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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, 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
____________________
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 8, 2004, 11,564,400 shares of common stock, par value $.0001
per share, ("Common Stock") of the Registrant were outstanding.
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1
I. C. ISAACS & COMPANY, INC.
FORM 10-Q
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION Page(s)
ITEM 1. FINANCIAL STATEMENTS 3 - 12
Consolidated Balance Sheets 3
Consolidated Statements of Operations 4
Consolidated Statements of Cash Flows 5
Summary of Accounting Policies 6
Notes to Consolidated Financial Statements 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 13 - 19
Important Information Regarding Forward-Looking
Statements 13
Significant Accounting Policies and Estimates 13
Results of Operations 14
Liquidity and Capital Resources 16
Backlog and Seasonality 18
Limited Dependence on One Customer 19
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK 20
ITEM 4. CONTROLS AND PROCEDURES 20
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 21
SIGNATURES 22
2
PART I--FINANCIAL INFORMATION
I.C. Isaacs & Company, Inc.
Consolidated Balance Sheets
Item 1. Financial Statements.
September 30, December 31,
2004 2003
----------------- -----------------
(Unaudited)
Assets
Current
Cash, including temporary investments of
$178,000 and $168,000................... $ 1,221,048 $ 782,519
Accounts receivable, less allowance for
doubtful accounts of $464,000 and
$275,000................................ 13,190,506 9,871,110
Inventories (Note 1)..................... 6,723,600 3,854,731
Prepaid expenses and other......... ..... 207,705 68,676
----------------- -----------------
Total current assets.................. 21,342,859 14,577,036
Property, plant and equipment, at cost,
less accumulated depreciation and
amortization.............................. 859,825 777,089
Other assets............................... 4,726,248 4,735,635
----------------- -----------------
$ 26,928,932 $ 20,089,760
================= =================
Liabilities And Stockholders' Equity
Current
Overdrafts............................... $ 706,614 $ 197,441
Revolving line of credit (Note 2)........ 2,621,991 4,224,285
Current maturities of long-term debt
(Note 2)................................ 3,017,484 2,013,977
Accounts payable......................... 1,683,226 1,039,901
Accrued expenses and other current
liabilities (Note 3).................... 5,098,630 2,523,253
----------------- -----------------
Total current liabilities............. 13,127,945 9,998,857
----------------- -----------------
Long-term debt (Note 2).................... 3,540,424 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, 12,376,699
and 12,311,366 shares issued; 11,199,990
and 11,134,657 shares outstanding....... 1,238 1,231
Additional paid-in capital............... 43,705,859 43,658,853
Accumulated deficit...................... (31,123,663) (35,790,241)
Treasury stock, at cost (1,176,709
shares)................................. (2,322,871) (2,322,871)
----------------- -----------------
Total stockholders' equity............ 10,260,563 5,546,972
----------------- -----------------
$ 26,928,932 $ 20,089,760
================= =================
See accompanying notes to consolidated financial statements.
3
I.C. Isaacs & Company, Inc.
Consolidated Statements of Operations (Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------ ------------------------------
2004 2003 2004 2003
-------------- -------------- -------------- --------------
Net sales............................... $ 22,797,357 $ 16,371,906 $ 64,731,910 $ 49,145,651
Cost of sales........................... 12,258,801 10,410,294 37,987,777 32,817,487
-------------- -------------- -------------- --------------
Gross profit............................ 10,538,556 5,961,612 26,744,133 16,328,164
-------------- -------------- -------------- --------------
Operating Expenses
Selling.............................. 3,943,256 2,961,801 10,240,945 7,701,206
License fees......................... 1,356,435 1,157,378 4,007,523 3,009,941
Distribution and shipping............ 493,439 482,375 1,480,101 1,553,644
General and administrative........... 2,018,163 1,207,979 5,696,819 3,720,168
-------------- -------------- -------------- --------------
Total operating expenses................ 7,811,293 5,809,533 21,425,388 15,984,959
-------------- -------------- -------------- --------------
Operating income........................ 2,727,263 152,079 5,318,745 343,205
-------------- -------------- -------------- --------------
Other income (expense)
Interest, net of interest income..... (191,917) (242,988) (582,934) (710,428)
Loss on sale of property............. -- (414,650) -- (414,650)
Other, net........................... 1,185 (39,870) 24,767 66,141
-------------- -------------- -------------- --------------
Total other expense..................... (190,732) (697,508) (558,167) (1,058,937)
-------------- -------------- -------------- --------------
Income (loss) before income taxes....... 2,536,531 (545,429) 4,760,578 (715,732)
Income tax expense (Note 4)............. 48,000 -- 94,000 --
-------------- -------------- -------------- --------------
Net income (loss)....................... $ 2,488,531 $ (545,429) $ 4,666,578 $ (715,732)
-------------- -------------- -------------- --------------
Basic earnings (loss) per share......... $ 0.22 $ (0.05) $ 0.42 $ (0.06)
Basic weighted average shares
outstanding............................ 11,164,621 11,134,657 11,142,947 11,134,657
Diluted earnings (loss) per share....... $ 0.18 $ (0.05) $ 0.36 $ (0.06)
Diluted weighted average shares
outstanding............................ 13,669,538 11,134,657 13,116,864 11,134,657
See accompanying notes to consolidated financial statements.
