IC ISAACS & CO INC, 10-Q, 2000-11-14

IC ISAACS & CO INC
10-Q, 2000-11-14
KNIT OUTERWEAR MILLS

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<PAGE>

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

-----------

FORM 10-Q

(MARK ONE)

--------------------------------------------------------------------------------
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
--------------------------------------------------------------------------------

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
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

As of November 10, 2000, 7,864,657 shares of common stock, par value
$.0001 per share, ("Common Stock") of the Registrant were outstanding.

<PAGE>

PART I--FINANCIAL INFORMATION
I.C. ISAACS & COMPANY, INC.
CONSOLIDATED BALANCE SHEETS

ITEM 1. FINANCIAL STATEMENTS.

<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1999 2000
---- ----
<S> <C> <C>
ASSETS
Current
Cash, including temporary investments of $512,000 and $436,000............................ $ 1,193,093 $ 1,075,483
Accounts receivable, less allowance for doubtful accounts of $725,000 and $875,000........ 10,950,550 25,159,516
Inventories (Note 1)...................................................................... 18,201,323 17,198,813
Refundable income taxes................................................................... 356,265 342,822
Prepaid expenses and other................................................................ 293,524 290,091
------------ ------------
Total current assets................................................................. 30,994,755 44,066,725

Property, plant and equipment, at cost, less accumulated depreciation and amortization....... 3,304,512 3,377,988
Trademark and licenses, less accumulated amortization of $307,210 and $554,188 (Note 7)...... 1,042,790 795,812
Goodwill, less accumulated amortization of $1,660,650 and $1,846,545......................... 991,450 805,555
Deferred royalty expense, less accumulated amortization of $88,287 and $353,148.............. 1,059,463 794,602
Other assets................................................................................. 3,042,261 3,434,774
------------ ------------
$ 40,435,231 $ 53,275,456
============ ============

LIABILITIES AND STOCKHOLDERS' EQUITY
Current
Checks issued against future deposits..................................................... $ 294,089 $ 526,837
Current maturities of revolving line of credit (Note 2)................................... 3,644,470 15,271,563
Current maturities of capital lease obligations........................................... 6,258 -
Accounts payable.......................................................................... 1,923,458 3,252,219
Accrued expenses and other current liabilities (Note 3)................................... 2,380,476 3,264,561
Accrued compensation...................................................................... 135,790 201,112
------------ ------------
Total current liabilities............................................................ 8,384,541 22,516,292
============ ============

Liability under licensing agreement (Note 7)................................................. 2,300,000 -

Commitments and Contingencies (Note 7)

Redeemable preferred stock................................................................... 2,000,000 3,300,000

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 and 9,011,366
shares issued; 7,197,990 and 7,864,657 shares outstanding.............................. 834 901
Additional paid-in capital................................................................ 38,674,998 39,674,931
Accumulated deficit....................................................................... (8,615,112) (9,906,638)
Treasury stock, at cost (1,146,709 shares)................................................ (2,310,030) (2,310,030)
------------ ------------
Total stockholders' equity........................................................... 27,750,690 27,459,164
------------ ------------
$ 40,435,231 $ 53,275,456
============ ============
</TABLE>

See accompanying notes to consolidated financial statements.
<PAGE>

I.C. ISAACS & COMPANY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
1999 2000 1999 2000
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Sales................................................ $24,884,949 $31,873,854 $68,169,645 $80,152,832
Cost of Sales............................................ 16,999,481 21,082,898 47,507,367 55,070,593
--------- ---------- ---------- ----------
Gross profit............................................. 7,885,468 10,790,956 20,662,278 25,082,239
--------- ---------- ---------- ----------
Operating Expenses
Selling............................................ 3,254,190 3,731,935 10,232,758 10,519,074
License fees....................................... 1,937,695 2,562,157 5,608,503 6,529,355
Distribution and shipping.......................... 696,871 898,286 2,232,030 2,495,678
General and administrative......................... 2,034,337 1,784,972 6,297,347 5,728,093
Provision for severance (Note 7)................... - - 750,000 225,000
--------- ---------- ---------- ----------
Total operating expenses................................. 7,923,093 8,977,350 25,120,638 25,497,200
--------- ---------- ---------- ----------

