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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
(Mark One)
X
- -------------- QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2003
or
- -------------- TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____ to ____
Commission file number: 0-23379
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I.C. ISAACS & COMPANY, INC.
(Exact name of Registrant as specified in its Charter)
DELAWARE 52-1377061
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3840 BANK STREET 21224-2522
BALTIMORE, MARYLAND (Zip Code)
(Address of principal executive offices)
(410) 342-8200
(Registrant's telephone number, including area code)
NONE
(Former name, former address and former
fiscal year-if changed since last report)
---------------------
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark whether the Registrant is an accelerated filer
(as defined in Rule 12b-2 of the Act). Yes |_| No |X|
As of May 14, 2003, 11,134,657 shares of common stock, par value $.0001
per share, ("Common Stock") of the Registrant were outstanding.
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PART I--FINANCIAL INFORMATION
I.C. Isaacs & Company, Inc.
Consolidated Balance Sheets
Item 1. Financial Statements.
December 31, March 31,
2002 2003
(Unaudited)
---------------- -----------------
Assets
Current
Cash, including temporary investments of $82,000 and $163,000................ $ 600,997 $ 1,178,815
Accounts receivable, less allowance for doubtful accounts of $245,000 and
$200,000.................................................................. 8,318,693 11,390,241
Inventories (Note 1)......................................................... 6,443,574 4,289,619
Prepaid expenses and other................................................... 206,933 439,028
---------- -----------
Total current assets...................................................... 15,570,197 17,297,703
Property, plant and equipment, at cost, less accumulated depreciation and
amortization................................................................. 1,780,871 1,679,335
Trademark and licenses, less accumulated amortization of $1,295,122 and
$1,350,000................................................................... 54,878 --
Other assets.................................................................... 5,042,204 4,966,885
---------- -----------
$ 22,448,150 $ 23,943,923
=========== ===========
Liabilities And Stockholders' Equity
Current
Checks issued against future deposits........................................ $ 626,082 $ 224,873
Current maturities of revolving line of credit (Note 2)..................... 5,030,453 7,613,470
Current maturities of long-term debt (Note 2)................................ 767,372 1,070,274
Accounts payable............................................................. 907,520 862,596
Accrued expenses and other current liabilities (Note 3)...................... 2,084,449 2,084,963
---------- -----------
Total current liabilities................................................. 9,415,876 11,856,176
---------- -----------
Long-term debt (Note 2)......................................................... 5,790,536 5,487,634
Commitments and Contingencies (Note 7)
Stockholders' Equity (Note 6)
Preferred stock; $.0001 par value; 5,000,000 shares authorized, none
outstanding............................................................... -- --
Common stock; $.0001 par value; 50,000,000 shares authorized, 12,311,366
shares issued; 11,134,657 shares outstanding.............................. 1,231 1,231
Additional paid-in capital................................................... 43,658,853 43,658,853
Accumulated deficit.......................................................... (34,095,475) (34,737,100)
Treasury stock, at cost (1,176,709 shares)................................... (2,322,871) (2,322,871)
---------- -----------
Total stockholders' equity................................................ 7,241,738 6,600,113
---------- -----------
$22,448,150 $23,943,923
=========== ===========
See accompanying notes to consolidated financial statements.
2
I.C. Isaacs & Company, Inc.
Consolidated Statements of Operations (Unaudited)
Three Months Ended
March 31,
2002 2003
------------ ------------
Net sales...................................................................... $ 20,156,508 $ 16,543,702
Cost of sales.................................................................. 11,686,262 11,872,806
------------ ------------
Gross profit................................................................... 8,470,246 4,670,896
------------ ------------
Operating Expenses
Selling..................................................................... 2,992,880 2,457,578
License fees................................................................ 1,443,042 927,563
Distribution and shipping................................................... 700,952 596,573
General and administrative.................................................. 1,525,841 1,156,709
------------ ------------
Total operating expenses....................................................... 6,662,715 5,138,423
------------ ------------
Operating income (loss)........................................................ 1,807,531 (467,527)
------------ ------------
Other income (expense)
Interest, net of interest income............................................ (171,371) (229,783)
Other, net.................................................................. 6,147 55,685
------------ ------------
Total other income (expense)................................................... (165,224) (174,098)
------------ ------------
Net income (loss).............................................................. $ 1,642,307 $ (641,625)
============ ============
Basic earnings (loss) per share................................................ $ 0.21 $ (0.06)
Weighted average shares outstanding............................................ 7,834,657 11,134,657
Diluted earnings (loss) per share.............................................. $ 0.21 $ (0.06)
Weighted average shares outstanding............................................ 7,844,657 11,134,657
See accompanying notes to consolidated financial statements.
