726,466 3,191,728
Minimum pension liability (Note 9) 1,377,000 --
Commitments and contingencies (Notes 3, 8 and 9)
Stockholders' Equity (Notes 6 and 7)
Preferred stock; $.0001 par value; 5,000,000 shares
authorized, none outstanding -- --
Common stock; $.0001 par value; 50,000,000 shares authorized;
13,173,194 and 12,790,799 shares issued; 11,996,485 and
11,614,090 shares outstanding 1,317 1,279
Additional paid-in capital 44,294,782 44,100,636
Accumulated deficit (23,213,613) (29,624,862)
Accumulated other comprehensive income (Note 9) (5,616,000) --
Treasury stock, at cost (1,176,709 shares) (2,322,871) (2,322,871)
----------------- -----------------
Total stockholders' equity 13,143,615 12,154,182
----------------- -----------------
$ 27,142,835 $ 27,832,910
================= =================
See accompanying summary of accounting policies and notes to consolidated
financial statements.
F-2
I.C. Isaacs & Company, Inc.
Consolidated Statements of Operations
Years Ended December 31,
-----------------------------------------------
2005 2004 2003
-------------- -------------- --------------
Net sales $ 83,288,935 $ 80,649,394 $ 64,304,688
Cost of sales 49,070,145 49,583,094 43,706,398
-------------- -------------- --------------
Gross profit 34,218,790 31,066,300 20,598,290
-------------- -------------- --------------
Operating Expenses
Selling 10,834,335 10,412,502 9,524,799
License fees (Note 8) 5,114,319 5,330,523 4,163,035
Distribution and shipping 2,247,450 1,968,214 2,062,032
General and administrative 8,603,793 7,531,809 5,243,916
Litigation settlement 1,750,000 -- --
Loss on sale of property -- -- 414,650
-------------- -------------- --------------
Total operating expenses 28,549,897 25,243,048 21,408,432
-------------- -------------- --------------
Operating income (loss) 5,668,893 5,823,252 (810,142)
-------------- -------------- --------------
Other income (expense)
Interest, net of interest income of $4,994, $6,543
and $1,687 (435,882) (729,068) (1,008,744)
Other, net 238 26,195 124,120
-------------- -------------- --------------
Total other expense (435,644) (702,873) (884,624)
-------------- -------------- --------------
Income (loss) from continuing operations 5,233,249 5,120,379 (1,694,766)
Income tax benefit 1,178,000 1,045,000 --
-------------- -------------- --------------
Net income (loss) $ 6,411,249 $ 6,165,379 $ (1,694,766)
============== ============== ==============
Basic net income (loss) per share $ 0.55 $ 0.55 $ (0.15)
Basic weighted average shares outstanding 11,729,305 11,264,483 11,134,657
Diluted net income (loss) per share $ 0.48 $ 0.46 $ (0.15)
Diluted weighted average shares outstanding 13,397,202 13,355,300 11,134,657
See accompanying summary of accounting policies and notes to consolidated
financial statements.
F-3
I.C. Isaacs & Company, Inc.
Consolidated Statements of Stockholders' Equity
Accumulated
Additional Other
Common Stock Common Stock Paid-in Accumulated Comprehensive Treasury
Shares Amount Capital Deficit Income Stock Total
Balance, at December 31, 2002 12,311,366 $ 1,231 $43,658,853 $ (34,095,475) $ -- $ (2,322,871) $ 7,241,738
Net loss -- -- -- (1,694,766) -- -- (1,694,766)
------------ ---------- ----------- ------------- ------------- ------------ ------------
Balance, at December 31, 2003 12,311,366 1,231 43,658,853 (35,790,241) -- (2,322,871) 5,546,972
Net Income -- -- -- 6,165,379 -- -- 6,165,379
Issuance of common stock 479,433 48 441,783 -- -- 441,831
------------ ---------- ----------- ------------- ------------- ------------ ------------
Balance, at December 31, 2004 12,790,799 1,279 44,100 636 (29,624,862) -- (2,322,871) 12,154,182
------------
Comprehensive Income:
Net Income -- -- -- 6,411,249 -- -- 6,411,249
Recognition of minimum pension
liability (Footnote 9) -- -- -- -- (5,616,000) -- (5,616,000)
------------
Total Comprehensive Income 795,249
------------
Issuance of common stock
associated with exercise of
stock options 176,000 18 194,166 -- -- -- 194,184
------------
Issuance of common stock
associated with exercise of
stock warrants 206,395 20 (20) -- -- -- --
------------ ---------- ----------- ------------- ------------- ------------ ------------
Balance, at December 31, 2005 13,173,194 $ 1,317 $44,294,782 $ (23,213,613) $ (5,616,000) $ (2,322,871) $ 13,143,615
============ ========== =========== ============= ============= ============ ============
See accompanying summary of accounting policies and notes to consolidated
financial statements.
F-4
I.C. Isaacs & Company, Inc.
Consolidated Statements of Cash Flows
Years Ended December 31,
----------------------------------------------
2005 2004 2003
-------------- -------------- --------------
Operating Activities
Net income (loss) $ 6,411,249 $ 6,165,379 $ (1,694,766)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities
Provision for doubtful accounts 1,016,475 370,387 202,111
Write off of accounts receivable (632,475) (329,387) (172,111)
Provision for sales returns and discounts 4,198,983 4,088,959 2,477,904
Sales returns and discounts (3,885,776) (3,578,959) (2,540,904)
Valuation allowance-deferred tax asset (1,324,000) (1,193,000) --
Depreciation and amortization 567,000 641,095 756,831
Loss on sale of assets -- -- 414,650
Officers' compensation contribution -- -- --
(Increase) decrease in assets
Accounts receivable (5,510,980) (695,613) (1,519,417)
Inventories 3,029,954 (4,462,706) 2,588,843
Prepaid expenses and other 105,352 (440,827) 138,257
Other assets 74,993 308,155 106,569
Increase (decrease) in liabilities
Accounts payable (1,034,442) 2,058,062 132,381
Accrued expenses and other current liabilities (307,470) 3,276,321 438,804
-------------- -------------- --------------
Cash provided by operating activities 2,709,019 6,207,866 1,329,152
-------------- -------------- --------------
Investing Activities
Proceeds from sale of assets -- -- 268,221
Capital expenditures (1,291,090) (1,858,489) (181,042)
-------------- -------------- --------------
Cash (used in) provided by investing activities (1,291,090) (1,858,489) 87,179
-------------- -------------- --------------
Financing Activities
Overdrafts 447,001 (197,441) (428,641)
Net payments on revolving line of credit (223,283) (4,001,002) (806,168)
Issuance of common stock 194,184 441,831 --
Principal payments on long-term debt (1,938,314) -- --
Cash on deposit to secure letter of credit -- (250,000) --
Deferred financing costs -- (79,379) --
-------------- -------------- --------------
Cash (used in) financing activities (1,520,412) (4,085,991) (1,234,809)
-------------- -------------- --------------
(Decrease) increase in cash and cash equivalents (102,483) 263,386 181,522
Cash and Cash Equivalents, at beginning of year 1,045,905 782,519 600,997
-------------- -------------- --------------
Cash and Cash Equivalents, at end of year $ 943,422 $ 1,045,905 $ 782,519
============== ============== ==============
See accompanying summary of accounting policies and notes to consolidated
financial statements.
F-5
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 & Company, L.P. (the "Partnership"), Isaacs
Design, Inc. ("Design") and I.C. Isaacs Far East Ltd. (collectively the
"Company"). I.C. Isaacs Far East Ltd. did not have any significant revenue or
expenses in 2005, 2004 or 2003. All intercompany balances and transactions have
been eliminated.
Business Description
The Company, which operates in one business segment, is a designer and
marketer of branded jeanswear and sportswear. The Company offers collections of
jeanswear and sportswear for men and women under the Marithe and Francois
Girbaud brand ("Girbaud brand") in the United States, Puerto Rico and the US
Virgin Islands. The Girbaud brand is an internationally recognized designer
label with a distinct European influence. The Company has positioned its Girbaud
brand line with a broad assortment of products, styles and fabrications
reflecting a contemporary European look. The Company markets a full collection
of men's and women's jeanswear and sportswear under the Girbaud brand, including
a broad array of bottoms, tops and outerwear.
Risks and Uncertainties
The apparel industry is highly competitive. The Company competes with many
companies, including larger, well capitalized companies which have sought to
increase market share through massive consumer advertising and price reductions.
