CONVERSION AGREEMENT

This Conversion Agreement (the “Agreement”) is entered into as of the 9^th day of May, 2008, by and between I.C. Isaacs & Company, Inc., a Delaware company (referred to herein as the “Company” or “Borrower”, as the context requires), and Textile Investment International S.A., a Luxembourg company (referred to herein as the “Purchaser” or “Lender”, as the context requires).

WHEREAS, the Borrower and Lender are parties to that certain 8% Amended and Restated Subordinated Secured Promissory Note (the “Note”), dated as of December 30, 2004;

WHERERAS, the principal amount of $2,103,461, remains outstanding under the Note on the date hereof, together with accrued and unpaid interest in the amount of $761,579, as of May 9, 2008 (the “Debt”);

WHEREAS, the Company desires to issue and sell and the Purchaser desires to purchase from the Company, in the aggregate 14,325,200 of newly issued shares of common stock of the Company (the “Common Stock”);

WHEREAS, Purchaser agrees, in consideration for the purchase of the Shares, to forgive in its entirety the Debt under the Note; and

WHEREAS, the parties hereto desire to set forth certain agreements and certain terms and conditions regarding the sale and purchase of the shares of Common Stock and the forgiveness of the Debt under the Note;

NOW, THEREFORE, the parties hereto hereby agree as follows:

Sale and Purchase of Shares; Closing

Section 1.1. Sale and Purchase of Shares; Purchase Price.

(a) Upon the terms and subject to the conditions of this Agreement, the Purchaser agrees to purchase from the Company, and the Company agrees to issue and sell to the Purchaser, on the “Closing Date” (as defined herein), 14,325,200 shares of Common Stock (the “Company Shares”) in consideration for the forgiveness of the Debt under the Note (the “Purchase Price”) pursuant to that certain Debt Forgiveness Agreement (a copy of which is attached as Annex A hereto).

Section 1.2. Closing.

(a) The closing of the transactions under this Agreement (the “Closing”) shall take place at the offices of Kramer Levin Naftalis & Frankel LLP, 1177 Avenue of the Americas, New York, New York 10036, at 10:00 a.m. (NY time) on the date hereof (the “Closing Date”).

Section 1.3.  Deliveries at Closing. At the Closing:

(a) The Company shall deliver to the Purchaser a certificate representing the Company Shares; except that a certificate for 4,675 of the Company Shares deliverable to the Purchaser shall be delivered pursuant to Section 1.4 hereof.

(b) The Purchaser shall deliver to the Company the Debt Forgiveness Agreement.

 

(c) The Company shall provide evidence reasonably satisfactory to the Purchasers that the following agreements have been or will be concurrently herewith entered into (and in the case of (ii) and (iv) below, the transactions thereunder consummated at Closing): (i) that certain notice of election of extension of employment agreement, (ii) that certain stock purchase agreement by and between the Company, Textile Investment International S.A. and the other parties thereto (the “Investor Stock Purchase Agreement”); (iii) that certain investor rights agreement between the Company, the Purchasers and Wurzburg Holding, S.A. (the “IRA”); (iv) that certain stock purchase agreement by and between the Company and Robert. S. Stec and (v) those two certain license amendment agreements to the men’s and women’s collections, respectively (copies of all such agreements which are attached hereto as Annex B, collectively with the Debt Forgiveness Agreement, the “Related Documents”).

(d) The Company shall provide evidence reasonably satisfactory to the Purchasers that the Wachovia consent (consenting to the transactions contemplated by and the terms of this Agreement and the Related Documents and confirming that the Third Amendment to Loan and Security Agreement remains in full force and effect) has been or will be concurrently with the Closing received.

Section 1.4. Additional Share Certificate. The Company shall deliver to the Purchaser within three (3) business days after the date hereof a certificate for the 4,675 Company Shares which were not delivered to the Purchaser at Closing.

