<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
(MARK ONE)
<TABLE>
<C> <S>
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
</TABLE>
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000.
OR
<TABLE>
<C> <S>
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
</TABLE>
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)
<TABLE>
<S> <C>
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)
</TABLE>
(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 / /
As of May 12, 2000, 7,864,657 shares of common stock ("Common Stock") of the
Registrant were outstanding.
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<PAGE>
PART I--FINANCIAL INFORMATION
I.C. ISAACS & COMPANY, INC.
CONSOLIDATED BALANCE SHEETS
ITEM 1. FINANCIAL STATEMENTS.
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1999 2000
------------ -----------
<S> <C> <C>
ASSETS
Current
Cash, including temporary investments of $512,000 and
$169,000................................................ $ 1,193,093 $ 913,642
Accounts receivable, less allowance for doubtful accounts
of $725,000 and $775,000................................ 10,950,550 18,664,502
Inventories (Note 1)...................................... 18,201,323 17,412,988
Refundable income taxes................................... 356,265 356,265
Prepaid expenses and other................................ 293,524 497,260
----------- -----------
Total current assets.................................. 30,994,755 37,844,657
Property, plant and equipment, at cost, less accumulated
depreciation and amortization............................. 3,304,512 3,231,306
Trademark and licenses, less accumulated amortization of
$307,210 and $390,536
(Note 7).................................................. 1,042,790 959,464
Goodwill, less accumulated amortization of $1,660,650 and
$1,722,615................................................ 991,450 929,485
Deferred royalty expense, less accumulated amortization of
$88,287 and $176,574...................................... 1,059,463 971,176
Other assets................................................ 3,042,261 3,168,115
----------- -----------
$40,435,231 $47,104,203
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current
Checks issued against future deposits..................... $ 294,089 $ 508,256
Current maturities of revolving line of credit (Note 2)... 3,644,470 9,568,479
Current maturities of capital lease obligations........... 6,258 --
Accounts payable.......................................... 1,923,458 2,044,629
Accrued expenses and other current liabilities (Note 3)... 2,380,476 2,593,953
Accrued compensation...................................... 135,790 220,813
----------- -----------
Total current liabilities............................. 8,384,541 14,936,130
----------- -----------
Liability under licensing agreement (Note 7)................ 2,300,000 2,300,000
Commitments and Contingencies (Note 7)
Redeemable preferred stock.................................. 2,000,000 2,000,000
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, 8,344,699 shares issued; 7,197,990 shares
outstanding............................................. 834 834
Additional paid-in capital................................ 38,674,998 38,674,998
Accumulated deficit....................................... (8,615,112) (8,497,729)
Treasury stock, at cost (1,146,709 shares)................ (2,310,030) (2,310,030)
----------- -----------
Total stockholders' equity............................ 27,750,690 27,868,073
----------- -----------
$40,435,231 $47,104,203
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
1
<PAGE>
I.C. ISAACS & COMPANY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
<S> <C> <C>
1999 2000
----------- -----------
Net Sales................................................... $22,527,838 $24,676,050
Cost of Sales............................................... 15,859,409 16,405,548
----------- -----------
Gross profit................................................ 6,668,429 8,270,502
----------- -----------
Operating Expenses
Selling................................................. 4,186,154 3,354,094
License fees............................................ 1,941,522 2,022,461
Distribution and shipping............................... 850,332 840,611
General and administrative.............................. 2,138,401 1,703,895
----------- -----------
Total operating expenses.................................... 9,116,409 7,921,061
----------- -----------
Operating income (loss)..................................... (2,447,980) 349,441
----------- -----------
Other income (expense)
Interest, net of interest income of $10,809 and
$3,562................................................ (430,323) (244,131)
Other, net.............................................. 25,963 (35,927)
----------- -----------
Total other income (expense)................................ (404,360) (280,058)
----------- -----------
Income (loss) before income taxes........................... (2,852,340) 69,383
Income tax benefit.......................................... -- 48,000
----------- -----------
Net income (loss)........................................... $(2,852,340) $ 117,383
=========== ===========
Basic earnings (loss) per share............................. $ (0.42) $ 0.02
Weighted average shares outstanding......................... 6,782,200 7,197,990
Diluted earnings (loss) per share........................... $ (0.42) $ 0.02
Weighted average shares outstanding......................... 6,782,200 7,452,320
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE>
I.C. ISAACS & COMPANY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
<S> <C> <C>
1999 2000
----------- -----------
Operating Activities
Net income (loss)......................................... $(2,852,340) $ 117,383
Adjustments to reconcile net income (loss) to net cash used
in operating activities
Provision for doubtful accounts......................... 288,703 184,728
Write off of accounts receivable........................ (291,703) (134,728)
Provision for sales returns and discounts............... 989,511 858,963
Sales returns and discounts............................. (943,252) (736,079)
Depreciation and amortization........................... 553,899 428,666
Gain on sale of assets.................................. (14,000) --
(Increase) decrease in assets
Accounts receivable................................... (1,247,420) (7,886,836)
Inventories........................................... 3,130,351 788,335
Refundable income taxes............................... 1,238,001 --
Prepaid expenses and other............................ 337,411 (203,736)
Other assets.......................................... (319,751) (143,440)
Increase (decrease) in liabilities
Accounts payable...................................... (2,050,519) 121,171
Accrued expenses and other current liabilities........ 163,590 213,477
Accrued compensation.................................. 9,865 85,023
----------- -----------
Cash used in operating activities........................... (1,007,654) (6,307,073)
----------- -----------
Investing Activities
Capital expenditures...................................... (129,560) (104,296)
Proceeds from sale of assets.............................. 114,000 --
----------- -----------
Cash used in investing activities........................... (15,560) (104,296)
----------- -----------
Financing Activities
Checks issued against future deposits..................... (791,315) 214,167
Principal proceeds from debt.............................. 1,383,809 5,924,009
Principal payments on debt................................ (47,262) (6,258)
----------- -----------
Cash provided by financing activities....................... 545,232 6,131,918
----------- -----------
Decrease in cash and cash equivalents....................... (477,982) (279,451)
Cash and Cash Equivalents, at beginning of period........... 1,345,595 1,193,093
----------- -----------
Cash and Cash Equivalents, at end of period................. $ 867,613 $ 913,642
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
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 Europe, S.L. ("Isaacs Europe"), I.C. Isaacs &
Company L.P. (the "Partnership"), Isaacs Design, Inc. ("Design") and I. C.