The Company continues to experience increased competition from many established
and new competitors at both the department store and specialty store channels of
distribution. The Company continues to redesign its jeanswear and sportswear
lines in an effort to be competitive and compatible with changing consumer
tastes. Also, the Company has developed and implemented marketing initiatives to
promote its Girbaud brand. A risk to the Company is that such a strategy may
lead to continued pressure on profit margins. In the past several years, many of
the Company's competitors have switched much of their apparel manufacturing from
the United States to foreign locations such as Mexico, the Dominican Republic
and throughout Asia. As competitors lower production costs, it gives them
greater flexibility to lower prices. Over the last several years, the Company
also switched its production to contractors outside the United States to reduce
costs. Since 2001, the Company has imported substantially all its inventory,
excluding t-shirts, as finished goods from contractors in Asia. This shift in
purchasing requires the Company to estimate sales and issue purchase orders for
inventory well in advance of receiving firm orders from its customers. A risk to
the Company is that its sales estimates may differ from actual orders. If this
happens, the Company may miss sales because it did not order enough inventory,
or it may have to sell excess inventory at reduced prices. The Company faces
other risks inherent in the apparel industry. These risks include changes in
fashion trends and related consumer acceptance and the continuing consolidation
in the retail segment of the apparel industry. The Company's ability, or
inability, to manage these risk factors could influence future financial and
operating results.
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.
F-6
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, 2005, 2004 and 2003, sales to one customer were $6,419,000, $7,713,000, and
$5,156,000. These amounts constitute 7.7%, 9.6% and 8.0% of total sales,
respectively. As of December 31, 2005 and 2004, the Company had one customer the
represented 11.4% and 13.1% of accounts receivable respectively. The Company
establishes an allowance for doubtful accounts based upon factors surrounding
the credit risk of specific customers, historical trends and other information.
The Company's account receivable write-off's as a percentage of net sales were
0.8%, 0.4% and 0.3% for the years ended December 31, 2005, 2004 and 2003,
respectively.
The Company is also subject to concentrations of credit risk with respect
to its cash and cash equivalents, which it minimizes by placing these funds with
high-quality institutions. The Company is exposed to credit losses in the event
of nonperformance by the counterparties to letter of credit agreements, but it
does not expect any financial institutions to fail to meet their obligation
given their high credit rating.
Revenue Recognition
Net revenue is recognized upon the transfer of title and risk of ownership
to customers. Revenue is recorded net of discounts, as well as provisions for
estimated returns and allowances. On a seasonal basis, the Company negotiates
price adjustments with its retail customers as sales incentives. The Company
estimates the cost of such adjustments on an ongoing basis considering
historical trends, projected seasonal results and an evaluation of current
economic conditions. These costs, which have been recorded as a reduction to net
revenue, were $3,710,000, $3,777,000 and $1,920,000 for the years ended December
31, 2005, 2004 and 2003 respectively.
Sales are recognized upon shipment of products. Allowances for estimated
returns are provided by the Company when sales are recorded by reviewing trends
and returns on a historical basis. Shipping and handling fees billed to
customers are classified in net sales in the consolidated statements of
operations. Shipping and handling costs incurred are classified in distribution
and shipping in the consolidated statements of operations.
Inventory, Cost of Goods Sold and Operating Expenses
Inventories are stated at the lower of cost or market. Inventory cost is
determined by the first-in, first-out (FIFO) method. The Company includes in
inventory costs and cost of goods sold all costs and expenses related to
obtaining merchandise incurred prior to the receipt of finished goods at the
Company's distribution facilities. These costs include, but are not limited to,
product cost, inbound freight charges, purchasing and receiving costs,
inspection costs, warehousing costs and internal transfer costs, as well as
insurance, duties, brokers' fees and consolidators' fees. The Company did not
experience abnormal amounts of idle facility expense, freight, handling costs,
or excessive spoilage which required treatment as current period charges in
2005, 2004 nor 2003.
The Company includes in selling, general and administrative expenses costs
incurred subsequent to the receipt of finished goods at its distribution
facilities, such as the cost of picking and packing goods for delivery to
customers. In addition, selling, general and administrative expenses include
product design costs, selling and store service costs, marketing expenses and
general and administrative expenses.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation is computed
over the estimated useful lives of the assets by the straight-line method.
Leasehold improvements are amortized using the shorter of the straight-line
method over the life of the lease or the estimated useful life of the
improvement.
F-7
Asset Impairment
The Company periodically evaluates the carrying value of long-lived assets
when events and circumstances warrant such a review. The carrying value of a
long-lived asset is considered impaired when the anticipated undiscounted cash
flow from such asset is separately identifiable and is less than the carrying
value. In that event, a loss is recognized based on the amount by which the
carrying value exceeds the fair market value of the long-lived asset. Fair
market value is determined primarily using the anticipated cash flows discounted
at a rate commensurate with the risk involved.
Stock Options
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 148, "Accounting for Stock Based Compensation
Transition and Disclosure - An Amendment to FAS No. 123" ("SFAS 148"), but
applies the intrinsic value method set forth in Accounting Principles Board
Opinion No. 25 for stock options granted to employees. If the Company had
elected to recognize compensation expense based on the fair value at the grant
dates, consistent with the method prescribed by SFAS No. 148, net loss per share
would have been changed to the pro forma amount indicated below. Effective 2006,
the Company will be required to recognize this compensation expense. The Company
anticipates 2006 expense to be approximately $535,000 for options currently
granted.
For stock options granted to employees and non-employee directors in 2005,
2004 and 2003 (see Footnote 7), the Company estimated the fair value of each
option granted using the Black-Scholes option-pricing model. In 2005, the
Company used the following assumptions: risk-free interest rate of 4.5%,
expected volatility of 120%, expected average option life of 3 to 6 years and no
dividend payments for 2005 for options to purchase 100,000, 20,000 120,000 and
75,000 shares granted in December, August, June and February 2005 respectively.
Using these assumptions, the per share fair value of each of 2005 option grants
ranged from $3.16 to $5.49. In 2004 and 2003, the Company used the following
assumptions: risk-free interest rate of 3.04%, 2.75%, 2.46%, 2.78%, and 2.91%
for options to purchase 25,000, 500,000, 175,000, 225,000, and 25,000 shares
granted in March 2004, December 2003, July 2003, March 2003 and February 2003,
respectively, expected volatility of 75%, expected option life of 5 years and no
dividend payments for 2004 or 2003. Using these assumptions, the per share fair
value of each of such option grants was $0.55 for the March 2004 grant, $0.60,
$0.86, $0.42 and $0.42, for the December, July, March and February, 2003 grants,
respectively.
Year ended December 31,
-----------------------------------------------
2005 2004 2003
-------------- --------------- --------------
Net income (loss) attributable to common stockholders,
as reported $ 6,411,249 $ 6,165,379 $ (1,694,766)
Total stock-based employee compensation expense
determined under the fair value based method
for all awards (977,538) (286,187) (231,448)
-------------- --------------- --------------
Pro forma net income (loss) attributable to common
stockholders $ 5,433,711 $ 5,879,192 $ (1,926,214)
============== =============== ==============
Basic net income (loss) per common share, as reported $ 0.55 $ 0.55 $ (0.15)
Basic net income (loss) per common share, pro forma $ 0.46 $ 0.52 $ (0.17)
Diluted net income (loss) per common share, as
reported $ 0.48 $ 0.46 $ (0.15)
Diluted net income (loss) per common share, pro forma $ 0.41 $ 0.44 $ (0.17)
F-8
Advertising Costs
Direct advertising costs included in selling expenses are expensed as
incurred and were $475,152, $749,908 and $559,966 for the years ended December
31, 2005, 2004 and 2003 respectively. These are included in the promotional
license requirement discussed in Footnote 8.
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 the financial statement and the income tax basis using
presently enacted tax rates.
Fair Value of Financial Instruments
Financial instruments of the Company include cash and cash equivalents, accounts
receivable, short-term investments and long and short-term debt. Fair values of
cash and cash equivalents, accounts receivable, short-term investments and
short-term debt approximate cost due to the short period of time to maturity.
Based upon the current borrowing rates available to the Company, estimated fair
values of long-term debt approximate their recorded amounts.
Net Income or Loss Per Share
Net income or loss per share is based on the weighted average number of
shares of common stock and dilutive common stock equivalents outstanding. Basic
loss per share includes no dilution and is computed by dividing income available
to common shareholders by the weighted average number of common shares
outstanding for the period. In 2005 and 2004, diluted income per share reflects
the potential dilution of securities that could share in the earnings of the
Company. There were outstanding employee stock options of 1,174,167, 1,590,817,
and 2,070,250, at December 31, 2005, 2004 and 2003, respectively and outstanding
warrants of 250,000, 500,000 and 500,000 at the end of 2005, 2004 and 2003
respectively and 120,000 director stock options at December 31, 2005. For 2005
and 2004, all options and warrants were included in the diluted net income per
share calculation. Basic and diluted loss per share are the same during 2003 as
these stock options and warrants were excluded from the computation of net loss
per share as their inclusion would have been anti-dilutive.
