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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
(MARK ONE)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999.
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
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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 May 15, 1999, 6,782,200 shares of common stock ("Common Stock") of the
Registrant were outstanding.
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PART I--FINANCIAL INFORMATION
I.C. ISAACS & COMPANY, INC.
CONSOLIDATED BALANCE SHEETS
ITEM 1. FINANCIAL STATEMENTS.
DECEMBER 31, MARCH 31,
1998 1999
------------- -------------
ASSETS
Current
Cash, including temporary investments of $887,845 and $393,000................... $ 1,345,595 $ 867,613
Accounts receivable, less allowance for doubtful accounts of $1,353,000 and
$1,350,000..................................................................... 14,904,501 16,108,662
Inventories (Note 1)............................................................. 23,121,971 19,991,620
Refundable income taxes (Note 4)................................................. 1,799,450 561,449
Prepaid expenses and other....................................................... 882,355 544,944
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Total current assets......................................................... 42,053,872 38,074,288
Property, plant and equipment, at cost, less accumulated depreciation and
amortization..................................................................... 3,247,646 3,096,522
Trademark and licenses, less accumulated amortization of $1,412,500 and $1,723,750
(Note 7)......................................................................... 10,437,500 10,126,250
Goodwill, less accumulated amortization of $1,412,790 and $1,474,755............... 1,239,310 1,177,345
Other assets....................................................................... 2,067,815 2,387,566
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$ 59,046,143 $ 54,861,971
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current
Checks issued against future deposits............................................ $ 1,298,929 $ 507,614
Current maturities of long term debt and revolving line of credit (Note 2)....... 2,412,235 3,796,044
Current maturities of capital lease obligations.................................. 179,864 138,860
Accounts payable................................................................. 4,301,707 2,251,188
Accrued expenses and other current liabilities (Note 3).......................... 2,074,305 2,237,895
Accrued compensation............................................................. 209,773 219,638
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Total current liabilities.................................................... 10,476,813 9,151,239
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Long-term debt
Note payable..................................................................... 11,250,000 11,250,000
Capital lease obligations........................................................ 6,258 --
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Total long-term debt......................................................... 11,256,258 11,250,000
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Commitments and Contingencies (Note 7)
STOCKHOLDERS' EQUITY (NOTES 5 AND 6)
Preferred stock; $.0001 par value; 5,000,000 shares authorized, none
outstanding.................................................................... -- --
Common stock; $.0001 par value; 50,000,000 shares authorized, 8,344,699 shares
issued; 6,782,200 shares outstanding........................................... 834 834
Additional paid-in capital....................................................... 38,924,998 38,924,998
Retained earnings (deficit)...................................................... 1,597,270 (1,255,070)
Treasury stock, at cost (1,562,499 shares)....................................... (3,210,030) (3,210,030)
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Total stockholders' equity................................................... 37,313,072 34,460,732
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$ 59,046,143 $ 54,861,971
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See accompanying notes to consolidated financial statements.
1
I.C. ISAACS & COMPANY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31,
----------------------------
1998 1999
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Net Sales........................................................................ $ 34,270,880 $ 22,527,838
Cost of Sales.................................................................... 23,563,591 15,859,409
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Gross profit..................................................................... 10,707,289 6,668,429
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Operating Expenses
Selling...................................................................... 4,326,084 4,186,154
License fees................................................................. 1,782,042 1,941,522
Distribution and shipping.................................................... 1,069,845 850,332
General and administrative................................................... 2,142,216 2,138,401
Provision for severance...................................................... 226,326 --
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Total operating expenses......................................................... 9,546,513 9,116,409
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Operating income (loss).......................................................... 1,160,776 (2,447,980)
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Other Income (Expense)
Interest, net of interest income of $133,336 and $10,809..................... (239,414) (430,323)
Other net.................................................................... 312,438 25,963
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Total other income (expense)..................................................... 73,024 (404,360)
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Income (loss) before income taxes................................................ 1,233,800 (2,852,340)
Provision for income taxes....................................................... 506,000 --
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Net Income (Loss)................................................................ $ 727,800 $ (2,852,340)
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Basic and diluted earnings (loss) per share...................................... $ 0.09 $ (0.42)
Weighted average shares outstanding.............................................. 8,198,667 6,782,200
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See accompanying notes to consolidated financial statements.