 

Representations and Warranties of the Company

The Company, represents and warrants to, and covenants and agrees with the Purchaser as follows:

Section 2.1. Organization and Good Standing. The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware. The Company has no subsidiaries other than I.C. Isaacs & Company L.P. and Isaacs Design, Inc. of which both are operating subsidiaries. The subsidiaries are duly organized, validly existing and in good standing under the laws of the State of Delaware. The Company and each of its subsidiaries have all requisite corporate power or limited partnership power, as the case may be, and authority to own their properties and assets and carry on their businesses as now conducted, and are duly qualified and in good standing as foreign corporations in each jurisdiction in which the location or nature of their property or the character of their businesses make such qualification necessary, except where the failure to be so qualified would not have a material adverse affect, financial or otherwise, on the business, condition, assets, properties, liabilities or results of operations of the Company or its subsidiaries.

Section 2.2. Corporate Power; Authorization; Binding Agreements. The Company has the corporate power and authority to execute and deliver this Agreement and the Related Documents and to perform its obligations hereunder and thereunder. The execution, delivery and performance of this Agreement and the Related Documents, the issuance and sale by the Company of the Company Shares hereunder and the consummation by the Company of the transactions contemplated hereby and by the Related Documents have been duly authorized by all necessary action, corporate or otherwise, on the part of the Company. This Agreement, the Related Documents and the other agreements of the Company required to consummate the transactions contemplated hereunder and thereunder have been duly executed and delivered by, and constitute valid and binding obligations of, the Company and are enforceable in accordance with their terms subject to the qualifications that enforcement of the rights and remedies created hereby is subject to (i) bankruptcy, insolvency, reorganization, moratorium and other laws of general application affecting rights and remedies of creditors, and (ii) general principals of equity (regardless of whether such enforcement is considered in a proceeding in equity or at law).

Section 2.3. Capitalization; Valid Issuance. The authorized capital stock of the Company consists of 50,000,000 shares of Common Stock, of which 13,740,127 shares are issued and 12,563,418 are outstanding on the date hereof, and 5,000,000 shares of Preferred Stock, of which no shares are issued and outstanding on the date hereof. Except as disclosed in the Form 10-K (as defined herein), there are no outstanding or authorized options, warrants, purchase rights, subscription rights, conversion rights, exchange rights, or other contracts or commitments that could require the Company or any subsidiary to issue, sell, or otherwise cause to become outstanding any of its capital stock. The aggregate number of shares of common stock of the Company reserved or required to be reserved by the Company for all such derivative securities, contracts and commitments is 3,250,000. There are no outstanding or authorized stock appreciation, phantom stock, profit participation, or similar rights with respect to the Company. There are no preemptive rights with respect to the issuance or sale of the Company Shares or registration rights. All of the presently outstanding shares of Common Stock have been duly and validly authorized and issued and are fully paid and non-assessable. The Company Shares to be issued hereunder have been duly and validly authorized and, when delivered and paid for pursuant to this Agreement, will be validly issued, fully paid and non-assessable. Assuming the accuracy of the Purchasers’ representations and warranties in Article III, the Company Shares are being offered and sold pursuant to an exemption from the registration requirements of the Securities Act of 1933, as amended (the “Act”). In connection with the offer and sale of the Company Shares, neither the Company, any affiliate of the Company nor any person acting on the Company’s or such affiliates’ behalf has engaged in any form of general solicitation or general advertising, as those terms are used in Rule 502(c) of the Act.

 

 

Section 2.4. Compliance with Other Instruments. The execution, delivery and performance of this Agreement and the Related Documents will not conflict with or, with or without notice or the lapse of time, result in any default or in any modification of (i) any provision of the articles of incorporation or by-laws or comparable organizational instruments of the Company or any subsidiary thereof or (ii) the terms of any contract, agreement, obligation, commitment, license, indenture, mortgage, deed of trust, loan or credit agreement or any other agreement or instrument to which the Company or any subsidiary thereof is a party or any of their assets are bound, or the creation of any lien, charge or encumbrance of any nature upon any of the properties or assets of the Company or any subsidiary thereof. The execution, delivery and performance of this Agreement by the Company will not violate any judgment, decree, statute, rule or regulation of any federal, state or local government or agency having jurisdiction over the Company or any subsidiary thereof or any of their assets.

