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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------
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 September 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
---------- ----------
Commission file number: 0-23379
--------------------
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 November 13, 2003, 11,134,657 shares of common stock, par value
$.0001 per share, ("Common Stock") of the Registrant were outstanding.
PART I--FINANCIAL INFORMATION
I.C. Isaacs & Company, Inc.
Consolidated Balance Sheets
Item 1. Financial Statements.
September 30, December 31,
------------------ -------------------
2003 2002
(Unaudited)
Assets
Current
Cash, including temporary investments of $56,000 and $82,000............. $ 638,306 $ 600,997
Accounts receivable, less allowance for doubtful accounts of $300,000
and $245,000.......................................................... 12,037,622 8,318,693
Inventories (Note 1)..................................................... 3,617,320 6,443,574
Prepaid expenses and other............................................... 525,712 206,933
--------------- -------------
Total current assets.................................................. 16,818,960 15,570,197
Property, plant and equipment, at cost, less accumulated depreciation and
amortization............................................................. 777,229 1,780,871
Other assets................................................................ 4,804,385 5,097,082
--------------- -------------
$ 22,400,574 $ 22,448,150
=============== =============
Liabilities And Stockholders' Equity
Current
Checks issued against future deposits.................................... $ 847,052 $ 626,082
Revolving line of credit (Note 2)........................................ 5,420,752 5,030,453
Current maturities of long-term debt (Note 2)............................ 1,693,428 767,372
Accounts payable......................................................... 1,097,071 907,520
Accrued expenses and other current liabilities (Note 3).................. 1,951,785 2,084,449
--------------- -------------
Total current liabilities............................................. 11,010,088 9,415,876
--------------- -------------
Long-term debt (Note 2)..................................................... 4,864,480 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...................................................... (34,811,207) (34,095,475)
Treasury stock, at cost (1,176,709 shares)............................... (2,322,871) (2,322,871)
--------------- -------------
Total stockholders' equity............................................ 6,526,006 7,241,738
--------------- -------------
$ 22,400,574 $ 22,448,150
=============== =============
See accompanying notes to consolidated financial statements.
2
I.C. Isaacs & Company, Inc.
Consolidated Statements of Operations (Unaudited)
Three Months Ended Nine Months Ended
---------------------------------- ----------------------------------
September 30, September 30,
2003 2002 2003 2002
-------------- -------------- ------------ -----------
Net sales................................................ $ 16,371,906 $ 16,348,297 $ 49,145,651 $ 53,491,961
Cost of sales............................................ 10,410,294 10,109,501 32,817,487 31,689,587
------------ ------------ ------------ -------------
Gross profit............................................. 5,961,612 6,238,796 16,328,164 21,802,374
------------ ------------ ------------ -------------
Operating Expenses
Selling............................................... 2,961,801 3,206,899 7,701,206 9,433,439
License fees.......................................... 1,157,378 1,197,228 3,009,941 3,880,384
Distribution and shipping............................. 482,375 568,751 1,553,644 1,820,644
General and administrative............................ 1,207,979 1,657,589 3,720,168 4,872,901
------------ ------------ ------------ -------------
Total operating expenses................................. 5,809,533 6,630,467 15,984,959 20,007,368
------------ ------------ ------------ -------------
Operating income (loss).................................. 152,079 (391,671) 343,205 1,795,006
------------ ------------ ------------ -------------
Other income (expense)
Interest, net of interest income...................... (242,988) (158,363) (710,428) (468,639)
Loss on sale of property.............................. (414,650) -- (414,650) --
Other, net............................................ (39,870) 39,635 66,141 48,860
------------ ------------ ------------ -------------
Total other income (expense)............................. (697,508) (118,728) (1,058,937) (419,779)
------------ ------------ ------------ -------------
Net income (loss)........................................ $ (545,429) $ (510,399) $ (715,732) $ 1,375,227
------------ ------------ ------------ -------------
Basic earnings (loss) per share.......................... $ (0.05) $ (0.07) $ (0.06) $ 0.18
Weighted average shares outstanding...................... 11,134,657 7,834,657 11,134,657 7,834,657
Diluted earnings (loss) per share........................ $ (0.05) $ (0.07) $ (0.06) $ 0.13
Weighted average shares outstanding...................... 11,134,657 7,834,657 11,134,657 10,329,039
See accompanying notes to consolidated financial statements.