3
I.C. Isaacs & Company, Inc.
Consolidated Statements of Cash Flows (Unaudited)
Three Months Ended
March 31,
----------------------------------
2002 2003
Operating Activities
Net income (loss)......................................................... $ 1,642,307 $ (641,625)
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities
Provision for doubtful accounts.............................................. 105,349 30,731
Write off of accounts receivable............................................. (123,349) (74,795)
Provision for sales returns and discounts.................................... 809,871 945,257
Sales returns and discounts.................................................. (863,871) (980,257)
Depreciation and amortization................................................ 364,755 211,724
Loss on sale of assets....................................................... 40,705 --
(Increase) decrease in assets
Accounts receivable.......................................................... (1,984,417) (2,992,484)
Inventories.................................................................. 471,576 2,153,955
Prepaid expenses and other................................................... 44,207 (232,095)
Other assets................................................................. (217,250) 36,569
Increase (decrease) in liabilities
Accounts payable............................................................. (432,173) (44,924)
Accrued expenses and other current liabilities............................... 269,539 514
----------- -----------
Cash provided by (used in) operating activities................................. 127,249 (1,587,430)
----------- -----------
Investing Activities
Capital expenditures......................................................... (19,346) (16,560)
----------- -----------
Cash used in investing activities............................................... (19,346) (16,560)
----------- -----------
Financing Activities
Checks issued against future deposits........................................ (156,878) (401,209)
Net borrowings on revolving line of credit................................... -- 2,583,017
Principal payments on long-term debt......................................... (283,179) --
----------- -----------
Cash (used in) provided by financing activities................................. (440,057) 2,181,808
----------- -----------
(Decrease) increase in cash and cash equivalents............................... (332,154) 577,818
Cash and Cash Equivalents, at beginning of period............................... 826,812 600,997
----------- -----------
Cash and Cash Equivalents, at end of period..................................... $ 494,658 $ 1,178,815
=========== ===========
See accompanying notes to consolidated financial statements.
4
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 2002 or thus far in 2003. All intercompany balances and transactions
have been eliminated.
Business Description
The Company, which operates in one business segment, designs and
markets a full collection of men's and women's jeanswear and sportswear under
the Marithe and Francois Girbaud brand names and trademarks in the United States
and Puerto Rico. The Marithe and Francois Girbaud brand is an internationally
recognized designer label with a distinct European influence. The Company has
positioned the Girbaud line with a broad assortment of products, styles and
fabrications reflecting a contemporary look.
Interim Financial Information
In the opinion of management, the interim financial information as of
March 31, 2003 and for the three months ended March 31, 2002 and 2003 contains
all adjustments, consisting only of normal recurring adjustments, necessary for
a fair presentation of the results for such periods. Results for interim periods
are not necessarily indicative of results to be expected for an entire year.
The accompanying consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Certain information and footnote disclosures normally included
in the consolidated financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to such
rules and regulations. These consolidated financial statements should be read in
conjunction with the consolidated financial statements, and the notes thereto,
included in the Company's Annual Report on Form 10-K for the year ended December
31, 2002.
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. 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 of 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 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.
5
Use of Estimates
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make certain estimates and
assumptions, particularly regarding valuation of accounts receivable and
inventory, recognition of liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements. Actual results could differ
from those estimates.
Concentration of Credit Risk
Financial instruments which potentially expose the Company to
concentrations of credit risk consist primarily of trade accounts receivable.
The Company's customer base is not concentrated in any specific geographic
region, but is concentrated in the retail industry. For the three months ended
March 31, 2003, sales to one customer accounted for 12.5% of total sales. For
the three months ended March 31, 2002, sales to no one customer accounted for
more than 10.0% of net sales. 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 is also subject to concentrations of credit risk with
respect to its cash and cash equivalents, which it minimizes by placing these
funds with high-quality institutions. The Company is exposed to credit losses in
the event of nonperformance by the counterparties to the letter of credit
agreements, but it does not expect any of these financial institutions to fail
to meet their obligations given their high credit ratings.
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.
Income Taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes ("SFAS
109"). Under SFAS 109, deferred taxes are determined using the liability method,
which requires the recognition of deferred tax assets and liabilities based on
differences between financial statement and income tax basis using presently
enacted tax rates. The Company has estimated its annual effective tax rate at 0%
based on its estimate of the utilization of existing net operating loss
carryforwards to offset any pre-tax income it may generate.
Earnings (Loss) Per Share
Earnings (loss) per share is based on the weighted average number of
shares of common stock and dilutive common stock equivalents outstanding. Basic
earnings (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. Diluted earnings per share reflects the
potential dilution of securities that could share in the earnings of an entity.