Comprehensive Income
The Company has adopted the provisions of Statement No. 130, "Reporting
Comprehensive Income" (See Footnote 9. Retirement Plan).
Recent Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board, or FASB, issued
Statement No. 123(R), Share-Based Payment, which is a revision of Statement 123.
Statement 123(R) requires all share-based payments to employees and directors to
be recognized in the financial statements based on their fair values, using
prescribed option-pricing models. SFAS 123(R), is effective for public companies
for annual periods beginning after June 15, 2005. Accordingly, the Company will
adopt 123(R) January 1, 2006. From and after that date, pro forma disclosure
will no longer be an alternative to financial statement recognition.
Accordingly, the adoption of Statement 123(R)'s fair value method may have a
significant impact on the Company's results of operations. The impact of
adoption of Statement 123(R) and its approximated impact on prior periods had
the Company adopted Statement 123(R) in prior periods, is further described in
F-9
the disclosures included in the Summary of Accounting Policies - Stock Options.
Statement 123(R) also requires the benefits of tax deductions in excess of
recognized compensation cost to be reported as a financing cash flow, rather
than as an operating cash flow as required under current literature. This
requirement will reduce net operating cash flows and increase net financing cash
flows in periods after adoption.
In May 2005, The FASB issued Statement No. 154, Accounting Changes and
Error Corrections, a Replacement of APB Opinion No. 20 and FASB Statement No. 3.
FASB Statement No. 154, effective for accounting changes and corrections of
errors made in fiscal years beginning after December 15, 2005, replaces APB
Opinion No. 20, Accounting Changes, and FASB Statement No. 3, Reporting
Accounting Changes in Interim Financial Statements, and changes the requirements
for the accounting for and reporting of a change in accounting principle. FASB
Statement No. 154 applies to all voluntary changes in accounting principle and
also applies to changes required by an accounting pronouncement in the unusual
instance that the pronouncement does not include specific transition provisions.
When a pronouncement includes specific transition provisions, those provisions
should be followed. FASB Statement No. 154 requires retrospective application
(the application of a different accounting principle to prior accounting periods
as if that principle had always been used) to prior periods' financial
statements of changes in accounting principle, unless it is impracticable to
determine either the period-specific effects or the cumulative effect of the
change. The Company does not believe FASB Statement No. 154 will have a material
effect on its financial statements.
In May 2005,the FASB released FASB Interpretation No. 47, or FIN 47,
Accounting for Conditional Asset Retirement Obligations, an interpretation of
FASB Statement No. 143. FIN 47 is effective for fiscal years ending after
December 15, 2005 and clarifies that the term conditional asset retirement
obligation as used in FASB Statement No. 143, Accounting for Asset Retirement
Obligations, refers to a legal obligation to perform an asset retirement
activity in which the timing and (or) method of settlement are conditional on a
future event that may or may not be within the control of the entity. The
obligation to perform the asset retirement activity is unconditional even though
uncertainty exists about the timing and (or) method of settlement. Thus, the
timing and (or) method of settlement may be conditional on a future event.
Accordingly, an entity is required to recognize a liability for the fair value
of a conditional asset retirement obligation if the fair value of the liability
can be reasonably estimated. The fair value of a liability for the conditional
asset retirement obligation should be recognized when incurred--generally upon
acquisition, construction, or development and (or) through the normal operation
of the asset. Uncertainty about the timing and (or) method of settlement of a
conditional asset retirement obligation should be factored into the measurement
of the liability when sufficient information exists. Statement 143 acknowledges
that in some cases, sufficient information may not be available to reasonably
estimate the fair value of an asset retirement obligation. This Interpretation
also clarifies when an entity would have sufficient information to reasonably
estimate the fair value of an asset retirement obligation. FIN 47 did not have
an effect on the Company's financial statements.
In February 2006, the FASB issued FASB Statement No. 155, "Accounting for
Certain Hybrid Financial Instruments" (SFAS155) , which nullifies and amends
various accounting guidance relating to accounting for derivative instruments
and securitization transactions. In general, these changes will reduce the
operational complexity associated with bifurcating embedded derivatives, and
increase the number of beneficial interests in securitization transactions. This
statement is effective for all financial instruments acquired or issued after
the beginning of our first fiscal year that begins after September 15, 2006.
Because we do not have any material derivative instruments or securitization
transactions, we believe there will be no material impact on our financial
condition, results of operations or cash flows upon adoption.
F-10
Notes to Consolidated Financial Statements
1. Inventories
Inventories consist of the following: December 31,
---------------------------------------
2005 2004
------------------ ------------------
Work-in-process $ 1,115,107 $ 227,444
Finished goods 4,172,376 8,089,993
------------------ ------------------
$ 5,287,483 $ 8,317,437
================== ==================
2. Property, Plant and Equipment
Property, plant and equipment consists of
the following:
December 31, Estimated
------------------------------------- Useful
2005 2004 Lives
---------------- ----------------- -----
Land $ 149,160 $ 149,160
Buildings and improvements 1,262,892 1,262,892 18 years
Machinery, equipment and fixtures 4,699,117 4,415,628 5-7 years
Leasehold improvements and other 6,046,741 5,652,769 various
---------------- -----------------
12,157,910 11,480,449
Less accumulated depreciation and
amortization 9,319,283 9,392,216
---------------- -----------------
$ 2,838,627 $ 2,088,233
================ =================
Depreciation and amortization expense for 2005, 2004 and 2003 totaled
$540,696, $547,345 and $501,953 respectively.
3. Long-term Debt
Long-term debt consists of the following: December 31,
-------------------------------
2005 2004
-------------- --------------
Revolving line of credit (a)(b) $ -- $ 223,283
Notes payable (c) 4,619,594 6,557,908
-------------- --------------
Total 4,619,594 6,781,191
Less current maturities of revolving line
of credit -- 223,283
Less current maturities of long-term debt 2,893,128 3,366,180
-------------- --------------
$ 1,726,466 $ 3,191,728
============== ==============
(a) On December 30, 2004, the Company entered into a three year credit facility
(the "Credit Facility") with Wachovia Bank, National Association
("Wachovia"). The Credit Facility provides that the Company may borrow,
using as collateral, up to 85% of eligible accounts receivable and a
portion of eligible inventory, both as defined by the Credit Facility.
Borrowings under the Credit Facility may not exceed $25.0 million including
F-11
outstanding letters of credit which are limited to $8.0 million at any one
time. There were approximately $1.8 million of outstanding letters of
credit at December 31, 2005. The Credit Facility accords to the Company the
right, at its election, to borrow these amounts as either Prime Rate Loans
or LIBOR Loans. Prime Rate Loans bear interest at the prime rate plus the
applicable margin in effect from time to time. LIBOR Loans are limited to
three in total, must be a minimum of $1,000,000 each and in integral
multiples of $500,000 in excess of that amount, and bear interest at the
LIBOR rate plus the applicable margin in effect from time to time. The
applicable margins, as defined by the Credit Facility, fluctuate from 0.00%
to 0.75% for the Prime Loans and 2.00% to 2.75% for LIBOR Loans. The
applicable margins are inversely affected by fluctuations in the amount of
"excess availability" - the unused portion of the amount available under
the facility - which are in staggered increments from less then $2.5
million to $7.5 million. The Prime Rate and the LIBOR Rate were 7.00% and
4.8226% respectively at December 31, 2005. All the amounts borrowed under
the credit facility at December 31, 2005 were Prime Rate Loans and the
effective rate was 7.25% at that time. Starting in 2005, the Credit
Facility also required the Company to comply with certain covenants
expressed as fixed charge coverage ratios and tangible liability to net
worth ratios. As collateral security for its obligations under the Credit
Facility, ICI and the LP granted a first priority security interest in all
of their respective assets to Wachovia. The Company paid $79,379 as a
facility fee to Wachovia in connection with the consummation of the Credit
Facility. That fee is deferred and is being amortized over the life of the
Credit Facility. The Company amortized $26,480 or these fees in 2005. In
January and February 2006, the Company was in violation of the fixed charge
coverage ratio covenant of the Credit Facility and has received a waiver
from Wachovia for these violations.