3
I.C. Isaacs & Company, Inc.
Consolidated Statements of Cash Flows (Unaudited)
Nine Months Ended
----------------------------------
September 30,
2003 2002
------------- ----------------
Operating Activities
Net (loss) income .......................................................... $ (715,732) $ 1,375,227
Adjustments to reconcile net (loss) income to net cash (used in) provided by
operating activities
Provision for doubtful accounts ............................................... 169,644 145,568
Write off of accounts receivable .............................................. (114,644) (295,568)
Provision for sales returns and discounts ..................................... 1,790,594 1,815,260
Sales returns and discounts ................................................... (1,739,595) (1,804,260)
Depreciation and amortization ................................................. 574,460 914,264
Loss on sale of assets ........................................................ 414,650 37,655
(Increase) decrease in assets
Accounts receivable ........................................................... (3,824,928) (323,324)
Inventories ................................................................... 2,826,254 (1,436,205)
Prepaid expenses and other .................................................... (318,779) 224,736
Other assets .................................................................. 91,570 (787,249)
Increase (decrease) in liabilities
Accounts payable .............................................................. 189,551 (18,206)
Accrued expenses and other current liabilities ................................ (132,664) (1,121,200)
------------ ------------
Cash used in operating activities ................................................ (789,619) (1,273,302)
------------ ------------
Investing Activities
Capital expenditures .......................................................... (52,562) (102,202)
Proceeds from sale of assets .................................................. 268,221 3,050
------------ ------------
Cash provided by (used in) investing activities .................................. 215,659 (99,152)
------------ ------------
Financing Activities
Checks issued against future deposits ......................................... 220,970 84,699
Net borrowings on revolving line of credit .................................... 390,299 1,515,811
Principal payments on long-term debt......................................... -- (283,178)
------------ ------------
Cash provided by (used in) financing activities .................................. 611,269 1,317,332
------------ ------------
Increase (decrease) in cash and cash equivalents ................................. 37,309 (55,122)
Cash and Cash Equivalents, at beginning of period ................................ 600,997 826,812
------------ ------------
Cash and Cash Equivalents, at end of period ...................................... $ 638,306 $ 771,690
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
September 30, 2003 and for the nine months ended September 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
5
related consumer acceptance and the continuing consolidation in the retail
segment of the apparel industry. The Company's ability, or inability, to manage
these risk factors could influence future financial and operating results.
Use of Estimates
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make certain estimates and
assumptions, particularly regarding valuation of accounts receivable and
inventory, recognition of liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements. Actual results could differ
from those estimates.
Concentration of Credit Risk
Financial instruments which potentially expose the Company to
concentrations of credit risk consist primarily of trade accounts receivable.
The Company's customer base is not concentrated in any specific geographic
region, but is concentrated in the retail industry. For the nine months ended
September 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 nine months
6
ended September 30, 2003 because the impact of dilutive securities would be
antidilutive. Basic and diluted earning per share are different for the nine
months ended September 30, 2002 because of the effect of dilutive stock options
and redeemable preferred stock. There were outstanding options to purchase
1,570,250 and 1,096,250 shares of common stock at September 30, 2003 and 2002,
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 September 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,
therefore, 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
September 30, December 31,
Inventories consist of the following: 2003 2002
---------------- --------------
Raw Materials................................................................. $ -- $ 1,418,225
Work-in-process............................................................... 233,434 545,660
Finished Goods................................................................ 3,383,886 4,479,689
------------ ------------
$ 3,617,320 $ 6,443,574
============ ============
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 6.20% at September 30, 2003).