Operating income (loss).................................. (37,625) 1,813,606 (4,458,360) (414,961)
Other income (expense)
Interest, net of interest income of $8,567,
$5,506, $23,130 and $12,300...................... (582,033) (431,782) (1,431,679) (931,323)
Other, net......................................... 71,460 31,618 297,345 6,758
--------- ---------- ---------- ----------
Total other income (expense)............................. (510,573) (400,164) (1,134,334) (924,565)
--------- ---------- ---------- ----------
Income (loss) before income taxes........................ (548,198) 1,413,442 (5,592,694) (1,339,526)
Income tax benefit....................................... - - - 48,000
--------- ---------- ---------- ----------
Net income (loss)........................................ $ (548,198) $1,413,442 $(5,592,694) $(1,291,526)
--------- ---------- ---------- ----------
Basic earnings (loss) per share.......................... $(0.08) $0.18 $(0.82) $(0.17)
Weighted average shares outstanding...................... 7,035,917 7,864,657 6,848,751 7,562,954
Diluted earnings (loss) per share........................ $(0.08) $0.18 $(0.82) $(0.17)
Weighted average shares outstanding...................... 7,035,917 7,977,897 6,848,751 7,562,954
</TABLE>

See accompanying notes to consolidated financial statements.

<PAGE>

I.C. ISAACS & COMPANY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
1999 2000
---- ----
<S> <C> <C>
Operating Activities
Net (loss).................................................................... $(5,592,694) $(1,291,526)
Adjustments to reconcile net loss to net cash used in operating activities
Provision for doubtful accounts............................................ 698,635 726,469
Write off of accounts receivable........................................... (1,282,292) (576,469)
Provision for sales returns and discounts.................................. 3,139,876 4,580,256
Sales returns and discounts................................................ (3,004,637) (4,309,980)
Depreciation and amortization.............................................. 1,700,951 1,323,635
Gain on sale of assets..................................................... (288,788) (57,659)
Compensation expense on stock options...................................... 3,938 7,875
(Increase) decrease in assets
Accounts receivable...................................................... (3,284,335) (14,629,242)
Inventories.............................................................. 3,165,296 1,002,510
Refundable income taxes.................................................. 1,437,455 13,443
Prepaid expenses and other............................................... 502,621 3,433
Other assets............................................................. (340,796) (446,081)
Increase (decrease) in liabilities
Accounts payable......................................................... (869,352) 1,328,761
Accrued expenses and other current liabilities........................... 2,053,467 876,210
Accrued compensation..................................................... 99,847 65,322
---------- -----------
Cash used in operating activities................................................ (1,860,808) (11,383,043)
---------- -----------
Investing Activities
Capital expenditures.......................................................... (440,698) (826,451)
Proceeds from sale of assets.................................................. 288,788 238,301
---------- -----------
Cash used in investing activities................................................ (151,910) (588,150)
---------- -----------
Financing Activities
Checks issued against future deposits......................................... (707,068) 232,748
Principal proceeds from debt.................................................. 2,758,994 11,627,093
Principal payments on debt.................................................... (161,314) (6,258)
Purchase of treasury stock.................................................... (100,000) -
---------- -----------
Cash provided by financing activities............................................ 1,790,612 11,853,583
---------- ----------

Decrease in cash and cash equivalents............................................ (222,106) (117,610)
Cash and Cash Equivalents, at beginning of period................................ 1,345,595 1,193,093
---------- -----------
Cash and Cash Equivalents, at end of period...................................... $1,123,489 $ 1,075,483
---------- -----------
</TABLE>

See accompanying notes to consolidated financial statements.

<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(R) 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 &
Francois Girbaud(R) designer brand in the United States, Puerto Rico and Canada;
collections of sportswear for men and boys under the Beverly Hills Polo Club(R)
brand in the United States, Puerto Rico and Europe; and lines of sportswear for
young men, women and boys under the BOSS(R) brand in the United States and
Puerto Rico. In the first quarter of 2000, 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
September 30, 2000 and for the nine months ended September 30, 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 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. Also, the Company has developed and implemented new marketing
initiatives to promote each of its brands, including "shop-in-shops" for its
Girbaud(R) 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. As competitors lower production costs, it gives them greater
flexibility to lower prices. Over the last several years, the Company also
switched substantially all of its production to contractors outside the United
States to reduce costs.

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.