Isaacs Far East Ltd. (collectively, the "Company"). The Company established
Isaacs Europe in July 1996 as the exclusive licensee of Beverly Hills Polo
Club-Registered Trademark- sportswear in Europe. Isaacs Europe and I. C. Isaacs
Far East Ltd. did not have any significant revenue or expenses in 1999 or thus
far in 2000. All intercompany balances and transactions have been eliminated.
BUSINESS DESCRIPTION
The Company, which operates in one business segment, designs, manufactures
and markets branded jeanswear and sportswear. The Company offers collections of
jeanswear and sportswear for men and women under the Marithe and Francois
Girbaud-Registered Trademark- designer brand in the United States and Puerto
Rico; lines of sportswear for young men, women and boys under the
BOSS-Registered Trademark- brand in the United States and Puerto Rico; and
collections of sportswear for men and boys under the Beverly Hills Polo
Club-Registered Trademark- brand in the United States, Puerto Rico and Europe.
Recently, the Company introduced a focused line of sportswear under its new
Urban Expedition (UBX) brand in the United States and Europe. The Company also
markets women's pants and jeans under various other Company-owned brand names
and under third-party private labels for sale to major chain stores and
catalogs.
INTERIM FINANCIAL INFORMATION
In the opinion of management, the interim financial information as of March
31, 2000 and for the three months ended March 31, 1999 and 2000 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, 1999.
RISKS AND UNCERTAINTIES
The apparel industry is highly competitive. The Company competes primarily
with larger, well capitalized companies which have sought to increase market
share through massive consumer advertising and price reductions. The Company has
continued 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. Also, the Company has developed and implemented new marketing
initiatives to promote each of its brands, including "shop-in-shops" for its
Girbaud-Registered Trademark- brand. A risk to the Company is that such a
strategy may lead to continued pressure on profit margins. In the past several
years, many of the Company's competitors have switched much of their apparel
manufacturing from the United States to foreign locations such as Mexico, the
Dominican Republic and throughout Asia.
4
<PAGE>
I.C. ISAACS & COMPANY, INC.
SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
As competitors lower production costs, it gives them greater flexibility to
lower prices. Over the last several years, the Company has switched a majority
of its production to contractors outside the United States to reduce costs.
Management believes that it will continue this strategy for the foreseeable
future.
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.
USE OF ESTIMATES
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make certain estimates and
assumptions, particularly regarding valuation of accounts receivable and
inventory, recognition of liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements. Actual results could differ
from those estimates.
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially expose the Company to concentrations
of credit risk consist primarily of trade accounts receivable. The Company's
customer base is not concentrated in any specific geographic region, but is
concentrated in the retail industry. For the three months ended March 31, 1999
and 2000, sales to the Company's largest customer were $4,274,388 and
$1,701,020, respectively. These amounts constitute 19.0% and 7.0% of total
sales, respectively. The significant customer was the same during both periods.
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.
GOODWILL
The Company has recorded goodwill based on the excess of the purchase price
over the value of net assets acquired. The Company analyzes the operating income
of the women's Company-owned and third party private label lines in relation to
the amortization of goodwill associated with those assets on a quarterly basis
for evidence of impairment of the goodwill.
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.
5
<PAGE>
I.C. ISAACS & COMPANY, INC.
SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes ("SFAS
109"). Under SFAS 109, deferred taxes are determined using the liability method,
which requires the recognition of deferred tax assets and liabilities based on
differences between financial statement and income tax basis using presently
enacted tax rates.
EARNINGS PER SHARE
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.