4
I.C. Isaacs & Company, Inc.
Consolidated Statements of Cash Flows (Unaudited)
Nine Months Ended
-------------------------------
September 30,
-------------------------------
2004 2003
-------------- --------------
Operating Activities
Net income (loss)............................ $ 4,666,578 $ (715,732)
Adjustments to reconcile net income (loss) to
cash provided by (used in) operating activities
Provision for doubtful accounts.............. 333,348 169,644
Write off of accounts receivable............. (144,348) (114,644)
Provision for sales returns and discounts.... 2,686,823 1,790,594
Sales returns and discounts.................. (2,503,833) (1,739,595)
Depreciation and amortization................ 439,367 574,460
Loss on sale of assets....................... -- 414,650
(Increase) decrease in assets
Accounts receivable.......................... (3,691,386) (3,824,928)
Inventories.................................. (2,868,869) 2,826,254
Prepaid expenses and other................... (139,029) (318,779)
Other assets................................. 165,637 91,570
Increase (decrease) in liabilities
Accounts payable............................. 643,325 189,551
Accrued expenses and other current
liabilities................................. 2,575,377 (132,664)
-------------- --------------
Cash provided by (used in) operating activities. 2,162,990 (789,619)
-------------- --------------
Investing Activities
Capital expenditures......................... (428,353) (52,562)
Proceeds from sale of assets................. -- 268,221
-------------- --------------
Cash (used in) provided by investing activities. (428,353) 215,659
-------------- --------------
Financing Activities
Overdrafts................................... 509,173 220,970
Net (payments) borrowings on revolving line
of credit................................... (1,602,294) 390,299
Cash on deposit to secure letter of credit... (250,000) --
Issuance of common stock..................... 47,013 --
-------------- --------------
Cash (used in) provided by financing activities. (1,296,108) 611,269
-------------- --------------
Increase in cash and cash equivalents........... 438,529 37,309
Cash and Cash Equivalents, at beginning of
period......................................... 782,519 600,997
-------------- --------------
Cash and Cash Equivalents, at end of period..... $ 1,221,048 $ 638,306
-------------- --------------
See accompanying notes to consolidated financial statements.
5
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
September 30, 2004 and for the three and the nine months ended September 30,
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 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.
6
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 September 30, 2004,
the Company had one customer who accounted for 14.3% of trade accounts
receivable. As of September 30, 2003, no one customer accounted for more than
10.0% of trade accounts receivable. For the three months ended September 30,
2004 and 2003 and the nine months ended September 30, 2004 and 2003, 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 bases 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. However, the Company
has estimated it will be required to pay alternative minimum tax for the year
ending December 31, 2004.
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 of an
entity. See Note 5 for the reconciliation of the basic and diluted earnings
(loss) per share for the three and nine months ended September 30, 2004. Basic
and diluted loss per share were the same for the three and nine months ended
September 30, 2003 because the impact of dilutive securities would have been
antidilutive. There were outstanding options to purchase 2,004,917 and 1,556,250
shares of common stock at September 30, 2004 and 2003, respectively. During the
first nine months of 2004, options to purchase 65,333 shares of common stock
were exercised, and the Company was paid $47,013 in connection therewith. There
were outstanding warrants to purchase 500,000 shares of common stock at
September 30, 2004 and 2003.
7
I.C. Isaacs & Company, Inc.