<PAGE>

CONCENTRATION OF CREDIT RISK

Financial instruments which potentially expose the Company to
concentrations of credit risk consist primarily of trade accounts receivable.
The Company's customer base is not concentrated in any specific geographic
region, but is concentrated in the retail industry. For the nine months ended
September 30, 2000, sales to no one customer accounted for more than 10.0% of
net sales. For the nine months ended September 30, 1999, sales to the Company's
two largest customers were $9,288,127 and $6,915,539, respectively. These
amounts constituted 13.6% and 10.1% of net sales, respectively. 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.

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 has no items of comprehensive income to
report.

RECENT ACCOUNTING PRONOUNCEMENTS

In June 1998, the Financial Accounting Standards Board (FASB) 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 on January 1,
2001 and requires application prospectively. Presently, the Company does not use
derivative instruments either in hedging activities

<PAGE>

or as investments. Accordingly, the Company believes that adoption of SFAS 133
will have no impact on its financial position or results of operations.

In March 2000, the FASB issued interpretation No. 44 ("FIN 44"),
"Accounting for Certain Transactions Involving Stock Compensation, an
Interpretation of APB Opinion No. 25". FIN 44 clarifies the application of APB
No. 25 for (a) the definition of employee for purposes of applying APB No. 25,
(b) the criteria for determining whether a plan qualifies as a noncompensatory
plan, (c) the accounting consequences of various modifications to the previously
fixed stock option or award, and (d) the accounting for an exchange of stock
compensation awards in a business combination. FIN 44 is effective July 2, 2000
but certain conclusions cover specific events that occur after either December
15, 1998 or January 12, 2000. The Company believes that adoption of FIN 44 will
not have an affect on the Company's financial statements but may impact the
accounting for grants or awards in future periods.

<PAGE>

I.C. ISAACS & COMPANY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. INVENTORIES

Inventories consist of the following:

<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1999 2000
---- ----
<S> <C> <C>
Raw Materials......................................................... $ 1,876,222 $ 1,163,432
Work-in-process....................................................... 1,009,124 1,003,563
Finished Goods........................................................ 15,315,977 15,031,818
----------- ------------
$18,201,323 $ 17,198,813
----------- ------------
</TABLE>

2. LONG-TERM DEBT

The Company has an asset-based revolving line of credit agreement (the
"Agreement") with Congress Financial Corporation ("Congress") 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 paid Congress a
financing fee of $125,000, one half of which was paid at the time of closing and
the other half of which was paid in June 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
September 30, 2000 and has obtained a waiver as of September 30, 2000. Effective
September 30, 2000, the credit agreement was amended to reduce the required
minimum level of net worth through December 31, 2000.

3. ACCRUED EXPENSES

Accrued expenses consist of the following:

<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1999 2000
---- ----
<S> <C> <C>
Royalties.................................................... $816,069 $1,710,886
Severance benefits........................................... 525,004 262,504
Bonuses...................................................... 84,000 425,000
Customer credit balances..................................... 233,011 238,630
Payable to salesmen.......................................... 751 364,356
Payroll tax withholdings..................................... 136,216 119,008
Compensation expense......................................... 7,263 15,138
Deferred fees................................................ 62,500 -
Income taxes payable......................................... 110,000 -
Accrued professional fees.................................... 100,000 50,000
Property taxes............................................... 106,812 52,200
Machine rentals.............................................. 105,942 -
Other........................................................ 92,908 26,839
---------- ----------
$2,380,476 $3,264,561
---------- ----------
</TABLE>

4. INCOME TAXES

<PAGE>

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 $26.0 million for income tax reporting
purposes for which no income tax benefit has been recorded due to the
uncertainty over the level of future taxable income.

<PAGE>

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 three months ended September 30,
2000:

<TABLE>
<CAPTION>
INCOME SHARES PER SHARE
------ ------ AMOUNT
------
<S> <C> <C> <C>
Basic earnings per share
Income available to common shareholders.............................. $1,413,442 7,864,657 $0.18
Effect of dilutive options........................................... 113,240
Dilutive earnings per share.......................................... $1,413,442 7,977,897 $0.18
</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 nine
months 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 September 30, 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 value to account for vesting provisions or for
non-transferability or risk of forfeiture. The weighted average remaining life
for options outstanding at September 30, 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>
NINE MONTHS ENDED
Net (loss): SEPTEMBER 30, 1999 SEPTEMBER 30, 2000
------------------ ------------------
<S> <C> <C>
As reported.............................................. $(5,592,694) $(1,291,526)
Pro forma................................................ (5,731,976) $(2,082,645)
Basic and diluted loss per share:
As reported.............................................. $(0.82) $(0.17)
Pro forma................................................ (0.84) $(0.28)
</TABLE>