Outstanding letters of credit approximated $1.7 million at September 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
violation of these covenants in the third quarter ended September 30, 2003. In
November 2003, the Credit Agreement was further amended to waive the violation
of these covenants for the third quarter ended September 30 and as of October
31, 2003 and to modify the minimum levels of working capital and tangible net
worth required for the remainder of the Credit Agreement. In connection with
this amendment, the Company has agreed to pay Congress $50,000 and agreed that
the borrowings under the Credit Agreement bear interest at the lender's prime
rate plus 2.25% effective November 1, 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 and the March, June and September
2003 Replacement Note payments have not been made.
8
3. Accrued Expenses September 30, December 31,
2003 2002
Accrued expenses consist of the following: ---------------- ---------------
Royalties $ 767,187 $ 375,000
Accrued interest 580,305 194,687
Accrued compensation 153,332 115,624
Other liabilities 119,676 21,000
Severance benefits 100,000 426,022
Sales commissions & selling bonuses payable 94,036 326,091
Customer credit balances 88,374 85,265
Payroll tax withholdings 28,980 52,605
Property taxes 19,895 46,155
Accrued professional fees -- 197,000
Financing fees -- 125,000
Insurance premium payable -- 120,000
-------------------------------------
$ 1,951,785 $ 2,084,449
=====================================
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 $45,879,000 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 nine
months ended September 30, 2002. Basic and diluted earnings per share are the
same for the three months ended September 30, 2003 and 2002 and the nine months
ended September 30, 2003 because the impact of the securities would be
antidilutive.
Per Share
Nine Months Ended September 30, 2002: Net Income Shares Amount
Basic earnings per share: ----------- -------- -----------
Net income attributable to common stockholders................ $ 1,375,227 7,834,657 $0.18
Effect of dilutive redeemable preferred stock 1,668,132
Effect of dilutive options.................................... 826,250
Dilutive earnings per share................................... $ 1,375,227 10,329,039 $0.13
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
9
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 nine months of 2003 and 2002, the
Company granted options to purchase 425,000 and 10,000 shares of common stock
respectively. There were outstanding options to purchase 1,570,250 and 1,096,250
shares of common stock at September 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 nine months 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%, 2.78% and 2.46% for
options to purchase 25,000, 225,000 and 175,000 shares of common stock granted
at February 15, March 31 and July 1, 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, $0.42 and $0.86, respectively 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:
Nine Months Ended September
30,
-------------------------------
2003 2002
-------------------------------
Net (loss) income attributable to common stockholders, as reported $ (715,732) $ 1,375,227
Less: Total stock based employee compensation expense determined under
the fair value based method for all awards (29,245) (11,698)
-------------------------------
Pro forma net (loss) income attributable to common stockholders $ (744,977) $ 1,363,529
===============================
Basic net (loss) income per common share:
As reported $ (0.06) $ 0.18
Pro forma $ (0.07) $ 0.17
Diluted net (loss) income per common share, pro forma
As reported $ (0.06) $ 0.13
Pro forma $ (0.07) $ 0.13
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
10
and November 2003, respectively. In November of 2003, Latitude and the
Company agreed that the $250,000 royalty payment that had been deferred from
December 2002 to October 2003 would be further deferred to May 2004, and the
$250,000 royalty payment that had been deferred from January 2003 to November
2003 would be further deferred to June 2004. 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. In November of 2003, Latitude and the Company agreed that the
$125,000 royalty payment that had been deferred from January 2003 to October
2003 would be further deferred to May 2004, and that one half of the $250,000
payment due in the month of November 2003 with respect to the minimum royalties
to be paid in 2003 would be paid in that month and the $125,000 balance thereof
shall be deferred to June 2004. 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 $3,009,941
and $3,880,384 for the nine months ended September 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.