Basic and diluted earning per share are the same for the three months ended
March 31, 2002 because the impact of dilutive securities was not significant.
Basic and diluted loss per share are the same for the three months ended March
31, 2003 because the impact of dilutive securities would be antidilutive. There
were outstanding options to purchase 1,086,250 and 1,556,250 shares of common
stock at
6
March 31, 2002 and 2003, respectively.
Recent Accounting Pronouncements
In June 2002, the FASB issued Statement No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities". The standard requires companies to
recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of commitment to an exit or disposal plan.
Examples of costs covered by the standard include lease termination cost and
certain employee severance costs that are associated with a restructuring,
discontinued operation, plant closing, or other exit or disposal activity.
Previous accounting guidance provided by EITF Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)" is replaced by
this Statement. Statement 146 is to be applied prospectively to exit or disposal
activities initiated after December 31, 2002. The Company adopted this Statement
on January 1, 2003 and the adoption had no effect on the Company's financial
statements for the period ended March 31, 2003.
7
I.C. Isaacs & Company, Inc.
Notes to Consolidated Financial Statements (Unaudited)
1. Inventories
December 31, March 31,
---------------- -----------------
Inventories consist of the following: 2002 2003
Raw Materials....................................................... $ 1,418,225 $ 617,266
Work-in-process..................................................... 545,660 358,994
Finished Goods...................................................... 4,479,689 3,313,359
----------- -----------
$ 6,443,574 $ 4,289,619
=========== ===========
2. Long-term Debt
The Company has an asset-based revolving line of credit (the "Credit
Agreement") with Congress Financial Corporation ("Congress"). In December 2002
and again in March 2003, the Credit Agreement was amended to extend the term
through December 31, 2004. The amended Credit Agreement provides that the
Company may borrow up to 80.0% of net eligible accounts receivable and a portion
of inventory, as defined in the Credit Agreement. Borrowings under the Credit
Agreement may not exceed $20.0 million including outstanding letters of credit
which are limited to $6.0 million from May 1 to September 30 of each year and
$4.0 million for the remainder of each year, and bear interest at the lender's
prime rate of interest plus 2.0% (effectively 6.25% at March 31, 2003).
Outstanding letters of credit approximated $1.3 million at March 31, 2003. In
connection with amending the Credit Agreement in December 2002, the Company paid
Congress a financing fee of $250,000, one half of which was paid at the time of
closing and the other half of which was paid in February 2003. This financing
fee is being amortized over 24 months beginning January 2003. In connection with
amending the Credit Agreement in March 2003 to amend the restrictive covenants,
the Company paid an additional $75,000. This financing fee will be amortized
over the remaining months of fiscal 2003. Under the terms of the Credit
Agreement the Company is required to maintain minimum levels of working capital
and tangible net worth. There can be no assurance that the Company will continue
to comply with these covenants during the remainder of 2003 or thereafter.
On May 6, 2002, Textile Investment International S.A. ("Textile"), an
affiliate of the licensor to the Company of the Girbaud brand, acquired a note
payable issued by the Company from a former licensor. On May 21, 2002, Textile
exchanged this note for an amended and restated note (the "Replacement Note"),
which deferred the original note's principal payments and extended the maturity
date until 2007. The Replacement Note is subordinated to the rights of Congress
under the Agreement. Due to certain availability requirements of the Credit
Agreement not being met, the December 2002 and March 2003 Replacement Note
payments have not been made.
8
3. Accrued Expenses
December 31, March 31,
Accrued expenses consist of the following: 2002 2003
------------ -----------
Royalties $ 375,000 $ 802,563
Accrued interest 194,687 325,539
Severance benefits 426,022 302,403
Accrued professional fees 197,000 138,752
Sales commissions payable 12,283 124,438
Accrued compensation 115,624 111,964
Customer credit balances 85,265 108,911
Payroll tax withholdings 52,605 90,115
Selling bonuses 313,808 21,587
Property taxes 46,155 20,000
Other 21,000 38,691
Financing fees 125,000 --
Insurance premium payable 120,000 --
----------- ----------
$ 2,084,449 $ 2,084,963
=========== ===========
4. Income Taxes
The Company has estimated its annual effective tax rate at 0% based on
its estimate of the utilization of existing net operating loss carryforwards to
offset any pre-tax income it may generate. The Company has net operating losses
of approximately $45,805,000 which begin to expire in 2013.