7. COMMITMENTS AND CONTINGENCIES

On October 22, 1999, the Company, Ambra Inc. ("Ambra") and Hugo Boss AG
("Hugo Boss") entered into an agreement to restructure the licensing arrangement
for the use of the BOSS(R) 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(R) license
agreement are as follows:

<PAGE>

In November 1997, and as further amended in March 1998, November
1998 and June 2000, 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, the U.S. Virgin Islands and Canada. 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:

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 least
$500,000 in advertising men's Girbaud-Registered Trademark- brand products in
each year through the term of the Girbaud-Registered Trademark- men's
agreement.

In March 1998 and as further amended in June 2000, 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, the U.S. Virgin Islands and
Canada. 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:

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-Registered Trademark- brand products in each
year through the term of the Girbaud-Registered Trademark- 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-Registered Trademark- 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-Registered Trademark- 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-Registered Trademark- 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-Registered Trademark-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.

In May 2000, the Company entered into an exclusive distribution
agreement for Girbaud-Registered Trademark- men's and women's jeanswear and
sportswear products in Canada. The Company will sell to Western Glove Works
("Distributor") Girbaud(-Registered Trademark-) products produced in North
America at cost plus 12.0%, which is less than its normal profit margins on
sales of comparable products to the Company's retail customers. For products
purchased by the Distributor from overseas, the Distributor will pay a
distributor's fee equal to 6.75% of net sales to the Company. Under the
agreement, the Distributor will pay a royalty fee equal to 6.25% of net sales
to the Company, which will in turn pay the royalty to Latitude Licensing
Corp. The initial term of the agreement expires on December 31, 2001. The
Distributor may renew the agreement for six additional one-year terms. The
minimum sales level for calendar 2001 is $1,600,000 (Canadian Dollars), which
results in a minimum distribution fee payable to the Company of $48,000
(Canadian Dollars). There are no minimum sales levels or distribution fees
for calendar year 2000.

<PAGE>

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(-Registered Trademark-) men's agreement has a three year term
expiring December 31, 2001 with renewal options for a total of nine 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 products. Payments are 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 nine years. Under the boy's
agreement the Company was 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.

In the second quarter of 2000 the Company announced that it intended
to close its last company-owned manufacturing facility located in Raleigh,
Mississippi. This closure, which occurred in the third quarter of 2000,
resulted in a charge against earnings of $0.2 million in the second quarter.
The production in this facility has been transferred to third party
independent contractor facilities in Mexico.

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 for men's sportswear 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. This Agreement was amended July 31, 2000 to reduce certain
royalty payments and increased the amount the Company is required to spend in
advertising the BHPC(-Registered Trademark-) line. For the period beginning
January 1, 2000 and ending June 30, 2000, no guaranteed minimum annual
royalties or guaranteed net shipment volumes applied; for the period
beginning July 1, 2000 and ending December 31, 2000, the royalty rate shall
be 3.0% of wholesale sales of BHPC(-Registered Trademark-) products including
purchases of BHPC(-Registered Trademark-) 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, 2004, the royalty rate shall be 3.0% of
Wholesale Sales, the guaranteed annual royalty shall be $60,000 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(-Registered Trademark-) line. During each of 2002, 2003 and 2004,
the Company is required to spend an amount equal to 4.0% of Wholesale Sales
in advertising the BHPC(-Registered Trademark-) 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 the 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 alleged that
the registration statement and prospectus used 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, as amended, and Sections 10(b) and 20(a) of the
Securities Act of 1934, as amended, and Rule 10b-5 promulgated thereunder.
The plaintiffs seek rescission, damages, costs and expenses, including
attorneys' fees and experts' fees, and such other relief as may be just and
proper. The Company has filed a motion to dismiss the consolidated complaint,
and this motion is currently pending before the Court. The Company believes
that the plaintiffs' allegations are without merit and intends to defend the
cases vigorously.