The Company has the following contractual obligations as of September
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 * $ 21,000,000 $ 6,000,000 $ 9,000,000 $ 6,000,000 --
Employment agreements 2,490,000 1,335,000 1,155,000 -- --
Consulting obligations * 1,275,000 300,000 600,000 375,000 --
-----------------
-------------- ---------------- -------------- --------------
Total contractual obligations $ 24,765,000 $ 7,635,000 $10,755,000 $ 6,375,000 --
================= ============== ================ ============== ==============
(*) 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) 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, and (v) the risk that the backlog of orders may not be
indicative of eventual actual shipments. 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 Nine Months
Ended Ended
September 30, September 30,
----------------------- -----------------------
2003 2002 2003 2002
---------- ------- ------- ------
Net sales................................... 100.0 % 100.0 % 100.0 % 100.0 %
Cost of sales............................... 63.4 62.0 66.8 59.3
--------- --------- ------------ -----------
Gross profit................................ 36.6 38.0 33.2 40.7
Selling expenses............................ 18.1 19.6 15.7 17.6
License fees................................ 7.3 7.3 6.1 7.3
Distribution and shipping expenses.......... 2.9 3.5 3.3 3.4
General and administrative expenses......... 7.4 10.1 7.5 9.1
--------- --------- ------------ -----------
Operating income (loss)..................... 0.9 % (2.5) % 0.6 % 3.3 %
Three Months Ended September 30, 2003 Compared to Three Months Ended
September 30, 2002
Net Sales.
Net sales remained relatively unchanged at $16.4 million in the three
months ended September 30, 2003 and 2002. Sales for the three months ended
September 30, 2003 reflects higher sales to off-price retailers compared to the
same period in 2002. Net sales of the Girbaud men's product line increased $0.5
million, or 3.8% to $13.7 million while the Girbaud women's product line
decreased $0.5 million, or 15.6% to $2.7 million.
Gross Profit.
Gross profit decreased 3.2% to $6.0 million in the three months ended
September 30, 2003 from $6.2 million for the same period in 2002. Gross profit
as a percentage of net sales decreased from 38.0% to 36.6% 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 September 30, 2003 compared to the same
period of 2002.
Operating Expenses
Operating expenses decreased 12.1% to $5.8 million in the three months
ended September 30, 2003 from $6.6 million for the same period of 2002. As a
percentage of net sales, operating expenses decreased to 35.7% from 40.5% over
the same period due to the Company's ongoing efforts to reduce operating
expenses. Selling expenses decreased 6.3% to $3.0 million in the three months
ended September 30, 2003 from $3.2
13
million for the same period in 2002. Selling expenses decreased primarily as a
result reduced selling bonuses and advertising and promotional related expenses
partially offset by higher design expenses. Advertising and promotional related
expenditures decreased $0.4 million to $0.4 million in the third quarter of 2003
from $0.8 million in the third quarter of 2002. License fees remained unchanged
at $1.2 million and at 7.3% as a percentage of net sales in the three months
ended September 30, 2003 and 2002. Distribution and shipping decreased 16.7% to
$0.5 million in the three months ended September 30, 2003 from $0.6 million for
the same period of 2002 as a result of reduced personnel costs. General and
administrative expenses decreased 29.4% to $1.2 million in the three months
ended September 30, 2003 from $1.7 million for the same period of 2002. The
decrease is attributable to a decrease in personnel costs and professional fees
for the three months ended September 30, 2003.
Operating Income.
Operating income increased $0.6 million to $0.2 million in the three
months ended September 30, 2003 from an operating loss of $0.4 million for the
same period of 2002. The increase is due to lower S,G&A expenses partially
offset by the slight reduction in gross profit.
Interest and Other Expense.
Interest expense increased $0.1 million to $0.3 million in the three
months ended September 30, 2003 from $0.2 million for the same period of 2002.
The increase is due to higher average borrowings on the revolving line of credit
of $5.9 million during the three months ended September 30, 2003 compared to
$1.3 million for the same period of 2002. The net loss in the third quarter of
2003 was negatively impacted by a $0.4 million non-cash charge from the sale of
land the Company was not utilizing in its operations. The cash proceeds of $0.3
million from the sale of this land were used to reduce amounts owed on the
Company's revolving line of credit.
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 $45.9 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.
Nine Months Ended September 30, 2003 Compared to Nine Months Ended
September 30, 2002
Net Sales.
Net sales decreased 8.2% to $49.1 million in the nine months ended
September 30, 2003 from $53.5 million for the same period of 2002. The decrease
was due to increased sales to off-price retailers at reduced selling prices in
the nine months ended September 30, 2003 compared to the same period in 2002.