COMPREHENSIVE INCOME
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" ("SFAS 130"), establishes standards for reporting and
display of comprehensive income, its components and accumulated balances.
Comprehensive income is defined to include all changes in equity except those
resulting from investments by owners and distributions to owners. Among other
disclosures, SFAS 130 requires that all items that are required to be recognized
under current accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the same prominence as
other financial statements. The Company adopted SFAS 130 during the first
quarter of 1998 and has no items of comprehensive income to report.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments"
("SFAS 133"). SFAS 133 establishes accounting and reporting standards for
derivative instruments and for hedging activities. SFAS 133 requires that an
entity recognize all derivatives as either assets or liabilities and measure
those instruments at fair market value. Under certain circumstances, a portion
of the derivative's gain or loss is initially reported as a component of other
comprehensive income and subsequently reclassified into income when the
transaction affects earnings. For a derivative not designated as a hedging
instrument, the gain or loss is recognized in income in the period of change.
SFAS 133 is effective for all fiscal quarters beginning after June 15, 2000 and
requires application prospectively. Presently, the Company does not use
derivative instruments either in hedging activities or as investments.
Accordingly, the Company believes that adoption of SFAS 133 will have no impact
on its financial position or results of operations.
6
<PAGE>
I.C. ISAACS & COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1999 2000
------------ -----------
<S> <C> <C>
Raw Materials...................................... $ 1,876,222 $ 3,999,756
Work-in-process.................................... 1,009,124 650,872
Finished Goods..................................... 15,315,977 12,762,360
----------- -----------
$18,201,323 $17,412,988
=========== ===========
</TABLE>
2. LONG-TERM DEBT
The Company has an asset-based revolving line of credit with Congress
Financial Corporation that allowed it to borrow up to $30.0 million based on a
percentage of eligible accounts receivable and inventory. Borrowings under the
revolving line of credit bore interest at the lender's prime rate less 0.25%. In
March 1999, the Company amended the Agreement to extend the date of termination
of the Agreement from June 30, 1999 to December 31, 2000. The amended Agreement
provides that the Company may borrow up to 80.0% of net eligible accounts
receivable and a portion of imported inventory, as defined in the Agreement.
Borrowings under the Agreement may not exceed $25.0 million including
outstanding letters of credit, which are limited to $8.0 million, and bear
interest at the lender's prime rate of interest plus 1.0%. In connection with
amending the Agreement, the Company will pay Congress a financing fee of
$125,000, one half of which was paid at the time of closing and the other half
of which will be paid on June 30, 2000. The financing fee will be amortized over
21 months. Under the terms of the credit agreement, as amended, the Company is
required to maintain minimum levels of working capital and tangible net worth.
The Company was in violation of the net worth covenant as of March 31, 2000 and
has obtained a waiver, through May 31, 2000, from Congress.
3. ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1999 2000
------------ ----------
<S> <C> <C>
Royalties........................................... $ 816,069 $1,120,747
Severance benefits.................................. 525,004 437,504
Customer credit balances............................ 233,011 221,979
Payable to salesmen................................. 751 192,531
Payroll tax withholdings............................ 136,216 178,533
Bonuses............................................. 84,000 96,000
Deferred fees....................................... 62,500 62,500
Income taxes payable................................ 110,000 62,000
Accrued professional fees........................... 100,000 50,000
Property taxes...................................... 106,812 17,400
Machine rentals..................................... 105,942 --
Other............................................... 100,171 154,759
---------- ----------
$2,380,476 $2,593,953
========== ==========
</TABLE>
7
<PAGE>
I.C. ISAACS & COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. INCOME TAXES
The Company has estimated its annual effective tax rate at 0% based on its
estimate of pre-tax income for 2000. Also, the Company has net operating loss
carryforwards of approximately $24.0 million for income tax reporting purposes
for which no income tax benefit has been recorded due to the uncertainty over
the level of taxable income in 2000.
5. 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 shareholders 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. The following table
presents a reconciliation between the weighted average shares outstanding for
basic and diluted earnings per share for the quarter ended March 31, 2000.
<TABLE>
<CAPTION>
PER
SHARE
INCOME SHARES AMOUNT
-------- --------- --------
<S> <C> <C> <C>
Basic Earnings per share
Income available to common shareholders..................... $117,383 7,197,990 $0.02
Effect of dilutive options.................................. 254,330
Dilutive earnings per share................................. $117,383 7,452,320 $0.02
-------- --------- -----
</TABLE>
6. STOCK OPTIONS
In May 1997, the Company adopted the 1997 Omnibus Stock Plan. Under the 1997
Omnibus Stock Plan, the Company may grant qualified and nonqualified stock
options, stock appreciation rights, restricted stock or performance awards,
payable in cash or shares of common stock, to selected employees. The Company
has reserved 1,100,000 shares of common stock for issuance under the 1997
Omnibus Stock Plan, as amended. Options vest at the end of the second year and
expire 10 years from the date of grant and upon termination of employment.
