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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 March 31, 2004
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____ to ____
Commission file number: 0-23379
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I.C. ISAACS & COMPANY, INC.
(Exact name of Registrant as specified in its Charter)
DELAWARE 52-1377061
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3840 BANK STREET 21224-2522
BALTIMORE, MARYLAND (Zip Code)
(Address of principal executive offices)
(410) 342-8200
(Registrant's telephone number, including area code)
NONE
(Former name, former address and former
fiscal year-if changed since last report)
---------------------
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark whether the Registrant is an accelerated filer
(as defined in Rule 12b-2 of the Act). Yes |_| No |X|
As of May 12, 2004, 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.
March 31, December 31,
2004 2003
------------------------
(Unaudited)
Assets
Current
Cash, including temporary investments of $66,000 and $168,000........................... $898,365 $782,519
Accounts receivable, less allowance for doubtful accounts of $350,000 and $275,000...... 13,415,934 9,871,110
Inventories (Note 1).................................................................... 5,272,117 3,854,731
Prepaid expenses and other.............................................................. 209,185 68,676
----------- ------------
Total current assets.................................................................. 19,795,601 14,577,036
Property, plant and equipment, at cost, less accumulated depreciation and amortization.... 695,719 777,089
Other assets.............................................................................. 4,605,385 4,735,635
----------- ------------
$25,096,705 $20,089,760
=========== ============
Liabilities And Stockholders' Equity
Current
Checks issued against future deposits................................................... $516,723 $197,441
Current maturities of revolving line of credit (Note 2)................................ 6,178,731 4,224,285
Current maturities of long-term debt (Note 2)........................................... 2,350,196 2,013,977
Accounts payable........................................................................ 1,617,732 1,039,901
Accrued expenses and other current liabilities (Note 3)................................. 3,814,058 2,523,253
----------- ------------
Total current liabilities............................................................. 14,477,440 9,998,857
----------- ------------
Long-term debt (Note 2)................................................................... 4,207,712 4,543,931
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..................................................................... (34,925,660)(35,790,241)
Treasury stock, at cost (1,176,709 shares).............................................. (2,322,871) (2,322,871)
------------ -----------
Total stockholders' equity............................................................ 6,411,553 5,546,972
----------- ------------
$25,096,705 $20,089,760
=========== ============
See accompanying notes to consolidated financial statements.
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2
I.C. Isaacs & Company, Inc.
Consolidated Statements of Operations (Unaudited)
Three Months Ended
March 31,
------------------------
2004 2003
------------------------
Net sales...................................................................................... $21,717,110 $16,543,702
Cost of sales.................................................................................. 13,518,379 11,872,806
----------- ------------
Gross profit................................................................................... 8,198,731 4,670,896
----------- ------------
Operating Expenses
Selling...................................................................................... 3,582,724 2,457,578
License fees................................................................................. 1,353,038 927,563
Distribution and shipping.................................................................... 502,648 596,573
General and administrative................................................................... 1,697,724 1,156,709
----------- ------------
Total operating expenses....................................................................... 7,136,134 5,138,423
----------- ------------
Operating income (loss)........................................................................ 1,062,597 (467,527)
----------- ------------
Other income (expense)
Interest, net of interest income............................................................. (198,767) (229,783)
Other, net................................................................................... 751 55,685
----------- ------------
Total other income (expense)................................................................... (198,016) (174,098)
----------- ------------
Net income (loss).............................................................................. $864,581 $(641,625)
----------- ------------
Basic earnings (loss) per share................................................................ $0.08 $(0.06)
Basic weighted average shares outstanding...................................................... 11,134,657 11,134,657
Diluted earnings (loss) per share.............................................................. $0.07 $(0.06)
Diluted weighted average shares outstanding.................................................... 12,279,657 11,134,657
See accompanying notes to consolidated financial statements.
3
I.C. Isaacs & Company, Inc.
