<PAGE>
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
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 JUNE 30, 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 incorporation (IRS Employer Identification No.)
or organization)
3840 BANK STREET 21224-2522
BALTIMORE, MD (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 August 14, 2000, 7,864,657 shares of common stock ("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, JUNE 30,
1999 2000
------------ ------------
<S> <C> <C>
ASSETS
Current
Cash, including temporary investments of $512,000 and
$391,000.............................................. $ 1,193,093 $ 1,132,233
Accounts receivable, less allowance for doubtful
accounts of $725,000 and $775,000..................... 10,950,550 17,023,343
Inventories (Note 1).................................... 18,201,323 15,741,641
Refundable income taxes................................. 356,265 342,822
Prepaid expenses and other.............................. 293,524 433,085
----------- ------------
Total current assets................................ 30,994,755 34,673,124
Property, plant and equipment, at cost, less accumulated
depreciation and amortization............................. 3,304,512 3,328,293
Trademark and licenses, less accumulated amortization of
$307,210 and $471,862 (Note 7)............................ 1,042,790 878,138
Goodwill, less accumulated amortization of $1,660,650 and
$1,784,580................................................ 991,450 867,520
Deferred royalty expense, less accumulated amortization of
$88,287 and $264,861...................................... 1,059,463 882,889
Other assets................................................ 3,042,261 3,242,117
----------- ------------
$40,435,231 $ 43,872,081
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current
Checks issued against future deposits................... $ 294,089 $ 1,244,907
Current maturities of revolving line of credit (Note
2).................................................... 3,644,470 7,967,074
Current maturities of capital lease obligations......... 6,258 --
Accounts payable........................................ 1,923,458 2,668,916
Accrued expenses and other current liabilities (Note
3).................................................... 2,380,476 2,552,397
Accrued compensation.................................... 135,790 93,065
----------- ------------
Total current liabilities........................... 8,384,541 14,526,359
----------- ------------
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) (11,320,080)
Treasury stock, at cost (1,146,709 shares).............. (2,310,030) (2,310,030)
----------- ------------
Total stockholders' equity.......................... 27,750,690 26,045,722
=========== ============
$40,435,231 $ 43,872,081
=========== ============
</TABLE>
See accompanying notes to consolidated financial statements.
1
<PAGE>
I.C. ISAACS & COMPANY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
1999 2000 1999 2000
------------ ------------ ----------- -----------
<S> <C> <C> <C> <C>
Net Sales................................. $20,756,858 $23,602,928 $43,284,696 $48,278,978
Cost of Sales............................. 14,648,477 17,582,147 30,507,886 33,987,695
----------- ----------- ----------- -----------
Gross profit.............................. 6,108,381 6,020,781 12,776,810 14,291,283
----------- ----------- ----------- -----------
Operating Expenses
Selling............................... 2,792,414 3,433,045 6,978,568 6,787,139
License fees.......................... 1,729,286 1,944,737 3,670,808 3,967,198
Distribution and shipping............. 684,827 756,781 1,535,159 1,597,392
General and administrative............ 2,124,609 2,239,226 4,263,010 3,943,121
Provision for severance (Note 7)...... 750,000 225,000 750,000 225,000
----------- ----------- ----------- -----------
Total operating expenses.................. 8,081,136 8,598,789 17,197,545 16,519,850
----------- ----------- ----------- -----------
Operating loss............................ (1,972,755) (2,578,008) (4,420,735) (2,228,567)
Other income (expense)
Interest, net of interest income of
$10,809, $3,232, $14,564 and
$6,794.............................. (419,323) (255,410) (849,646) (499,541)
Other, net............................ 199,922 11,067 225,885 (24,860)
----------- ----------- ----------- -----------
Total other income (expense).............. (219,401) (244,343) (623,761) (524,401)
----------- ----------- ----------- -----------
Loss before income taxes.................. (2,192,156) (2,822,351) (5,044,496) (2,752,968)
Income tax benefit........................ -- -- -- 48,000
----------- ----------- ----------- -----------
Net loss.................................. $(2,192,156) $(2,822,351) $(5,044,496) $(2,704,968)
=========== =========== =========== ===========
Basic and diluted loss per share.......... $ (0.32) $ (0.37) $ (0.74) $ (0.37)