Notes to Consolidated Financial Statements (Unaudited)
1. Inventories
September 30, December 31,
Inventories consist of the following: 2004 2003
---------------- ----------------
Work-in-process......................... $ 455,918 $ 289,407
Finished Goods.......................... 6,267,682 3,565,324
---------------- ----------------
$ 6,723,600 $ 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 1.25% (effectively 6.50% at September 30,
2004). Outstanding letters of credit approximated $2.5 million at September 30,
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. The Company's management believes that the Company will continue to
comply with these covenants during the remainder of 2004.
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 and bears interest at 8% per annum. The Replacement Note is
subordinated to the rights of Congress under the Credit 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, June
and September 2004 Replacement Note payments have not been made. The fact that
these payments were not paid did not constitute an event of default under the
Replacement Note. The Replacement Note has been classified as current or
long-term based upon the deferred scheduled quarterly payments as detailed per
the Replacement Note.
3. Accrued Expenses
September 30, December 31,
Accrued expenses consist of the following: 2004 2003
---------------- ----------------
License fees (Note 7) $ 1,907,523 $ 1,153,094
Accrued interest 1,037,628 702,628
Management & selling bonuses 987,442 236,587
Accrued professional fees 199,150 50,000
Accrued compensation 194,635 68,397
Sales commissions payable 181,852 60,294
Income taxes 94,000 --
Customer credit balances 68,807 61,633
Payroll tax withholdings 39,022 69,619
Property taxes 19,895 19,895
Other 368,676 101,106
---------------- ----------------
$ 5,098,630 $ 2,523,253
================ ================
8
4. Income Taxes
The Company has recorded a liability for alternative minimum tax related to
the usage of net operating loss carryforwards in the current year. Any other
income tax liability will be offset with the $40.5 million in net operating loss
carryforwards. 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 per share with regard to the weighted average shares outstanding for
the three and nine months ended September 30, 2004. No reconciliation was
prepared for the three and nine months ended September 30, 2003 for the basic
and diluted loss per share as these are the same because the impact of dilutive
securities was antidilutive.
Per Share
Three Months Ended September 30, 2004: Net Income Shares Amount
------------ ------------ ------------
Basic earnings per share:
Net income............................. $ 2,488,531 11,164,621 $ 0.22
Effect of dilutive options and warrants 2,504,917
Diluted earnings per share............. $ 2,488,531 13,669,538 $ 0.18
Per Share
Nine Months Ended September 30, 2004: Net Income Shares Amount
------------ ------------ ------------
Basic earnings per share:
Net income............................. $ 4,666,578 11,142,947 $ 0.42
Effect of dilutive options and warrants 1,973,917
Diluted earnings per share............. $ 4,666,578 13,116,864 $ 0.36
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. Options to purchase 25,000
and 425,000 shares of common stock were granted in the first nine months of 2004
and 2003 respectively. There were outstanding options to purchase 2,004,917 and
1,556,250 shares of common stock at September 30, 2004 and 2003, respectively.
During the first nine months of 2004, options to purchase 65,333 shares of
common stock were exercised, and the Company was paid $47,013 in connection
therewith. There were outstanding warrants to purchase 500,000 shares of common
stock at September 30, 2004 and 2003.
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 2004 and 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 3.04%, 2.46% 2.78% and 2.91% for options
to purchase 25,000, 175,000, 225,000 and 25,000 shares granted at March 1, 2004,
July 1, 2003, March 31, 2003 and February 15, 2003, respectively, expected
volatility of 75%, expected option life of 5 years and no dividend payments for
2004 or 2003. Using these assumptions, the fair value was $0.55 per stock option
granted on March 1, 2004 and was $0.86, $0.42 and $0.42, respectively, per stock
option granted on July 1, March 31 and February 15, 2003.
9
If the Company had elected to recognize compensation expense based on the
fair value at the grant dates, consistent with the method prescribed by SFAS No.