Consolidated Statements of Cash Flows (Unaudited)
Three Months Ended
March 31,
----------------------
2004 2003
----------------------
Operating Activities
Net income (loss).............................................................................. $864,581 $(641,625)
Adjustments to reconcile net income (loss) to net cash used in operating activities
Provision for doubtful accounts.................................................................. 152,132 30,731
Write off of accounts receivable................................................................. (77,132) (74,795)
Provision for sales returns and discounts........................................................ 821,670 945,257
Sales returns and discounts...................................................................... (638,680) (980,257)
Depreciation and amortization.................................................................... 142,250 211,724
(Increase) decrease in assets
Accounts receivable.............................................................................(3,802,814)(2,992,484)
Inventories.....................................................................................(1,417,386) 2,153,955
Prepaid expenses and other...................................................................... (140,509) (232,095)
Other assets.................................................................................... 99,000 36,569
Increase (decrease) in liabilities
Accounts payable................................................................................ 577,831 (44,924)
Accrued expenses and other current liabilities.................................................. 1,290,805 514
---------- -----------
Cash used in operating activities................................................................ (2,128,252)(1,587,430)
---------- -----------
Investing Activities
Capital expenditures........................................................................... (29,630) (16,560)
---------- -----------
Cash used in investing activities................................................................ (29,630) (16,560)
----------- ----------
Financing Activities
Checks issued against future deposits.......................................................... 319,282 (401,209)
Net borrowings on revolving line of credit..................................................... 1,954,446 2,583,017
----------- ----------
Cash provided by financing activities............................................................ 2,273,728 2,181,808
----------- ----------
Increase in cash and cash equivalents............................................................ 115,846 577,818
Cash and Cash Equivalents, at beginning of period................................................ 782,519 600,997
----------- ----------
Cash and Cash Equivalents, at end of period...................................................... $898,365 $1,178,815
---------- -----------
See accompanying notes to consolidated financial statements.
4
I.C. Isaacs & Company, Inc.
Summary of Accounting Policies
Basis of Presentation
The consolidated financial statements include the accounts of I. C.
Isaacs & Company, Inc. ("ICI"), I.C. Isaacs & Company L.P. (the
"Partnership"), Isaacs Design, Inc. ("Design") and I. C. Isaacs Far East Ltd.
(collectively, the "Company"). I.C. Isaacs Far East Ltd. did not have any
significant revenue or expenses in 2003 or thus far in 2004. All
intercompany balances and transactions have been eliminated.
Business Description
The Company, which operates in one business segment, designs and
markets a full collection of men's and women's jeanswear and sportswear under
the Marithe and Francois Girbaud brand names and trademarks in the United States
and Puerto Rico. The Marithe and Francois Girbaud brand is an internationally
recognized designer label with a distinct European influence. The Company has
positioned the Girbaud line with a broad assortment of products, styles and
fabrications reflecting a contemporary look.
Interim Financial Information
In the opinion of management, the interim financial information as of
March 31, 2004 and for the three months ended March 31, 2004 and 2003 contains
all adjustments, consisting only of normal recurring adjustments, necessary for
a fair presentation of the results for such periods. Results for interim periods
are not necessarily indicative of results to be expected for an entire year.
The accompanying consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Certain information and footnote disclosures normally included
in the consolidated financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to such
rules and regulations. These consolidated financial statements should be read in
conjunction with the consolidated financial statements, and the notes thereto,
included in the Company's Annual Report on Form 10-K for the year ended December
31, 2003.
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. As of March 31, 2004, the
Company had one customer who accounted for 10.3% of trade accounts receivable.
As of March 31, 2003, no one customer accounted for more than 10.0% of trade
accounts receivable. For the three months ended March 31, 2004, sales to no one
customer accounted for more than 10.0% of total sales. For the three months
ended March 31, 2003, sales to one customer accounted for 12.5% 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 stockholders by the weighted average number of common
shares outstanding for the period. Diluted earnings per share reflects the
potential dilution of securities that could share in the earnings of an entity.
See Note 5 for the reconciliation of the basic and diluted earnings (loss) per
share for the three months ended March 31, 2004 and 2003. Basic and diluted loss
per share were the same for the three months ended March 31, 2003 because the
impact of dilutive securities would be antidilutive. There were outstanding
options to purchase 2,070,250 and 1,556,250 shares of common stock and
outstanding warrants to purchase 500,000 shares of common stock and 500,000
shares of common stock at March 31, 2004 and 2003, respectively.