The following table relates to stock option activity in the first quarter of
2000, under the Plan:
<TABLE>
<CAPTION>
NUMBER OF OPTION PRICE
SHARES PER SHARE
--------- ----------------
<S> <C> <C>
Outstanding at December 31, 1999................. 996,250 $1.188 to $2.125
Granted.......................................... 15,000 $1.84
Outstanding at March 31, 2000.................... 1,011,250 $1.188 to $2.125
</TABLE>
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, the Company has estimated the fair value of each option granted using
the Black-Scholes option-pricing model with the following assumptions: risk-free
interest rate of 4.70%, expected volatility of 90%, expected option life of 5.5
years and no dividend payment expected. Using these assumptions, the fair value
of the stock options granted is $1.16. There were no adjustments made in
calculating the fair
8
<PAGE>
I.C. ISAACS & COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. STOCK OPTIONS (CONTINUED)
value to account for vesting provisions or for non-transferability or risk of
forfeiture. The weighted average remaining life for options outstanding at
March 31, 2000 is 8 years.
If the Company had elected to recognize compensation expense based on the
fair value at the grant dates, consistent with the method prescribed by SFAS
No. 123, net income per share would have been changed to the pro forma amount
indicated below:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------
MARCH 31, 1999 MARCH 31, 2000
--------------- --------------
<S> <C> <C>
Net income:
As reported.................................... $(2,852,340) $ 117,383
Pro forma...................................... (3,135,952) (117,692)
Basic and diluted loss per share:
As reported.................................... $ (0.42) $ 0.02
Pro forma...................................... (0.46) (0.02)
</TABLE>
7. COMMITMENTS AND CONTINGENCIES
On October 22, 1999, the Company, Ambra and Hugo Boss entered into an
agreement to restructure the licensing arrangement for the use of the
BOSS-Registered Trademark- trademark. In settlement of the $2,300,000 liability
related to the licensing agreement, the Company issued, in May 2000, 1,300,000
shares of redeemable preferred stock having an estimated fair market value of
$1,300,000 and 666,667 shares of common stock, which had an aggregate value of
$1,000,000 based on the market price of $1.50 at the time the parties agreed to
the restructuring. The minimum annual royalties under the
BOSS-Registered Trademark- license agreement are as follows:
<TABLE>
<S> <C>
2000........................................................ $3,200,000
2001........................................................ $3,200,000
2002........................................................ $2,600,000
2003........................................................ $2,100,000
</TABLE>
In November 1997 and as further amended in March and November 1998, the
Company entered into an exclusive license agreement with Latitude Licensing
Corp. to manufacture and market men's jeanswear, casual wear, outerwear and
active influenced sportswear under the Girbaud-Registered Trademark- brand and
certain related trademarks in the United States, Puerto Rico and the U.S. Virgin
Islands. The initial term of the agreement extended through December 31, 1999.
The agreement has been extended through December 31, 2002, upon which date the
Company will have the option to renew the agreement for an additional five
years. Under the agreement, the Company is required to make 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.
Payments are subject to guaranteed minimum annual royalties as follows:
<TABLE>
<S> <C>
2000........................................................ $2,000,000
2001........................................................ $2,500,000
</TABLE>
Beginning with the first quarter of 1998, the Company became obligated to
pay the greater of actual royalties earned or the minimum guaranteed royalties
for that year. The Company is required to spend at
9
<PAGE>
I.C. ISAACS & COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. COMMITMENTS AND CONTINGENCIES (CONTINUED)
least $500,000 in advertising men's Girbaud-Registered Trademark- brand products
in each year through the term of the Girbaud men's agreement.
In March 1998, the Company entered into an exclusive license agreement with
Latitude Licensing Corp. to manufacture and market women's jeanswear, casual
wear and active influenced sportswear under the Girbaud-Registered Trademark-
brand and certain related trademarks in the United States, Puerto Rico and the
U.S. Virgin Islands. The initial term of the agreement extended through
December 31, 1999. The agreement has been extended through December 31, 2002,
upon which date the Company will have the option to renew the agreement for an
additional five years. Under the agreement, the Company is required to make
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. Payments are subject to guaranteed minimum annual royalties as
follows:
<TABLE>
<S> <C>
2000........................................................ $ 800,000
2001........................................................ $1,000,000
</TABLE>
Beginning with the first quarter of 1999, the Company was obligated to pay
the greater of actual royalties earned or the minimum guaranteed royalties for
that year. The Company is required to spend at least $400,000 in advertising
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-Registered Trademark- brand. In
December 1998, the Girbaud-Registered Trademark- women's license agreement was
amended to provide that the Company would spend an additional $1.8 million on
sales and marketing in 1999 in conjunction with a one year deferral of the
requirement that the Company open a Girbaud retail store in New York City. In
August 1999, the Company issued 500,000 shares of restricted common stock to
Latitude Licensing Corp. in connection with an amendment of the Girbaud women's
license agreement. The market value of the shares issued, as of the date of
issuance, was $750,000 and, together with the initial license fee of $600,000,
is being amortized over the remaining life of the agreement. Under the amended
license agreement, if the Company has not signed a lease agreement for a Girbaud
retail store by July 31, 2002 it will become obligated to pay Latitude Licensing
Corp. an additional $500,000 in royalties.