Section 2.5. Brokerage. No broker, finder, agent or similar intermediary has acted on the Company’s behalf in connection with the transactions contemplated by this Agreement and there are no brokerage commissions, finder’s fees or similar items of compensation payable in connection therewith based on any agreement made by or on behalf of the Company. The Company will indemnify and hold the Purchasers harmless from and against any liability or any expense arising out of any such claim.

Section 2.6.  Consents, etc. No consent, approval, waiver or authorization of or designation, declaration or filing with any governmental or regulatory authority or any other person is required in connection with the valid execution and delivery of this Agreement or the Related Documents, the offer, sale and issuance of the Company Shares or the consummation of the transactions contemplated by this Agreement or the Related Documents, except for filings that may be required to comply with applicable federal and state securities laws.

Section 2.7. No Governmental Proceeding or Litigation. No suit, action, investigation, inquiry or other proceeding by any governmental body or other person or legal or administrative proceeding has been instituted or, to the Company’s knowledge, threatened which questions the validity or legality of the transactions contemplated hereby or by the Related Documents or would reasonably be expected to have a material adverse effect on the Company.

Section 2.8. Special Committee. The transactions contemplated by this Agreement, the IRA and the Investor Stock Purchase Agreement have been unanimously approved by the Special Committee of the Board of Directors. The Special Committee has determined, after receiving and based upon the advice of its financial and legal advisors and after consideration of the Company’s limited options for raising external capital and the impact on the Company’s net operating losses, that the consideration to be paid for the Company Shares pursuant to, and the transactions contemplated by, this Agreement, the IRA and the Investor Stock Purchase Agreement, are fair to and in the best interests of the Company’s stockholders and the transactions contemplated by this Agreement, the IRA and the Investor Purchase Agreement are in the best interests of the Company’s creditors. The foregoing determination is reflected in all material respects in the minutes of the meetings of the Special Committee held on April 29, 2008, May 2, 2008 and May 5, 2008, certified copies of which have been provided to the Purchasers.

 

 

Section 2.9. Form 10-K. The Company’s Annual Report on Form 10-K for the year ended December 31, 2007, in the form delivered to the Purchasers on May 6, 2008 (the “Form 10-K”), has been completed (subject to immaterial non-substantive language changes that might be made prior to filing), except for the Part III information which will be completed prior to May 15, 2008, is in form ready to be filed with the Securities and Exchange Commission (the “SEC”). The Company’s independent registered public accounting firm has confirmed to the Company that such firm’s audit report for the fiscal year ended December 31, 2007 is released to the Company and that such firm will consent to the filing of the Form 10-K with the SEC when the Part III information is inserted. The Form 10-K at the time it is filed will comply as to form in all material respects with the applicable requirements of the Act and the Securities Exchange Act of 1934, as amended, as the case may be, the Sarbanes-Oxley Act and the rules and regulations of the SEC thereunder applicable to such Company SEC reports. The Form 10-K does not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements in such Form 10-K, in the light of the circumstances under which they were made, not misleading.

Section 2.10. Financial Statements. Each of the consolidated financial statements (including, in each case, any related notes and schedules) contained in the Form 10-K (i) complies as to form in all material respects with applicable accounting requirements and the published rules and regulations of the SEC with respect thereto and (ii) were prepared in accordance with United States generally accepted accounting principles (“GAAP”) applied on a consistent basis throughout the periods involved (except as may be indicated in the notes to such financial statements). The consolidated balance sheets (including, in each case, any related notes and schedules) contained in the Form 10-K fairly presents in all material respects the consolidated financial position of the Company and its subsidiaries as of the dates indicated and each of the consolidated statements of income and of changes in financial position contained in the Form 10-K (including, in each case, any related notes and schedules) fairly presents in all material respects the consolidated results of operations, retained earnings and changes in financial position, as the case may be, of the Company and its subsidiaries for the periods set forth therein.