6
Recent Accounting Pronouncements
In December 2003, the FASB issued a revision to SFAS No. 132,
Employers' Disclosures about Pensions and Other Postretirement Benefits". This
statement does not change the measurement or recognition aspects for pensions
and other postretirement benefit plans; however, it does revise employee
disclosures to include more information about the plan assets, obligations to
pay benefits and funding obligations. SFAS No. 132, as revised, is generally
effective for financial statements with fiscal years ending after December 15,
2003. Certain additional disclosures applicable to foreign defined benefit plans
are effective for fiscal years ending after June 15th, 2004. The Company has
adopted the required provisions of SFAS No. 132, as revised.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity," SFAS
No. 150 clarifies the definition of a liability as currently defined in FASB
Concepts Statement No. 6, "Elements of Financial Statements, " as well as other
planned revisions. This statement requires a financial instrument that embodies
an obligation of an issuer to be classified as a liability. In addition, the
statement establishes standards for the initial and subsequent measurement of
these financial instruments and disclosure requirements. SFAS No. 150 is
effective for financial instruments entered into or modified after May 31, 2003
and for all other matters, is effective at the first interim period beginning
after June 15, 2003. The adoption of SFAS No. 150 did not have a material effect
on the Company's financial position or results of operations.
In April 2003, the FASB issued SFAS No. 149," Amendment of Statement
No. 133 on Derivative Instruments and Hedging Activities," SFAS No. 149 amends
SFAS No. 133 for decisions made by the FASB's Derivatives Implementation Group,
other FASB projects dealing with financial instruments, and in response to
implementation issues raised in relation to the application of the definition of
a derivative. This statement is generally effective for contracts entered into
or modified after June 30, 2003 and for hedging relationships designed after
June 30, 2003. The adoption of SFAS No. 149 did not have material effect on the
Company's financial position or results of operations.
In January 2003, the FASB issued Interpretation ("FIN") No. 46,
"Consolidation of Variable Interest Entities" and in December 2003, a revised
interpretation was issued (FIN No. 46, as revised). In general, a variable
interest entity ("VIE") is a corporation, partnership, trust, or any other legal
structure used for business purposes that either does not have equity investors
with voting rights or has equity investors that do not provide sufficient
financial resources for the entity to support its activities. FIN No. 46, as
revised, requires a VIE to be consolidated by a company if that company is
designated as the primary beneficiary. The interpretation applies to VIEs
created after January 31, 2003, and for all financial statements issued after
December 15, 2003 for VIEs in which an enterprise held a variable interest that
it acquired before February 1, 2003. The adoption of FIN No. 46, as revised, did
not have a material effect on the Company's financial position or results of
operations.
7
I.C. Isaacs & Company, Inc.
Notes to Consolidated Financial Statements (Unaudited)
1. Inventories
March 31, December 31,
----------------- ----------------
Inventories consist of the following: 2004 2003
Work-in-process............................................... $ 243,462 $ 289,407
Finished Goods................................................ 5,028,655 3,565,324
--------- ---------
$ 5,272,117 $ 3,854,731
============ ===========
2. Long-term Debt
The Company has an asset-based revolving line of credit (the "Credit
Agreement") with Congress Financial Corporation ("Congress") which expires on
December 31, 2004. The Credit Agreement, as previously amended, 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 March 31, 2004).
Outstanding letters of credit approximated $1.2 million at March 31, 2004. In
connection with amending the Credit Agreement in December 2002, the Company paid
Congress a financing fee of $250,000. This financing fee is being amortized over
the 24 month period which began in January 2003. The Company is currently in
compliance with the working capital and tangible net worth covenants, however,
there can be no assurance that the Company will continue to comply with these
covenants during the remainder of 2004 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, the March, June, September and December 2003
and the March 2004 Replacement Note payments have not been made. Under the
Replacement Note, the fact that these payments were not paid does not put the
Replacement Note in default. The Replacement Note has been classified as current
or long-term based upon the deferred scheduled quarterly payments as detailed
per the Replacement Note agreement.
8
3. Accrued Expenses
March 31, December 31,
Accrued expenses consist of the following: 2004 2003
---------------- ----------------
License fees (Note 7) $ 2,178,038 $ 1,153,094
Accrued interest 812,628 702,628
Management & selling bonuses 195,442 236,587
Sales commissions payable 148,783 60,294
Payroll tax withholdings 101,040 69,619
Customer credit balances 97,713 61,633
Accrued compensation 87,843 68,397
Accrued professional fees 50,000 50,000
Property taxes 19,895 19,895
Other 122,676 101,106
---------------- ----------------
$ 3,814,058 $ 2,523,253
================ ================
4. Income Taxes
The Company has estimated its annual effective tax rate at 0% based on its
estimate of pre-tax income for 2004, any of which to be offset by its net
operating loss carryforwards of approximately $44.3 million. These net operating
loss carryforwards begin to expire in 2013 for income tax reporting purposes and
no income tax benefit has been recorded due to the uncertainty over the level of
future taxable income.