Weighted average shares outstanding....... 6,781,101 7,622,899 6,781,101 7,410,444
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE>
I.C. ISAACS & COMPANY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-------------------------
1999 2000
----------- -----------
<S> <C> <C>
Operating Activities
Net loss................................................ $(5,044,496) $(2,704,968)
Adjustments to reconcile net loss to net cash used in
operating activities
Provision for doubtful accounts......................... 487,495 482,898
Write off of accounts receivable........................ (1,215,495) (432,898)
Provision for sales returns and discounts............... 2,021,258 2,050,111
Sales returns and discounts............................. (2,009,293) (2,051,725)
Depreciation and amortization........................... 1,103,660 866,029
Gain on sale of assets.................................. (211,448) --
Compensation expense on stock options................... 2,363 4,375
(Increase) decrease in assets
Accounts receivable................................. (976,603) (6,121,179)
Inventories......................................... 3,983,503 2,459,682
Refundable income taxes............................. 1,340,607 13,443
Prepaid expenses and other.......................... 430,787 (139,560)
Other assets........................................ (339,530) (235,569)
Increase (decrease) in liabilities
Accounts payable.................................... (1,338,984) 745,458
Accrued expenses and other current liabilities...... 592,922 167,546
Accrued compensation................................ 74,186 (42,725)
----------- -----------
Cash used in operating activities........................... (1,099,068) (4,939,082)
----------- -----------
Investing Activities
Capital expenditures.................................... (225,313) (388,942)
Proceeds from sale of assets............................ 211,448 --
----------- -----------
Cash used in investing activities........................... (13,865) (388,942)
----------- -----------
Financing Activities
Checks issued against future deposits................... (611,214) 950,818
Principal proceeds from debt............................ 1,862,385 4,322,604
Principal payments on debt.............................. (93,517) (6,258)
Purchase of treasury stock.............................. (100,000) --
----------- -----------
Cash provided by financing activities....................... 1,057,654 5,267,164
----------- -----------
Decrease in cash and cash equivalents....................... (55,279) (60,860)
Cash and Cash Equivalents, at beginning of period........... 1,345,595 1,193,093
----------- -----------
Cash and Cash Equivalents, at end of period................. $ 1,290,316 $ 1,132,233
----------- -----------
</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 & Francois
Girbaud-Registered Trademark- designer brand in the United States and Puerto
Rico; collections of sportswear for men and boys under the Beverly Hills Polo
Club-Registered Trademark- brand in the United States, Puerto Rico and Europe;
and lines of sportswear for young men, women and boys under the
BOSS-Registered Trademark- brand in the United States and Puerto Rico. The
Company recently acquired a license to offer jeanswear and sportswear under the
Girbaud-Registered Trademark- brand in Canada. 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
June 30, 2000 and for the six months ended June 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-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. As competitors lower production costs,
it gives them greater flexibility to lower prices. Over the last several
4
<PAGE>
I.C. ISAACS & COMPANY, INC.
SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
years, the Company also switched nearly 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.
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 six months ended June 30, 2000,
sales to no one customer accounted for more than 10.0% of net sales. For the six
months ended June 30, 1999, sales to the Company's two largest customers were
$9,214,832 and $7,955,464, respectively. These amounts constitute 21.3% and
13.1% of total 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.
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 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, JUNE 30,
1999 2000
------------ -----------
<S> <C> <C>
Raw Materials...................................... $ 1,876,222 $ 2,059,267
Work-in-process.................................... 1,009,124 768,317
Finished Goods..................................... 15,315,977 12,914,057
----------- -----------
$18,201,323 $15,741,641
=========== ===========
</TABLE>
2. LONG-TERM DEBT
The Company has an asset-based revolving line of credit 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
June 30, 2000 and has obtained a waiver, through August 31, 2000, from Congress.
3. ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1999 2000
------------ ----------
<S> <C> <C>
Royalties........................................... $ 816,069 $1,086,730
Severance benefits.................................. 525,004 655,004
Customer credit balances............................ 233,011 286,410
Payable to salesmen................................. 751 75,401
Payroll tax withholdings............................ 136,216 119,267
Compensation expense................................ 7,263 11,638
Deferred fees....................................... 62,500 --
Income taxes payable................................ 110,000 --
Accrued professional fees........................... 100,000 50,000
Property taxes...................................... 106,812 34,800
Machine rentals..................................... 105,942 --
Other............................................... 176,908 233,147
---------- ----------
$2,380,476 $2,552,397
========== ==========
</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 $27.0 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.
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. There is no difference
in basic and diluted loss per share as the effect of dilutive securities is
antidilutive.
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 six 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 June 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 June 30, 2000 is 8 years.
8
<PAGE>
I.C. ISAACS & COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. STOCK OPTIONS (CONTINUED)
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>
SIX MONTHS ENDED
-----------------------------
JUNE 30, 1999 JUNE 30, 2000
Net loss: ------------- -------------
<S> <C> <C>
As reported...................................... $(5,044,496) $(2,704,968)
Pro forma........................................ (5,114,137) (3,295,118)
Basic and diluted loss per share:
As reported...................................... $ (0.74) $ (0.37)
Pro forma........................................ (0.75) (0.44)
</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, 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:
<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 least $500,000 in advertising
men's Girbaud-Registered Trademark- brand products in each year through the term
of the Girbaud men's agreement.
9
<PAGE>
I.C. ISAACS & COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. COMMITMENTS AND CONTINGENCIES (CONTINUED)
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:
<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 & Francois 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.
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
10
<PAGE>
I.C. ISAACS & COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. COMMITMENTS AND CONTINGENCIES (CONTINUED)
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.
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 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 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.
In the second quarter of 2000 the Company announced that it intends to close
its last company-owned manufacturing facility, located in Raleigh, Mississippi.
This closure, which will occur 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 will be 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 mens 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. Effective March 1, 1999, BHPC
Marketing, Inc. amended the International Agreements to eliminate all royalties
through December 31, 1999. This Agreement was further amended July 31, 2000 to
reduce certain royalty payments and increase 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 apply; for the period beginning
July 1, 2000 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, 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 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 line.
11
<PAGE>
I.C. ISAACS & COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. COMMITMENTS AND CONTINGENCIES (CONTINUED)
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 lead 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 has
filed a motion to dismiss the complaint and expects that briefing will be
completed in September. The Company believes that the plaintiff's allegations
are without merit and intends to defend the cases vigorously.
12
<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 and costs
associated therewith. 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
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 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)"and has filed for usage of the mark in other countries. All other
trademarks or service marks, including "Girbaud-Registered Trademark-" &
"Marithe & 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>
SIX MONTHS
ENDED
JUNE 30,
--------------------
1999 2000
--------- --------
<S> <C> <C>
Net sales................................................. 100.0% 100.0%
Cost of sales............................................. 70.5 70.4
----- -----
Gross profit.............................................. 29.5 29.6
Selling expenses.......................................... 16.1 14.1
License fees.............................................. 8.5 8.2
Distribution and shipping expenses........................ 3.5 3.3
General and administrative expenses....................... 11.6 8.6
----- -----
Operating Income (loss)................................... (10.2)% (4.6)%
===== =====
</TABLE>
13
<PAGE>
THREE MONTHS ENDED JUNE 30, 2000 COMPARED TO THREE MONTHS ENDED JUNE 30, 1999
NET SALES.