<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, the strength of the Company's backlog, acceptance of
Girbaud(-Registered Trademark-) women's brand by retailers and consumers,
statements regarding the profitability of the Company in the fourth quarter
of 2000 and the full year of 2001, projections of increases in license fees,
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 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, its beliefs and intent with respect to the pending class action
lawsuit and costs associated therewith and the effect of changes in financial
accounting rules on its financial statements. Such statements are subject to
a variety of risks and uncertainties, many of which are beyond the Company's
control, which could cause actual results to differ materially from those
contemplated in such forward-looking statements, including in particular the
risks and uncertainties described under "Risk Factors" in the Company's
Prospectus which include, among other things, (i) changes in the marketplace
for the Company's products, including customer tastes, (ii) the introduction
of new products or pricing changes by the Company's competitors, (iii)
changes in the economy, (iv) the risk that the backlog of orders may not be
indicative of eventual actual shipments, and (v) termination of one or more
of its agreements for use of the Girbaud(-Registered Trademark-), Beverly
Hills Polo Club(-Registered Trademark-) and BOSS(-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 hereof.
The Company undertakes no obligation to update or revise the information
contained in this Quarterly Report on Form 10-Q, whether as a result of new
information, future events or circumstances or otherwise.

"I.C. Isaacs(-Registered Trademark-)" is a trademark of the Company.
The Company has filed a federal trademark application for the mark "Urban
Expedition (UBX)" and has filed for usage of the mark in other countries. All
other trademarks or service marks, including "Girbaud(-Registered
Trademark-)" & "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>
NINE MONTHS
ENDED
SEPTEMBER 30,
1999 2000
---- ----
<S> <C> <C>
Net sales........................................................... 100.0% 100.0%
Cost of sales....................................................... 69.7 68.7

Gross profit........................................................ 30.3 31.3
Selling expenses.................................................... 15.0 13.1
License fees........................................................ 8.2 8.1
Distribution and shipping expenses.................................. 3.3 3.1
General and administrative expenses................................. 10.3 7.5

Operating Income (loss)............................................. (6.5)% (0.5)%
</TABLE>

<PAGE>

THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THREE MONTHS ENDED \
SEPTEMBER 30, 1999

NET SALES.

Net sales increased 28.1% to $31.9 million in the three months ended
September 30, 2000 from $24.9 million in the three months ended September 30,
1999. The increase was primarily due to higher volume shipments of
Girbaud(-Registered Trademark-) and UBX sportswear partially offset by
decreases in shipments of BOSS(-Registered Trademark-). Net sales of
Girbaud(-Registered Trademark-) sportswear increased $12.0 million to $24.2
million. Net sales of the Girbaud(-Registered Trademark-) men's product line
increased $10.8 million to $20.2 million while the Girbaud(-Registered
Trademark-) women's product line increased $1.2 million to $4.0 million. The
Company began shipping the men's Girbaud(-Registered Trademark-) product line
in the second quarter of 1998 and the women's Girbaud(-Registered Trademark-)
product line in the fourth quarter of 1998. Net sales of Beverly Hills Polo
Club(-Registered Trademark-) remained relatively unchanged. 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 shipped $0.8

<PAGE>

million in the three months ended September 30, 2000. Net sales of
BOSS(-Registered Trademark-) sportswear decreased $5.1 million or 71.8% to
$2.0 million due to intense competition in the jeanswear market, particularly
with respect to the BOSS(-Registered Trademark-) brand, and changing consumer
tastes. The Company's women's private label sales decreased $0.3 million to
$0.8 million in the three months ended September 30, 2000. International
sales were insignificant for the three months ended September 30, 1999 and
the three months ended September 30, 2000.

GROSS PROFIT.

Gross profit increased 36.7% to $10.8 million in the three months
ended September 30, 2000 from $7.9 million in the three months ended
September 30, 1999. Gross profit as a percentage of net sales increased from
31.7% to 33.9% over the same period. The increase in gross profit resulted
from an increase in sales of Girbaud(-Registered Trademark-) men's goods
coupled with a decrease in sales of markdown items of excess sportswear
inventory.

SELLING, DISTRIBUTION, GENERAL AND ADMINISTRATIVE EXPENSES.

