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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 June 30, 2003
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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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 August 13, 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.
June 30, December 31,
2003 2002
------------ ------------
(Unaudited)
Assets
Current
Cash, including temporary investments of $27,000 and $82,000 $ 660,978 $ 600,997
Accounts receivable, less allowance for doubtful accounts of
$225,000 and $245,000 11,982,894 8,318,693
Inventories (Note 1) 3,884,599 6,443,574
Prepaid expenses and other 472,043 206,933
------------ ------------
Total current assets 17,000,514 15,570,197
Property, plant and equipment, at cost, less accumulated
depreciation and amortization 1,567,588 1,780,871
Other assets 4,873,135 5,097,082
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$ 23,441,237 $ 22,448,150
============ ============
Liabilities And Stockholders' Equity
Current
Checks issued against future deposits $ 437,145 $ 626,082
Current maturities of revolving line of credit (Note 2) 5,673,140 5,030,453
Current maturities of long-term debt (Note 2) 1,379,302 767,372
Accounts payable 1,837,451 907,520
Accrued expenses and other current liabilities (Note 3) 1,864,158 2,084,449
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Total current liabilities 11,191,196 9,415,876
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Long-term debt (Note 2) 5,178,606 5,790,536
Commitments and Contingencies (Note 7)
Stockholders' Equity (Note 6)
Preferred stock; $.0001 par value; 5,000,000 shares
authorized, none outstanding -- --
Common stock; $.0001 par value; 50,000,000 shares authorized,
12,311,366 shares issued; 11,134,657 shares outstanding 1,231 1,231
Additional paid-in capital 43,658,853 43,658,853
Accumulated deficit (34,265,778) (34,095,475)
Treasury stock, at cost (1,176,709 shares) (2,322,871) (2,322,871)
------------ ------------
Total stockholders' equity 7,071,435 7,241,738
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$ 23,441,237 $ 22,448,150
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See accompanying notes to consolidated financial statements.
2
I.C. Isaacs & Company, Inc.
Consolidated Statements of Operations (Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- ---------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
Net sales $ 16,230,043 $ 16,987,156 $ 32,773,745 $ 37,143,664
Cost of sales 10,534,387 9,893,824 22,407,193 21,580,086
------------ ------------ ------------ ------------
Gross profit 5,695,656 7,093,332 10,366,552 15,563,578
------------ ------------ ------------ ------------
Operating Expenses
Selling 2,281,827 3,233,660 4,739,405 6,226,540
License fees 925,000 1,240,114 1,852,563 2,683,156
Distribution and shipping 474,696 550,941 1,071,269 1,251,893
General and administrative 1,355,480 1,689,471 2,512,189 3,215,312
------------ ------------ ------------ ------------
Total operating expenses 5,037,003 6,714,186 10,175,426 13,376,901
------------ ------------ ------------ ------------
Operating income 658,653 379,146 191,126 2,186,677
------------ ------------ ------------ ------------
Other income (expense)
Interest, net of interest income (237,657) (138,905) (467,440) (310,276)
Other, net 50,326 3,078 106,011 9,225
------------ ------------ ------------ ------------
Total other income (expense) (187,331) (135,827) (361,429) (301,051)
------------ ------------ ------------ ------------
Net income (loss) $ 471,322 $ 243,319 $ (170,303) $ 1,885,626
------------ ------------ ------------ ------------
Basic earnings (loss) per share $ 0.04 $ 0.03 $ (0.02) $ 0.24
Weighted average shares outstanding 11,134,657 7,834,657 11,134,657 7,834,657
Diluted earnings (loss) per share $ 0.04 $ 0.03 $ (0.02) $ 0.22
Weighted average shares outstanding 11,144,657 9,568,789 11,134,657 8,683,331
See accompanying notes to consolidated financial statements.
3
I.C. Isaacs & Company, Inc.
