===============================================================================
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, 2005
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 May 13, 2005, 11,707,573 shares of common stock, par value $.0001
per share, ("Common Stock") of the Registrant were outstanding.
===============================================================================
1
I. C. ISAACS & COMPANY, INC.
FORM 10-Q
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION Page(s)
ITEM 1. FINANCIAL STATEMENTS 3 - 13
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 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS 14 - 19
Important information Regarding Forward-Looking Statements 14
Significant Accounting Policies and Estimates 14
Results of Operations 15
Liquidity and Capital Resources 16
Backlog and Seasonality 19
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 21
SIGNATURES 22
2
PART I--FINANCIAL INFORMATION
I.C. Isaacs & Company, Inc.
Consolidated Balance Sheets (Unaudited)
Item 1. Financial Statements.
March 31, December 31,
------------ ------------
2005 2004
Assets
Current
Cash, including temporary investments of $256,000 and $70,000 .... $ 1,301,954 $ 1,045,905
Accounts receivable, less allowance for doubtful accounts of
$365,000 and $316,000 ......................................... 12,981,306 10,015,723
Inventories (Note 1) ............................................. 5,696,140 8,317,437
Deferred tax asset (Note 4) ...................................... 1,193,000 1,193,000
Prepaid expenses and other ....................................... 380,155 509,503
------------ ------------
Total current assets .......................................... 21,552,555 21,081,568
Property, plant and equipment, at cost, less accumulated depreciation
and amortization ................................................. 2,668,683 2,088,233
Other assets ........................................................ 4,525,119 4,663,109
------------ ------------
$ 28,746,357 $ 27,832,910
============ ============
Liabilities And Stockholders' Equity
Current
Revolving line of credit (Note 2) ................................ $ -- 223,283
Current maturities of long-term debt (Note 2) .................... 3,722,346 3,366,180
Accounts payable ................................................. 1,462,929 3,097,963
Accrued expenses and other current liabilities (Note 3) .......... 5,969,019 5,799,574
------------ ------------
Total current liabilities ..................................... 11,154,294 12,487,000
------------ ------------
Long-term debt (Note 2) ............................................. 2,835,562 3,191,728
------------ ------------
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,
12,862,799 and 12,790,799 shares issued; 11,686,090 and
11,614,090 shares outstanding ................................. 1,286 1,279
Additional paid-in capital ....................................... 44,199,692 44,100,636
Accumulated deficit .............................................. (27,121,606) (29,624,862)
Treasury stock, at cost (1,176,709 shares) ....................... (2,322,871) (2,322,871)
------------ ------------
Total stockholders' equity .................................... 14,756,501 12,154,182
------------ ------------
$ 28,746,357 $ 27,832,910
============ ============
See accompanying notes to consolidated financial statements.
3
I.C. Isaacs & Company, Inc.
Consolidated Statements of Operations (Unaudited)
Three Months Ended
-------------------------------------
March 31,
2005 2004
------------ ------------
Net sales ................................. $ 23,701,942 $ 20,764,668
Cost of sales ............................. 13,750,928 13,518,379
------------ ------------
Gross profit .............................. 9,951,014 7,246,289
------------ ------------
Operating Expenses
Selling ................................ 2,999,180 2,630,282
License fees ........................... 1,488,000 1,353,038
Distribution and shipping .............. 550,538 502,648
General and administrative ............. 2,249,069 1,697,724
------------ ------------
Total operating expenses .................. 7,286,787 6,183,692
------------ ------------
Operating income .......................... 2,664,227 1,062,597
------------ ------------
Other income (expense)
Interest, net of interest income ....... (110,201) (198,767)
Other, net ............................. 230 751
------------ ------------
Total other expense ....................... (109,971) (198,016)
------------ ------------
Income before income taxes ................ 2,554,256 864,581
Income tax expense (Note 4) ............... 51,000 --
------------ ------------
Net income ................................ $ 2,503,256 $ 864,581
------------ ------------
Basic earnings per share .................. $ 0.21 $ 0.08
Basic weighted average shares outstanding . 11,650,802 11,134,657
Diluted earnings per share ................ $ 0.18 $ 0.07
Diluted weighted average shares outstanding 13,651,907 12,279,657
See accompanying notes to consolidated financial statements.