(b) Prior to December 30, 2004, the Company had an asset-based revolving line
of credit (the "Credit Agreement") with Congress Financial Corporation
("Congress"). This Credit Agreement, as amended, provided that the Company
could have borrowed up to 80.0% of net eligible accounts receivable and a
portion of inventory. Borrowings under the Credit Agreement could not
exceed $20.0 million, including outstanding letters of credit which were
limited to either $4.0 million or $6.0 million at various times during the
year. These borrowings bore interest at the lender's prime rate of interest
plus 2.25% (effectively 6.50% at December 30, 2004). In connection with
amending the Credit Agreement in December 2002, March 2003 and November
2003, the Company paid and deferred certain financing fees and either
expensed as paid or amortized them over the remaining life of the amended
Credit Agreement. The Company expensed or amortized $125,000 and $250,000
of these fees in 2004 and 2003.
Average short-term borrowings and the related interest rates are as
follows:
Substantially all 2004 information relates ----------------------------------
to the Congress Credit Agreement Year Ended December 31,
----------------------------------
2005 2004
-------------- -----------------
Borrowings under revolving line of credit $ -- $ 223,283
Weighted average interest rate 6.95% 6.50%
Maximum month-end balance during year $ 1,879,000 $ 6,433,000
Average month-end balance during year $ 1,048,000 $ 4,056,270
(c) On May 6, 2002, Textile Investment International S.A. ("Textile"), an
affiliate of Latitude Licensing Corp. ("Latitude"), the licensor of the
Company, acquired a note that the Company had issued to a former licensor.
On May 21, 2002, Textile exchanged that note for an amended and restated
note bearing interest at the rate of 8% per annum, (the "Replacement
Note"), which subordinated Textile's rights under the note to the rights of
Congress under the Credit Agreement, deferred the original note's principal
payments and extended the maturity date of the note until December 31,
2007. In connection with the execution of the Credit Facility, the
Replacement Note was further amended and restated to subordinate Textile's
rights to the rights of Wachovia under the Credit Facility (the "Amended
and Restated Replacement Note" and together with the Replacement Note, the
"Textile Notes"). Pursuant to the subordination provisions of the Textile
F-12
Notes, the Company was obligated to defer the payments that otherwise would
have been due thereunder during each calendar quarter commencing with the
quarter ended December 31, 2002 and continuing through March 31, 2005.
Also, pursuant to the provisions of the Textile Notes, the non-payment and
deferral of those payments did not constitute a default thereunder.
Pursuant to amendments to the licensing agreements executed in December
2004, the payment of approximately $2.3 million of minimum and additional
royalties that otherwise would have been payable in 2004 was deferred, and
the payment thereof became due and payable during the 18 month period which
commenced in June 2005 (see Note 8). Pursuant to an Intercreditor and
subordination agreement entered into by Wachovia and Textile in connection
with the consummation of the Credit Facility, Textile was permitted to
elect to authorize the Company to defer the payment of quarterly amounts
that otherwise would have been due and payable under the Amended and
Restated Replacement Note and apply such amount in payment of deferred
royalties under the licensing agreements. As of June 30, 2005, all 2004
deferred royalty payments were paid in full. The obligations under the
Textile Notes have been classified as current or long-term based upon the
respective original due dates of the quarterly payments specified in the
Replacement Note or the Amended and Restated Replacement Note, as the case
may be. Accordingly, each deferred quarterly payment has been classified as
current even though the payment thereof may not be paid until a future
year. As allowed under the Credit Facility, the Company resumed making
payments on the Textile Notes in the third quarter of 2005 and made a total
of $2,090,000 in principal and interest payments on those notes in 2005.
At December 31, 2005, long-term debt maturities were as follows:
2006 $ 2,893,128
2007 1,726,466
----------------
$ 4,619,594
================
4. Accrued Expenses
Accrued expenses consist of the following: December 31,
----------------------------------
2005 2004
-------------- ----------------
Litigation settlement $ 1,750,000 $ --
Accrued interest 1,312,134 1,136,023
Royalties & other licensor obligations, Note 8 771,537 2,489,274
Management & selling bonuses 470,047 1,087,442
Property taxes 318,607 19,895
Accrued professional fees 289,769 51,650
Accrued rent expense 166,603 111,000
Sales commissions payable 157,039 51,629
Accrued compensation 145,692 120,871
Customer credit balances 60,224 82,832
Payroll tax withholdings 14,193 71,934
Severance accrual -- 290,570
Income taxes payable -- 148,000
Other 36,259 138,454
-------------- ----------------
$ 5,492,104 $ 5,799,574
============== ================
5. Income Taxes
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. As of December 31, 2005 and 2004, the Company has net
operating loss carry forwards for income tax reporting purposes of approximately
$34,706,000 and $41,353,000 respectively, which represent deferred tax assets of
approximately $13,633,000 and $15,908,000 respectively. These net operating
losses begin to expire in 2014. Through 2003, no income tax benefit had been
recorded due to the uncertainty over the Company's ability to generate taxable
income beyond 2003. As a result of the income the Company generated in 2005 and
2004, the Company's management reevaluated its net operating losses and the
F-13
related valuation allowances and has recognized a net income tax benefit of $
1,178,000 and $1,045,000 for 2005 and 2004 respectively.
Significant items comprising the Company's deferred tax assets are as follows:
December 31,
-----------------------------
2005 2004
------------- -------------
Net operating loss carry forwards $ 13,633,000 $ 15,908,000
Minimum pension liability 2,206,000 --
Depreciation and amortization 806,000 764,000
Bonus accrual 255,000 --
Accrued royalty payments -- 915,000
Accrued interest payable 523,000 446,000
Capital loss carryforward 163,000 163,000
Allowance for doubtful accounts 216,000 124,000
Inventory valuation 51,000 51,000
Litigation settlement and accrued severance 735,000 114,000
Contribution carryovers 46,000 44,000
Deferred rent payments 65,000 --
State tax accrual 106,000 --
AMT credits 272,000 --
Other 21,000 21,000
------------- -------------
19,098,000 18,550,000
Valuation allowance (16,581,000) (17,357,000)
------------- -------------
Net deferred tax asset $ 2,517,000 $ 1,193,000
============= =============
A reconciliation between the statutory and effective tax rates is as follows:
Year Ended December 31,
--------------------------------
2005 2004 2003
---------- -------- ------------
Federal statutory rate 34.0% 34.0% (35.0)%
State and local taxes, net of federal benefit 4.5 4.0 (4.0)
Permanent differences (4.0) 2.0 1.0
Alternative minimum taxes 2.0 2.0 --
(Benefit) expense of valuation allowance (59.0) (62.4) 38.0
---------- -------- ------------
(22.5)% (20.4)% -- %
========== ======== ============
The 2005 net tax benefit is derived from Year Ended December 31, 2005
the following components:
------------------------------------------------
Federal State Total
---------------- ------------- ----------------
Current tax expense $ (146,000) $ -- $ (146,000)
Deferred tax benefit 1,054,000 270,000 1,324,000
---------------- ------------- ----------------
Net income tax benefit 908,000 $ 270,000 1,178,000
================ ============= ================
No reconciliation for 2003 was provided as there was no tax expense or benefit
for that year.
6. Stockholders' Equity
The Company currently holds 1,176,709 of common stock shares in its
treasury at a cost of $2,322,871.
Prior to 2003, the Company granted warrants to purchase 500,000 shares of
the Company's Common Stock for $0.75 per share to Textile. On April 13, 2005,
Textile assigned these warrants to an unaffiliated entity. In December 2005,
this unaffiliated entity exercised its right to purchase 250,000 shares. In
accordance with the net issuance formula contained in the warrants and in lieu
of paying $0.75 per share, the unaffiliated entity gave up the right to purchase
F-14
43,605 shares and received 206,395 shares in the transaction based upon a
closing price of $4.30 per share on the exercise date.
7. Stock Options
Omnibus Stock Option Plan
In May 1997, the Company adopted the 1997 Omnibus Stock Plan (the "Plan").
Under the Plan, as amended in 1999, 2002 and as amended and restated in 2003,
the Company may grant qualified and nonqualified stock options, stock
appreciation rights, restricted stock or performance awards, payable in cash or
shares of common stock, to selected employees. The Company has reserved
2,200,000 shares of common stock for issuance under the Plan.