Net sales of the Girbaud men's product line decreased $3.3 million, or 7.3% to
$41.9 million while the Girbaud women's product line decreased $1.1 million, or
13.3% to $7.2 million
Gross Profit.
Gross profit decreased 25.2% to $16.3 million in the nine months ended
September 30, 2003 from $21.8 million for the same period of 2002. Gross profit
as a percentage of net sales decreased from 40.7% to 33.2% 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 nine months ended September, 2003 compared to the same
period of 2002.
14
Operating Expenses
Operating expenses decreased 20.0% to $16.0 million in the nine months
ended September 30, 2003 from $20.0 million for the same period of 2002. As a
percentage of net sales, operating expenses decreased to 32.6% from 37.4% over
the same period due to overall reduced operating expenses. Selling expenses
decreased 18.1% to $7.7 million in the nine months ended September 30, 2003 from
$9.4 million for the same period of 2002. Selling expenses decreased primarily
as a result of lower commissions earned on lower net sales, reduced selling
bonuses and advertising and promotional related expenses. Advertising and
promotional related expenditures decreased $1.0 million to $1.2 million in the
nine months ended September 30, 2003 from $2.4 million for the same period 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 $0.9 million to $3.0 million in the nine months ended
September 30, 2003 from $3.9 million for the same period of 2002. As a
percentage of net sales, license fees decreased to 6.1% 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 Girbaud women's 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 11.1% to $1.6 million in the nine months ended September 30, 2003 from
$1.8 million for the same period of 2002 as a result of reduced personnel costs.
General and administrative expenses decreased 24.5% to $3.7 million in the nine
months ended September 30, 2003 from $4.9 million for the same period of 2002.
The decrease is attributable to a decrease in personnel costs and professional
fees for the nine months ended September 30, 2003.
Operating Income.
Operating income decreased $1.5 million to $0.3 million in the nine
months ended September 30, 2003 from $1.8 million for the same period of 2002.
The decrease is the result of the reduction in gross profit partially offset by
lower S,G&A expenses.
Interest and Other Expense.
Interest expense increased $0.2 million to $0.7 million in the nine
months ended September 30, 2003 from $0.5 million for the same period of 2002.
The increase is due to higher average borrowings on the revolving line of credit
of $5.8 million during the nine months ended September 30, 2003 compared to $1.5
million for the same period of 2002. The net loss in the nine months ended
September 30, 2003 was negatively impacted by a $0.4 million non-cash charge
from the sale of land the Company was not utilizing in its operations. The cash
proceeds of $0.3 million from the sale of this land were used to reduce amounts
owed on the Company's revolving line of credit.
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 $45.9 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
15
significantly during the first nine months of 2003 compared to the same period
of 2002, primarily due to a cumulative net loss of $7.1 million over the four
quarters ended September 30, 2003. As of September 30, 2003 the Company had cash
and cash equivalents, including temporary investments, of $0.6 million and
working capital of $5.8 million compared to $0.8 million and $12.9 million,
respectively, as of September 30, 2002.
Operating Cash Flow
Cash used in operations totaled $0.8 million for the first nine months
of 2003, compared to $1.3 million for the same period of 2002. This is primarily
due to the net loss of $0.7 million and increases in accounts receivable,
prepaid and other expenses and a decrease in accrued expenses and other
liabilities offset by a decrease in inventory and an increase in accounts
payable. Cash provided by investing activities was $0.2 million for the first
nine months of 2003 compared to cash used in investing activities of $0.1
million for the same period of 2002. The cash proceeds of $0.3 million from the
sale of land the Company was not utilizing in its operations were used to reduce
amounts owed on the Company's revolving line of credit. Cash provided by
financing activities totaled $0.6 million for the first nine months of 2003
compared to $1.3 million for the same period of 2002, resulting primarily from
borrowings on the Company's revolving line of credit offset and an increase in
checks issued against future deposits.
Accounts receivable increased $3.8 million from December 31, 2002 to
September 30, 2003 compared to $0.3 million from December 31, 2001 to September
30, 2002. Inventory decreased $2.8 million from December 31, 2002 to September
30, 2003 compared to an increase of $1.4 million from December 31, 2001 to
September 30, 2002. Capital expenditures were $0.1 for the first nine 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 6.20% at September 30, 2003).