In January 2000, the Company entered into a global sourcing agreement with
G.I. Promotions to act as a non-exclusive sourcing agent to licensees of the
Marithe & Francoise Girbaud trademark for the manufacture of Girbaud jeanswear
and sportswear. The global sourcing agreement extends until December 31, 2003
and provides that the Company shall net a facilitation fee of 5.0% of the total
FOB pricing for each order shipped to licensees under this agreement. Also in
January 2000, the Company entered into a license agreement with Wurzburg Holding
S.A. ("Wurzburg"). The license has a term of three years and provides that the
Company shall pay Wurzburg a royalty of 1.0% of the total FOB pricing for each
order shipped to a licensee under the global sourcing agreement.
Since 1993, the Company has had an exclusive wholesale licensing arrangement
with BHPC Marketing, Inc. for the manufacture and promotion of certain men's
sportswear bearing the registered trademark Beverly Hills Polo Club. The BHPC
men's agreement has a three year term expiring December 31, 2001 with renewal
options for a total of six years. Under the men's agreement the Company is
required to make payments to the licensor in an amount equal to 5.0% of net
invoiced sales of licensed products and to spend an amount equal to 1.0% of net
invoiced sales of such merchandise in advertising for the licensed
10
<PAGE>
I.C. ISAACS & COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. COMMITMENTS AND CONTINGENCIES (CONTINUED)
products. Payments is subject to a guaranteed minimum annual royalty of $586,000
in each of 2000 and 2001.
In May 1998, the Company entered into a license agreement with BHPC
Marketing, Inc., to manufacture and market boys knitted and woven shirts, cotton
pants, jeanswear, shorts, swimwear and outerwear under the Beverly Hills Polo
Club-Registered Trademark- brand in the United States and Puerto Rico. The
initial term of the agreement is three years, commencing January 1, 1999, with
renewal options for a total of six years. Under the boy's agreement the Company
is required to make payments to the licensor in an amount equal to 5.0% of net
sales in 1999 and is subject to guaranteed annual minimum royalties of $75,000
and $100,000 in 2000 and 2001, respectively.
On August 15, 1995, I.C. Isaacs Europe, S.L., a Spanish limited corporation
and wholly-owned subsidiary of the Company, entered into retail and wholesale
license agreements (collectively, the "International Agreements") for use of the
Beverly Hills Polo Club-Registered Trademark- trademark in Europe. The
International Agreements, as amended, provide certain exclusive rights to use
the Beverly Hills Polo Club-Registered Trademark- trademark in all countries in
Europe for an initial term of three years ending December 31, 1999, renewable at
the Company's option, provided the Company is not in breach thereof at the time
the renewal notice is given, through five consecutive extensions ending
December 31, 2007. Effective March 1, 1999, BHPC Marketing, Inc. amended the
International Agreements to eliminate all royalties through December 31, 1999.
For the period beginning January 1, 2000 and ending June 30, 2000, no guaranteed
minimum annual royalties or guaranteed net shipment volumes apply; for the
period beginning July 1, 2001 and ending December 31, 2000, the royalty rate
shall be 3.0% of wholesale sales of BHPC products including purchases of BHPC
products by Beverly Hills Polo Club retail stores in Europe ("Wholesale Sales")
and no guaranteed annual royalties shall apply; for the period beginning
January 1, 2001 and ending December 31, 2001, the royalty rate shall be 3.0% of
Wholesale Sales, and the guaranteed annual royalty shall be $60,000; for the
period beginning January 1, 2002 and ending December 31, 2003, the royalty rate
shall be 5.0% of Wholesale Sales, the guaranteed annual royalty shall be
$150,000 and the Company shall be subject to the guaranteed net shipment volumes
in effect immediately prior to the amendment dated March 1, 1999. For the period
beginning January 1, 2000 and ending December 31, 2001, the Company is required
to spend an amount equal to 4.0% of Wholesale Sales in advertising the BHPC
line. During each of 2002 and 2003, the Company is required to spend an amount
equal to 2.0% of Wholesale Sales in advertising the BHPC line.
The Company and certain of its current and former officers and directors
have been named as defendants in three putative class actions filed in United
States District Court for the District of Maryland. The first of the actions was
filed on November 10, 1999 by Leo Bial and Robert W. Hampton. The three actions,
which have been consolidated with Mr. Bial as the first-named plaintiff, purport
to have been brought on behalf of all persons (other than the defendants and
their affiliates) who purchased the Company's stock between December 17, 1997
and November 11, 1998. The plaintiffs allege that the registration statement and
prospectus issued in connection with the Company's initial public offering,
completed in December 1997, contained materially false and misleading
statements, which artificially inflated the price of the Company's stock during
the class period. Specifically, the complaints allege violations of Sections 11,
12(a)(2) and 15 of the Securities Act of 1933 and Sections 10(b) and 20(a) of
the Securities Act of 1934 and Rule 10b-5 promulgated thereunder. The plaintiffs
seek recision, damages, costs and expenses, including attorneys' fees and
experts' fees, and such other relief as may be just and proper. The Company
believes that the plaintiff's allegations are without merit and intends to
defend the cases vigorously.