5. Earnings (Loss) Per Share
The following table presents a reconciliation of the basic and diluted
earnings (loss) per share with regard to the weighted average shares outstanding
for the three months ended March 31, 2004 and 2003. Basic and diluted loss per
share are the same for the three months ended March 31, 2003 because the impact
of dilutive securities was antidilutive.
Per Share
Three Months Ended March 31, 2004: Net Income Shares Amount
---------- ------- ---------
Basic earnings per share:
Net income attributable to common shareholders....... $ 864,581 11,134,657 $0.08
Effect of dilutive options and warrants.............. -- 1,145,000 --
Diluted earnings per share........................... $ 864,581 12,279,657 $0.07
Per Share
Three Months Ended March 31, 2003: Net Loss Shares Amount
-------- ------ ---------
Basic loss per share:
Net loss attributable to common shareholders......... $ (641,625) 11,134,657 $(0.06)
Effect of dilutive options and warrants.............. -- -- --
Diluted loss per share............................... $ (641,625) 11,134,657 $(0.06)
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 reserved 2,200,000
shares of common stock for issuance under the Plan. In the first three months of
2003, options to purchase 275,000 shares of common stock were granted. There was
no stock option activity in the first three months of 2004. There were
outstanding options to purchase 2,070,250 and 1,556,250 shares of common stock
at March 31, 2004 and 2003, respectively.
9
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock Based
Compensation" ("SFAS 123"), but applies the intrinsic value method set forth in
Accounting Principles Board Opinion No. 25. For stock options granted to
employees in the first quarter of 2003, the Company estimated the fair value of
each option granted using the Black-Scholes option-pricing model with the
following assumptions: risk-free interest rate of 2.91% and 2.78% for 25,000 and
250,000 options granted at February 15, 2003 and March 31, 2003, respectively,
expected volatility of 75%, expected option life of 5 years and no dividend
payment for 2003. Using these assumptions, the fair value of the stock options
granted in the three months ended 2003 is $0.42 per stock option.
If the Company had elected to recognize compensation expense based on
the fair value at the grant dates, consistent with the method prescribed by SFAS
No. 123, net income per share would have been changed to the pro forma amounts
indicated below:
Three Months Ended March
31,
-------------------------------
2004 2003
-------------------------------
Net income (loss) attributable to common stockholders, as reported $ 864,581 $ (641,625)
Less: Total stock based employee compensation expense determined
under the fair value based method for all awards (79,359) (15,274)
-------------------------------
Pro forma net income (loss) attributable to common stockholders $ 785,222 $ (656,899)
===============================
Basic net income (loss) per common share, as reported $ 0.08 $ (0.06)
Basic net income (loss) per common share, pro forma $ 0.07 $ (0.06)
Diluted net income (loss) per common share, as reported $ 0.07 $ (0.06)
Diluted net income (loss) per common share, pro forma $ 0.06 $ (0.06)
7. Commitments and Contingencies
Girbaud Men's Licensing Agreement
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. The agreement will expire in 2007. Under the
agreement as amended, the Company is required to make royalty payments to
Latitude in an amount equal to 6.25% of net sales of regular licensed
merchandise and 3.0% of certain irregular and closeout licensed merchandise. The
Company is obligated to pay the greater of actual royalties earned or minimum
guaranteed annual royalties of $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. 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.
Girbaud Women's Licensing Agreement
The Company has entered into an exclusive license agreement with
Latitude to manufacture and market women's jeanswear, casual wear, and active
influenced sportswear under the Girbaud brand and certain related trademarks in
the United States, Puerto Rico, and the U.S. Virgin Islands. The agreement will
expire in 2007.
10
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 made no minimum royalty payments under this
agreement from February to May 2003. The Company paid license fees of $1,353,038
associated with the first three months of 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
Latitude for advertising and promotional expenditures related to the Girbaud
brand.
Total license fees on Girbaud sportswear sales amounted to $1,353,038
and $927,563 for the three months ended March 31, 2004 and 2003, respectively.