5. Earnings (Loss) Per Share
Earnings (loss) per share is based on the weighted average number of
shares of common stock and dilutive common stock equivalents outstanding. Basic
earnings (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. Diluted earnings (loss) per share reflects
the potential dilution of securities that could share in the earnings (loss) of
an entity. The following table presents a reconciliation between the weighted
average shares outstanding for basic and diluted loss per share for the three
months ended March 31, 2002. Basic and diluted earnings per share are the same
for the three months ended March 31, 2003 because the impact of dilutive
securities was not significant.
Per Share
Three Months Ended March 31, 2002: Net Income Shares Amount
Basic earnings per share: ---------- ------ ---------
Net income attributable to common shareholders................ $ 1,642,307 7,834,657 $0.21
Effect of dilutive options.................................... 10,000
Dilutive earnings per share................................... $ 1,642,307 7,844,657 $0.21
6. Stock Options
In May 1997, the Company adopted the 1997 Omnibus Stock Plan. Under the
1997 Omnibus Stock Plan, the Company may grant qualified and nonqualified stock
options, stock appreciation rights, restricted stock or performance awards,
payable in cash or shares of common stock, to selected employees. The Company
has reserved 1,600,000 shares of common stock for issuance under the 1997
Omnibus Stock Plan, as amended. Based on the terms of the option agreement, the
options vest at the end of the first, second or third year and expire either 5
or 10 years from the date of grant or upon termination of employment. In the
first three months of 2003, options to purchase 275,000 shares of common stock
were granted. There was no stock option activity in the first three months of
2002. There were outstanding options to purchase 1,086,250 and 1,556,250 shares
of common stock at March 31, 2002 and 2003, respectively.
9
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock Based
Compensation" ("SFAS 123"), but applies the intrinsic value method set forth in
Accounting Principles Board Opinion No. 25. For stock options granted to
employees in the first quarter of 2003, the Company has estimated the fair value
of each option granted using the Black-Scholes option-pricing model with the
following assumptions: risk-free interest rate of 2.91% and 2.78% for 25,000 and
250,000 options granted at February 15, 2003 and March 31, 2003, respectively,
expected volatility of 75%, expected option life of 5 years and no dividend
payment expected for 2003. Using these assumptions, the fair value of the stock
options granted in 2003 is $0.42 per stock option.
If the Company had elected to recognize compensation expense based on
the fair value at the grant dates, consistent with the method prescribed by SFAS
No. 123, net income per share would have been changed to the pro forma amount
indicated below:
Three Months Ended March 31,
---------------------------
2002 2003
----------- -----------
Net income (loss) attributable to common stockholders, as reported $ 1,642,307 $ (641,625)
Less: Total stock based employee compensation expense determined
under the fair value based method for all awards (5,083) (15,274)
----------- -----------
Pro forma net income (loss) attributable to common stockholders $ 1,637,224 $ (656,899)
=========== ===========
Basic and diluted net income (loss) per common share, as reported $ 0.21 $ (0.06)
Basic and diluted net income (loss) per common share, pro forma $ 0.21 $ (0.06)
7. Commitments and Contingencies
The Company has entered into an exclusive license agreement with
Latitude Licensing Corp. (the "Licensor"), 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. In June 2002, the Company notified Latitude of its
intention to extend the agreement through 2007. 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 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
$3,000,000 through 2007. In February 2003, Latitude and the Company agreed to
defer the December 2002 and January 2003 royalty payments of $250,000 each to
October and November 2003, respectively. 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.
The Company has entered into an exclusive license agreement with
Latitude Licensing Corp, to manufacture and market women's jeanswear, casual
wear, and active influenced sportswear under the Girbaud brand and certain
related trademarks in the United States, Puerto Rico, and the U.S. Virgin
Islands. In June 2002, the Company notified Latitude of its intention to extend
the agreement through 2007. 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 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. In February 2003, Latitude and the Company agreed to defer the
December 2002 and January 2003 royalty payments of $125,000 each to October and
November 2003 respectively and to reduce the 2003 minimum guaranteed royalty
payments by $450,000 to $1,050,000. 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. 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.
10
Total license fees on Girbaud sportswear sales amounted to $1,443,042
and $927,563 for the three months ended March 31, 2002 and 2003, respectively.
The Company is party to employment agreements with executive officers
and other key employees which provide for specific levels of compensation and
certain other benefits including severance provisions.