S,G&A increased 6.7% to $6.4 million in the three months ended
September 30, 2000 from $6.0 million in the three months ended September 30,
1999. As a percentage of net sales, S,G&A expenses decreased to 20.1% from
24.1% over the same period due to higher sales and lower general and
administrative expenses partially offset by higher selling and distribution
expenses. Selling expenses increased primarily as a result of commissions
owed on the higher sales. Advertising expenditures decreased $0.1 million to
$0.4 million as the Company focused more on targeted print and media
advertising campaigns for the Girbaud(-Registered Trademark-) men's and
women's collections. The Company has spent the required $0.9 million in
advertising as well as $1.9 million on sales and marketing for the women's
and men's Girbaud(-Registered Trademark-) brand in 2000. Distribution and
shipping expenses increased 28.6% to $0.9 million in the three months ended
September 30, 2000 from $0.7 million in the three months ended September 30,
1999 as a result of increased shipments. General and administrative expenses
decreased 10.0% to $1.8 million in the three months ended September 30, 2000
from $2.0 million in the three months ended September 30, 1999. The decrease
is attributable to lower amortization expense related to the transfer of the
BOSS trademark in October 1999.

LICENSE FEES.

License fees increased $0.7 million to $2.6 million in the three
months ended September 30, 2000 from $1.9 million in the three months ended
September 30, 1999. As a percentage of net sales, license fees increased from
7.6% to 8.2%. The increase in license fees as a percentage of sales is
directly related to the growth in sales of Girbaud(-Registered Trademark-)
merchandise, which involve higher royalty rates than other brands, as
well as declining sales of BOSS, which has a relatively higher minimum
royalty.

OPERATING INCOME (LOSS).

The Company generated operating income of $1.8 million in the three
months ended September 30, 2000 compared to a negligible operating loss in the
three months ended September 30, 1999. The improvement was due to higher gross
margins partially offset by an increase in operating expenses.

INTEREST EXPENSE.

Interest expense decreased $0.2 million to $0.4 million in the three
months ended September 30, 2000 from $0.6 million in the three months ended
September 30, 1999. 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 at an increased interest rate under the
revolving line of credit.

INCOME TAXES.

The Company has estimated its annual effective tax rate at 0% based
on its estimate of pre-tax income for 2000. Also, the Company has net
operating loss carryforwards of approximately $26.0 million for income tax
reporting purposes for which no income tax benefit has been recorded due to
the uncertainty over the level of future taxable income.

<PAGE>

NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1999

NET SALES.

Net sales increased 17.6% to $80.2 million in the nine months ended
September 30, 2000 from $68.2 million in the nine months ended September 30,
1999. The increase was primarily due to higher volume shipments of
Girbaud(-Registered Trademark-) and UBX sportswear partially offset by
decreases in shipments of BOSS(-Registered Trademark-) sportswear and the
Company's women's private label lines. Net sales of Girbaud(-Registered
Trademark-) sportswear increased $34.2 million to $53.9 million. Net sales of
the Girbaud(-Registered Trademark-) men's product line increased $29.3
million to $45.7 million, while the Girbaud(-Registered Trademark-) women's
product line increased $4.9 million to $8.2 million. The Company began
shipping the men's Girbaud(-Registered Trademark-) product line in the second
quarter of 1998 and the women's Girbaud(-Registered Trademark-) product line
in the fourth quarter of 1998. Net sales of Beverly Hills Polo
Club(-Registered Trademark-) sportswear remained relatively unchanged. 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 shipped $1.9
million in the nine months ended September 30, 2000. Net sales of
BOSS(-Registered Trademark-) sportswear decreased $21.9 million or 68.7% to
$10.0 million due to intense competition in the jeanswear market,
particularly with respect to the BOSS(-Registered Trademark-) brand, and
changing consumer tastes. The Company's women's private label sales decreased
$1.7 million or 37.8% to $2.8 million from September 30, 1999 to September
30, 2000. International sales were insignificant for the nine months ended
September 30, 1999 and 2000.

GROSS PROFIT.

Gross profit increased 21.3% to $25.1 million in the nine months
ended September 30, 2000 from $20.7 million in the nine months ended
September 30, 1999. Gross profit as a percentage of net sales increased from
30.3% to 31.3% over the same period. The increase in gross profit was
primarily due to higher sales of Girbaud(-Registered Trademark-) jeanswear
and sportswear at higher margins offset by the overall sluggish retail
environment, changes in the product mix and off price sales of goods coupled
with continued markdowns on excess sportswear inventory.

SELLING, DISTRIBUTION, GENERAL AND ADMINISTRATIVE EXPENSES.