Consolidated Statements of Cash Flows (Unaudited)
Six Months Ended
June 30,
------------------------
2003 2002
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Operating Activities
Net (loss) income $ (170,303) $1,885,626
Adjustments to reconcile net (loss) income to
net cash (used in) provided by operating
activities
Provision for doubtful accounts 87,055 68,360
Write off of accounts receivable (107,055) (118,360)
Provision for sales returns and discounts 1,141,042 930,361
Sales returns and discounts (1,171,042) (981,361)
Depreciation and amortization 395,312 609,511
Loss on sale of assets -- 37,655
(Increase) decrease in assets
Accounts receivable (3,614,201) 261,409
Inventories 2,558,975 (720,160)
Prepaid expenses and other (265,110) 121,859
Other assets 76,568 (472,251)
Increase (decrease) in liabilities
Accounts payable 929,931 (222,625)
Accrued expenses and other current
liabilities (220,291) (538,327)
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Cash (used in) provided by operating
activities (359,119) 861,697
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Investing Activities
Capital expenditures (34,650) (94,218)
Proceeds from sale of assets -- 3,050
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Cash used in investing activities (34,650) (91,168)
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Financing Activities
Checks issued against future deposits (188,937) (348,856)
Net borrowings on revolving line of credit 642,687 --
Principal payments on long-term debt -- (283,179)
----------- ----------
Cash provided by (used in) financing
activities 453,750 (632,035)
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Increase in cash and cash equivalents 59,981 138,494
Cash and Cash Equivalents, at beginning of
period 600,997 826,812
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Cash and Cash Equivalents, at end of period $ 660,978 $ 965,306
----------- ----------
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
June 30, 2003 and for the six months ended June 30, 2003 and 2002 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 six months ended
June 30, 2003 and 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 (loss) per share reflects
the potential dilution of securities that could share in the earnings of an
entity. Basic and diluted loss per share are the same for the six months ended
June 30, 2003 because the impact of dilutive securities would be antidilutive.
Basic and diluted earning per share are different for the six months ended June
30, 2002 because of the effect of dilutive stock options and redeemable
preferred stock. There were outstanding options to purchase 1,556,250 and
1,086,250 shares of common stock at June 30, 2003 and 2002, respectively.
6
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 June 30, 2003.
In April, 2003, the FASB issued Statement No. 149, "Amendment of
Statement 133 on Derivative Instruments and Hedging Activities". The Statement
amends Statement 133 for decisions made by the Derivatives Implementation Group
, in particular the meaning of an initial net investment, the meaning of
underlying and the characteristics of a derivative that contains financing
components. Presently, the Company has no derivative financial instruments and,
therefor, believes that adoption of the Statement will have no effect on its
financial statements.
In May 2003, the FASB issued Statement No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity". The
Statement requires that the issuer classify certain instruments as liabilities,
rather than equity, or so-called mezzanine equity. Presently, the Company has no
financial instruments that come under the scope of the Statement and ,
therefore, believe that adoption of the new Statement will have no impact on its
financial statements.
7
I.C. Isaacs & Company, Inc.
Notes to Consolidated Financial Statements (Unaudited)
1. Inventories
Inventories consist of the following: June 30, 2003 December 31, 2002
------------- -----------------
Raw Materials $ 108,788 $ 1,418,225
Work-in-process 682,423 545,660
Finished Goods 3,093,388 4,479,689
----------- ----------------
$ 3,884,599 $ 6,443,574
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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 6.00% at June 30, 2003).
Outstanding letters of credit approximated $1.2 million at June 30, 2003. Under
the terms of the Credit Agreement the Company is required to maintain minimum
levels of working capital and tangible net worth. The Company was in compliance
with these covenants at June 30, 2003. 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, March 2003 and June 2003 Replacement
Note payments have not been made.