A summary of stock options outstanding and exercisable as of December 31, 2005,
2004 and 2003 is as follows:
-----------------------------------------------------------------------------------------------------
Options outstanding at December 31, 2005 Options exercisable at
December 31, 2005
-----------------------------------------------------------------------------------------------------
Weighted Weighted Weighted
Range of Average Average Average
Exercise Number Remaining Exercise Number Exercise
Prices Outstanding Life (years) Price Exercisable Price
- -------------------- ----------------- -------------- -------------- -------------- --------------
$0.48 to $0.60 166,667 6.52 $0.570 158,333 $0.575
$0.87 to $2.125 712,500 3.03 $1.215 529,167 $1.309
$3.10 to $6.95 295,000 7.30 $4.539 -- --
- ------------------- ----------------- -------------- -------------- -------------- --------------
$0.48 to $6.95 1,174,167 4.60 $1.959 687,500 $1.140
=================== ================= ============== ============== ============== ==============
- -----------------------------------------------------------------------------------------------------
Options outstanding at December 31, 2004 Options exercisable at
December 31, 2004
- -----------------------------------------------------------------------------------------------------
Weighted Weighted Weighted
Range of Average Average Average
Exercise Number Remaining Exercise Number Exercise
Prices Outstanding Life (years) Price Exercisable Price
- -------------------- ----------------- -------------- -------------- -------------- --------------
$0.30 to $0.60 364,667 5.80 $0.568 198,000 $0.551
$0.87 to $2.125 1,226,150 4.35 $1.260 867,817 $1.390
- ------------------- ----------------- -------------- -------------- -------------- --------------
$0.30 to $2.125 1,590,817 4.59 $1.101 1,065,817 $1.234
=================== ================= ============== ============== ============== ==============
- -----------------------------------------------------------------------------------------------------
Options outstanding at December 31, 2003 Options exercisable at
December 31, 2003
- -----------------------------------------------------------------------------------------------------
Weighted Weighted Weighted
Range of Average Average Average
Exercise Number Remaining Exercise Number Exercise
Prices Outstanding Life (years) Price Exercisable Price
- -------------------- ----------------- -------------- -------------- -------------- --------------
$0.30 to $0.60 645,000 6.26 $0.193 -- $ --
$0.90 to $2.125 1,425,250 5.86 $0.978 1,425,250 $1.311
- ------------------- ----------------- -------------- -------------- -------------- --------------
$0.30 to $2.125 2,070,250 5.98 $0.679 1,425,250 $1.311
=================== ================= ============== ============== ============== ==============
F-15
Weighted Average
The following table relates to options activity Number of Exercise Price
in 2003, 2004 and 2005 under the Plan: Options Per Option
-------------- ----------------
Granted 925,000 0.770
Cancelled (161,000) 1.380
--------------
Options outstanding at December 31, 2003 2,070,250 1.076
Cancelled (25,000) 0.600
Granted 25,000 0.870
Exercised (479,433) 0.922
--------------
Options outstanding at December 31, 2004 1,590,817 1.101
Cancelled (435,650) 1.423
Granted 195,000 5.277
Exercised (176,000) 1.103
--------------
Options outstanding at December 31, 2005 1,174,167 1.959
==============
Options exercisable at December 31, 2005 687,500 1.140
==============
Non-employee Directors Stock Option Plan
In June 2005, the Board of Directors of the Company and the Company's
stockholders adopted Non-Employee Directors Stock Option Plan (the "Directors
Plan") non-employee directors receive automatic grants of options to purchase
common stock in amounts that are specified by such plan. The exercise prices of
all options granted under the Directors Plan are fixed at 100% of the market
price of the common stock on each grant date. The Company has reserved 450,000
shares of common stock for issuance under the Directors Plan. Options to
purchase 120,000 shares of common stock with a weighted average exercise price
of $5.60 per share were granted under the Directors Plan during 2005, all of
which were outstanding and unexercised at December 31, 2005.
8. Commitments and Contingencies
Operating Leases
The Company rents real and personal property under leases expiring at
various dates through 2014. Certain of the leases stipulate payment of real
estate taxes and other occupancy expenses. Minimum annual rental commitments
under noncancellable operating leases in effect at December 31, 2005 are
summarized as follows:
Showrooms & Computer & Total
Office Space Office Equipment
---------------- ----------------- -----------------
2006 $ 399,043 $ 120,622 $ 519,665
2007 409,018 62,862 471,880
2008 419,244 38,007 457,251
2009 432,808 -- 432,808
2010 477,545 -- 477,545
Thereafter 2,031,492 -- 2,031,492
---------------- ----------------- -----------------
$ 4,169,150 $ 221,491 $ 4,390,641
================ ================= =================
F-16
In July 2004, the Company signed a 10 year lease to relocate its New York
offices and showrooms. The Company will expense the rent payments on a straight
line basis in accordance with the provisions of SFAS No. 13 "Accounting for
Leases" starting October 2004, the date the Company obtained access to the
facility. Also, in connection with this lease, the Company has provided to the
lessor a $250,000 letter of credit and has provided a deposit for this amount to
the bank as security for this letter of credit. As the use of these funds is
restricted, this deposit is classified as a non-current asset.
Total rent expense is as follows: Year Ended December 31,
---------------------------------------------
2005 2004 2003
------------- ------------- -------------
Minimum rentals $ 504,526 $ 386,345 $ 475,966
Other lease costs 116,497 40,631 154,437
------------- ------------- -------------
621,023 426,976 $ 630,403
============= ============= =============
Licenses
Girbaud Men's Licensing Agreement
The Company has entered into an exclusive license agreement with Latitude
to manufacture and market men's jeanswear, casual wear, outerwear and active
influenced sportswear under the Girbaud brand and certain related trademarks in
the United States, Puerto Rico and the U.S. Virgin Islands. The terms of the
agreement will expire at the end of 2007. The Company has the option to extend
the terms the agreement through the end of 2011. Under the agreement as amended,
the Company is required to make royalty payments to the licensor in an amount
equal to 6.25% of net sales or regular licensed merchandise and 3.0% of certain
irregular and closeout licensed merchandise. The Company is obligated to pay the
greater of actual royalties earned or minimum guaranteed annual royalties of
$3,000,000 through 2007. The Company is required to spend the greater of an
amount equal to 3% of Girbaud men's net sales or $500,000 in advertising and
related expenses promoting the men's Girbaud brand products in each year through
the term of the Girbaud men's agreement. If Latitude mounts any fashion shows in
the Company's territory, the Company also is required to participate in up to
two of such shows, and to pay $75,000 to Latitude with respect thereto. The
Company has agreed to increase the minimum annual amount of these expenditures
under the men's license agreement by $200,000 in each of the years 2007, 2008
and 2009 in order to, among other things, facilitate and support a repositioning
of the Girbaud brand for better store distribution.
Girbaud Women's Licensing Agreement
The Company has entered into an exclusive license agreement with Latitude
to manufacture and market women's jeanswear, casual wear, 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 terms of the agreement
will expire at the end of 2007. The Company has the option to extend the terms
the agreement through the end of 2011. Under the agreement as amended, the
Company is required to make royalty payments to the licensor in an amount equal
to 6.25% of net sales or regular licensed merchandise and 3.0% of certain
irregular and closeout licensed merchandise. The Company is obligated to pay the
greater of actual royalties earned or minimum guaranteed annual royalties of
$1,500,000 through 2007. The Company is required to spend the greater of an
amount equal to 3% of Girbaud women's net sales or $400,000 in advertising and
related expenses promoting the women's Girbaud brand products in each year
through the term of the Girbaud women's agreement. If Latitude mounts any
women's fashion shows in the Company's territory, the Company also is required
to participate in up to two of such shows, and to pay $75,000 to Latitude with
respect thereto. The Company has agreed to increase the minimum annual amount of
these expenditures under the women's license agreement to $200,000 in each of
the years 2007, 2008 and 2009 in order to, among other things, facilitate and
support a repositioning of the Girbaud brand for better store distribution. In
addition, while the agreement is in effect the Company is required to pay
$190,000 per year to the licensor for advertising and promotional expenditures
related to the Girbaud brand.
During each of the six years ended December 31, 2005, the amounts of
advertising and related expenses incurred by the Company in marketing the
F-17
Girbaud brand products were less than the amounts required under the agreements.
In each of the various amendments to the men's and women's license agreements
which were executed in 2002 - 2004, Latitude and the Company confirmed to one
another that neither party was in default to the other in the performance of any
of the obligations owed by either of them to the other. On March 29, 2006,
Latitude also waived the Company's failure to spend the minimum amounts required
under the men's and women's license agreements in 2005.
Pursuant to amendments to the licensing agreements executed in December
2004 (see Note 3), the payment of approximately $2.3 million of minimum and
additional royalties that otherwise would have been payable in 2004 was
deferred. All 2004 deferred royalty payments were paid in full during 2005 and
all 2005 royalty payments were paid in full when due in 2005.