Section 2.11. Loan Agreement; No Default. There are no outstanding Defaults or Events of Default (as such terms are defined in the Loan Agreement) under that certain Loan and Security Agreement dated December 30, 2004 (as amended or otherwise modified from time to time, including but not limited to the Third Amendment thereto, the “Loan Agreement”) by and among I.C. Isaacs & Company, L.P., as borrower, the Company and Isaacs Design, Inc., as guarantors, and Wachovia.

Section 2.12. Royalty Deferrals. There are no deferred royalty payments (or interest thereon) owing under the men’s or women’s license agreements between the Company or its subsidiaries and Latitude Licensing Corp. other than the four months of 2008 royalty payments being deferred pursuant to the license amendments which are a part of the Related Documents.

Representations and Warranties of the Purchaser

The Purchaser represents and warrants to, and covenants and agrees with the Company as follows:

Section 3.1. Authorization; Power; Binding Agreements. The execution, delivery and performance of this Agreement has been duly authorized by all necessary action of the Purchaser. The Purchaser has the full right, power and authority to enter into this Agreement. This Agreement constitutes the valid and binding obligation of the Purchaser, enforceable in accordance with its terms subject to the qualifications that enforcement of the rights and remedies hereby is subject to (i) bankruptcy, insolvency, reorganization, moratorium and other laws of general application affecting rights and remedies of creditors, and (ii) general principles of equity (regardless of whether such enforcement is considered in a proceeding in equity or at law).

Section 3.2. Purchase for Investment. The Purchaser is purchasing the Company Shares for its own account, for investment purposes and not with a view to, or for resale in connection with, any distribution or public offering thereof within the meaning of the Act.

Section 3.3. Unregistered Securities; Legend. The Purchaser understands that the securities to be acquired by it pursuant to this Agreement have not been registered under the Act, and will be issued in reliance upon an exemption from the registration requirements thereof. The Purchaser acknowledge that the certificate issued representing the Company Shares shall bear a restrictive legend substantially as follows:

“The securities represented by this certificate have not been registered under the Securities Act of 1933, as amended, or any applicable state securities laws and may not be offered for sale, sold, transferred or conveyed without registration or an opinion of counsel in form and substance satisfactory to the Company to the effect that such registration is not required.”

Section 3.4. Access to Data; Experience; Accredited Investor. The Purchaser has had an opportunity to discuss the Company’s business plans with the management of the Company, and to ask questions of officers of the Company and to make an independent assessment of its investment in the Company Shares. The Purchaser has substantial experience in evaluating and investing in a nonliquid investment such as the Company Shares and is capable of evaluating the merits and risks of its investment in the Company. The Purchaser is an accredited investor as that term is defined in Rule 501 of Regulation D under the Act, and understands that the offer and sale of the Company Shares has been and is being made in reliance upon an exemption from registration under the Act. The Purchaser is able to withstand the loss of its entire investment.

Section 3.5. Brokerage. No broker, finder, agent or similar intermediary has acted on the Purchaser’s behalf in connection with the transactions contemplated by this Agreement and there are no brokerage commissions, finder’s fees or similar items of compensation in connection therewith based on any arrangement or agreement made by or on behalf of the Purchaser. The Purchaser will indemnify and hold the Company harmless against any liability or expense arising out of any such claim.

 

 

Section 3.6. Organization and Good Standing. The Purchaser is a corporation duly organized, validly existing and in good standing under the laws of Luxembourg and has all requisite corporate power and authority to carry on its business as now conducted.

Section 3.7. Corporate Power; Authorization. The Purchaser has the corporate power and authority to execute and deliver this Agreement and to perform fully its obligations hereunder. The execution, delivery and performance of this Agreement and the consummation of the transactions contemplated hereby have been duly authorized by all necessary action on the part of the Purchaser.