2
I.C. ISAACS & COMPANY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31,
----------------------------
1998 1999
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Operating Activities
Net income (loss)............................................................... $ 727,800 $ (2,852,340)
Adjustments to reconcile net income (loss) to net cash used in operating
activities
Provision for doubtful accounts............................................... 339,498 288,703
Write off of accounts receivable.............................................. (259,498) (291,703)
Provision for sales returns and discounts..................................... 1,603,680 989,511
Sales returns and discounts................................................... (1,509,918) (943,252)
Depreciation and amortization................................................. 542,335 553,899
Gain on sale of assets........................................................ -- (14,000)
Other......................................................................... 242 --
(Increase) decrease in assets
Accounts receivable......................................................... (1,972,775) (1,247,420)
Inventories................................................................. (2,676,814) 3,130,351
Refundable income taxes..................................................... -- 1,238,001
Prepaid expenses and other.................................................. (301,465) 337,411
Other assets................................................................ (2,359) (319,751)
Increase (decrease) in liabilities
Accounts payable............................................................ 387,711 (2,050,519)
Accrued expenses and other current liabilities.............................. 1,069,571 163,590
Accrued compensation........................................................ 271,321 9,865
Income taxes payable........................................................ 295,336 --
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Cash used in operating activities................................................. (1,485,335) (1,007,654)
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Investing Activities
Capital expenditures............................................................ $ (955,697) $ (129,560)
Acquisition of Girbaud license.................................................. (600,000) --
Proceeds from sale of assets.................................................... -- 114,000
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Cash used in investing activities................................................. (1,555,697) (15,560)
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Financing Activities
Checks issued against future deposits........................................... -- (791,315)
Issuance of common stock........................................................ 4,774,860 --
Principal proceeds from debt.................................................... 61,525 1,383,809
Principal payments on debt...................................................... (38,738) (47,262)
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Cash provided by financing activities............................................. 4,797,647 545,232
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Increase (decrease) in cash and cash equivalents.................................. 1,756,615 (477,982)
Cash and Cash Equivalents, at beginning of period................................. 7,422,067 1,345,595
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Cash and Cash Equivalents, at end of period....................................... $ 9,178,682 $ 867,613
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See accompanying notes to consolidated financial statements.
3
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 (collectively, the "Company"). ICI operates as the general
partner of the Partnership and has a 99.0% ownership interest. Design operates
as the limited partner of the Partnership and has a 1.0% ownership interest. The
Company established Isaacs Europe in July 1996 as the exclusive licensee of
Beverly Hills Polo Club-Registered Trademark- sportswear in Europe. Isaacs
Europe did not have any significant revenue or expenses in 1998 or thus far in
1999. All intercompany balances and transactions have been eliminated.
BUSINESS DESCRIPTION
The Company, which operates in one business segment, designs, manufactures
and markets full lines of sportswear for young men, women and boys under the
BOSS-Registered Trademark- brand in the United States and Puerto Rico and for
men and boys under the Beverly Hills Polo Club-Registered Trademark- brand in
the United States, Puerto Rico and Europe. The Company offers broad collections
of men's and women's sportswear under the Girbaud-Registered Trademark- designer
brand in the United States and Puerto Rico. The Company also manufactures and
markets women's pants and jeans under various other Company-owned brand names as
well as under third-party private labels for sale to major chain stores and
catalogs.
INTERIM FINANCIAL INFORMATION
In the opinion of management, the interim financial information as of March
31, 1999 and for the three months ended March 31, 1998 and 1999 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.
RISKS AND UNCERTAINTIES
The apparel industry is highly competitive. The Company competes primarily
with larger, well capitalized companies which have sought to increase market
share through price reductions. Recently, the Company has experienced increased
competition from a number of competitors, including the Tommy Jeans division of
Tommy Hilfiger and the Polo Jeans division of Polo Ralph Lauren, at both the
department store and specialty store channels of distribution. The Company
believes that both Tommy Jeans and Polo Jeans have undertaken strategies that
include massive consumer advertising and the addition of sales efforts directed
at specialty stores as a way to expand distribution. The Company continues to
redesign its sportswear to meet changing consumer tastes. Also, the Company has
developed and implemented new marketing initiatives to promote the BOSS brand.
The 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 alter
prices. Over the last several years, the Company has switched a majority of its
production to contractors outside the United States to reduce costs. Management
believes that it will continue this strategy for the foreseeable future.
4
I.C. ISAACS & COMPANY, INC.
SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
The Company faces other risks inherent in the apparel industry. These risks
include changes in fashion trends and related consumer acceptance and the
continuing consolidation in the retail segment of the apparel industry. The
Company's ability, or inability, to manage these risk factors could influence
future financial and operating results.
USE OF ESTIMATES
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make certain estimates and
assumptions, particularly regarding valuation of accounts receivable and
inventory, recognition of liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements. Actual results could differ
from those estimates.
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially expose the Company to concentrations
of credit risk consist primarily of trade accounts receivable. The Company's
customer base is not concentrated in any specific geographic region, but is
concentrated in the retail industry. For the three months ended March 31, 1998
and 1999, sales to the Company's largest customer were $7,853,401 and
$4,274,388, respectively. These amounts constitute 22.9% and 19.0% of total
sales, respectively. The significant customer was the same during both periods.
The Company establishes an allowance for doubtful accounts based upon factors
surrounding the credit risk of specific customers, historical trends and other
information.
The Company is also subject to concentrations of credit risk with respect to
its cash and cash equivalents, which it minimizes by placing these funds with
high-quality institutions.