The Company has the following contractual obligations to Latitude as of
March 31, 2004:
Schedule of certain contractual
obligations to Latitude: Payments Due By Period
-------------------------------------------------------------
Total Current 1-3 years 4-5 years After 5
years
--------------- --------------- --------------- -------------- -----------
Girbaud license
obligations * $ 18,825,000 $ 6,450,000 $ 9,000,000 $ 3,375,000 --
Girbaud fashion shows 1,050,000 300,000 600,000 150,000 --
Girbaud creative &
advertising fees 666,000 143,500 380,000 142,500 --
--------------- --------------- --------------- -------------- -----------
Total contractual
obligations $ 20,541,000 $ 6,893,500 $ 9,980,000 $ 3,667,500 --
=============== =============== =============== ============== ===========
(*) Adjusted to account for the deferrals, reductions and waivers of the royalty
obligations mentioned above.
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.
11
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Important Information Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. Those statements
include indications regarding the intent, belief or current expectations of the
Company and its management, including the Company's plans with respect to the
sourcing, manufacturing, marketing and distribution of its products, the
strength of the Company's backlog, the belief that current levels of cash and
cash equivalents together with cash from operations and existing credit
facilities will be sufficient to meet its working capital requirements for the
next twelve months, its expectations with respect to the performance of the
counterparties to its letter of credit agreements, its plans to invest in
derivative instruments and the collection of accounts receivable, its beliefs
and intent with respect to and the effect of changes in financial accounting
rules on its financial statements. Such statements are subject to a variety of
risks and uncertainties, many of which are beyond the Company's control, which
could cause actual results to differ materially from those contemplated in such
forward-looking statements, including in particular the risks and uncertainties
described under "Risk Factors" in the Company's Prospectus which include, among
other things, (i) changes in the marketplace for the Company's products,
including customer tastes, (ii) the introduction of new products or pricing
changes by the Company's competitors, (iii) changes in the economy, (iv) the
risk that the backlog of orders may not be indicative of eventual actual
shipments, and (v) termination of one or more of its agreements for use of the
Girbaud brand names and images in the manufacture and sale of the Company's
products. Existing and prospective investors are cautioned not to place undue
reliance on these forward-looking statements, which speak only as of the date
hereof. The Company undertakes no obligation to update or revise the information
contained in this Quarterly Report on Form 10-Q, whether as a result of new
information, future events or circumstances or otherwise.
"I.C. Isaacs " is a trademark of the Company. All other trademarks or
service marks, including "Girbaud " and "Marithe and Francois Girbaud"
(collectively, "Girbaud"), appearing in this Form 10-Q are the property of their
respective owners and are not the property of the Company.
Significant Accounting Policies and Estimates
The Company's significant accounting policies are more fully described
in its Summary of Accounting Policies to the Company's consolidated financial
statements. The preparation of financial statements in conformity with
accounting principles generally accepted within the United States requires
management to make estimates and assumptions in certain circumstances that
affect amounts reported in the accompanying financial statements and related
notes. In preparing these financial statements, management has made its best
estimates and judgments of certain amounts included in the financial statements,
giving due consideration to materiality. The Company does not believe there is a
great likelihood that materially different amounts would be reported related to
the accounting policies described below; however, application of these
accounting policies involves the exercise of judgment and the use of assumptions
as to future uncertainties and, as a result, actual results could differ from
these estimates.
The Company evaluates the adequacy of its allowance for doubtful
accounts at the end of each quarter. In performing this evaluation, the Company
analyzes the payment history of its significant past due accounts, subsequent
cash collections on these accounts and comparative accounts receivable aging
statistics. Based on this information, along with consideration of the general
strength of the economy, the Company develops what it considers to be a
reasonable estimate of the uncollectible amounts included in accounts
receivable. This estimate involves significant judgment by the management of the
Company. Actual uncollectible amounts may differ from the Company's estimate.
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
12
at the conclusion of the appropriate selling season. This estimate involves
significant judgment by the management of the Company. Actual gross margins on
sales of excess inventory may differ from the Company's estimate.
Results of Operations
The following table sets forth, for the periods indicated, the
percentage relationship to net sales of certain items in the Company's
consolidated financial statements for the periods indicated.