3. Accrued Expenses
Accrued expenses consist of the following: June 30, 2003 December 31, 2002
---------------- ------------------
Royalties $ 750,000 $ 375,000
Accrued interest 454,129 194,687
Severance benefits 225,000 426,022
Accrued compensation 130,991 115,624
Sales commissions payable 114,010 12,283
Accrued professional fees 60,000 197,000
Payroll tax withholdings 36,503 52,605
Customer credit balances 34,834 85,265
Property taxes 20,000 46,155
Other 38,691 21,000
Selling bonuses -- 313,808
Financing fees -- 125,000
Insurance premium payable -- 120,000
-----------------------------------
$ 1,864,158 $ 2,084,449
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8
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 $45,334,000 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 stockholders 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 six
months ended June 30, 2002. Basic and diluted earnings per share are the same
for the six months ended June 30, 2003 because the impact of dilutive securities
would be antidilutive. Basic and diluted earnings per share are the same for the
three months ended June 30, 2003 and the three months ended June 30, 2002
because the impact of the securities was not significant.
Per Share
Six Months Ended June 30, 2002: Net Income Shares Amount
------------------------------------------
Basic earnings per share:
Net income attributable to common stockholders $1,885,626 7,834,657 $0.24
Effect of dilutive redeemable preferred stock 838,674
Effect of dilutive options 10,000
Dilutive earnings per share $1,885,626 8,683,331 $0.22
6. Stock Options
Under the Company's Amended and Restated Omnibus Stock Plan (the
"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
2,200,000 shares of common stock for issuance under the Plan. 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 six months of 2003, options to purchase
250,000 shares of common stock were granted. There was no stock option activity
in the first six months of 2002. There were outstanding options to purchase
1,556,250 and 1,086,250 shares of common stock at June 30, 2003 and 2002,
respectively.
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 half 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
225,000 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.
9
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:
Six Months Ended June 30,
-------------------------------
2003 2002
-------------------------------
Net (loss) income attributable to common stockholders, as reported $ (170,303) $ 1,885,626
Less: Total stock based employee compensation expense determined
under the fair value based method for all awards (29,637) 11,697
-------------------------------
Pro forma net (loss) income attributable to common stockholders $ (199,940) $ 1,873,929
===============================
Basic net (loss) income per common share, as reported $ (0.02) $ 0.24
Diluted net (loss) income per common share, pro forma $ (0.02) $ 0.22
7. Commitments and Contingencies
The Company has entered into an exclusive license agreement with
Latitude Licensing Corp. (("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. 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 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. Total license fees on
Girbaud sportswear sales amounted to $1,852,563 and $2,683,156 for the six
months ended June 30, 2003 and 2002, 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.
10
The Company has the following contractual obligations as of June 30,
2003:
Schedule of certain contractual obligations: Payments Due By Period
----------------------------------------------------------------
Total Current 1-3 years 4-5 years After 5 years
----------------- -------------- ---------------- -------------- --------------
Girbaud license obligations * $ 21,750,000 $ 6,000,000 $ 9,000,000 $ 6,750,000 --
Employment agreements 3,067,500 1,335,000 1,732,500 -- --
Consulting obligations * 1,350,000 300,000 600,000 450,000 --
-----------------
-------------- ---------------- -------------- --------------
Total contractual obligations $ 26,167,500 $ 7,635,000 $11,332,500 $ 7,200,000 --
================= ============== ================ ============== ==============
(*) 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, 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.
12
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 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 Six Months
Ended Ended
June 30, June 30,
----------------------------------- ----------------------------------
2003 2002 2003 2002
----------------- ---------------- ---------------- ----------------
Net sales................................... 100.0 % 100.0 % 100.0 % 100.0 %
Cost of sales............................... 64.8 58.2 68.3 58.2
Gross profit................................ 35.2 41.8 31.7 41.8
Selling expenses............................ 14.2 18.8 14.3 16.7
License fees................................ 5.6 7.1 5.8 7.3
Distribution and shipping expenses.......... 3.1 3.5 3.4 3.5
General and administrative expenses......... 8.6 10.0 7.6 8.6
Operating income............................ 4.3 % 2.4 % 0.6 % 5.7 %
Three Months Ended June 30, 2003 Compared to Three Months Ended June 30, 2002
Net Sales.
Net sales decreased 4.7% to $16.2 million in the three months ended
June 30, 2003 from $17.0 million in the three months ended June 30, 2002. The
decrease was due to increased sales to off-price retailers at reduced selling
prices in the three months ended June 30, 2003 compared to the same period in
2002. Net sales of the Girbaud men's product line decreased $1.0 million, or
6.8% to $13.7 million while the Girbaud women's product line increased $0.2
million, or 8.7% to $2.5 million
Gross Profit.