Following is a schedule of the Company's commitment obligations as of
December 31, 2005:
Summary schedule of commitments: Payments Due By Period
--------------------------------------------------------
Total Current 1-3 years 4-5 years After 5 years
----------------- ------------- -------------- ------------- -------------
Operating leases $ 4,390,641 $ 519,665 $ 929,131 $ 910,353 $ 2,031,492
Employment agreements 2,563,500 1,296,500 1,267,000 -- --
Licensing agreement fee obligations (*) 9,388,265 4,888,265 4,500,000 -- --
Licensing agreement fashion show
obligations(*) 825,000 525,000 300,000 -- --
Licensing agreement creative & advertising fee
obligations (*) 410,000 220,000 190,000 -- --
Promotional expense license requirement(*) 2,200,000 900,000 1,300,000 -- --
--------------- ------------ ------------- ------------ ------------
Total contractual obligations $ 19,777,406 $ 8,349,430 $ 8,486,131 $ 910,353 $ 2,031,492
=============== ============ ============= ============ ============
(*) License agreement obligations include amounts accrued but unpaid at December
31, 2005 as well as obligation commitments for years subsequent to that
date.
Employment Agreements
The Company is party to employment agreements with three officers which
provide for specified levels of compensation and certain other benefits. The
agreements, which expire between 2007 and 2008, also provide for severance
payments from the termination date through the expiration date under certain
circumstances.
F-18
9. Retirement Plan
The Company sponsors a defined benefit pension plan that covers
substantially all employees with more than one year of service. The Company's
policy is to fund pension costs accrued. Contributions to the plan reflect
benefits attributed to employees' service to date, as well as service expected
to be earned in the future. The benefits are based on the number of years of
service and the employee's compensation during the three consecutive complete
years of service prior to or including the year of termination of employment.
Plan assets consist primarily of common stocks, fixed income securities and
cash. The latest available actuarial valuation is as of December 31, 2005.
Pension expense for 2005, 2004 and 2003 was approximately $398,000, $446,000,
and $349,000 respectively, and includes the following components:
Years Ended December 31,
-------------------------------------------
2005 2004 2003
------------- ------------- -------------
Service cost of current period $ 77,000 $ 60,000 $ 54,000
Interest on the above service cost 6,000 4,000 4,000
------------- ------------- -------------
83,000 64,000 58,000
Interest on the projected benefit
obligation 520,000 522,000 450,000
Expected return on plan assets (584,000) (556,000) (519,000)
Amortization of prior service cost 43,000 43,000 43,000
Amortization of loss 336,000 373,000 317,000
------------- ------------- -------------
Pension cost $ 398,000 $ 446,000 $ 349,000
============= ============= =============
Years ended December 31,
--------------------------------------------
The following table sets forth the
Plan's funded status and amounts
recognized at December 31, 2005, 2004
and 2003: 2005 2004 2003
------------- ------------- -------------
Vested benefits $ 8,727,000 $ 6,704,000 $ 5,764,000
Nonvested benefits 26,000 30,000 30,000
------------- ------------- -------------
Accumulated benefit obligation 8,753,000 6,734,000 5,794,000
Effect of anticipated future
compensation levels and other events (1,549,000) 425,000 245,000
------------- ------------- -------------
Projected benefit obligation 7,204,000 7,159,000 6,039,000
------------- ------------- -------------
Fair value of assets held in the plan 7,376,000 7,438,000 7,396,000
------------- ------------- -------------
Deficit of projected benefit obligation
over plan assets 172,000 279,000 1,357,000
Unrecognized net loss from past
experience different from that assumed 4,067,000 4,000,000 3,150,000
Adjustment to record minimum liability (5,616,000) -- --
Unrecognized prior service cost -- 43,000 85,000
------------- ------------- -------------
Net (minimum pension liability) prepaid
periodic pension cost $ (1,377,000) $ 4,322,000 $ 4,592,000
============= ============= =============
With respect to the above table, the weighted average discount rate used to
measure the projected benefit obligation and net (minimum pension liability)
prepaid periodic pension cost was 5.75% for 2005 and 7.5% for both 2004 and
2003; the rate of increase in future compensation levels is 3%; and the expected
long-term rate of return on assets is 8%. At December 31, 2005, the accumulated
benefit obligation exceeded the fair value of the Plan's assets which created a
net minimum pension liability of $1,377,000 which is included as a non-current
liability in the accompanying consolidated balance sheets. Prior to December 31,
2005, the fair value of the Plan's assets exceeded the accumulated benefit
obligation and a net prepaid periodic pension cost of $4,322,000 and $4,592,000
is included in other assets in the accompanying consolidated balance sheets at
F-19
December 31, 2004 and 2003 respectively. To recognize the minimum pension
liability, the Company recorded an adjustment of $5,616,000 as other
comprehensive income in the fourth quarter of 2005.
The following sets forth the Plan's change in
benefit obligation for 2005 and 2004: Years Ended December 31,
------------------------------
2005 2004
------------- --------------
Benefit obligation at beginning of year $ 7,159,000 $ 6,039,000
Service cost 83,000 64,000
Interest cost 520,000 22,000
Benefits paid (664,000) (779,000)
Actuarial loss 106,000 1,313,000
------------- --------------
Benefit obligation at end of period $ 7,204,000 $ 7,159,000
============= ==============
The following sets forth the Plan's change in plan
assets for 2005 and 2004: Years Ended December 31,
------------------------------
2005 2004
-------------- -------------
Fair value of plan assets at beginning of year $ 7,438,000 $ 7,396,000
Return on plan assets 584,000 556,000
Employer contributions 315,000 175,000
Benefits paid (664,000) (779,000)
Assets gain/(loss) deferred (297,000) 90,000
-------------- -------------
Fair value of plan assets at end of year $ 7,376,000 $ 7,438,000
============== =============
The plan's fiduciaries set investment policies and strategies for the trust.
Long-term strategic investment objectives include preserving the funded status
of the trust and balancing risk and return. The plan's fiduciaries oversee the
investment allocation process, which includes selecting investment managers,
setting long-term strategic targets and monitoring asset allocations. Target
allocation ranges are guidelines, not limitations, and occasionally plan
fiduciaries will approve allocations above or below a target range.
The Company's pension plan weighted-average asset
allocations at December 31, 2005 and 2004, by
asset category are as follows: December 31,
------------------------------
2005 2004
------------- --------------
Equity Securities 67% 70%
Debt Securities 28% 20%
Cash Accounts 5% 10%
------------- --------------
100% 100%
============= ==============
The following benefit payments, which reflect expected future
services, as appropriate, are expected to be paid: Pension Benefits
-----------------
2006 $ 113,000
2007 154,000
2008 189,000
2009 211,000
2010 220,000
Years 2011-2015 1,628,000
-----------------
$ 2,515,000
================
F-20
10. Supplemental Disclosures of Cash Flow Information
Cash paid during the year for interest amounted to $259,771, $295,077 and
$499,166 for 2005, 2004 and 2003, respectively. Cash paid during 2005 for income
taxes amounted to $304,000. The Company did not make any income tax payments in
2004 or 2003.
Non-cash effect of recording minimum pension
liability and exercise of stock warrants 2005 2004 2003
-----------------------------------------------------
Recognition of minimum pension liability $ (5,616,000) $ -- $ --
Exercise of stock warrants 20 -- --
11. Quarterly Financial Data (Unaudited)
Summarized quarterly financial data for 2005 and 2004 is as follows:
Quarter
- --------------------------------------------------------------------------------------------------
2005 First Second Third Fourth
- -------------------------------------------------- --------------- --------------- ---------------
Net sales $ 23,701,942 $ 21,749,284 $ 20,296,262 $ 17,541,447
Gross profit 9,951,014 8,842,470 8,796,480 6,628,826
Net income (loss) 2,503,256 2,019,873 2,271,815 (383,695)
Basic earnings per share $ 0.21 $ 0.17 $ 0.19 $ (0.03)
Diluted earnings per share $ 0.18 $ 0.15 $ 0.17 $ ( 0.03)
============== ============== ============== ==============
Quarter
- --------------------------------------------------------------------------------------------------
2004 First Second Third Fourth
- -------------------------------------------------- --------------- --------------- ---------------
Net sales $ 20,764,668 $ 19,667,444 $ 21,888,273 $ 18,329,009
Gross profit 7,246,289 7,456,847 9,629,472 6,733,692
Net income 864,581 1,313,466 2,488,531 1,498,801
Basic earnings per share $ 0.08 $ 0.12 $ 0.22 $ 0.13
Diluted earnings per share $ 0.07 $ 0.11 $ 0.18 $ 0.11
============== ============== ============== ==============
1. Earnings (loss) per share calculations for each of the quarters are based
on the weighted average shares outstanding for each period. The sum of the
quarters may not necessarily be equal to the full year earnings per share
amounts.