11
<PAGE>
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
manufacturing marketing and distribution of its products, its expectations with
respect to risks of its investments and the performance of the counterparties to
its letter of credit agreement, its plans not to invest in derivative
instruments, its expectations regarding future capital expenditures and its
beliefs and intent with respect to the pending class action lawsuit. Such
statements are subject to a variety of risks and uncertainties, many of which
are beyond the Company's control, which could cause actual results to differ
materially from those contemplated in such forward-looking statements, including
in particular the risks and uncertainties described under "Risk Factors" in the
Company's Prospectus which include, among other things, (i) changes in the
marketplace for the Company's products, including customer tastes, (ii) the
introduction of new products or pricing changes by the Company's competitors,
(iii) changes in the economy, and (iv) termination of one or more of its
agreements for use of the BOSS-Registered Trademark-, Beverly Hills Polo
Club-Registered Trademark- and Girbaud-Registered Trademark- 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 hereto. 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-Registered Trademark-" is a trademark of the Company. The
Company has filed a federal trademark application for the mark "Urban Expedition
(UBX)." All other trademarks or service marks, including
"Girbaud-Registered Trademark-" and "Marithe and Francois
Girbaud-Registered Trademark-" (collectively, "Girbaud"),
"BOSS-Registered Trademark-" and "Beverly Hills Polo Club-Registered Trademark-"
appearing in this Form 10-Q are the property of their respective owners and are
not the property of the Company.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage
relationship to net sales of certain items in the Company's consolidated
financial statements for the periods indicated.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31,
-------------------
<S> <C> <C>
1999 2000
----- -----
Net sales................................................... 100.0% 100.0%
Cost of sales............................................... 70.4 66.5
----- -----
Gross profit................................................ 29.6 33.5
Selling expenses............................................ 18.6 13.6
License fees................................................ 8.6 8.2
Distribution and shipping expenses.......................... 3.8 3.4
General and administrative expenses......................... 9.5 6.9
----- -----
Operating Income (loss)..................................... (10.9)% 1.4%
===== =====
</TABLE>
THREE MONTHS ENDED MARCH 31, 2000 COMPARED TO THREE MONTHS ENDED MARCH 31, 1999
NET SALES.
Net sales increased 9.8% to $24.7 million in the three months ended March
31, 2000 from $22.5 million in the three months ended March 31, 1999. The
increase was primarily due to higher volume shipments of the
Girbaud-Registered Trademark- brand partially offset by decreases in shipments
of BOSS-Registered Trademark- and Beverly Hills
12
<PAGE>
Polo Club-Registered Trademark- men's sportswear. Net sales of
Girbaud-Registered Trademark- sportswear increased $11.6 million to $15.0
million. The Company began shipping the men's Girbaud product line in the second
quarter of 1998 and the women's Girbaud product line in the fourth quarter of
1998. Net sales of BOSS-Registered Trademark- sportswear decreased $8.0 million
or 66.1% to $4.1 million due to intense competition in the jeanswear market,
particularly with respect to the BOSS-Registered Trademark- brand, and changing
consumer tastes. Net sales of Beverly Hills Polo Club-Registered Trademark-
sportswear decreased $0.6 million or 14.3% to $3.6 million due to lower demand
for men's bottoms and tops. Net sales of Beverly Hills Polo Club men's
sportswear decreased $1.1 million to $3.0 million while net sales of Beverly
Hills Polo Club boy's sportswear increased $0.5 million to $0.6 million. The
Company began marketing boys' sportswear under the Beverly Hills Polo
Club-Registered Trademark- brand in the first quarter of 1999. The Company began
shipping its UBX line in the first quarter of 2000 and was able to ship $0.6
million in the three months ended March 31, 2000. The Company's women's private
label sales decreased $1.4 million or 50.0% to $1.4 million from March 31, 1999
to March 31, 2000. In November 1998, the Company entered into exclusive
international license agreements to manufacture and market men's and women's
sportswear under the Girbaud brand in selected countries in Central and South
America and in the Caribbean. International sales were insignificant for the
three months ended March 31, 1999 and 2000.
GROSS PROFIT.
Gross profit increased 23.9% to $8.3 million in the three months ended March
31, 2000 from $6.7 million in the three months ended March 31, 1999. Gross
profit as a percentage of net sales increased from 29.6% to 33.5% over the same
period. The increase in gross profit was due to increased sales, especially in
the Girbaud brand, which generates higher margins than the Company's other
products, and a reduction in the amount of inventory markdowns.
SELLING, DISTRIBUTION, GENERAL AND ADMINISTRATIVE EXPENSES.