4
I.C. Isaacs & Company, Inc.
Consolidated Statements of Cash Flows (Unaudited)
Three Months Ended
-----------------------------
March 31,
-----------------------------
2005 2004
----------- -----------
Operating Activities
Net income.................................................................. $ 2,503,256 $ 864,581
Adjustments to reconcile net income to cash provided by (used in) operating
activities
Provision for doubtful accounts .............................................. 126,470 152,132
Write off of accounts receivable ............................................. (77,470) (77,132)
Provision for sales returns and discounts .................................... 802,485 821,670
Sales returns and discounts .................................................. (883,485) (638,680)
Depreciation and amortization ................................................ 132,615 142,250
(Increase) decrease in assets
Accounts receivable .......................................................... (2,933,583) (3,802,814)
Inventories .................................................................. 2,621,297 (1,417,386)
Prepaid expenses and other ................................................... 129,348 (140,509)
Other assets ................................................................. 131,375 99,000
Increase (decrease) in liabilities
Accounts payable ............................................................. (1,635,034) 577,831
Accrued expenses and other current liabilities ............................... 169,445 1,290,805
----------- -----------
Cash provided by (used in) operating activities ................................. 1,086,719 (2,128,252)
----------- -----------
Investing Activities
Capital expenditures ......................................................... (706,450) (29,630)
----------- -----------
Cash used in investing activities ............................................... (706,450) (29,630)
----------- -----------
Financing Activities
Overdrafts ................................................................... -- 319,282
Net (payments) borrowings on revolving line of credit ........................ (223,283) 1,954,446
Issuance of common stock ..................................................... 99,063 --
----------- -----------
Cash (used in) provided by financing activities ................................. (124,220) 2,273,728
----------- -----------
Increase in cash and cash equivalents ........................................... 256,049 115,846
Cash and Cash Equivalents, at beginning of period ............................... 1,045,905 782,519
----------- -----------
Cash and Cash Equivalents, at end of period ..................................... $ 1,301,954 $ 898,365
----------- -----------
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 2004 or thus far in 2005. 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, 2005 and for the three months ended March 31, 2005 and 2004 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 accounting principles generally accepted in the United Sates
of America 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 accounting principles generally accepted in the United Sates
of America 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, 2004.
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
Revenue Recognition
Net revenue is recognized upon the transfer of title and risk of
ownership to customers, which is generally upon shipment as terms are FOB
shipping point. Revenue is recorded net of discounts, as well as provisions for
estimated returns and allowances. The Company estimates the provision for
returns by reviewing trends and returns on a historical basis. On a seasonal
basis, the Company negotiates price adjustments with its retail customers as
sales incentives. The Company estimates the cost of such adjustments on an
ongoing basis considering historical trends, projected seasonal results and an
evaluation of current economic conditions. For the three months ended March 31,
2005, these costs were recorded as a reduction to net revenue and the March 31,
2004 amounts have been reclassified to reflect this change. These price
adjustments, which were previously classified as selling expenses in prior
years, were $1,000,000 and $952,442 for the three months ended March 31, 2005
and 2004 respectively. This change has no effect on net income or loss in any
period presented.
Use of Estimates
The preparation of financial statements in accordance with accounting
principles generally accepted in the United Sates of America 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, 2005, the
Company had two customers who accounted for 18.5% and 14.3% of trade accounts
receivable. As of March 31, 2004, the Company had one customer who accounted for
10.3% of trade accounts receivable. For the three months ended March 31, 2005
and 2004 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 2%
based on its estimate of the utilization of existing net operating loss
carryforwards to offset any pre-tax income it may generate.
7
Earnings Per Share
Earnings per share is based on the weighted average number of shares of
common stock and dilutive common stock equivalents outstanding. Basic earnings
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 per share for the three months
ended March 31, 2005 and 2004.
Recent Accounting Pronouncements
In March 2004, the Financial Accounting Standards Board ("FASB") issued
a proposed statement, "Share-Based Payment", which addresses the accounting for
share-based payment transactions in which an enterprise receives employee
services in exchange for equity instruments of the enterprise or liabilities
that are based on the grant-date fair value of the enterprise's equity
instruments or that may be settled by the issuance of such equity instruments.