The Company has the following contractual obligations as of March 31,
2003:
Schedule of certain contractual obligations: Payments Due By Period
----------------------------------------------------------------
Total Current 1-3 years 4-5 years After 5 years
----------------- -------------- ---------------- -------------- --------------
Girbaud license obligations * $ 21,925,000 $ 5,050,000 $ 9,000,000 $ 7,875,000 --
Employment agreements 3,645,000 1,335,000 2,310,000 -- --
Consulting obligations * 1,575,000 450,000 600,000 525,000 --
----------------- -------------- ---------------- -------------- --------------
Total contractual obligations $ 27,145,000 $ 6,835,000 $11,910,000 $ 8,400,000 --
================= ============== ================ ============== ==============
(*) Adjusted to account for the deferrals, reductions and waivers of the
Consultants' Fees and royalty obligations mentioned above.
11
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Important Information Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q 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 indications regarding the intent, belief or current expectations of the
Company and its management, including the Company's plans with respect to the
sourcing, manufacturing, marketing and distribution of its products, the
strength of the Company's backlog, the belief that current levels of cash and
cash equivalents together with cash from operations and existing credit
facilities will be sufficient to meet its working capital requirements for the
next twelve months, its expectations with respect to the performance of the
counterparties to its letter of credit agreements, its plans to invest in
derivative instruments and the collection of accounts receivable, its beliefs
and intent with respect to and the effect of changes in financial accounting
rules on its financial statements. Such statements are subject to a variety of
risks and uncertainties, many of which are beyond the Company's control, which
could cause actual results to differ materially from those contemplated in such
forward-looking statements, including in particular the risks and uncertainties
described under "Risk Factors" in the Company's Prospectus which include, among
other things, (i) changes in the marketplace for the Company's products,
including customer tastes, (ii) the introduction of new products or pricing
changes by the Company's competitors, (iii) changes in the economy, (iv) the
risk that the backlog of orders may not be indicative of eventual actual
shipments, and (v) termination of one or more of its agreements for use of the
Girbaud brand names and images in the manufacture and sale of the Company's
products. Existing and prospective investors are cautioned not to place undue
reliance on these forward-looking statements, which speak only as of the date
hereof. The Company undertakes no obligation to update or revise the information
contained in this Quarterly Report on Form 10-Q, whether as a result of new
information, future events or circumstances or otherwise.
"I.C. Isaacs " is a trademark of the Company. All other trademarks or
service marks, including "Girbaud " and "Marithe and Francois Girbaud "
(collectively, "Girbaud"), " appearing in this Form 10-Q are the property of
their respective owners and are not the property of the Company.
Significant Accounting Policies and Estimates
The Company's significant accounting policies are more fully described
in its Summary of Accounting Policies to the Company's consolidated financial
statements. The preparation of financial statements in conformity with
accounting principles generally accepted within 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 judgements 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 judgement 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 judgement by the management of
the Company. Actual uncollectible amounts may differ from the Company's
estimate.
The Company estimates inventory markdowns based on customer orders sold
below cost, to be shipped in the following period and on the amount of similar
unsold inventory at period end. The Company
12
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 judgement by the management
of the Company. Actual gross margins on sales of excess inventory may differ
from the Company's estimate.
Results of Operations
The following table sets forth, for the periods indicated, the
percentage relationship to net sales of certain items in the Company's
consolidated financial statements for the periods indicated.
Three Months
Ended March 31,
2003 2002
------ -------
Net sales............................................................................... 100.0% 100.0%
Cost of sales........................................................................... 72.1 58.0
------ ------
Gross profit............................................................................ 27.9 42.0
Selling expenses........................................................................ 15.2 14.8
License fees............................................................................ 5.5 7.3
Distribution and shipping expenses...................................................... 3.6 3.4
General and administrative expenses..................................................... 7.3 7.5
Operating income (loss)................................................................. (3.0)% 9.0%
======= ======
Three Months Ended March 31, 2003 Compared to Three Months Ended March 31, 2002
Net Sales.
Net sales decreased 18.3% to $16.5 million in the three months ended
March 31, 2003 from $20.2 million in the three months ended March 31, 2002 The
Company believes that the decrease was due to the sluggish retail environment
and the late presentation of the 2003 spring line. Net sales of the Girbaud
men's product line decreased $2.8 million, or 16.2% to $14.5 million while the
Girbaud women's product line decreased $0.8 million, or 28.6% to $2.0 million
Gross Profit.
Gross profit decreased 44.7% to $4.7 million in the three months ended
March 31, 2003 from $8.5 million in the three months ended March 31, 2002. Gross
profit as a percentage of net sales decreased from 42.0% to 27.9% over the same
period. The decrease in gross profit is a result of lower sales volumes and
sales of goods to off-price retailers at substantially reduced gross profit
margins.
Operating Expenses
Operating expenses decreased 23.9% to $5.1 million in the three months
ended March 31, 2003 from $6.7 million in the three months ended March 31, 2002.