Section 3.8. No Conflicts or Violations. The execution, delivery and performance of this Agreement will not conflict with or, with or without notice or the lapse of time, result in any material default or in any material modification of (i) any provision of the certificate of incorporation or by-laws of the Purchaser or (ii) the terms of any contract, agreement, obligation, commitment, license, indenture, mortgage, deed of trust, loan or credit agreement or any other agreement or instrument to which the Purchaser is a party or any of its assets are bound, or the creation of any lien, charge or encumbrance of any nature upon any of the properties or assets of the Purchaser. The execution, delivery and performance of this Agreement by the Purchaser will not violate any judgment, decree, statute, rule or regulation of any federal, state or local government or agency having jurisdiction over the Purchaser or its assets.

 

Miscellaneous

Section 4.1. Survival of Representations. The representations, warranties, covenants and agreements made herein or in any certificates or documents executed in connection herewith shall survive the execution and delivery hereof and thereof and the acquisition by the Purchaser of the Company Shares for a period of 36 months following the Closing.

Section 4.2. Parties in Interest. All agreements, representations and warranties contained in this Agreement by and on behalf of any of the parties hereto shall bind and inure to the benefit of the respective successors and assigns of the parties hereto, whether so expressed or not.

Section 4.3. Entire Agreement; Amendments and Waivers. This Agreement (including Annex A) and the Related Documents contain the entire agreement among the parties with respect to the transactions contemplated hereby and thereby, and supersede all prior agreements, written or oral, with respect thereto. Changes in or additions to this Agreement may be made only upon written consent of the Company and the Purchaser.

 

 

Section 4.4. Governing Law. This Agreement and the rights and obligations of the parties hereunder are to be governed and construed in accordance with the laws of the State of New York, without regard to conflicts of law principles.

Section 4.5. Notices. Any notice or other communication required or permitted hereunder shall be in writing and shall be delivered personally or sent by electronic mail or facsimile transmission, overnight courier, or certified, registered or express mail, postage prepaid. Any such notice shall be deemed given when so delivered personally or sent by electronic mail or facsimile transmission during normal business hours of the recipient, and if not sent during normal business hours, then on the recipient’s next business day, one day after deposit with an overnight courier, or if mailed, five (5) days after the date of deposit in the mails, as follows:

if to the Purchaser, to:

Textile Investment International S.A.

41, Avenue de la Gare

Luxembourg L-1611

Grand Duchy of Luxembourg

Fax: 001 ###-###-#### 4747

Attention: Rene Faltz, Managing Director

with a copy to:

Friedman Kaplan Seiler & Adelman LLP

1633 Broadway

New York, New York 10019

Fax: (212) 833-1250

Attention: Barry A. Adelman, Esq.

if to the Company, to:

I.C. Isaacs & Company, Inc.

475 10^th Avenue, 9^th Floor

New York, New York 10018

Fax: ____________________

Attention: Robert S. Stec

with a copy to:

Kramer Levin Naftalis & Frankel LLP

1177 Avenue of the Americas

New York, New York 10036

Fax: (212) 750-8000

Attention: Terrence L. Shen, Esq.

 

 

Any party may by notice given in accordance with this section to the other parties designate another address or person for receipt of notices hereunder.

Section 4.6. Counterparts. This Agreement may be executed in multiple counterparts and by facsimile, each of which when so executed and delivered shall be an original, but all of such counterparts shall together constitute one and the same instrument.

Section 4.7. Effect of Headings. The section and paragraph headings herein are for convenience only and shall not affect the construction hereof.

Section 4.8. Severability. This Agreement shall be deemed severable, and the invalidity or unenforceability of any term or provision hereof shall not affect the validity or enforceability of this Agreement or of any other term or provisions hereof. Furthermore, in lieu of any such invalid or unenforceable term or provision, the parties hereto intend that there shall be added as a part of this Agreement a provision as similar in terms to such invalid or unenforceable provisions as may be possible and be valid and enforceable.

 

 

IN WITNESS WHEREOF, this Agreement has been executed by the parties hereto as of the date first set forth above.

 

 

[Signature Page to Conversion Agreement]