Selling, distribution, general, and administrative expenses ("SG&A")
decreased 18.1% to $5.9 million in the three months ended March 31, 2000 from
$7.2 million in the three months ended March 31, 1999. As a percentage of net
sales, SG&A expenses decreased to 23.9% from 31.9% over the same period due to
higher net sales coupled with reduced advertising expenditures as well as lower
bad debt and amortization expenses. Advertising expenditures decreased
$0.6 million to $0.6 million as the Company reduced targeted advertising
campaigns for BOSS and Beverly Hills Polo Club. The Company is required to spend
at least $1.1 million in advertising for the women's and men's
Girbaud-Registered Trademark- brands in 2000. Distribution and shipping expenses
remained essentially unchanged for the three months ended March 31, 2000 and
1999. General and administrative expenses decreased 19.0% to $1.7 million in the
three months ended March 31, 2000 from $2.1 million in the three months ended
March 31, 1999. The decrease is attributable to lower bad debt expense and
amortization expenses related to the transfer of the BOSS trademark in October
1999.
LICENSE FEES.
License fees increased $0.1 million to $2.0 million in the three months
ended March 31, 2000 from $1.9 million in the three months ended March 31, 2000.
As a percentage of net sales, license fees decreased from 8.6% to 8.2%. The
increase in license fees is directly related to the growth in sales of Girbaud
merchandise. The Company anticipates that it will continue to exceed the minimum
quarterly sales levels in the Girbaud license agreements, which will result in
higher license fees.
OPERATING INCOME (LOSS).
Operating income (loss) decreased 112.5% to $0.3 million in the three months
ended March 31, 2000 from $(2.4) million in the three months ended March 31,
1999. The improvement was due to higher net sales and gross profit coupled with
a decrease in operating expenses.
13
<PAGE>
INTEREST EXPENSE.
Interest expense decreased $0.2 million to $0.2 million in the three months
ended March 31, 2000. The Company eliminated $0.3 million in interest expense
related to the $11.25 million note payable for the BOSS trademark that was
cancelled in the third quarter of 1999, offset by an increase in interest
expense related to higher borrowings under the line of credit.
INCOME TAXES.
The Company has estimated its annual effective tax rate at 0% based on its
estimate of pre-tax income for 2000. Also, the Company has net operating loss
carryforwards of approximately $24.0 million for income tax reporting purposes
for which no income tax benefit has been recorded due to the uncertainty over
the level of taxable income in 2000.
LIQUIDITY AND CAPITAL RESOURCES
The Company has relied primarily on internally generated funds, trade credit
and asset-based borrowings to finance its operations. The Company's capital
requirements primarily result from working capital needed to support increases
in inventory and accounts receivable. The Company's working capital decreased
significantly during the first three months of 2000 compared to the first three
months of 1999, primarily due to a cumulative net loss of $7.2 million over the
four quarters ended March 31, 2000. As of March 31, 2000, the Company had cash,
including temporary investments, of $0.9 million and working capital of
$22.9 million compared to $0.9 million and $28.9 million, respectively, as of
March 31, 1999.
OPERATING CASH FLOW
Cash used by operations totaled $6.3 million for the first three months of
2000 primarily due to increases in accounts receivable. Cash used for investing
activities for the first three months of 2000 were $0.1 million. Cash provided
by financing activities totaled $6.1 million for the first three months of 2000,
resulting primarily from borrowings on the Company's revolving line of credit.
Accounts receivable increased $7.9 million from December 31, 1999 to
March 31, 2000 compared to an increase of $1.2 million from December 31, 1998 to
March 31, 1999. Inventory decreased $0.8 million from December 31, 1999 to
March 31, 2000 compared to a decrease of $3.1 million from December 31, 1998 to
March 31, 1999. The Company has strengthened its control over inventory in order
to reduce growth in inventory.
Capital expenditures were $0.1 million for the first three months of 2000
compared with $0.1 million for the first three months of 1999. The Company does
not expect to incur significant capital expenditures during the rest of 2000.
On May 15, 2000, the Company announced that it intends to close its Raleigh,
Mississippi manufacturing facility. It is anticipated that such closure will
occur during the third quarter and will result in a charge to earnings. The
production in this facility will be transferred to third party independent
contractor facilities in Mexico.
CREDIT FACILITIES
The Company has an asset-based revolving line of credit with Congress
Financial Corporation that allowed it to borrow up to $30.0 million based on a
percentage of eligible accounts receivable and inventory. Borrowings under the
revolving line of credit bore interest at the lender's prime rate less 0.25%. In
March 1999, the Company amended the Agreement to extend the date of termination
of the Agreement from June 30, 1999 to December 31, 2000. The amended Agreement
provides that the Company may borrow up to 80.0% of net eligible accounts
receivable and a portion of imported inventory, as defined in
14
<PAGE>
the Agreement. Borrowings under the Agreement may not exceed $25.0 million
including outstanding letters of credit, which are limited to $8.0 million, and
bear interest at the lender's prime rate of interest plus 1.0%. In connection
with amending the Agreement the Company will pay Congress a financing fee of
$125,000, one half of which was paid at the time of closing and the other half
of which will be paid on June 30, 2000. The financing fee will be amortized over
21 months. Under the terms of the credit agreement, as amended, the Company is
required to maintain minimum levels of working capital and tangible net worth.