Net sales increased 13.5% to $23.6 million in the three months ended
June 30, 2000 from $20.8 million in the three months ended June 30, 1999. The
increase was primarily due to higher volume shipments of
Girbaud-Registered Trademark-, Beverly Hills Polo Club-Registered Trademark-,
and UBX sportswear partially offset by decreases in shipments of
BOSS-Registered Trademark-. Net sales of Girbaud-Registered Trademark-
sportswear increased $10.5 million to $14.7 million. Net sales of the
Gribaud-Registered Trademark- men's product line increased $9.2 million to
$13.1 million while the Girbaud-Registered Trademark- women's product line
increased $1.3 million to $1.6 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 BOSS-Registered Trademark- sportswear decreased $8.7 million
or 68.5% to $4.0 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 increased $0.6 million or 18.2% to $3.9 million due to higher demand
for men's bottoms and tops. Net sales of Beverly Hills Polo Club men's
sportswear increased $0.7 million to $3.6 million while net sales of Beverly
Hills Polo Club boy's sportswear decreased $0.1 million to $0.3 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 shipped $0.5 million in
the three months ended June 30, 2000. The Company's women's private label sales
remained relatively unchanged from June 30, 1999 to June 30, 2000. International
sales were insignificant for the three months ended June 30, 1999 and 2000.
GROSS PROFIT.
Gross profit decreased 1.6% to $6.0 million in the three months ended
June 30, 2000 from $6.1 million in the three months ended June 30, 1999. Gross
profit as a percentage of net sales decreased from 29.4% to 25.5% over the same
period. The decrease in gross profit resulted from the overall sluggish retail
environment and changes in product mix and off-price sales of goods.
SELLING, DISTRIBUTION, GENERAL AND ADMINISTRATIVE EXPENSES.
S,G&A increased 4.7% to $6.7 million in the three months ended June 30, 2000
from $6.4 million in the three months ended June 30, 1999. As a percentage of
net sales, S,G&A expenses decreased to 28.4% from 30.8% over the same period due
to higher sales and a reduction in the provision for severance offset by higher
selling and general and administrative expenses. Advertising expenditures
decreased $0.2 million to $0.6 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 is required to spend $0.9 million in
advertising as well as $1.9 million on sales and marketing for the women's and
men's Girbaud brand in 2000. Distribution and shipping expenses remained
relatively unchanged during the three months ended June 30, 2000 and 1999.
General and administrative expenses increased 4.8% to $2.2 million in the three
months ended June 30, 2000 from $2.1 million in the three months ended June 30,
1999. The increase is attributable to higher professional fees related to the
Company's defense in 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 intends to close its last
company-owned manufacturing facility, located in Raleigh, Mississippi. This
closure, which will occur 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 will be transferred to third party independent contractor facilities in
Mexico.
14
<PAGE>
LICENSE FEES.
License fees increased $0.2 million to $1.9 million in the three months
ended June 30, 2000 from $1.7 million in the three months ended June 30, 2000.
As a percentage of net sales, license fees decreased from 8.2% to 8.1%. The
decrease in license fees as a percentage of sales 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-Registered Trademark- license agreements, which will result in higher
license fees.
OPERATING LOSS.
Operating loss increased 30.0% to $(2.6) million in the three months ended
June 30, 2000 from $(2.0) million in the three months ended June 30, 1999. The
decline was due primarily to lower gross margins coupled with an increase in
operating expenses.
INTEREST EXPENSE.
Interest expense decreased $0.1 million to $0.3 million in the three months
ended June 30, 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 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 $27.0 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.
SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO SIX MONTHS ENDED JUNE 30, 1999
NET SALES.
Net sales increased 11.5% to $48.3 million in the six months ended June 30,
2000 from $43.3 million in the six months ended June 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
$22.1 million to $29.7 million. Net sales of the Girbaud-Registered Trademark-
men's product line increased $18.4 million to $25.4 million, while the
Girbaud-Registered Trademark- women's product line increased $3.7 million to
$4.3 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. The Company began shipping its UBX line in the first quarter of
2000 and shipped $1.1 million in the six months ended June 30, 2000. Net sales
of BOSS-Registered Trademark- sportswear decreased $16.8 million or 67.7% to
$8.0 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
remained relatively unchanged. The Company's women's private label sales
decreased $1.3 million or 38.2% to $2.1 million from June 30, 1999 to June 30,
2000. International sales were insignificant for the six months ended June 30,
1999 and 2000.
GROSS PROFIT.
Gross profit increased 11.7% to $14.3 million in the six months ended
June 30, 2000 from $12.8 million in the six months ended June 30, 1999. Gross
profit as a percentage of net sales increased from 29.5% to 29.6% 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.