S,G&A decreased 3.1% to $18.9 million in the nine months ended
September 30, 2000 from $19.5 million in the nine months ended September 30,
1999. As a percentage of net sales, S,G&A expenses decreased to 23.7% from
28.6% over the same period due to higher sales, reduced general and
administrative expenses, and a reduction in the provision for severance
partially offset by an increase in selling expenses and distribution
expenses. Advertising expenditures decreased $0.7 million to $1.3 million as
the Company focused more on targeted print and media advertising campaigns
for the Girbaud(-Registered Trademark-) men's and women's collection. The
Company has spent the required $0.9 million in advertising as well as $1.9
million on sales and marketing for the women's and men's Girbaud(-Registered
Trademark-) brand in 2000. Distribution and shipping expenses increased 13.6%
to $2.5 million in the nine months ended September 30, 2000 from $2.2 million
in the nine months ended September 30, 1999 as a result of the increased
shipments. General and administrative expenses decreased 15.7% to $5.9
million in the nine months ended September 30, 2000 from $7.0 million in the
nine months ended September 30, 1999. The decrease is attributable to reduced
personnel and lower amortization expense related to the transfer of the BOSS
trademark in October 1999, offset by increased professional fees related to
the Company's defense in a class action lawsuit. The Company expects that
professional fees associated with the lawsuit in the future will be paid by
the Company's insurance carrier. In the second quarter of 1999 the Company's
President and Chief Operating Officer resigned. In connection with this
resignation the Company recorded a provision for severance of $0.8 million.
In the second quarter of 2000 the Company announced that it intended to close
its last company-owned manufacturing facility located in Raleigh,
Mississippi. This closure, which occurred in the third quarter of 2000,
resulted in a charge against earnings of $0.2 million in the second quarter.
The production in this facility has been transferred to third party
independent contractor facilities in Mexico.

LICENSE FEES.

License fees increased $0.9 million to $6.5 million in the nine
months ended September 30, 2000 from $5.6 million in the nine months ended
September 30, 1999. As a percentage of net sales, license fees decreased from
8.2% to 8.1%. The overall increase in license fees is directly related to the
growth in the sales of Girbaud(-Registered Trademark-) merchandise, which
involve higher royalty rates than other brands, as well as declining sales
of BOSS, which has a relatively higher minimum royalty.

OPERATING LOSS.

Operating loss decreased 91.1% to $0.4 million in the nine months
ended September 30, 2000 from $4.5 million in the nine months ended September
30, 1999. The improvement was due to increased shipments of
Girbaud(-Registered Trademark-) sportswear at higher margins partially offset
by an increase in operating expenses and decreases in shipments of BOSS
sportswear and the Company's women's private label lines.

INTEREST EXPENSE.

<PAGE>

Interest expense decreased $0.5 million to $0.9 million in the nine
months ended September 30, 2000 from $1.4 million in the nine months ended
September 30, 1999. The Company eliminated $0.9 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 at an increased interest rate under the
revolving line of credit.

INCOME TAXES.

The Company has estimated its annual effective tax rate at 0% based
on its estimate of pre-tax income for 2000. Also, the Company has net
operating loss carryforwards of approximately $26.0 million for income tax
reporting purposes for which no income tax benefit has been recorded due to
the uncertainty over the level of future taxable income.

LIQUIDITY AND CAPITAL RESOURCES

The Company has relied primarily on 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 nine months of 2000
compared to the first nine months of 1999, primarily due to a cumulative net
loss of $5.9 million over the four quarters ended September 30, 2000. As of
September 30, 2000, the Company had cash and cash equivalents, including
temporary investments, of $1.1 million and working capital of $21.6 million
compared to $1.1 million and $22.3 million, respectively, as of September 30,
1999.

OPERATING CASH FLOW

Cash used by operations totaled $11.4 million for the first nine
months of 2000, compared with $1.9 million for the same period of 1999. This
is primarily due to the net loss of $1.3 million and increases in accounts
receivable partially offset by decreases in inventories and increases in
accounts payable and accrued expenses. Cash used for investing activities for
the first nine months of 2000 were $0.6 million. Cash provided by financing
activities totaled $11.9 million for the first nine months of 2000, resulting
primarily from borrowings on the Company's revolving line of credit.

As a result of increased sales, accounts receivable increased $14.6
million from December 31, 1999 to September 30, 2000 compared to an increase
of $3.3 million from December 31, 1998 to September 30, 1999. Inventory
decreased $1.0 million from December 31, 1999 to September 30, 2000 compared
to a decrease of $3.2 million from December 31, 1998 to September 30, 1999.