123, net income per share would have been changed to the pro forma amounts
indicated below:
Three Months Ended
September 30,
------------------------------
2004 2003
-------------- --------------
Net income (loss), as reported $ 2,488,531 $ (545,429)
Less: Total stock based employee
compensation expense determined under
the fair value method for all awards (68,607) (20,085)
-------------- --------------
Pro forma net income (loss) attributable to
common stockholders $ 2,419,924 $ (565,514)
============== ==============
Basic net income (loss) per common share
As reported $ 0.22 $ (0.05)
Pro forma $ 0.22 $ (0.05)
Diluted net income (loss) per common share
As reported $ 0.18 $ (0.05)
Pro forma $ 0.18 $ (0.05)
Nine Months Ended
September 30,
------------------------------
2004 2003
-------------- --------------
Net income (loss), as reported $ 4,666,578 $ (715,732)
Less: Total stock based employee
compensation expense determined under
the fair value method for all awards (217,580) (29,245)
-------------- --------------
Pro forma net income (loss) attributable to
common stockholders $ 4,448,998 $ (744,977)
============== ==============
Basic net income (loss) per common share
As reported $ 0.42 $ (0.06)
Pro forma $ 0.40 $ (0.07)
Diluted net income (loss) per common share
As reported $ 0.36 $ (0.06)
Pro forma $ 0.34 $ (0.07)
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. In addition, the Company has
the option to renew the agreement for an additional 4 year term through 2011.
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. These amounts had been paid as of June 30, 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.
10
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. 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
addition, the Company has the option to renew the agreement for an additional 4
year term through 2011. 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. In November of 2003,
Latitude and the Company agreed that the $125,000 royalty payment that had been
deferred from December 2002 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 that that the balance thereof shall be deferred to June 2004.
These amounts had been paid as of June 30, 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 women's agreement.
Total license fees on Girbaud sportswear sales amounted to $1,356,435 and
$1,157,378 for the three months ended September 30, 2004 and 2003, respectively
and $4,007,523 and $3,009,941 for the nine months ended September 30, 2004 and
2003, respectively. As of September 30, 2004, the Company has accrued but not
paid $1,907,523 of the 2004 royalty payments (Note 3).
The Company has the following contractual obligations to Latitude as of
September 30, 2004:
Schedule of certain contractual obligations
to Latitude:
Payments Due By Period
-----------------------------------------------------------------------------------------
Total Less than 1 1-3 years 4-5 years After 5 years
year
---------------- ---------------- ---------------- ---------------- ----------------
Girbaud license
obligations $ 15,900,000 $ 5,775,000 $ 9,000,000 $ 1,125,000 --
Girbaud fashion shows 1,125,000 375,000 600,000 150,000 --
Girbaud creative &
advertising fees 617,500 190,500 380,000 47,000 --
---------------- ---------------- ---------------- ---------------- ----------------
Total contractual
obligations $ 17,642,500 $ 6,340,500 $ 9,980,000 $ 1,322,000 --
================ ================ ================ ================ ================
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.
In July 2004, the Company signed a 10 year lease to relocate the New York
Corporate Headquarters and Showroom. Expecting the relocation to occur in early
2005, the annual rental payments will be approximately $388,000, $398,000,
$408,000, $418,000 and $429,000 in years 2005 through 2009 and $2,505,000 for
the 5 years thereafter combined. The Company will expense these rent payments on
a straight line basis in accordance with the provisions of SFAS No. 13
"Accounting for Leases" starting January 2005, the anticipated date the facility
will be ready for occupancy. Also, in connection with this lease, the Company
has provided to the lessor a $250,000 letter of credit and has provided a
deposit for this amount to the bank as security for this letter of credit. As
the use of these funds is restricted, this deposit is classified as a non
current asset.
11
7. Retirement Plan
The Company contributed $175,000 and $200,000 into the defined benefit
pension plan during the nine months ended September 30, 2004 and 2003,
respectively. The Company has recognized pension expense of $114,000 and $90,000
for the three months ended September 30, 2004 and 2003, respectively and
$328,000 and $270,000 for the nine months ended September 30, 2004 and 2003,
respectively.
12
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, but not limited to, (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 orders and
subsequent sales and the related gross margins on unsold inventory at month end
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 judgment by
the management of the Company. Actual gross margins on sales of excess inventory
may differ from the Company's estimate.