Gross profit decreased 19.7% to $5.7 million in the three months ended
June 30, 2003 from $7.1 million in the three months ended June 30, 2002. Gross
profit as a percentage of net sales decreased from 41.8% to 35.2% over the same
period. The decrease in gross profit is the result of sales to off-price
retailers at reduced selling prices and an increase in air freight costs
effecting gross profit margins in the three months ended June 30, 2003 compared
to the same period of 2002.
Operating Expenses
Operating expenses decreased 25.4% to $5.0 million in the three months
ended June 30, 2003 from $6.7 million in the three months ended June 30, 2002.
As a percentage of net sales, operating expenses decreased to 30.9% from 39.4%
over the same period due to the Company's ongoing effort to reduce operating
expenses. Selling expenses decreased 28.1% to $2.3 million in the three months
ended June 30, 2003 from $3.2 million in the three months ended June 30, 2002.
Selling expenses decreased primarily as a result of commissions earned on lower
net sales, reduced selling bonuses and advertising expenses. Advertising
expenditures decreased $0.5 million to $0.2 million from $0.7 million in the
second quarter of 2003 compared to the second 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
products in each year through the term of the Girbaud agreements. License fees
decreased $0.3 million to $0.9 million in the three months ended June 30, 2003
from $1.2 million in the three months ended June 30, 2002. As a percentage of
net sales, license fees decreased to 5.6% from 7.1%. 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 16.7% to $0.5 million in the three months ended June 30, 2003 from
$0.6 million in the three months ended June 30, 2002 as a result of reduced
personnel costs. General and administrative expenses decreased 17.6% to $1.4
million in the three months ended June 30, 2003 from $1.7 million in the three
months ended June 30, 2002. The decrease is attributable to a decrease in
personnel costs and professional fees for the three months ended June 30, 2003.
13
Operating Income.
Operating income increased $0.3 million to $0.7 million in the three
months ended June 30, 2003 from $0.4 million in the three months ended June 30,
2002. The increase is due to lower S,G&A expenses offset by the reduction in
gross profit.
Interest Expense.
Interest expense increased $0.1 million to $0.2 million in the three
months ended June 30, 2003 from $0.1 million in the three months ended June 30,
2002. The increase is due to higher average borrowings on the revolving line of
credit during the three months ended June 30, 2003 compared to the same period
for 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 $45.3 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.
Six Months Ended June 30, 2003 Compared to Six Months Ended June 30, 2002
Net Sales.
Net sales decreased 11.6% to $32.8 million in the six months ended June
30, 2003 from $37.1 million in the six months ended June 30, 2002. The decrease
was due to increased sales to off-price retailers at reduced selling prices in
the six months ended June 30, 2003 compared to the same period in 2002. Net
sales of the Girbaud men's product line decreased $3.7 million, or 11.6% to
$28.3 million while the Girbaud women's product line increased $0.6 million, or
11.7% to $4.5 million
Gross Profit.
Gross profit decreased 32.9% to $10.4 million in the six months ended
June 30, 2003 from $15.5 million in the six months ended June 30, 2002. Gross
profit as a percentage of net sales decreased from 41.8% to 31.7% over the same
period. The decrease in gross profit is the result of sales to off-price
retailers at reduced selling prices and an increase in air freight costs
effecting gross profit margins in the three months ended June 30, 2003 compared
to the same period of 2002.