The Company was in violation of the net worth covenant as of March 31, 2000 and
has obtained a waiver, through May 31, 2000, from Congress.
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 by collection personnel has been
effective in reducing credit losses to an immaterial amount. In the first
quarter of 1999 and 2000, the Company's credit losses were $0.3 million and
0.2 million, respectively. In each of these periods, the Company's actual credit
losses as a percentage of net sales has been less than one and one-half percent.
The Company believes that current levels of cash and cash equivalents ($0.9
million at March 31, 2000) together with cash from operations and existing
credit facilities, will be sufficient to meet its working capital requirements
for the next 12 months.
SEASONALITY
The Company's business is impacted by the general seasonal trends that are
characteristic of the apparel and retail industries. In the Company's segment of
the apparel industry, sales are generally higher in the first and third
quarters. Historically, the Company has taken greater markdowns in the second
and fourth quarters. The Company generally receives orders for its products
three to five months prior to the time the products are delivered to stores. As
of March 31, 2000, the Company had unfilled orders of approximately
$36.0 million, compared to approximately $23.0 million of such orders as of
March 31, 1999. The backlog of orders at any given time is affected by a number
of factors, including seasonality, weather conditions, scheduling of
manufacturing and shipment of products. As the timing of the shipment of
products may vary from year to year, the results for any particular quarter may
not be indicative of the results for the full year.
IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments"
("SFAS 133"). SFAS 133 establishes accounting and reporting standards for
derivative instruments and for hedging activities. SFAS 133 requires that an
entity recognize all derivatives as either assets or liabilities and measure
those instruments at fair market value. Under certain circumstances, a portion
of the derivative's gain or loss is initially reported as a component of other
comprehensive income and subsequently reclassified into income when the
transaction affects earnings. For a derivative not designated as a hedging
instrument, the gain or loss is recognized in income in the period of change.
SFAS 133 is effective for all fiscal quarters beginning after June 15, 2000 and
requires application prospectively. Presently, the Company does not use
derivative instruments either in hedging activities or as investments.
Accordingly, the Company believes that adoption of SFAS 133 will have no impact
on its financial position or results of operations.
15
<PAGE>
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 loss, 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.
PART II--OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
None
(b) Reports on Form 8-K.
None
16
<PAGE>
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.
<TABLE>
<S> <C> <C>
I.C. ISAACS & COMPANY, INC.
By: /s/ ROBERT J. ARNOT
-----------------------------------------
Robert J. Arnot
CHAIRMAN OF THE BOARD, PRESIDENT AND
CHIEF EXECUTIVE OFFICER
</TABLE>
Dated: May 15, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
NAME CAPACITY DATE
---- -------- ----
<C> <S> <C>
Chairman of the Board, Chief
/s/ ROBERT J. ARNOT Executive Officer, President
-------------------------------------- and Director (Principal May 15, 2000
Robert J. Arnot Executive Officer)
Vice President and Chief
Financial
/s/ EUGENE C. WIELEPSKI Officer and Director
-------------------------------------- (Principal May 15, 2000
Eugene C. Wielepski Financial and Accounting
Officer)
</TABLE>
17
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C> <C>
<PERIOD-TYPE> 12-MOS 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1999 DEC-31-2000
<PERIOD-START> JAN-01-1999 JAN-01-1999 JAN-01-2000
<PERIOD-END> DEC-31-1999 MAR-31-1999 MAR-31-2000
<CASH> 1,193,093 0 913,642
<SECURITIES> 0 0 0
<RECEIVABLES> 11,675,550 0 19,439,502
<ALLOWANCES> (725,000) 0 (775,000)
<INVENTORY> 18,201,323 0 17,412,988
<CURRENT-ASSETS> 30,994,755 0 37,844,657
<PP&E> 15,024,662 0 15,227,382
<DEPRECIATION> 11,720,150 0 (11,996,076)
<TOTAL-ASSETS> 40,435,231 0 47,104,203
<CURRENT-LIABILITIES> 8,384,541 0 14,936,130
<BONDS> 0 0 0
0 0 0
0 0 0
<COMMON> 834 0 834
<OTHER-SE> 27,749,856 0 27,867,239
<TOTAL-LIABILITY-AND-EQUITY> 40,435,231 0 47,104,203
<SALES> 0 22,527,838 24,676,050
<TOTAL-REVENUES> 0 22,527,838 24,676,050
<CGS> 0 15,859,409 16,405,548
<TOTAL-COSTS> 0 9,116,409 7,921,061
<OTHER-EXPENSES> 0 (25,963) 35,927
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 0 430,323 244,131
<INCOME-PRETAX> 0 (2,852,340) 69,383
<INCOME-TAX> 0 0 (48,000)
<INCOME-CONTINUING> 0 (2,852,340) 117,383
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 0 (2,852,340) 117,383
<EPS-BASIC> 0 (0.42) 0.02
<EPS-DILUTED> 0 (0.42) 0.02
</TABLE>