As a percentage of net sales, operating expenses decreased to 30.9% from 33.2%
over the same period due to overall reduced operating expenses. Selling expenses
decreased primarily as a result of commissions earned on lower net sales,
reduced selling bonuses and reduced advertising expenses. Advertising
expenditures decreased $0.1 million to $0.1 million from $0.2 million in the
first quarter of 2003 compared to the first quarter of 2002. The Company is
required to spend the greater of an amount equal to 3% of Girbaud net sales or
$900,000 in advertising and related expenses promoting the Girbaud brand
13
products in each year through the term of the Girbaud agreements. License fees
decreased $0.5 million to $0.9 million in the three months ended March 31, 2003
from $1.4 million in the three months ended March 31, 2002. As a percentage of
net sales, license fees decreased to 5.5% from 6.9%. The decrease in license
fees as a percentage of net sales is primarily due to the decrease in net sales
levels and a reduction of the 2003 minimum guaranteed annual royalty payments
associated with the women's Girbaud product offering. See Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources - Credit Facilities. Distribution and shipping
decreased 14.3% to $0.6 million in the three months ended March 31, 2003 from
$0.7 million in the three months ended March 31, 2002. The decrease is a result
of reduced personnel costs associated with lower net sales. General and
administrative expenses decreased 20.0% to $1.2 million in the three months
ended March 31, 2003 from $1.5 million in the three months ended March 31, 2002.
The decrease is attributable to a decrease in personnel costs and professional
fees for the three months ended March 31, 2003.
Operating Income (Loss).
Operating income decreased $2.3 million to an operating loss of $0.5
million in the three months ended March 31, 2003 from operating income of $1.8
million in the three months ended March 31, 2002. The deterioration is due to
lower gross profit margins on lower net sales partially offset by a reduction of
S,G&A expenses.
Interest Expense.
Interest expense remained unchanged at $0.2 million in the three months
ended March 31, 2003 and 2002.
Income Taxes.
The Company has estimated its annual effective tax rate at 0% based on
its estimate of pre-tax income for 2003. Also, the Company has net operating
loss carryforwards of approximately $45.8 million, which begin to expire in
2013, for income tax reporting purposes for which no income tax benefit has been
recorded due to the uncertainty over the level of future taxable income.
Liquidity and Capital Resources
The Company has relied primarily on asset-based borrowings, internally
generated funds and trade credit to finance its operations. The Company's
capital requirements primarily result from working capital needed to support
increases in inventory and accounts receivable. The Company's working capital
decreased significantly during the first three months of 2003 compared to the
first three months of 2002, primarily due to a cumulative net loss of $7.2
million over the four quarters ended March 31, 2003. As of March 31, 2003, the
Company had cash and cash equivalents, including temporary investments, of $1.2
million and working capital of $5.4 million compared to $0.5 million and $12.7
million, respectively, as of March 31, 2002.
Operating Cash Flow
Cash used in operations totaled $1.6 million for the first three months
of 2003, compared with cash provided by operations of $0.1 million for the same
period of 2002. This is primarily due to the net loss of $0.6 million and
increases in accounts receivable, prepaid and other expenses and a decrease in
accounts payable partially offset by a decreases in inventory. Cash used for
investing activities was insignificant for the first three months of 2003. Cash
provided by financing activities totaled $2.2 million for the first three months
of 2003, resulting primarily from borrowings on the Company's revolving line of
credit offset by a decrease in checks issued against future deposits.
Accounts receivable increased $3.0 million from December 31, 2002 to
March 31, 2003 compared to an increase of $2.0 million from December 31, 2001 to
March 31, 2002. Inventory decreased $2.2 million from December 31, 2002 to March
14
31, 2003 compared to a decrease of $0.5 million from December 31, 2001 to March
31, 2002. Capital expenditures were insignificant for the first three months of
2003 and 2002.
Credit Facilities
The Company has an asset-based revolving line of credit (the "Credit
Agreement") with Congress Financial Corporation ("Congress"). In December 2002
and again in March 2003, the Credit Agreement was amended to extend the term
through December 31, 2004. The amended Credit Agreement provides that the
Company may borrow up to 80.0% of net eligible accounts receivable and a portion
of inventory, as defined in the Credit Agreement. Borrowings under the Credit
Agreement may not exceed $20.0 million including outstanding letters of credit
which are limited to $6.0 million from May 1 to September 30 of each year and
$4.0 million for the remainder of each year, and bear interest at the lender's
prime rate of interest plus 2.0% (effectively 6.25% at March 31, 2003).