14
Operating Expenses
Operating expenses decreased 23.9% to $10.2 million in the six months
ended June 30, 2003 from $13.4 million in the six months ended June 30, 2002. As
a percentage of net sales, operating expenses decreased to 31.1% from 36.1% over
the same period due to overall reduced operating expenses. Selling expenses
decreased 24.2% to $4.7 million in the six months ended June 30, 2003 from $6.2
million in the six months ended June 30, 2002. Selling expenses decreased
primarily as a result of commissions earned on lower net sales, reduced selling
bonuses and advertising expenses. Advertising expenditures decreased $0.6
million to $0.3 million from $0.9 million in the first half of 2003 compared to
the first half 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 products in each year through the term of
the Girbaud agreements. License fees decreased $0.8 million to $1.9 million in
the six months ended June 30, 2003 from $2.7 million in the six months ended
June 30, 2002. As a percentage of net sales, license fees decreased to 5.8% from
7.3%. 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 15.4% to $1.1 million in the six months
ended June 30, 2003 from $1.3 million in the six months ended June 30, 2002 as a
result of reduced personnel costs. General and administrative expenses decreased
21.9% to $2.5 million in the six months ended June 30, 2003 from $3.2 million in
the six months ended June 30, 2002. The decrease is attributable to a decrease
in personnel costs and professional fees for the six months ended June 30, 2003.
Operating Income.
Operating income decreased $2.0 million to $0.2 million in the six
months ended June 30, 2003 from $2.2 million in the six months ended June 30,
2002. The decrease is the result of the reduction in gross profit offset by
lower S,G&A expenses.
Interest Expense.
Interest expense increased $0.2 million to $0.5 million in the six
months ended June 30, 2003 from $0.3 million in the six months ended June 30,
2002. The increase is due to higher average borrowings on the revolving line of
credit during the six months ended June 30, 2003 compared to the same period for
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 $45.3 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 six months of 2003 compared to the
first six months of 2002, primarily due to a cumulative net loss of $7.0 million
over the four quarters ended June 30, 2003. As of June 30, 2003, the Company had
cash and cash equivalents, including temporary investments, of $0.7 million and
working capital of $5.8 million compared to $1.0 million and $13.6 million,
respectively, as of June 30, 2002.
15
Operating Cash Flow
Cash used in operations totaled $0.4 million for the first six months
of 2003, compared with cash provided by operations of $0.9 million for the same
period of 2002. This is primarily due to the net loss of $0.2 million and
increases in accounts receivable, prepaid and other expenses and a decrease in
accrued expenses and other liabilities partially offset by a decrease in
inventory and an increase in accounts payable. Cash used for investing
activities was insignificant for the first six months of 2003. Cash provided by
financing activities totaled $0.5 million for the first six 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 $3.6 million from December 31, 2002 to
June 30, 2003 compared to a decrease of $0.3 million from December 31, 2001 to
June 30, 2002. Inventory decreased $2.6 million from December 31, 2002 to June
30, 2003 compared to an increase of $0.7 million from December 31, 2001 to June
30, 2002. Capital expenditures were insignificant for the first six 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 6.03% at June 30, 2003).
Outstanding letters of credit approximated $1.2 million at June 30, 2003. Under
the terms of the Credit Agreement the Company is required to maintain minimum
levels of working capital and tangible net worth. The Company was in compliance
with these covenants at June 30, 2003. There can be no assurance that the
Company will continue to comply with these covenants during the remainder of
2003 or thereafter.
In February 2003 in connection with amending the Credit Agreement,
Latitude Licensing Corp., the licensor of the Girbaud trademarks to 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.
16
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
six months of 2003 and 2002 and the Company's actual credit losses as a
percentage of net sales were 0.2% and 0.3%, respectively.
The Company has the following contractual obligations and commercial commitments
as of June 30, 2003:
Schedule of contractual obligations:
Payments Due By Period
------------------------------------------------------------------------
Less than 1
Total year 1-3 years 4-5 years After 5 years
-------------- -------------- -------------- ------------- -------------
Revolving line of credit $ 5,673,140 $ 5,673,140 $ -- $ -- $ --
Long term debt 6,557,908 1,379,302 2,705,701 2,472,905 --
Operating leases 259,332 213,280 46,052 -- --
Girbaud license
obligations * 21,750,000 6,000,000 9,000,000 6,750,000 --
Employee agreements 3,067,500 1,335,000 1,732,500 -- --
Consulting obligations * 1,350,000 300,000 600,000 450,000 --
----------- ----------- ----------- ---------- ----------
Total contractual cash
obligations $38,657,880 $14,900,722 $14,084,253 $9,672,905 $ --
=========== =========== =========== ========== ==========
(*) 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
---------------------------------------------------------------
Less than 1
Total 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 June 30, 2003, the Company had $5.7 million of borrowings and
outstanding letters of credit of approximately $1.2 million under the
Credit Agreement.