Capital expenditures were $0.8 million for the first nine months of
2000 compared with $0.4 million for the first nine months of 1999. The
Company expects to continue to incur capital expenditures for the
Girbaud(-Registered Trademark-) shop-in-shop program going forward.

On May 15, 2000, the Company announced that it intended to close its
last company owned manufacturing facility located in Raleigh, Mississippi.
This closure, which occurred in the third quarter of 2000, resulted in a
charge against earnings of $0.2 million in the second quarter. The production
in this facility was 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 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
paid Congress a financing fee of $125,000, one half of which was paid at the
time of closing and the other half of which was paid in June, 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 September 30, 2000 and has obtained a waiver as of
September 30, 2000. Effective September 30, 2000, the credit agreement was
amended to reduce the required minimum level of net worth through December 31,
2000.

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. The Company's credit loss was $0.6 million, or 0.7% of net
sales, for the nine months ended September 30, 2000 compared with a credit
loss of $1.3 million, or 1.9% of net sales for the nine months ended
September 30, 1999.

<PAGE>

The Company believes that current levels of cash and cash
equivalents ($1.1 million at September 30, 2000) together with cash from
operations and existing credit facilities, will be sufficient to meet its
working capital requirements for the next 12 months. Although the Company
currently believes that it has sufficient capital resources to meet
anticipated working capital and capital expenditure requirements beyond the
next twelve months, unanticipated events and opportunities may make it
necessary for the Company to return to the public markets, establish new
credit facilities or raise capital in private transactions in order to meet
capital requirements.

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. Based principally on the strength of Girbaud brand
sportswear as of September 30, 2000, the Company had unfilled orders of
approximately $33 million, an increase of 43.5%, compared to approximately
$23 million of such orders as of September 30, 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 on January 1, 2001 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.

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
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.

<PAGE>

PART II--OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

The Company and certain of its current and former officers and directors have
been named as defendants in three putative class actions filed in the 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 thc first-named
plaintiff, purport to have been brought on behalf of all persons (other than
thc 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 used in connection with the
Company's initial public offering, completed in December 1997, contained
materially false and misleading statements, which artificially inflated thc
price of the Company's stock during the class period. Specifically, the
complaints alleged violations of Sections 11, 12(a)(2) and 15 of the
Securities Act of 1933, as amended, and Sections 10(b) and 20(a) of the
Securities Act of 1934, as amended, and Rule 10b-5 promulgated thereunder.
The plaintiffs seek rescission, damages, costs and expenses, including
attorney's fees, and such other relief as may be just and proper. Thc Company
has filed a motion to dismiss thc consolidated complaint, and this motion is
currently pending before the Court. The Company believes that the plaintiffs'
allegations are without merit and intends to defend the cases vigorously.

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

None

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None

ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.

(a) Exhibits.

10.78 Amendment No. 2, dated as of August 25, 2000, to Consulting Agreement
by and between I.C. Isaacs & Company, Inc. and Gary Brashers.

10.79 Eighteenth Amendment to Financing Agreement, dated as of May 30,
2000.

10.80 Nineteenth Amendment to Financing Agreement, dated June 23, 2000.

10.81 Twentieth Amendment to Financing Agreement, dated as of
November 7, 2000.

10.82 Letter Agreement dated August 9, 2000, by and between I.C. ISAACS &
Company LP and Congress Financial Corporation relating to Covenant
Supplement to the Accounts Financing Agreement.

27 Financial Data Schedule

(b) Reports on Form 8-K.

None

<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.

I.C. ISAACS & COMPANY, INC.

By: /s/ Robert J. Arnot
----------------------------------------
Robert J. Arnot
CHAIRMAN OF THE BOARD, PRESIDENT AND
CHIEF EXECUTIVE OFFICER

Dated: November 14, 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.

NAME CAPACITY DATE
---- -------- -----
<S> <C> <C>
Chairman of the Board, Chief November 14, 2000
/s/ Robert J. Arnot Executive Officer, President and
---------------------------- Director (Principal
Robert J. Arnot Executive Officer)

/s/ Eugene C. Wielepski Vice President and Chief Financial November 14, 2000
---------------------------- Officer and Director (Principal
Eugene C. Wielepski Financial and Accounting Officer)

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