The proposed statement would eliminate the ability to account for share-based
compensation transactions using Accounting Principles Board ("APB") Opinion No.
25, "Accounting for Stock Issued to Employees", and generally would require
instead that such transactions be accounted for using a fair-value-based method.
In December 2004, the FASB issued Statement No. 123(R), Share-Based Payment,
which is a revision of Statement 123. Generally, the approach in SFAS 123(R) is
similar to the approach described in SFAS 123. However, SFAS 123(R) requires all
share-based payments to employees, including grants of employee stock options,
to be recognized in the income statement based on their grant-date fair values.
Pro forma disclosure is no longer an alternative.
As permitted by SFAS 123, the Company currently accounts for
share-based payments to employees using APB 25's intrinsic value method and, as
such, generally recognizes no compensation cost for employee stock options.
Accordingly, the adoption of SFAS 123(R)'s fair value method may have a
significant impact on the Company's result of operations as the Company will be
required to recognize the cost of employee services received in exchange for
awards of equity instruments based on the grant-date fair value of those awards.
The impact of adoption of SFAS 123(R) cannot be predicted at this time because
it will depend on levels of share-based payments granted in the future. In April
2005, the Securities and Exchange Commission delayed the effective date of SFAS
123(R), which is now effective for public companies for annual, rather than
interim, periods that begin after June 15, 2005. The Company is currently
evaluating the impact on its financial statements upon the adoption of SFAS
123(R).
8
I.C. Isaacs & Company, Inc. Notes to Consolidated
Financial Statements (Unaudited)
1. Inventories
March 31, December 31,
------------ ------------
Inventories consist of the following: 2005 2004
------------ ------------
Work-in-process............................................... $ 1,129,723 $ 3,688,980
Finished Goods................................................ 4,566,417 4,628,457
------------ ------------
$ 5,696,140 $ 8,317,437
============ ============
2. Long-Term Debt
On December 30, 2004, the Company entered into a three year credit
facility (the "Credit Facility") with Wachovia Bank, National Association
("Wachovia"). The Credit Facility provides that the Company may borrow, using
as collateral, up to 85% of eligible accounts receivable and a portion of
eligible inventory, both as defined by the Credit Facility. Borrowings under
the Credit Facility may not exceed $25.0 million including outstanding letters
of credit which are limited to $8.0 million at any one time. There were
approximately $3.7 million of outstanding letters of credit at March 31, 2005.
The Credit Facility accords to the Company the right, at its election, to
borrow these amounts as either Prime Rate Loans or LIBOR Loans. Prime Rate
Loans bear interest at the prime rate plus the applicable margin in effect from
time to time. LIBOR Loans are limited to three in total, must be a minimum of
$1,000,000 each and in integral multiples of $500,000 in excess of that amount,
and bear interest at the LIBOR rate plus the applicable margin in effect from
time to time. The applicable margins, as defined by the Credit Facility,
fluctuate from 0.00% to 0.75% for the Prime Loans and 2.00% to 2.75% for LIBOR
Loans. The applicable margins are inversely affected by fluctuations in the
amount of "excess availability" - the unused portion of the amount available
under the facility - which are in staggered increments from less then $2.5
million to $7.5 million. The Prime Rate and the LIBOR Rate were 5.50% and 3.84%
respectively at March 31, 2005. The Credit Facility also requires the Company
to comply with certain covenants expressed as fixed charge coverage ratios and
tangible liability to net worth ratios. As collateral security for the
Company's obligations under the Credit Facility, ICI unconditionally guaranteed
the payment and performance of all obligations arising thereunder, and the
Partnership granted a first priority security interest in all of its assets to
Wachovia. In 2004, the Company paid $79,379 as a facility fee to Wachovia in
connection with the consummation of the Credit Facility. That fee is deferred
and will be amortized over the life of the Credit Facility.