Three Months
Ended
March 31,
----------------
2004 2003
----- ----
Net sales............................................................................... 100.0% 100.0%
Cost of sales........................................................................... 62.2 72.1
Gross profit............................................................................ 37.8 27.9
Selling expenses........................................................................ 16.6 15.2
License fees............................................................................ 6.5 5.5
Distribution and shipping expenses...................................................... 2.3 3.6
General and administrative expenses..................................................... 7.8 7.3
Operating income (loss)................................................................. 4.6% (3.7)%
Three Months Ended March 31, 2004 Compared to Three Months Ended March 31, 2003
Net Sales.
Net sales increased 31.5% to $21.7 million in the three months ended
March 31, 2004 from $16.5 million in the three months ended March 31, 2003. The
Company believes the improvement was the direct result of the strength of its
products in the marketplace and improved shipping performance. Net sales of the
Girbaud men's product line increased $3.9 million, or 26.9% to $18.4 million
while the Girbaud women's product line increased $1.3 million, or 65.0% to $3.3
million.
Gross Profit.
Gross profit increased 74.5% to $8.2 million in the three months ended
March 31, 2004 from $4.7 million in the three months ended March 31, 2003 due to
higher sales, higher gross profit margins and reduced air freight. Gross profit
as a percentage of net sales, or gross profit margin, increased to 37.8% from
27.9% over the same period. The increase in gross profit margin is primarily a
result of a higher percentage of sales to customers at full price in the first
quarter of 2004 compared to higher sales of goods to off-price retailers at
substantially reduced gross profit margins in the first quarter of 2003.
Operating Expenses
Operating expenses increased 39.2% to $7.1 million in the three months
ended March 31, 2004 from $5.1 million in the three months ended March 31, 2003.
As a percentage of net sales, operating expenses increased to 32.7% from 30.9%
over the same period due to increased license fees, selling and administrative
expenses. Selling expenses increased primarily as a result of higher merchandise
allowances given to customers, higher commissions earned on higher net sales and
increased selling and design salaries. Advertising expenditures increased $0.1
million to $0.2 million in the first quarter of 2004 compared to $0.1 million in
the first quarter of 2003. The Company is required to spend the greater of an
amount equal to 3% of Girbaud net sales or $0.9 million in advertising and
related expenses promoting the Girbaud brand products in each year of the terms
of the Girbaud agreements. License fees increased $0.5 million to $1.4 million
13
in the three months ended March 31, 2004 from $0.9 million in the three months
ended March 31, 2003. As a percentage of net sales, license fees increased to
6.5% from 5.5% during the same periods. The increase in license fees as a
percentage of net sales is primarily due to the increase in net sales levels
causing royalty payments in excess of the 2004 minimum guaranteed royalty
payments 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 March 31, 2004 from
$0.6 million in the three months ended March 31, 2003. The decrease is a result
of reduced personnel costs associated with the reduction in personnel after the
first quarter of 2003. General and administrative expenses increased 41.7% to
$1.7 million in the three months ended March 31, 2004 from $1.2 million in the
three months ended March 31, 2003. The increase is attributable to an increase
in personnel costs and bad debt expense for the three months ended March 31,
2004. The increase in personnel costs are the result of higher salaries
associated with the restructuring of the Company's management in 2003. The
increase in bad debt expense is associated with increased sales levels.
Operating Income (Loss).
Operating income increased $1.6 million to $1.1 million in the three
months ended March 31, 2004 compared to an operating loss of $0.5 million in the
three months ended March 31, 2003. The improvement is due to higher gross profit
margins on higher net sales partially offset by higher S,G&A expenses.
Interest Expense.
Interest expense remained unchanged at $0.2 million in the three months
ended March 31, 2004 and 2003.
Income Taxes.
The Company has estimated its annual effective tax rate at 0% based on
its estimate of pre-tax income for 2004, any of which will be offset by its net
operating loss carryforwards of approximately $44.3 million. These net operating
loss carryforwards begin to expire in 2013 for income tax reporting purposes and
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. As of March 31, 2004, the
Company had cash and cash equivalents, including temporary investments, of $0.9
million and working capital of $5.3 million compared to $1.2 million and $5.4
million, respectively, as of March 31, 2003.