2. On February 14, 2006, without admitting or denying any liability, the
Company settled the arbitration proceedings commenced against it and its
wholly owned subsidiary, I.C. Isaacs & Company, L.P. (the "L.P.") by a
former executive. Pursuant to the settlement, the Company paid the sum of
$1.75 million in February 2006 and recorded this settlement as a charge to
expense in the fourth quarter of 2005.
F-21
SCHEDULE II
I. C. Isaacs & Company, Inc.
Valuation and Qualifying Accounts
Description Balance Charged to Balance at
Beginning of Costs and
the Year Expenses Decuction End of Year
---------------- -------------- -------------- --------------
Year Ended December 31, 2003
Allowance for doubtful accounts $ 245,000 $ 202,000 $ (172,000) $ 275,000
Merchandise allowances 1,558,000 1,920,000 (2,317,000) 1,161,000
Reserve for sales returns and discounts 126,000 2,477,000 (2,540,000) 63,000
Year Ended December 31, 2004
Allowance for doubtful accounts $ 275,000 $ 370,000 $ (329,000) $ 316,000
Merchandise allowances 1,161,000 3,777,000 (3,197,000) 1,741,000
Reserve for sales returns and discounts 63,000 4,089,000 (3,579,000) 573,000
Year Ended December 31, 2005
Allowance for doubtful accounts $ 316,000 $ 1,016,000 $ (632,000) $ 700,000
Merchandise allowances 1,741,000 3,710,000 (4,278,000) 1,173,000
Reserve for sales returns and discounts 573,000 4,199,000 (3,886,000) 886,000
F-22
Exhibit Index
-------------
Exhibit No. Description
3.01 Amended and Restated Certificate of Incorporation (a copy of
which was filed with the Commission on October 3, 1997 as Exhibit
3.01 to the Company's Registration Statement on Form S-1 (the
"S-1 Registration Statement"), and is hereby incorporated herein
by this reference).
3.02 Amended and Restated By-laws (a copy of which was filed as
Exhibit 3.02 to the S-1 Registration Statement, and is hereby
incorporated herein by this reference).
3.03 Certificate of Designation of the Series A Convertible Preferred
Stock of the Company (a copy of which was filed with the
Commission on November 15, 1999 as Exhibit 3.03 to the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30,
1999, and is hereby incorporated herein by this reference).
3.04 Certificate of Amendment to the Certificate of Designation of the
Series A Convertible Preferred Stock of the Company (a copy of
which was filed with the Commission on April 2, 2001 as Exhibit
3.04 to the Company's Annual Report on Form 10-K for the year
ended December 31, 2000, and is hereby incorporated herein by
this reference).
3.05 Second Certificate of Amendment to the Certificate of Designation
of the Series A Convertible Preferred Stock of the Company (a
copy of which was filed with the Commission on November 14, 2002
as Exhibit 3.05 to the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 2002 (the "September 2002
10-Q"), and is hereby incorporated herein by this reference).
3.06 Certificate of Amendment of Amended and Restated Certificate of
Incorporation (a copy of which was filed with the Commission on
August 14, 2003 as Exhibit 3.06 to the Company's Quarterly Report
on Form 10-Q for the quarter ended June 30, 2003 (the "June 2003
10-Q"), and is hereby incorporated herein by this reference).
4.01 Specimen Common Stock Certificate (a copy of which was filed with
the Commission on October 3, 1997 as Exhibit 4.01 to the
Company's Registration Statement on Form S-1 (the "S-1
Registration Statement"), and is hereby incorporated herein by
this reference).
4.02 Warrant No. 1 issued by the Company to Textile Investment
International S.A. ("Textile") for the purchase of 300,000 shares
of Common Stock (a copy of which was filed with the Commission on
November 14, 2002 as Exhibit 4.02 to the September 2002 10-Q, and
is hereby incorporated herein by this reference).
4.03 Warrant No. 2 issued by the Issuer to Textile for the purchase of
200,000 shares of Common Stock (a copy of which was filed as
Exhibit 4.03 to the September 2002 10-Q, and is hereby
incorporated herein by this reference).
4.04 Amended and Restated Omnibus Stock Plan as in effect on June 30,
2003 (a copy of which was filed as Exhibit 4.04 to the June 2003
10-Q, and is hereby incorporated herein by this reference).
4.05 2005 Non-Employee Directors Stock Option Plan (a copy of which
was filed with the Commission on August 10, 2005 as Exhibit 4.05
to Amendment No. 1 to the Company's Registration Statement on
Form S-2 (the "S-2 Amendment"), and is hereby incorporated herein
by this reference).
10.01 Form of Indemnification Agreement (a copy of which was filed as
Exhibit 10.09 to the S-1 Registration Statement, and is hereby
incorporated herein by this reference).
10.02 Girbaud Trademark License and Technical Assistance Agreement
dated November 1, 1997 (a copy of which was filed with the
Commission on November 26, 1997 as Exhibit 10.26 to Amendment No.
2 to the S-1 Registration Statement ("S-1 Amendment 2"), and is
hereby incorporated herein by this reference).
10.03 Defined Benefit Pension Plan (a copy of which was filed with as
Exhibit 10.27(a) to S-1 Amendment No. 2, and is hereby
incorporated herein by this reference).
10.04 First Amendment to Defined Benefit Pension Plan (a copy of which
was filed as Exhibit 10.27(b) to S-1 Amendment 2, and is hereby
incorporated herein by this reference).
10.05 Girbaud Trademark License and Technical Assistance Agreement
dated January 15, 1998 (a copy of which was filed with the
Commission on March 27, 1998 as Exhibit 10.26(a) to the Company's
Annual Report on Form 10-K for the year ended December 31, 1997
(the "1997 10-K"), and is hereby incorporated herein by this
reference).
10.06 Girbaud Trademark License and Technical Assistance Agreement for
Women's Collection dated March 4, 1998 (a copy of which was filed
as Exhibit 10.26(b) to the 1997 10-K, and is hereby incorporated
herein by this reference).
10.07 Amendment No. 1 dated June 18, 1998 to Girbaud Trademark and
Technical Assistance Agreement for Women's Collection (a copy of
which was filed with the Commission on August 12, 1998 as Exhibit
10.32 to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1998, and is hereby incorporated herein by
this reference).
10.08 Amendment No. 1 dated November 12, 1998 to Trademark License and
Technical Assistance Agreement for Men's Collections by and
between I.C. Isaacs & Co., L.P. and Latitude Licensing Corp. (a
copy of which was filed with the Commission on March 30, 1999 as
Exhibit 10.40 to the Company's Annual Report on Form 10-K for the
year ended December 31, 1998 (the "1998 10-K"), and is hereby
incorporated herein by this reference).
10.09 Amendment No. 2 dated November 12, 1998 to Trademark License and
Technical Assistance Agreement for Women's Collections by and
between I.C. Isaacs & Co., L.P. and Latitude Licensing Corp. (a
copy of which was filed as Exhibit 10.41 to the 1998 10-K, and is
hereby incorporated herein by this reference).
10.10 Executive Employment Agreement by and between I.C. Isaacs &
Company, Inc. and Daniel Gladstone dated January 21, 1999 (a copy
of which was filed as Exhibit 10.42 to 1998 10-K, and is hereby
incorporated herein by this reference).
10.11 Amendment No. 1 dated March 4, 1998 to Trademark License and
Technical Assistance Agreement for Men's Collections by and
between the Company and Latitude Licensing Corp. (a copy of which
was filed as Exhibit 10.56 to the 1998 10-K, and is hereby
incorporated herein by this reference).
10.12 Amendment No. 3 dated December 23, 1998 to Trademark License and
Technical Assistance Agreement for Women's Collections by and
between the Company and Latitude Licensing Corp. (a copy of which
was filed as Exhibit 10.57 to the 1998 10-K, and is hereby
incorporated herein by this reference).
10.13 Amendment No. 4 to the Trademark License and Technical Assistance
Agreement Covering Women's Products dated August 2, 1999 (a copy
of which was filed with the Commission on August 13, 1999 as
Exhibit 10.60 to the Company's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1999, and is hereby incorporated
herein by this reference).