On May 6, 2002, Textile Investment International S.A. ("Textile"), an
affiliate of Latitude Licensing Corp. ("Latitude"), the licensor of the
Company, acquired a note that the Company had issued to a former licensor. On
May 21, 2002, Textile exchanged that note for an amended and restated note (the
"Replacement Note"), which subordinated Textile's rights under the note to the
rights of Congress under the Credit Agreement, deferred the original note's
principal payments and extended the maturity date of the note until 2007. In
connection with the execution of the Credit Facility, the Replacement Note was
further amended and restated to subordinate Textile's rights to the rights of
Wachovia under the Credit Facility (the "Amended and Restated Replacement Note"
and together with the Replacement Note, the "Textile Notes"). Pursuant to the
subordination provisions of the Textile Notes, the Company was obligated to
defer the payments that otherwise would have been due thereunder during each
calendar quarter of December 31, 2002 through March 31, 2005. Also, pursuant to
the provisions of the Textile Notes, the non-payment and deferral of those
payments did not constitute a default thereunder. The obligations under the
Textile Notes have been classified as current or long-term based upon the
respective original due dates of the quarterly payments specified in the
Replacement Note or the Amended and Restated Replacement Note, as the case may
be. Accordingly, each deferred quarterly payment has been classified as current
even though the payment thereof may not be due until a future year.
9
3. Accrued Expenses
March 31, December 31,
2005 2004
---------------- ----------------
Accrued expenses consist of the following:
Royalties & other licensor obligations, Note 7 $ 1,894,774 $ 2,489,274
Management & selling bonuses 1,391,492 1,087,442
Accrued interest 1,226,923 1,136,023
Severance accrual 396,325 290,570
Accrued professional fees 184,963 51,650
Income taxes payable 158,000 148,000
Sales commissions payable 146,899 51,629
Accrued rent expense 125,239 111,000
Customer credit balances 115,049 82,832
Accrued compensation 101,085 120,871
Payroll tax withholdings 68,720 71,934
Property taxes 19,895 19,895
Other 139,655 138,454
---------------- ----------------
$ 5,969,019 $ 5,799,574
================ ================
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 $41.2 million in net
operating loss carryforwards. These net operating loss carryforwards begin to
expire in 2014 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 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 months ended March 31, 2005 and 2004.
Per Share
Three Months Ended March 31, 2005: Net Income Shares Amount
---------------- ------------- -----------------
Basic earnings per share............................. $ 2,503,256 11,650,802 $0.21
Effect of dilutive options and warrants.............. 2,001,105
Diluted earnings per share........................... $ 2,503,256 13,651,907 $0.18
Per Share
Three Months Ended March 31, 2004: Net Income Shares Amount
---------------- ------------- -----------------
Basic earnings per share............................. $ 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
10
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. No options to purchase
shares of common stock were granted in the first three months of 2005. Options
to purchase 25,000 shares of common stock were granted in the first three months
of 2004. There were outstanding options to purchase 1,465,817 and 2,070,250
shares of common stock at March 31, 2005 and 2004, respectively. During the
first three months of 2005, options to purchase 72,000 shares of common stock
were exercised, and the Company was paid $99,063 in connection therewith. No
options to purchase shares of common were exercised in the first three months of
2004. There were outstanding warrants to purchase 500,000 shares of common stock
at March 31, 2005 and 2004.
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, 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% expected volatility of 75%, expected option
life of 5 years and no dividend payments for 2004. Using these assumptions, the
fair value was $0.55 per stock option granted on March 1, 2004. 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,
--------------------------------
2005 2004
---------------- ---------------
Net income, as reported $ 2,503,256 $ 864,581
Less: Total stock based employee compensation expense
determined under the fair value method for all awards (50,473) (79,359)
---------------- ---------------
Pro forma net income attributable to common stockholders $ 2,452,783 $ 785,222
================ ===============
Basic net income per common share
As reported $ 0.21 $ 0.08
Pro forma $ 0.21 $ 0.07
Diluted net income per common share
As reported $ 0.18 $ 0.07
Pro forma $ 0.18 $ 0.06
7. Commitments and Contingencies
Girbaud Men's Licensing Agreement
The Company has entered into an exclusive license agreement with
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. 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 or 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. 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.
11
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. In June 2002, the
Company notified Latitude of its intention to extend the agreement through 2007.