Operating Cash Flow
Cash used in operations totaled $2.1 million for the first three months
of 2004, compared to $1.6 million for the same period of 2003. This is primarily
due to net income of $0.9 million reduced by increases in accounts receivable,
inventory, prepaid and other expenses partially offset by increases in accounts
payable and accrued liabilities. Cash used for investing activities was
insignificant for the first three months of 2004 and 2003. Cash provided by
financing activities totaled $2.3 million for the first three months of 2004,
resulting primarily from borrowings on the Company's revolving line of credit
and an increase in checks issued against future deposits.
Accounts receivable increased $3.8 million from December 31, 2003 to
March 31, 2004 compared to an increase of $3.0 million from December 31, 2002 to
March 31, 2003. Inventory increased $1.4 million from December 31, 2003 to March
31, 2004 compared to a decrease of $2.1 million from December 31, 2002 to March
31, 2003. Capital expenditures were insignificant for the first three months of
2004 and 2003.
14
Credit Facilities
The Company has an asset-based revolving line of credit (the "Credit Agreement")
with Congress Financial Corporation ("Congress") which expires on December 31,
2004. The Credit Agreement, as previously amended, 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 March 31, 2004).
Outstanding letters of credit approximated $1.2 million at March 31, 2004. In
connection with amending the Credit Agreement in December 2002, the Company paid
Congress a financing fee of $250,000. This financing fee is being amortized over
the 24 month period which began in January 2003. The Company is currently in
compliance with the working capital and tangible net worth covenants, however,
there can be no assurance that the Company will continue to comply with these
covenants during the remainder of 2004 or thereafter.
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 $0.2 million and $0.1 for the
first three months of 2004 and 2003 respectively and the Company's actual credit
losses as a percentage of net sales were 0.9% and 0.6%, respectively.
The Company has the following contractual obligations and commercial commitments
as of March 31, 2004:
Schedule of contractual obligations:
Payments Due By Period
-------------------------------------------------------------------------------
Total Less than 1 1-3 years 4-5 years After 5
year years
----------------- -------------- -------------- -------------- -----------
Revolving line of credit $ 6,178,731 $ 6,178,731 $ -- $ -- $ --
Long term debt 6,557,908 2,350,196 2,873,815 1,333,897 --
Operating leases 574,806 315,865 220,844 38,097 --
Employment agreements 2,971,000 1,655,000 1,316,000 -- --
Girbaud license
obligations * 18,825,000 6,450,000 9,000,000 3,375,000 --
Girbaud fashion shows 1,050,000 300,000 600,000 150,000 --
Girbaud creative & --
advertising fees 666,000 143,500 380,000 142,500
----------------- -------------- -------------- -------------- -----------
Total contractual cash
obligations $ 36,823,445 $ 17,393,292 $ 14,390,659 $ 5,039,494 $ --
================= ============== ============== ============== ===========
(*) Adjusted to account for the deferrals, reductions and waivers of the
royalty and other payment obligations mentioned above.
Commercial Commitments
The Company has commercial commitments totaling $20,000,000, all from
its Credit Agreement and less then one year in duration. At March 31, 2004, the
15
Company had $6.2 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
($0.9 million at March 31, 2004) together with funds available under its Credit
Agreement, before cash provided by or used in operations, will be sufficient to
meet its capital requirements for the next 12 months.
Backlog and Seasonality
The Company's business is impacted by the general seasonal trends that
are characteristic of the apparel and retail industries. In the Company's
segment of the apparel industry, sales are generally higher in the first and
third quarters. Historically, the Company has taken greater markdowns in the
second and fourth quarters. The Company generally receives orders for its
products three to five months prior to the time the products are delivered to
stores. As of March 31, 2004, the Company had unfilled orders of approximately
$26.8 million, compared to $10.5 million of such orders as of March 31, 2003.
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. The Company believes the strength of its products in the
marketplace has directly resulted in the improved backlog of orders at March 31,
2004. 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 December 2003, the FASB issued a revision to SFAS No. 132,
Employers' Disclosures about Pensions and Other Postretirement Benefits". This
statement does not change the measurement or recognition aspects for pensions
and other postretirement benefit plans; however, it does revise employee
disclosures to include more information about the plan assets, obligations to
pay benefits and funding obligations. SFAS No. 132, as revised, is generally
effective for financial statements with fiscal years ending after December 15,
2003. Certain additional disclosure applicable to foreign defined benefit plans
are effective for fiscal years ending after June 15, 2004. The Company has
adopted the required provisions of SFAS No. 132, as revised.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity," SFAS
No. 150 clarifies the definition of a liability as currently defined in FASB
Concepts Statement No. 6, "Elements of Financial Statements," as well as other
planned revisions. This statement requires a financial instrument that embodies
an obligation of an issuer to be classified as a liability, In addition, the
statement establishes standards for the initial and subsequent measurement of
these financial instruments and disclosure requirements. SFAS No. 150 is
effective for financial instruments entered into or modified after May 31, 2003
and for all other matters, is effective at the first interim period beginning
after June 15, 2003. The adoption of SFAS No. 150 did not have a material effect
on the Company's financial position or results of operations.