15
<PAGE>
SELLING, DISTRIBUTION, GENERAL AND ADMINISTRATIVE EXPENSES.
S,G&A decreased 6.7% to $12.6 million in the six months ended June 30, 2000
from $13.5 million in the six months ended June 30, 1999. As a percentage of net
sales, S,G&A expenses decreased to 26.1% from 31.2% over the same period due to
higher sales, reduced selling and general and administrative expenses and a
reduction in the provision for severance. Advertising expenditures decreased
$0.7 million to $1.2 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 is required to spend $0.9 million in advertising
as well as $1.9 million on sales and marketing for the women's and men's Girbaud
brand in 2000. Distribution and shipping expenses remained relatively unchanged
during the six months ended June 30, 2000 and 1999. General and administrative
expenses decreased 9.3% to $3.9 million in the six months ended June 30, 2000
from $4.3 million in the six months ended June 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
intends to close its last company-owned manufacturing facility, located in
Raleigh, Mississippi. This closure, which will occur 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 will be transferred to third party
independent contractor facilities in Mexico.
LICENSE FEES.
License fees increased $0.3 million to $4.0 million in the six months ended
June 30, 2000 from $3.7 million in the six months ended June 30, 1999. As a
percentage of net sales, license fees decreased from 8.5% to 8.2%. As a
percentage of net sales, license fees remained relatively unchanged. The overall
increase in liscense fees is directly related to the growth in the sales of
Girbaud-Registered Trademark- merchandise. The Company anticipates that it will
continue to exceed the minimum quarterly sales levels in the
Girbaud-Registered Trademark- license agreement, which will result result in
higher license fees.
OPERATING LOSS.
Operating loss decreased 50.0% to $2.2 million in the six months ended
June 30, 2000 from $4.4 million in the six months ended June 30, 1999. The
improvement was due to increased shipments of Girbaud-Registered Trademark-
sportswear at higher margins coupled with reduced operating expenses.
INTEREST EXPENSE.
Interest expense decreased $0.3 million to $0.5 million in the six months
ended June 30, 2000. The Company eliminated $0.6 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 $27.0 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.
16
<PAGE>
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 six months of 2000 compared to the first six
months of 1999, primarily due to a cumulative net loss of $7.9 million over the
four quarters ended June 30, 2000. As of June 30, 2000, the Company had cash,
including temporary investments, of $1.1 million and working capital of
$20.1 million compared to $1.3 million and $27.0 million, respectively, as of
June 30, 1999.
OPERATING CASH FLOW
Cash used by operations totaled $4.9 million for the first six months of
2000 primarily due to the net loss of $2.7 million and increases in accounts
receivable offset by decreases in inventories. Cash used for investing
activities for the first six months of 2000 were $0.4 million. Cash provided by
financing activities totaled $5.3 million for the first six months of 2000,
resulting primarily from borrowings on the Company's revolving line of credit.
Accounts receivable increased $6.1 million from December 31, 1999 to
June 30, 2000 compared to an increase of $1.0 million from December 31, 1998 to
June 30, 1999. Inventory decreased $2.5 million from December 31, 1999 to
June 30, 2000 compared to a decrease of $4.0 million from December 31, 1998 to
June 30, 1999. The Company has strengthened its control over inventory in order
to reduce growth in inventory and maximize cash flow.
Capital expenditures were $0.4 million for the first six months of 2000
compared with $0.2 million for the first six 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 intends to close its last
company-owned manufacturing facility, located in Raleigh, Mississippi. This
closure, which will occur 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 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 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 June 30, 2000 and has obtained
a waiver, through August 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
17
<PAGE>
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. For the six months ended June 30, 1999 and 2000,
the Company's credit losses were $1.2 million and $0.4 million, respectively.
The Company's actual credit losses as a percentage of net sales were 2.8% and
0.8% respectively.)
The Company believes that current levels of cash and cash equivalents
($1.1 million at June 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.
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 June 30, 2000, the Company had unfilled orders of approximately $44 million,
an increase of 76.0%, compared to approximately $25 million of such orders as of
June 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 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.