Under the agreement as amended, the Company is required to make royalty payments
to the licensor in an amount equal to 6.25% of net sales or 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. The Company is required
to spend the greater of an amount equal to 3% of Girbaud women's net sales or
$400,000 in advertising and related expenses promoting the women's Girbaud brand
products in each year through the term of the Girbaud women's agreement. In
addition, while the agreement is in effect the Company is required to pay
$190,000 per year to the licensor for advertising and promotional expenditures
related to the Girbaud brand.
Total license fees on Girbaud product line sales amounted to $1,488,000
and $1,353,038 for the three months ended March 31, 2005 and 2004, respectively.
In connection with the refinancing of the Company's credit facility in December
2004, Latitude and the Company agreed to defer approximately $2.3 million of
2004 minimum and additional royalty payments to 2005. The Company has paid $1.2
million of the 2004 deferred amounts as of March 31, 2005 and expects to pay the
remaining amounts by the end of the first half of 2005. The Company has paid and
expects to continue to pay all 2005 royalty payments as they become due.
The Company has the following contractual obligations as of March 31,
2005:
Schedule of contractual obligations: Payments Due By Period
---------------------------------------------------------------
Total Current 1-3 years 4-5 years After 5 years
-------------- -------------- --------------- -------------- --------------
Employment agreements $ 2,481,500 $ 1,227,875 $ 1,253,625 $ -- $ --
Girbaud license
obligations * 13,861,026 5,986,026 7,875,000 -- --
Girbaud fashion shows 900,000 375,000 525,000 -- --
Girbaud creative &
advertising fees 570,000 235,000 335,000 -- --
--------------
-------------- --------------- -------------- --------------
Total contractual
obligations $ 17,812,526 $ 7,823,901 $ 9,988,625 $ -- $ --
============== ============== =============== ============== ==============
(*) Adjusted to account for the deferrals of the royalty obligations mentioned
above.
In July 2004, the Company signed a 10 year lease to relocate its New
York corporate offices and showroom. The relocation occurred in January of 2005
and 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 expenses these rent payments on a
straight line basis in accordance with the provisions of SFAS No. 13 "Accounting
for Leases" starting October 2004, the month the Company obtained access to the
facility. Also, in connection with this lease, the Company 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.
12
8. Retirement Plan
The Company contributed $175,000 into the defined benefit pension plan
during the three months ended March 31, 2004. The Company did not make any
contributions into the plan during the first three months of 2005 but expects to
make contributions of approximately $315,000 during 2005. The Company has
recognized pension expense of $132,000 and $99,000 for the three months ended
March 31, 2005 and 2004, respectively.
Components of net periodic pension cost Three Months Ended
------------------------------------
2005 2004
--------------- --------------
Service cost of current period $ 16,000 $ 13,000
Interest on the above service cost 1,000 1,000
--------------- --------------
17,000 14,000
Interest on the projected benefit obligation 143,000 115,000
Expected return on plan assets (132,000) (123,000)
Amortization of prior service cost 11,000 10,000
Amortization of loss 93,000 83,000
--------------- -------------
Pension cost $ 132,000 $ 99,000
=============== =============
13
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
In this report, the term "ICI" means I. C. Isaacs & Company, Inc.,
individually, the terms "Partnership," "Design" and "Far East" mean ICI's wholly
owned subsidiaries, I.C. Isaacs & Company L.P., Isaacs Design, Inc. and I.C.
Isaacs (Far East) Limited, respectively, and the term "Company" means ICI, the
Partnership, Design and Far East, collectively.
"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.
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.
Significant Accounting Policies and Estimates
The Company's significant accounting policies are more fully described
in its Summary of Accounting Policies appearing at pages 6 through 8 of this
report.. 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.
14
Net revenue is recognized upon the transfer of title and risk of ownership
to customers, which is generally upon shipment as terms are FOB shipping point.
Revenue is recorded net of discounts, as well as provisions for estimated
returns and allowances. The Company estimates the provision for returns by
reviewing trends and returns on a historical basis. On a seasonal basis, the
Company negotiates price adjustments with its retail customers as sales
incentives. The Company estimates the cost of such adjustments on an ongoing
basis considering historical trends, projected seasonal results and an
evaluation of current economic conditions.
Shipping and handling fees billed to customers are included in net
sales in the consolidated statements of operations. Shipping and handling costs
incurred are classified in distribution and shipping in the consolidated
statements of operations.