13
Results of Operations
The following table sets forth 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,
------------------- -------------------
2004 2003 2004 2003
-------- -------- -------- --------
Net sales............................. 100.0% 100.0% 100.0% 100.0%
Cost of sales......................... 53.9 63.4 58.7 66.8
-------- -------- -------- --------
Gross profit.......................... 46.1 36.6 41.3 33.2
Selling expenses...................... 17.1 18.1 15.8 15.7
License fees.......................... 6.1 7.3 6.2 6.1
Distribution and shipping expenses.... 2.2 2.9 2.3 3.3
General and administrative expenses... 8.8 7.4 8.8 7.5
-------- -------- -------- --------
Operating income...................... 11.9% 0.9% 8.2% 0.6%
-------- -------- -------- --------
Three Months Ended September 30, 2004 Compared to Three Months Ended September
30, 2003
Net Sales
Net sales increased 39.0% to $22.8 million in the three months ended
September 30, 2004 from $16.4 million in the three months ended September 30,
2003. Net sales of the Girbaud men's product line increased $4.2 million, or
30.7% to $17.9 million while the Girbaud women's product line increased $2.2
million, or 81.5% to $4.9 million. The growth in net sales for the men's and
women's divisions resulted from increased sales in department store and
specialty store business.
Gross Profit
Gross profit increased 75.0% to $10.5 million in the three months ended
September 30, 2004 from $6.0 million in the three months ended September 30,
2003 due to higher sales and higher gross profit margins. Gross profit as a
percentage of net sales, or gross margin, increased to 46.1% from 36.6% over the
same period. Higher gross profit and gross margins were due to improved
negotiations with the Company's vendors, increased product mark-up and a higher
percentage of sales to customers at full price in the third quarter of 2004.
Operating Expenses
Operating expenses increased 34.5% to $7.8 million in the three months
ended September 30, 2004 from $5.8 million in the three months ended September
30, 2003. As a percentage of net sales, operating expenses decreased slightly to
34.2% from 35.4% over the same period. The increase in operating expenses
resulted primarily from higher selling expenses and licensing fees associated
with higher sales as well as an increase in administrative expenses. Selling
expenses increased primarily as a result of higher merchandise allowances given
to customers and higher commissions earned on higher net sales. Advertising and
promotional related expenses increased $0.1 million to $0.5 million in the third
quarter of 2004 compared to $0.4 million in the third 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
14
increased $0.2 million to $1.4 million in the three months ended September 30,
2004 from $1.2 million in the three months ended September 30, 2003. As a
percentage of net sales, license fees decreased to 6.1% from 7.3% during the
same periods. The increase in license fees is primarily due to the increase in
net sales levels causing royalty payments in excess of the 2004 minimum
guaranteed royalty payments. Distribution and shipping remained unchanged at
$0.5 million in the three months ended September 30, 2004 and 2003. General and
administrative expenses increased 66.7% to $2.0 million in the three months
ended September 30, 2004 from $1.2 million in the three months ended September
30, 2003. The increase is attributable to increases in personnel and related
costs for the three months ended September 30, 2004. The increase in personnel
costs is the result of higher salaries associated with the restructuring of the
Company's management in 2003 and bonuses accrued based on the Company's 2004
performance.
Operating Income
Operating income increased $2.5 million to $2.7 million in the three months
ended September 30, 2004 compared to $0.2 million in the three months ended
September 30, 2003. The improvement is due to higher gross margins on higher net
sales partially offset by higher operating expenses.
Interest Expense, net
Interest expense, net remained relatively unchanged for the three months
ended September 30, 2004 and 2003.
Income Taxes
The Company has recorded a liability for alternative minimum tax related to
the usage of net operating loss carryforwards in the current year. Any other
income tax liability will be offset with the $43.0 million in net operating loss
carryforwards. 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.
Nine Months Ended September 30, 2004 Compared to Nine Months Ended September 30,
2003
Net Sales
Net sales increased 31.8% to $64.7 million in the nine months ended
September 30, 2004 from $49.1 million in the nine months ended September 30,
2003. Net sales of the Girbaud men's product line increased $11.7 million, or
27.9%, to $53.6 million while the Girbaud women's product line increased $3.9
million, or 54.2%, to $11.1 million. The improvement was due to strong growth in
the men's and women's division which was the direct result of the strength of
the Company's products in the marketplace and improved shipping performance.
Gross Profit
Gross profit increased 63.8% to $26.7 million in the nine months ended
September 30, 2004 from $16.3 million in the nine months ended September 30,
2003 due to higher sales and higher gross margins. Gross profit as a percentage
of net sales, or gross margin, increased to 41.3% from 33.2% over the same
period. Higher gross profit and gross margins were due to better product
performance, improved delivery to retailers and a higher percentage of sales to
customers at full price in the first nine months of 2004.