In April 2003, the FASB issued SFAS No.149," Amendment of Statement No.
133 on Derivative Instruments and Hedging Activities," SFAS No. 149 amends SFAS
No. 133 for decisions made by the FASB's Derivatives Implementation Group, other
FASB projects dealing with financial instruments, and in response to
implementation issues raised in relation to the application of the definition of
a derivative. This statement is generally effective for contracts entered into
or modified after June 30, 2003 and for hedging relationships designed after
June 30, 2003. The adoption of SFAS No. 149 did not have material effect on the
Company's financial position or results of operations.
In January 2003, the FASB issued Interpretation ("FIN") No. 46,
"Consolidation of Variable Interest Entities" and in December 2003, a revised
interpretation was issued (FIN No. 46, as revised). In general, a variable
interest entity ("VIE") is a corporation, partnership, trust, or any other legal
structure used for business purposes that either does not have equity investors
with voting rights or has equity investors that do not provide sufficient
financial resources for the entity to support its activities. FIN No. 46, as
revised, requires a VIE to be consolidated by a company if that company is
designated as the primary beneficiary. The interpretation applies to VIEs
16
created after January 31, 2003, and for all financial statements issued after
December 15, 2003 for VIEs in which an enterprise held a variable interest that
it acquired before February 1, 2003. The adoption of FIN No. 46, as revised, did
not have a material effect on the Company's financial position or results of
operations.
17
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
The Company maintains disclosure controls and procedures that are designed
o to ensure that information required to be disclosed in the Company's
Exchange Act reports
|X| is recorded, processed, summarized and reported within the time
periods specified in the SEC's rules and forms,
|X| is accumulated and communicated to the Company's management,
including the Company's Chief Executive Officer and Chief
Financial Officer, as appropriate, to allow timely decisions
regarding required disclosure.
o with the objective of providing reasonable assurance that
|X| the Company's transactions are properly authorized;
|X| the Company's assets are safeguarded against unauthorized or
improper use; and
|X| the Company's transactions are properly recorded and reported,
all to permit the preparation of the Company's financial
statements in conformity with generally accepted accounting
principles.
In designing and evaluating the Company's disclosure controls and
procedures, the Company's management recognized that any controls and
procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives, and that
management must apply its judgment in evaluating the cost-benefit relationship
of possible controls and procedures.
The Company conducted 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. Among
other matters, the Company sought in the Company's evaluation to determine
whether there were any significant deficiencies or material weaknesses in the
Company's disclosure controls and procedures, or whether the Company had
identified any acts of fraud involving personnel who have a significant role in
the implementation of those controls and procedures.
Based upon that evaluation, the Company's CEO and CFO have concluded
that, subject to the limitations described above, the Company's disclosure
controls and procedures are effective to ensure that material information
relating to the Company and its consolidated subsidiary is made known to
management, including the CEO and CFO, particularly during the period when the
Company's periodic reports are being prepared, and that the Company's disclosure
controls and procedures are effective to provide reasonable assurance that the
Company's financial statements are fairly presented in conformity with generally
accepted accounting principles.
There have been no significant changes in the Company's disclosure
controls and procedures or in other factors that could significantly affect them
during the 1st quarter of 2004.
18
PART II--OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
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
32.1 Certification Pursuant to Section 1350 of chapter 63
of Title 18 of the United States Code
(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: May 12, 2004 BY: /S/ PETER J. RIZZO
----------------------------
Peter J. Rizzo,
Chief Executive Officer
Dated: May 12, 2004 BY: /S/ ROBERT J. CONOLOGUE
------------------------------
Robert J. Conologue, Chief Operating
Officer and Chief Financial Officer
(Principal Financial Officer)
20