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.
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
Ended
March 31,
-------------------
2005 2004
------ -------
Net sales..............................................100.0% 100.0%
Cost of sales.......................................... 58.2 64.9
------ -------
Gross profit........................................... 41.8 35.1
Selling expenses....................................... 12.7 12.5
License fees........................................... 6.3 6.7
Distribution and shipping expenses..................... 2.5 2.4
General and administrative expenses.................... 9.3 8.2
Operating income....................................... 11.0% 5.3%
------ -------
Three Months Ended March 31, 2005 Compared to Three Months Ended March 31, 2004
Net Sales
Net sales increased 13.9% to $23.7 million in the three months ended
March 31, 2005 from $20.8 million in the three months ended March 31, 2004. The
Company shipped 1.1 million units of its products in the first quarter of 2005
compared to 1.0 million units during the same period of 2004. Net sales of the
Girbaud men's product line increased $1.8 million, or 10.2% to $19.4 million
while the Girbaud women's product line increased $1.1 million, or 34.4% to $4.3
million. The growth in net sales for the men's and women's divisions resulted
primarily from increased sales to department stores and specialty stores.
15
Gross Profit
Gross profit increased 38.9% to $10.0 million in the first quarter of
2005 from $7.2 million in the same quarter of 2004. Gross margins increased to
41.8% in the first quarter of 2005 from 35.1% in the first quarter of 2004. The
Company continued to experience higher gross profit and gross margins due to
better product performance and improved deliveries to retailers.
Operating Expenses
Operating expenses increased 17.7% to $7.3 million in the three months
ended March 31, 2005 from $6.2 million in the three months ended March 31, 2004.
The increase in operating expenses resulted primarily from higher selling and
administrative expenses. Selling expenses increased primarily as a result of
higher commission expenses associated with higher net sales and design personnel
expenses associated with the Company's management restructuring. This management
restructuring, which started in the latter part of 2003, also directly affected
the administrative expenses. Advertising and promotional related expenses
remained unchanged at $0.5 million in the first quarters of 2005 and 2004. 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 $0.1 million to $1.5 million in the three months ended March 31, 2005
from $1.4 million in the three months ended March 31, 2004. As a percentage of
net sales, license fees decreased to 6.3% in the first quarter of 2005 from 6.7%
during the same period of 2004. The increase in license fees is primarily due to
the increase in net sales levels causing royalty payments in excess of the 2005
minimum guaranteed royalty payments. Distribution and shipping increased
slightly to $0.6 million in the three months ended March 31, 2005 compared to
$0.5 million in the same period of 2004. General and administrative expenses
increased 29.4% to $2.2 million in the three months ended March 31, 2005 from
$1.7 million in the three months ended March 31, 2004. The increase is
attributable to increases in personnel and related costs for the three months
ended March 31, 2004.
Operating Income
Operating income increased $1.6 million to $2.7 million in the three
months ended March 31, 2005 compared to $1.1 million in the three months ended
March 31, 2004. 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 to $0.1 million for the three months
ended March 31, 2005 compared to $0.2 million for the same period of 2004 due to
lower overall borrowings on the Company's revolving line of credit facility. Due
to the improved cash flows from operations, the Company paid down the borrowings
on its 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 $41.2 million in net
operating loss carryforwards. These net operating loss carryforwards begin to
expire in 2014 for income tax reporting purposes.
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, 2005, the
Company had cash and cash equivalents, including temporary investments, of $1.3
million and working capital of $10.4 million compared to $0.9 million and $5.4
million, respectively, as of March 31, 2004.
16
Cash Flows
Cash provided by operations totaled $1.1 million for the first three
months of 2005, compared to cash used in operations of $2.1 million for the same
period of 2004. The $3.2 million improvement is primarily due to net income of
$2.5 million and decreases in inventories partially reduced by increases in
accounts receivable and decreases in accounts payable. Cash used for investing
activities was $0.7 million for the first three months of 2005. Cash used by
investing activities was insignificant in the first 3 months of 2004. Cash used
in financing activities was $0.1 million for the first three months of 2005,
resulting primarily from payments on the Company's revolving line of credit
partially offset by cash received for issuance of common stock related to the
exercise of stock options.