Operating Expenses
Operating expenses increased 33.8% to $21.4 million in the nine months
ended September 30, 2004 from $16.0 million in the nine months ended September
30, 2003. As a percentage of net sales, operating expenses increased slightly to
33.1% from 32.6% over the same period due to increased license fees, selling and
administrative expenses. The increase in operating expenses resulted primarily
15
from higher selling expenses and licensing fees associated with higher sales as
well as an increase in administrative expenses. Selling expenses increased
primarily as a result of higher merchandise allowances given to customers and
higher commissions earned on higher net sales. Advertising and promotional
related expenses remained relatively unchanged at $1.2 million in the nine
months September 30, 2004 and 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 $1.0 million to $4.0 million
in the nine months ended September 30, 2004 from $3.0 million in the nine months
ended September 30, 2003. As a percentage of net sales, license fees increased
to 6.2% from 6.1% during the same periods. The increase in license fees 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. Distribution and shipping decreased $0.1 million to
$1.5 million in the nine months ended September 30, 2004 from $1.6 million in
the nine months ended September 30, 2003. General and administrative expenses
increased 54.1% to $5.7 million in the nine months ended September 30, 2004 from
$3.7 million in the nine months ended September 30, 2003. The increase is
attributable to an increase in personnel and related costs and the provision for
doubtful accounts for the nine months ended September 30, 2004. The increase in
personnel costs is the result of higher salaries associated with the
restructuring of the Company's management in 2003 and bonuses accrued based on
the Company's 2004 performance. The increase in the provision for doubtful
accounts is associated with increased sales levels.
Operating Income
Operating income increased $5.0 million to $5.3 million in the nine months
ended September 30, 2004 compared to $0.3 million in the nine months ended
September 30, 2003. The improvement is due to higher gross margins on higher net
sales partially offset by higher operating expenses.
Interest Expense, net
Interest expense, net decreased $0.1 million to $0.6 million in the nine
months ended September 30, 2004 from $0.7 million in the nine months ended
September 30, 2003 due to lower average borrowings on the Company's revolving
line of credit.
Income Taxes
The Company has recorded a liability for alternative minimum tax related to
the usage of net operating loss carryforwards in the current year. Any other
income tax liability will be offset with the $43.0 million in net operating loss
carryforwards. 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 September 30, 2004, the
Company had cash and cash equivalents, including temporary investments, of $1.2
million and working capital of $8.2 million compared to $0.6 million and $5.8
million, respectively, as of September 30, 2003.
Cash Flows
Cash provided by operations totaled $2.2 million for the first nine months
of 2004, compared to cash used in operations of $0.8 million for the same period
of 2003. The $3.0 million improvement is primarily due to net income of $4.7
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 $0.4 million for the first
nine months of 2004 compared to cash provided by investing activities of $0.2
million for the first nine months of 2003. Cash used in financing activities
totaled $1.3 million for the first nine months of 2004, resulting primarily from
payments on the Company's revolving line of credit partially offset by an
increase in overdrafts.
16
Accounts receivable increased $3.7 million from December 31, 2003 to
September 30, 2004 due to increased seasonal sales and higher third quarter
sales compared to an increase of $3.8 million from December 31, 2002 to
September 30, 2003. Inventory increased $2.9 million from December 31, 2003 to
September 30, 2004 to meet higher sales demand and improved deliveries to
retailers compared to a decrease of $2.8 million from December 31, 2002 to
September 30, 2003. Capital expenditures were $0.4 million for the first nine
months of 2004 compared to $0.1 million for the first nine months of 2003.
Overdrafts increased $0.5 million in the first nine months of 2004 compared to
an increase of $0.2 million in the same period of 2003. The cash provided by
operations in the first nine months of 2004 was partially used to pay down the
revolving line of credit during this same time period. Cash used in operations
during the first nine months of 2003 required the Company to borrow $0.4 from
its revolving ling of credit during the same period. The Company issued a letter
of credit from one of its banks in the third quarter of 2004. This letter of
credit is secured by a restricted deposit of $250,000.
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 1.25% (effectively 6.50% at September 30,
2004). At September 30, 2004, the Company had $2.6 million of borrowings and
approximately $2.5 million of outstanding letters of credit under the Credit
Agreement. 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.