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.
18
<PAGE>
PART II OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
(c) The following is a description of securities issued during the three
month period ended June 30, 2000 that were not registered under the
Securities Act of 1933, as amended:
(i) On May 4, 2000, the Company issued 1,300,000 shares of Series A
Convertible Preferred Stock, par value $.0001, of the Company and
666,667 shares of restricted Common Stock, par value $.0001, of the
Company (collectively, the "Shares"). The Preferred Shares are
convertible, at the option of the holder, for a 60 day period
beginning October 1, 2003 into a promissory note of the Company in a
principal amount of $1.00 multiplied by the total number of shares of
Preferred Stock being converted, with interest thereafter at an
annual interest rate of 12%.
(ii) The Shares were sold to Ambra Inc. ("Ambra").
(iii) The Shares were issued in connection with the restructuring of the
licensing agreement for use of the BOSS-Registered Trademark-
trademark.
(iv) The Shares were issued in a private placement pursuant to Rule 506
of Regulation D promulgated under the Securities Act of 1933, as
amended. The Shares were not offered in the form of general
solicitation or advertisement, but rather to one party, Ambra, which
is an accredited investor and the licensor of the
BOSS-Registered Trademark- mark to the Company. The Company made
available to Ambra all materials and information relating to the
investment that were requested by Ambra.
(v) There were no cash proceeds from the offering of the Shares.
ITEM 4. RESULTS OF VOTING AT ANNUAL MEETING OF SHAREHOLDERS.
(a) The Company held its annual meeting of shareholders on June 8, 2000.
(b) No response required.
(c) 1. The following individuals were nominees for the Board of Directors,
and the number of votes for or withheld for each nominee were as
follows: Neal J. Fox--For 5,352,776, Withheld 9,950; Anthony J.
Marterie--For 5,352,776, Withheld 9,950; Ronald S. Schmidt--For
5,291,776; Withheld 70,950.
2. Approval of BDO Seidman, LLP as the independent auditors of the
Company for the fiscal year ending December 31, 2000. The number of
votes for, against and abstaining is as follows: 5,335,926; Against
26,800; Abstaining (none).
19
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
<TABLE>
<C> <S>
10.68 Amendment to International Exclusive License Agreements
dated September 1, 1999, by and between I.C. Isaacs Europe,
S.L. and BHPC Marketing, Inc
10.73 Girbaud Distribution Agreement Canada dated as of May 15,
2000, between Western Glove Works and I.C Isaacs and Company
L.P.
10.74 Amendment No. 1 dated as of May 15, 2000, to Girbaud
Distribution Agreement Canada dated as of May 15, 2000,
between Western Glove Works and I.C. Isaacs and Company L.P.
10.75 Amendment No. 2 dated June 21, 2000, to Trademark License
and Technical Assistance Agreement Covering Men's Products
dated January 15, 1998, by and between Latitude Licensing
Corp. and I.C. Isaacs & Company L.P.
10.76 Amendment No. 5 dated June 21, 2000, to Trademark License
and Technical Assistance Agreement Covering Women's Products
dated January 15, 1998, by and between Latitude Licensing
Corp. and I.C. Isaacs & Company L.P.
10.77 Amendment by and between BHPC Marketing, Inc., and I.C
Isaacs Europe, S.L. dated July 31, 2000, relating to the
International Exclusive License Agreements (Wholesale and
Retail) dated August 15, 1996
</TABLE>
(b) Reports on Form 8-K.
None
20
<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: August 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.
<TABLE>
<CAPTION>
NAME CAPACITY DATE
---- -------- ----
<C> <S> <C>
Chairman of the Board, Chief
/s/ ROBERT J. ARNOT Executive Officer, President
------------------------------------------- and Director (Principal August 14, 2000
Robert J. Arnot Executive Officer)
Vice President and Chief
/s/ EUGENE C. WIELEPSKI Financial Officer and
------------------------------------------- Director (Principal August 14, 2000
Eugene C. Wielepski Financial and Accounting
Officer)
</TABLE>
21