Outstanding letters of credit approximated $1.3 million at March 31, 2003. In
connection with amending the Credit Agreement in December 2002, the Company paid
Congress a financing fee of $250,000, one half of which was paid at the time of
closing and the other half of which was paid in February 2003. This financing
fee is being amortized over 24 months beginning January 2003. Under the terms of
the Credit Agreement the Company is required to maintain minimum levels of
working capital and tangible net worth. There can be no assurance that the
Company will continue to comply with these covenants during the remainder of
2003 or thereafter.
In connection with amending the Credit Agreement in February 2003, the
Licensor and the Company agreed to:
- - defer the December 2002 and January 2003 royalty payments of $250,000 each
under the Girbaud Men's Agreement to October and November 2003
respectively;
- - defer the December 2002 royalty payment of $125,000 under the Girbaud
Women's Agreement to October 2003;
- - reduce the 2003 minimum guaranteed annual royalty payments by $450,000 to
$1,050,000 by paying $25,000 each in of the months of April and May, 2003;
$125,000 in each of the months of June, July, August, September, October
and December, 2003; and $250,000 in November 2003;
- - defer payment of approximately $94,000 of Consultants' Fees which became
due in December 2002 under the Girbaud Men's and Women's Agreements and pay
$30,000 of that amount in February 2003 and the balance in August 2003; and
- - reduce the Consultants' Fees payable in 2003 from $300,000 to $100,000 and
waive payment of approximately $97,000 that the Company owed for samples
provided by Girbaud.
The Company extends credit to its customers. Accordingly, the Company
may have significant risk in collecting accounts receivable from its customers.
The Company has credit policies and procedures which it uses to minimize
exposure to credit losses. The Company's collection personnel regularly contact
customers with receivable balances outstanding beyond 30 days to expedite
collection. If these collection efforts are unsuccessful, the Company may
discontinue merchandise shipments until the outstanding balance is paid.
Ultimately, the Company may engage an outside collection organization to collect
past due accounts. Timely contact with customers has been effective in reducing
credit losses. The Company's credit losses were $0.1 million each for the first
three months of 2003 and 2002 and the Company's actual credit losses as a
percentage of net sales were 0.6% and 0.5%, respectively.
15
The Company has the following contractual obligations and commercial commitments
as of March 31, 2003:
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 $ 7,613,470 $ 7,613,470 $-- $ -- $ --
Long term debt 6,557,908 1,070,274 2,652,071 2,835,563 --
Operating leases 414,995 339,280 46,052 29,663 --
Girbaud license obligations * 21,925,000 5,050,000 9,000,000 7,875,000 --
Employee agreements 3,645,000 1,335,000 2,310,000 --
Consulting obligations * 1,575,000 450,000 600,000 525,000 --
---------------- ---------------- ---------------- ---------------- --------------
Total contractual cash
obligations $ 41,731,373 $15,858,024 $14,608,123 $11,265,226 $ --
================ ================ ================ ================ ==============
(*) Adjusted to account for the deferrals, reductions and waivers of the
Consultants' Fees, royalty and other payment obligations mentioned above
Schedule of commercial commitments:
Amount of Commitment Expiration Per Period
--------------------------------------------------------------------------------------
Total Less than 1 year 1-3 years 4-5 years After 5 years
---------------- ------------------ -------------- -------------- --------------
Line of credit ** (including
letters of credit) $ 20,000,000 $ 20,000,000 $ -- $ -- $ --
---------------- ------------------ -------------- -------------- --------------
Total commercial commitments
$ 20,000,000 $ 20,000,000 $ -- $ -- $ --
================ ================== ============== ============== ==============
(**) At March 31, 2003, the Company had $7.6 million of borrowings and
outstanding letters of credit of approximately $1.3 million under the
Credit Agreement.
The Company believes that current levels of cash and cash equivalents
($1.2 million at March 31, 2003) together with cash from operations and funds
available under its Agreement, will be sufficient to meet its capital
requirements for the next 12 months.
Backlog and Seasonality
The Company's business is impacted by the general seasonal trends that
are characteristic of the apparel and retail industries. In the Company's
segment of the apparel industry, sales are generally higher in the first and
third quarters. Historically, the Company has taken greater markdowns in the
second and fourth quarters. The Company generally receives orders for its
products three to five months prior to the time the products are delivered to
stores. As of March 31, 2003 the Company has unfilled orders of approximately
$11.0 million, compared to $21.7 million of such orders as of March 31, 2002.
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 indicative of the
results for the full year.
16
Impact of Recent Accounting Pronouncements
In June 2002, the FASB issued Statement No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities". The standard requires companies to
recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of commitment to an exit or disposal plan.
Examples of costs covered by the standard include lease termination cost and
certain employee severance costs that are associated with a restructuring,
discontinued operation, plant closing, or other exit or disposal activity.