Outstanding letters of credit approximated $1.7 million at September 30, 2003.
Under the terms of the Credit Agreement the Company is required to maintain
minimum levels of working capital and tangible net worth. 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 violation of these covenants
in the third quarter ended September 30, 2003. In November 2003, the Credit
Agreement was further amended to waive the violation of these covenants for the
third quarter ended September 30 and as of October 31, 2003 and to modify the
minimum levels of working capital and tangible net worth required for the
remainder of the Credit Agreement. In connection with this amendment, the
Company has agreed to pay Congress $50,000 and agreed that the borrowings under
the Credit Agreement bear interest at the lender's prime rate plus 2.25%
effective November 1, 2003. There can be no assurance that the Company will
continue to comply with these covenants during the remainder of 2003 or
thereafter.
In November 2003 in connection with amending the Credit Agreement,
Latitude Licensing Corp., the licensor of the Girbaud trademarks to the Company,
agreed that:
o the $250,000 royalty payment under the Girbaud Men's Agreement that had
been deferred from December 2002 to October 2003 would be further deferred
to May 2004;
o the $250,000 royalty payment under the Girbaud Men's Agreement that had
been deferred from January 2003 to November 2003 would be further deferred
to June 2004;
16
o the $125,000 royalty payment under the Girbaud Women's Agreement that had
been deferred from December 2002 to October 2003 would be further deferred
to May 2004;
o one half of the $250,000 payment due in the month of November 2003 with
respect to the minimum royalties to be paid under the Girbaud Women's
Agreement in 2003 would be paid in that month and the $125,000 balance
thereof shall be deferred to June 2004.
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 for the nine months
of 2003 and $0.3 million for the same period of 2002 and the Company's actual
credit losses as a percentage of net sales were 0.2% and 0.5%, respectively.
The Company has the following contractual obligations and commercial commitments
as of September 30, 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 $ 5,420,752 $ 5,420,752 $-- $ -- $ --
Long term debt 6,557,908 1,693,428 2,761,018 2,103,462 --
Operating leases 236,306 213,280 23,026 -- --
Girbaud license obligations * 21,000,000 6,000,000 9,000,000 6,000,000 --
Employee agreements 2,490,000 1,335,000 1,155,000 -- --
Consulting obligations * 1,275,000 300,000 600,000 375,000 --
---------------- ---------------- ---------------- ---------------- --------------
Total contractual cash
obligations $36,979,966 $14,962,460 $13,539,044 $ 8,478,462 $ --
================ ================ ================ ================ ==============
(*) 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 September 30, 2003, the Company had $5.4 million of borrowings and
outstanding letters of credit of approximately $1.7 million under the
Credit Agreement.
17
The Company believes that current levels of cash and cash equivalents
($0.6 million at September 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.
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 October 31, 2003 the Company had an order backlog of approximately
$22.0 million, compared to $10.5 million of such orders as of October 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.
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,
therefore, 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
None
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
10.112 Amendment No. 2 and Waiver to Amendment and Restated Loan and
Security Agreement, dated November 12, 2003, by and between I. C.
Isaacs & Company L.P. and Congress Financial Corporation
10.113 Amendment no. 8, dated October 29, 2003 to the Trademark License and
Technical Assistance Agreement for Women's Collections between
Latitude Licensing Corp. and I.C. Isaacs & Company L.P.
10.114 Amendment no. 6, dated October 29, 2003 to the Trademark License and
Technical Assistance Agreement dated the 1st day of November 1997 by
and between Latitude Licensing Corp. and I.C. Isaacs & Company L.P.
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.
None
19
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: November 14, 2003
BY: /S/ DANIEL J. GLADSTONE
----------------------------------------------------
Daniel J. Gladstone,
President and
Chief Executive Officer
Dated: November 14, 2003 BY: /S/ ROBERT J. CONOLOGUE
----------------------------------------------------
Robert J. Conologue,
Chief Operating Officer and Chief Financial Officer
(Principal Financial Officer)
20