The Company is currently negotiating with lenders to establish a new credit
facility for 2005 and 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 $0.3 million and $0.2 million for the
first nine months of 2004 and 2003, respectively, and the Company's actual
credit losses as a percentage of net sales were 0.5% and 0.4%, respectively.
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 and bears interest at 8% per annum. The Replacement Note is
subordinated to the rights of Congress under the Credit 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, June
and September 2004 Replacement Note payments have not been made. The fact that
these payments were not paid did not constitute an event of default under the
Replacement Note. The Replacement Note has been classified as current or
long-term based upon the deferred scheduled quarterly payments as detailed per
the Replacement Note.
17
The Company has the following contractual obligations and commercial commitments
as of September 30, 2004.
Schedule of contractual obligations and commercial commitments:
Payments Due By Period
-----------------------------------------------------------------------------------------
Total Less than 1 1-3 years 4-5 years After 5 years
year
---------------- ---------------- ---------------- ---------------- ----------------
Revolving line of credit $ 2,621,991 $ 2,621,991 $ -- $ -- $ --
Long-term debt 6,557,908 3,017,484 2,991,871 548,553 --
Operating leases 4,928,634 498,655 1,009,837 843,756 2,576,386
Employment agreements 2,756,000 1,345,000 1,286,000 125,000 --
Girbaud license
obligations 15,900,000 5,775,000 9,000,000 1,125,000 --
Girbaud fashion shows 1,125,000 375,000 600,000 150,000 --
Girbaud creative &
advertising fees 617,500 190,500 380,000 47,000 --
---------------- ---------------- ---------------- ---------------- ----------------
Total contractual cash
obligations $ 34,507,033 $ 13,823,630 $ 15,267,708 $ 2,839,309 $ 2,576,386
================ ================ ================ ================ ================
In July 2004, the Company signed a 10 year lease to relocate the New York
Corporate Headquarters and Showroom. Expecting the relocation to occur in early
2005, the annual rental payments will be approximately $388,000, $398,000,
$408,000, $418,000 and $429,000 in years 2005 through 2009 and $2,505,000 for
the 5 years thereafter combined. The Company will expense these rent payments on
a straight line basis in accordance with the provisions of SFAS No. 13
"Accounting for Leases" starting January 2005, the anticipated date the facility
will be ready for occupancy. Also, in connection with this lease, the Company
has provided to lessor a $250,000 letter of credit and has provided a deposit
for this amount to the bank as security for this letter of credit. As the use of
these funds is restricted, this deposit is classified as a non current asset.
The Company believes that current levels of cash and cash equivalents ($1.2
million at September 30, 2004), together with funds available under its existing
or future credit facilities, 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 September 30, 2004, the Company had unfilled orders of approximately $29.0
million, compared to $16.2 million of such orders as of September 30, 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 as well as the sales force receiving and processing these orders
earlier has directly resulted in the improved backlog of orders at September 30,
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.
18
Limited Dependence on One Customer
The Company's customer base is not concentrated in any specific geographic
region, but is concentrated in the retail industry. As of September 30, 2004,
the Company had one customer who accounted for 14.3% of trade accounts
receivable. The Company does not believe that the loss of that customer would
have a material adverse effect on its business or financial condition. As of
September 30, 2003, no one customer accounted for more then 10% of trade
accounts receivable. For the three months ended September 30, 2004 and 2003 and
the nine months ended September 30, 2004 and 2003, sales to no one customer
accounted for more than 10.0% of net sales.
19
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
-- to ensure that information required to be disclosed in the Company's
Exchange Act reports
-- is recorded, processed, summarized and reported within the time
periods specified in the SEC's rules and forms,
-- 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.
-- with the objective of providing reasonable assurance that
-- the Company's transactions are properly authorized;
-- the Company's assets are safeguarded against unauthorized or
improper use; and
-- 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 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 third quarter of 2004.
20
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
21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
I.C. ISAACS & COMPANY, INC
Dated: November 8, 2004 BY: /S/ PETER J. RIZZO
-----------------------------------------
Peter J. Rizzo,
Chief Executive Officer
Dated: November 8, 2004 BY: /S/ ROBERT J. CONOLOGUE
-----------------------------------------
Robert J. Conologue, Chief Operating
Officer and Chief Financial Officer
(Principal Financial Officer)
22