Accounts receivable increased $3.0 million from December 31, 2004 to
March 31, 2005 due to increased seasonal sales and higher first quarter sales in
2005 compared to an increase of $3.8 million from December 31, 2003 to March 31,
2004. Inventory decreased $2.6 million from December 31, 2004 to March 31, 2005
as the inventory, which was built up at December 31, 2004, was shipped to meet
the higher sales demand and improved deliveries to retailers in the first
quarter of 2005. Inventories increased in the same period of 2004 as inventory
levels had not been built up to sufficient levels at that time to improve
deliveries to retail customers. Capital expenditures were $0.7 million for the
first three months of 2005 due to the build out of the new office space in New
York. There were no overdrafts in the first quarter of 2005 compared to an
increase of $0.3 million in the same period of 2004.
Credit Facilities
On December 30, 2004, the Company entered into a three year credit
facility (the "Credit Facility") with Wachovia Bank, National Association
("Wachovia"). The Credit Facility provides that the Company may borrow, using
as collateral, up to 85% of eligible accounts receivable and a portion of
eligible inventory, both as defined by the Credit Facility. Borrowings under
the Credit Facility may not exceed $25.0 million including outstanding letters
of credit which are limited to $8.0 million at any one time. There were
approximately $3.7 million of outstanding letters of credit at March 31, 2005.
The Credit Facility accords to the Company the right, at its election, to
borrow these amounts as either Prime Rate Loans or LIBOR Loans. Prime Rate
Loans bear interest at the prime rate plus the applicable margin in effect from
time to time. LIBOR Loans are limited to three in total, must be a minimum of
$1,000,000 each and in integral multiples of $500,000 in excess of that amount,
and bear interest at the LIBOR rate plus the applicable margin in effect from
time to time. The applicable margins, as defined by the Credit Facility,
fluctuate from 0.00% to 0.75% for the Prime Loans and 2.00% to 2.75% for LIBOR
Loans. The applicable margins are inversely affected by fluctuations in the
amount of "excess availability" - the unused portion of the amount available
under the facility - which are in staggered increments from less then $2.5
million to $7.5 million. The Prime Rate and the LIBOR Rate were 5.50% and 3.84%
respectively at March 31, 2005. The Credit Facility also requires the Company
to comply with certain covenants expressed as fixed charge coverage ratios and
tangible liability to net worth ratios. As collateral security for its
obligations under the Credit Facility, ICI unconditionally guaranteed the
payment and performance of all obligations arising thereunder, and the
Partnership granted a first priority security interest in all of its assets to
Wachovia. In 2004, the Company paid $79,379 as a facility fee to Wachovia in
connection with the consummation of the Credit Facility. That fee is deferred
and will be amortized over the life of the Credit Facility.
The Company extends credit to its customers. Accordingly, the Company
may have significant risk in collecting accounts receivable from its customers.
The Company has credit policies and procedures which it uses to minimize
exposure to credit losses. The Company's collection personnel regularly contact
customers with receivable balances outstanding beyond 30 days to expedite
collection. If these collection efforts are unsuccessful, the Company may
discontinue merchandise shipments until the outstanding balance is paid.
Ultimately, the Company may engage an outside collection organization to collect
past due accounts. Timely contact with customers has been effective in reducing
credit losses. The Company's credit losses were $0.1 million and $0.2 million
for the first three months of 2005 and 2004, respectively, and the Company's
actual credit losses as a percentage of net sales were 0.4% and 1.0%,
respectively.
17
On May 6, 2002, Textile Investment International S.A. ("Textile"), an
affiliate of Latitude Licensing Corp. ("Latitude"), the licensor of the
Company, acquired a note that the Company had issued to a former licensor. On
May 21, 2002, Textile exchanged that note for an amended and restated note (the
"Replacement Note"), which subordinated Textile's rights under the note to the
rights of Congress under the Credit Agreement, deferred the original note's
principal payments and extended the maturity date of the note until 2007. In
connection with the execution of the Credit Facility, the Replacement Note was
further amended and restated to subordinate Textile's rights to the rights of
Wachovia under the Credit Facility (the "Amended and Restated Replacement Note"
and together with the Replacement Note, the "Textile Notes"). Pursuant to the
subordination provisions of the Textile Notes, the Company was obligated to
defer the payments that otherwise would have been due thereunder during each
calendar quarter of December 31, 2002 through March 31, 2005. Also, pursuant to
the provisions of the Textile Notes, the non-payment and deferral of those
payments did not constitute a default thereunder. The obligations under the
Textile Notes have been classified as current or long-term based upon the
respective original due dates of the quarterly payments specified in the
Replacement Note or the Amended and Restated Replacement Note, as the case may
be. Accordingly, each deferred quarterly payment has been classified as current
even though the payment thereof may not be due until a future year.