10.14 Amendment No. 2 dated June 21, 2000, to Trademark License and
Technical Assistance Agreement Covering Men's Products dated
January 15, 1998, by and between Latitude Licensing Corp. and
I.C. Isaacs & Company L.P. 3.03 (a copy of which was filed with
the Commission on August 14, 2000 as Exhibit 10.75 to the
Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 2000 (the "June 2000 10-Q"), and is hereby incorporated
herein by this reference).
10.15 Amendment No. 5 dated June 21, 2000, to Trademark License and
Technical Assistance Agreement Covering Women's Products dated
January 15, 1998, by and between Latitude Licensing Corp. and
I.C. Isaacs & Company L.P. (a copy of which was filed as Exhibit
10.76 to the June 2000 10-Q, and is hereby incorporated herein by
this reference).
10.16 Amendment No.3 to Trademark License and Technical Assistance
Agreement Covering Men's Products Dated May 31, 2001 (a copy of
which was filed with the Commission on April 1, 2002 as Exhibit
10.92 to the Company's Annual Report on Form 10-K for the year
ended December 31, 2001, and is hereby incorporated herein by
this reference).
10.17 Amended and Restated Executive Employment Agreement dated April
17, 2002, by and between the Company and Eugene C. Wielepski (a
copy of which was filed with the Commission on April 22, 2002 as
Exhibit 10.94 to Amendment No. 1 to the Company's Annual Report
on Form 10-K for the year ended December 31, 2001 (the "2001 10-K
Amendment"), and is hereby incorporated herein by this
reference).
10.18 Amended and Restated Executive Employment Agreement dated April
17, 2002, by and between the Company and Daniel J. Gladstone (a
copy of which was filed as Exhibit 10.95 to Amendment No. 1 to
the 2001 10-K Amendment, and is hereby incorporated herein by
this reference).
10.19 Amendment No. 4 dated October 2, 2002 to the Trademark License
and Technical Assistance Agreement dated January 15, 2002 by and
between Latitude Licensing Corp. and I.C. Isaacs & Company, L.P.
(a copy of which was filed with the Commission on November 14,
2002 as Exhibit 10.102 to the Company's Quarterly Report on Form
10-Q for the quarter ended September 30, 2002 (the "September
2002 10-Q"), and is hereby incorporated herein by this
reference).
10.20 Amendment No. 6 dated October 2, 2002 to the Trademark License
and Technical Assistance Agreement for Women's Collections dated
October 2, 2002 by and between Latitude Licensing Corp. and I.C.
Isaacs & Company, L.P. (a copy of which was filed as Exhibit
10.103 to the September 2002 10-Q, and is hereby incorporated
herein by this reference).
10.21 Amendment no. 7, dated March 31, 2003 to the Trademark License
and Technical Assistance Agreement for Women's Collections
between Latitude Licensing Corp. and I.C. Isaacs & Company L.P.
(a copy of which was filed with the Commission on April 4, 2003
as Exhibit 10.110 to the Company's Annual Report on Form 10-K for
the year ended December 31, 2002 (the "2002 10-K"), and is hereby
incorporated herein by this reference).
10.22 Amendment no. 5 dated March 31, 2003 to the Trademark License and
Technical Assistance Agreement dated the 1st day of November 1997
by and between Latitude Licensing Corp. and I.C. Isaacs & Company
L.P. (a copy of which was filed as Exhibit 10.111 to the 2002
10-K, and is hereby incorporated herein by this reference).
10.23 Amendment dated as of May 15th, 2003 to the Amended and Restated
Employment Agreement between I.C. Isaacs & Company, L.P. and
Daniel J. Gladstone (a copy of which was filed with the
Commission on May 15, 2003 as Exhibit 10.114 to the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31,
2003 (the "March 2003 10-Q"), and is hereby incorporated herein
by this reference).
10.24 Amendment dated as of March 31st, 2003 to the Amended and
Restated Employment Agreement between I.C. Isaacs & Company, L.P.
and Eugene C. Wielespki (a copy of which was filed as Exhibit
10.115 to the March 2003 10-Q, and is hereby incorporated herein
by this reference).
10.25 Amendment No. 8, dated October 29, 2003 to the Trademark License
and Technical Assistance Agreement for Women's Collections
between Latitude Licensing Corp. and I.C. Isaacs & Company L.P.
(a copy of which was filed with the Commission on November 14,
2003 as Exhibit 10.118 to the Company's Quarterly Report on Form
10-Q for the quarter ended September 30, 2003 (the "September
2003 10-Q"), and is hereby incorporated herein by this
reference).
10.26 Amendment No. 6, dated October 29, 2003 to the Trademark License
and Technical Assistance Agreement dated the 1st day of November
1997 by and between Latitude Licensing Corp. and I.C. Isaacs &
Company L.P. (a copy of which was filed as Exhibit 10.119 to the
September 2003 10-Q, and is hereby incorporated herein by this
reference).
10.27 Amendment dated October 13, 2004 to the Executive Employment
Agreement dated December 9, 2003 by and Between I.C. Isaacs &
Company, L.P. and Peter J. Rizzo (a copy of which was filed with
the Commission as Exhibit 10.120 to the Company's Report on Form
8-K filed on October 22, 2004 (the "October 22, 2004 Form 8-K"),
and is hereby incorporated herein by this reference).
10.28 Executive Employment agreement made as of the 1st day of March
2004, by and between I.C. Isaacs & Company LP and Jesse de la
Rama (a copy of which was filed as Exhibit 10.121 to the October
22, 2004 Form 8-K, and is hereby incorporated herein by this
reference).
10.29 Loan and Security Agreement Dated as of December 30, 2004 by and
between I.C. Isaacs & Company, L.P. and Wachovia Bank, National
Association (a copy of which was filed with the Commission as
Exhibit 10.122 to the Company's Report on Form 8-K filed on
January 6, 2005, and is hereby incorporated herein by this
reference).
10.30 Amendment No. 7, dated December 16, 2004, to the Trademark
License and Technical Assistance Agreement dated the 1st day of
November 1997 by and between Latitude Licensing Corp. and I.C.
Isaacs & Company L.P. (a copy of which was filed with the
Commission on March 31, 2005 as Exhibit 10.123 to the Company's
Annual Report on Form 10-K for the year ended December 31, 2004
(the "2004 10-K"), and is hereby incorporated herein by this
reference).
10.31 Amendment No. 9, dated December 16, 2004, to the Trademark
License and Technical Assistance Agreement for Women's
Collections dated March 4, 1998 by and between Latitude Licensing
Corp. and I.C. Isaacs & Company L.P. (a copy of which was filed
as Exhibit 10.124 to the 2004 10-K, and is hereby incorporated
herein by this reference).
10.32 Assignment of warrant to purchase 300,000 shares of the Company's
common stock dated September 28th, 2004 by Textile Investment
International S.A. to Rockbrook Investments SA., and consented to
on April 13, 2005 by the Company (a copy of which was filed as
Exhibit 99.01 to the S-2 Amendment, and is hereby incorporated
herein by this reference).
10.33 Assignment of warrant to purchase 200,000 shares of the Company's
common stock dated September 28th, 2004 by Textile Investment
International S.A. to Rockbrook Investments SA. , and consented
to on April 13, 2005 by the Company (a copy of which was filed as
Exhibit 99.02 to the S-2 Amendment, and is hereby incorporated
herein by this reference).
10.34 Executive Employment Agreement dated December 19, 2005 between
I.C. Isaacs & Company L.P. and Gregg A. Holst (a copy of which
was filed as Exhibit 10.34 to the Company's Report on Form 8-K
filed on December 29, 2005, and is hereby incorporated herein by
this reference).
10.35 Amendment No. 8, dated March 29, 2006, to the Trademark License
and Technical Assistance Agreement dated the 1st day of November
1997 by and between Latitude Licensing Corp. and I.C. Isaacs &
Company L.P.
10.36 Amendment No. 10, dated March 29, 2006, to the Trademark License
and Technical Assistance Agreement for Women's Collections dated
March 4, 1998 by and between Latitude Licensing Corp. and I.C.
Isaacs & Company L.P.
14.01 Code of Ethics for Senior Financial Executives
14.02 Code of Ethics and Business Conduct
21.01 List of Subsidiaries (a copy of which was filed as Exhibit 21.01
to the S-2 Amendment, and is hereby incorporated herein by this
reference).
23.01 Consent of BDO Seidman, LLP
31.01 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002
31.02 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002
32.01 Certification Pursuant to Section 1350 of chapter 63 of Title 18
of the United States Code