The Company believes that current levels of cash and cash equivalents
($0.7 million at June 30, 2003) together with cash from operations and funds
available under the Credit Agreement, will be sufficient to meet its capital
requirements for the next 12 months.
17
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 June 30, 2003 the Company had unfilled orders of approximately
$11.5 million, compared to $18.2 million of such orders as of June 30, 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.
Impact of Recent Accounting Pronouncements
In April, 2003, the FASB issued Statement No. 149, "Amendment of
Statement 133 on Derivative Instruments and Hedging Activities". The Statement
amends Statement 133 for decisions made by the Derivatives Implementation Group,
in particular the meaning of an initial net investment, the meaning of
underlying and the characteristics of a derivative that contains financing
components. Presently, the Company has no derivative financial instruments and,
therefor, believes that adoption of the Statement will have no effect on its
financial statements.
In May 2003, the FASB issued Statement No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity". The
Statement requires that the issuer classify certain instruments as liabilities,
rather than equity, or so-called mezzanine equity. Presently, the Company has no
financial instruments that come under the scope of the Statement and ,
therefore, believe that adoption of the new Statement will have no impact on its
financial statements.
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.
18
PART II--OTHER INFORMATION
Item 4 Submission of Matters to a Vote of Security Holders
The Company held its annual meeting of stockholders on June 30, 2003.
As of the May 26, 2003 record date of the meeting, there were a total of
11,134,657 shares of the Company's common stock outstanding and entitled to be
voted at the annual meeting. There were 10,476,471 shares (93.75%) present in
person or by proxy at the meeting.
At the meeting:
-- the stockholders approved a proposal to declassify the Board of
Directors and elect all directors at each annual meeting by a
vote of 9,938,984 shares in favor (88.9%) and 534,887 shares
opposed to the proposal
-- the following directors were elected at the meeting to serve
until the 2004 Annual Meeting and until their respective
successors shall be duly elected and qualified:
Number of Shares
----------------------------------
Director For Against or
Abstained
------------------------------------ -------------- ---------------
Olivier Bachellerie 10,259,899 216,572
Robert J. Conologue 10,259,899 216,572
Neal J. Fox 10,259,899 216,572
Robert S. Stec 10,259,899 216,572
As a result of the Stockholders' approval of the proposal to declassify
the Board, at the Annual Meeting of Stockholders to be held in 2004, the
stockholders will elect directors to fill the four seats occupied by the
above-mentioned directors, and the two seats presently occupied by the Company's
Class II directors
Also at the meeting, the stockholders
-- approved a proposal to adopt the Corporation's Amended and
Restated Stock Incentive Plan by a vote of 9,938,984 shares in
favor (61.9%) and 351,425 shares opposed to the proposal; and
-- ratified the selection of BDO Seidman LLP as the Company's
independent accountants for the fiscal year ending December 31,
2003 by a vote of 10,464,521 shares in favor (93.6%) and 8,950
shares opposed to the proposal.
19
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
3.06 Certificate of Amendment of the Company's Amended and Restated
Certificate of Incorporation
4.04 Amended and Restated Omnibus Stock Plan as in effect on June 30,
2003
31.1 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002
31.2 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002
32 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K.
-- On May 16, 2003, the Company filed a Report on Form 8-K with
regard to its announcing its financial results for the three
months ended March 31, 2003.
20
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: August 14, 2003 BY: /S/ DANIEL J. GLADSTONE
Daniel J. Gladstone,
---------------------------------------------------
President and
Chief Executive Officer
Dated: August 14, 2003 BY: /S/ ROBERT J. CONOLOGUE
Robert J. Conologue,
---------------------------------------------------
Chief Operating Officer and Chief Financial Officer
(Principal Financial Officer)
21