The Company has the following contractual obligations and commercial commitments
as of March 31, 2005:
Schedule of contractual obligations:
Payments Due By Period
------------------------------------------------------------------------------------
Total Less than 1 year 1-3 years 4-5 years After 5 years
----------------- ---------------- ------------- -------------- ---------------
Revolving line of credit $ -- $ -- $ -- $ -- $ --
Long term debt 6,557,908 3,722,346 2,835,562 -- --
Operating leases 4,717,581 495,270 937,047 895,365 2,389,899
Employment agreements 2,481,500 1,227,875 1,253,625 -- --
Girbaud license
obligations 13,861,026 5,986,026 7,875,000 -- --
Girbaud fashion shows 900,000 375,000 525,000 -- --
Girbaud creative & --
advertising fees 570,000 235,000 335,000 --
---------------- ------------- ------------ ---------- --------------
Total contractual cash
obligations $ 29,088,015 $ 12,041,517 $ 13,761,234 $ 895,365 $ 2,389,899
================ ============= ============= ========== ==============
In July 2004, the Company signed a 10 year lease to relocate its New
York corporate offices and showroom. The relocation occurred in January of 2005
and 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 expenses these rent payments on a
straight line basis in accordance with the provisions of SFAS No. 13 "Accounting
for Leases" starting October 2004, the month the Company obtained access to the
facility. Also, in connection with this lease, the Company 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.
The Company believes that current levels of cash and cash equivalents
($1.3 million at March 31, 2005), together with funds available under its
existing or future credit facilities, will be sufficient to meet its capital
requirements for the next 12 months.
18
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. The Company had unfilled orders of $30.2 million at March 31, 2005, an
increase of 12.7% compared to $26.8 million at March 31, 2004. The Company noted
that as a result of improved operating procedures that were put in place in
March of 2004 which prompted the earlier receipt and inputting of orders, more
challenging comparisons for backlog have been created for the current year.
Consequently, although the Company continues to anticipate similar rates of
sales growth, it does not expect its order backlog in 2005 to increase at the
same rate as 2004. 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
March 31, 2005. 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.
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 March 31,
2005, the Company had two customers who accounted for 18.5% and 14.3% of trade
accounts receivable. As of March 31, 2004, the Company had one customer who
accounted for 10.3% of trade accounts receivable. For the three months ended
March 31, 2005 and 2004 sales to no one customer accounted for more than 10.0%
of net sales. The Company does not believe that the loss of either customer
would have a material adverse effect on its business or financial condition.
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's management evaluated, with the participation of the Chief
Executive Officer and Chief Financial Officer, the effectiveness of the
Company's disclosure controls and procedures as of the end of the period covered
by this report. Based on that evaluation, the Chief Executive Officer and Chief
Financial Officer have concluded that the Company's disclosure controls and
procedures were effective as of the end of the period covered by this report.
There has been no change in the Company's internal control over financial
reporting that occurred during the quarter covered by this report that has
materially affected, or is reasonably likely to materially affect, the Company's
internal control over financial reporting.
20
PART II--OTHER INFORMATION
Item 6. Exhibits.
Exhibit Number
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
21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
I.C. ISAACS & COMPANY, INC
Dated: May 16, 2005 BY: /S/ PETER J. RIZZO
Peter J. Rizzo,
-------------------------------------------------
Chief Executive Officer
Dated: May 16, 2005 BY: /S/ EUGENE C. WIELEPSKI
-------------------------------------------------
Eugene C. Wielepski, Chief Financial Officer
(Principal Financial Officer)
22