Previous accounting guidance provided by EITF Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)" is replaced by
this Statement. Statement 146 is to be applied prospectively to exit or disposal
activities initiated after December 31, 2002. The Company adopted this Statement
on January 1, 2003 and the adoption had no effect on the Company's financial
statements for the period ended March 31, 2003.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The Company's principal market risk results from changes in floating
interest rates on short-term debt. The Company does not use interest rate swap
agreements to mitigate the risk of adverse changes in the prime interest rate.
However, the impact of a 100 basis point change in interest rates affecting the
Company's short-term debt would not be material to the net 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 4. Controls and Procedures
Within the 90 days prior to the date of this report, the Company
carried out an evaluation, under the supervision and with the participation of
the Company's management, including the Company's Chief Executive Officer and
Chief Financial Officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures pursuant to Rule 13a-14 under the
Securities Exchange Act of 1934, as amended. Based upon that evaluation, the
Chief Executive Officer and Chief Financial Officer concluded that the Company's
disclosure controls and procedures are effective in timely alerting them to
material information relating to the Company required to be included in the
Company's periodic SEC filings. There have been no significant changes in the
Company's internal controls or in other factors that could significantly affect
the Company's controls subsequent to the date of that evaluation, and no
corrective actions with regard to significant deficiencies and material
weaknesses.
19
PART II--OTHER INFORMATION
Item 1. Legal Proceedings
In February 2003, an action entitled B2 Worldwide, Inc. v I.C. Isaacs &
Company, Inc. was commenced against the Company in the United States District
Court for the District of New Jersey under Case No. 03 CV 718 (JBS). The
plaintiff, a designer and manufacturer of men's sportswear, alleges that the
Company promised to give it orders for the manufacture of men's sportswear to be
marketed by the Company in the Spring of 2003 under the Girbaud label. The
complaint seeks unspecified damages in excess of $75,000. The Company intends to
interpose an answer to the complaint denying all of the material allegations of
the complaint and to vigorously defend itself in the action.
Item 2. Changes in Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4 Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
10.112 Employment Agreement dated the 31st day of March, 2003 between
I.C. Isaacs & Company, L.P. and Robert Conologue
10.113 Employment Agreement dated the 15th day of February,
2003 between I.C. Isaacs & Company, L.P. and Sandra Finkelstein
10.114 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
10.115 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
10.116 Consulting Agreement made as of the 31st day of March 31st,
2003 between I.C. Isaacs & Company, L.P. and Societe de Finance
et d'Investissement, SA
99.1 Certification Pursuant to Section 1350 of Chapter 63 of Title 18
of the United States Code
(b) Reports on Form 8-K.
20
The Company filed a report on Form 8-K on February 5, 2003
that disclosed that Staffan Ahrenberg had been elected as
Chairman of the Board of Directors of the Company following
the resignation of Robert J. Arnot, and that Mr. Arnot also
had resigned as a director, Chief Executive Officer and
President of the Company effective as of February 6, 2003.
21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
I.C. ISAACS & COMPANY, INC
Dated May 15, 2003 BY: /S/ Daniel J. Gladstone
-----------------------------
Daniel J. Gladstone
President and Chief Executive Officer
Dated: May 15, 2003 BY: /S/ Robert Conologue
-----------------------------
Robert Conologue
Chief Operating Officer and Chief
Financial Officer
(Principal Financial Officer)
22
Certification Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
I, Daniel J. Gladstone, certify that:
1. I have reviewed the quarterly report on Form 10-Q of I.C. Isaacs &
Company, Inc. for the period ended March 31, 2003 (this "Report");
2. Based on my knowledge, this Report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this Report;
3. Based on my knowledge, the financial statements, and other financial
information included in this Report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this Report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this Report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this Report (the "Evaluation Date"); and
(c) presented in this Report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors:
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves
management or other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this Report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Dated: May 15, 2003
/s/ Daniel J. Gladstone
--------------------------------------
Daniel J. Gladstone, President and CEO
23
Certification Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 (Continued)
I, Robert Conologue, certify that:
1. I have reviewed the quarterly report on Form 10-Q of I.C. Isaacs &
Company, Inc. for the period ended March 31, 2003 ("this Report");
2. Based on my knowledge, this Report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this Report;
3. Based on my knowledge, the financial statements, and other financial
information included in this Report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this Report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this Report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this Report (the "Evaluation Date"); and
(c) presented in this Report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors:
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves
management or other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this Report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Dated: May 15, 2003
/s/ Robert Conologue
------------------------------
Robert Conologue, COO and CFO