The Company is exposed to credit losses in the event of nonperformance by
the counterparties to the letter of credit agreements, but it does not expect
any financial institutions to fail to meet their obligations given their high
credit rating.
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. During the year ended December 31,
1998, management determined that a reduction in sales had significantly impacted
the operating income of the women's Company-owned and third party private label
lines and that an impairment of the goodwill associated with the line has
occurred. In response, management recorded a one-time write down of $435,000 and
reduced the estimated life of the goodwill from 40 years to 20 years. Effective
October 1, 1998, the remaining goodwill is being amortized over 63 months.
Management will continue to analyze the profitability of the women's third party
private label lines on a quarterly basis for any additional impairment.
ASSET IMPAIRMENT
Effective January 1, 1996, ICI adopted Statement of Financial Accounting
Standard No. 121, "Accounting for the Impairment of Long-Lived Assets" ("SFAS
121"). In accordance with SFAS 121, ICI 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
5
I.C. ISAACS & COMPANY, INC.
SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
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.
There is no difference in basic and diluted earnings per share in the first
quarter of 1998 or 1999.
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.
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
I.C. ISAACS & COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. INVENTORIES
Inventories consist of the following:
DECEMBER 31, MARCH 31,
1998 1999
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Raw Materials.................................................. $ 4,790,634 $ 4,198,023
Work-in-process................................................ 1,531,424 996,851
Finished Goods................................................. 16,799,913 14,796,746
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$ 23,121,971 $ 19,991,620
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2. LONG-TERM DEBT
In March 1999, the Company amended its revolving line of credit agreement to
extend the term of the agreement through December 31, 2000. The line of credit
agreement was originally set to expire on June 30, 1999. The amended agreement
provides that the Company may borrow up to 80.0% of net eligible accounts
receivable and a portion of imported inventory, as defined in the agreement.
Borrowings under the agreement may not exceed $25.0 million including
outstanding letters of credit, which are limited to $8.0 million, and bear
interest at the lender's prime rate of interest plus 1.0%. In connection with
amending the Agreement the Company will pay Congress a financing fee of
$125,000, one half of which was paid at the time of closing and the other half
of which will be paid on June 30, 2000. The financing fee will be amortized over
21 months. The Company is now required to maintain minimum levels of working
capital and tangible net worth. The Company was in compliance with these
restrictive covenants as of March 31, 1999.
3. ACCRUED EXPENSES
Accrued expenses consist of the following:
DECEMBER 31, MARCH 31,
1998 1999
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Royalties........................................................ $ 912,657 $ 1,072,060
Accrued professional fees........................................ 150,000 162,500
Payable to salesmen.............................................. 2,519 114,422
Severance benefits............................................... 300,000 148,067
Payroll tax withholdings......................................... 111,725 228,331
Customer credit balances......................................... 226,479 169,936
Property taxes................................................... -- 17,400
Accrued interest................................................. 189,816 187,500
Franchise taxes payable.......................................... 96,000 --
Other............................................................ 85,109 137,679
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$2,074,305 $ 2,237,895
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4. INCOME TAXES
The Company has estimated its annual effective tax rate at 0% due to the
uncertainty over the level of earnings in 1999. Also, the Company has net
operating loss carryforwards of approximately $17.0 million
7
I.C. ISAACS & COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. INCOME TAXES (CONTINUED)
for income tax reporting purposes for which no income tax benefit has been
recorded due to the uncertainty over the generation of taxable income in 1999.
5. STOCKHOLDERS' EQUITY
In June 1998, the Company's Board of Directors authorized a stock repurchase
program. Under this program the Company may repurchase up to $4.0 million of its
common stock. From inception through March 31, 1999, the Company had purchased
1,537,800 shares at a cost of $3,195,162.
6. STOCK OPTIONS
In May 1997, ICI adopted the 1997 Omnibus Stock Plan. Under the 1997 Omnibus
Stock Plan, ICI 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 1997 Omnibus Stock Plan is
administered by the Board of Directors. The Company has reserved 500,000 shares
of common stock for issuance under the 1997 Omnibus Stock Plan. In August 1998
the Company granted options to purchase 351,000 shares of the Company's common
stock at an exercise price of $2.125 per share. In January 1999 the Company
granted options to purchase 244,000 shares of the Company's common stock at an
exercise price of $1.56 per share. The shares will become fully vested on the
second anniversary of the grant date.
The Board of Directors has approved an increase in the shares of common
stock that may be issued with respect to awards granted under the Plan to an
aggregate of 1.1 million shares. This increase is subject to approval by the
Company's stockholders at the 1999 annual meeting of stockholders.
The following table relates to options activity in the first quarter of
1999, under the Plan:
NUMBER OF OPTION PRICE
SHARES PER SHARE
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Outstanding at December 31, 1998............................... 346,000 $2.125
Granted........................................................ 244,000 $1.56
Cancelled...................................................... (90,000) $2.125
Outstanding at March 31, 1999.................................. 500,000 $1.56 to $2.125
ICI has adopted the disclosure-only provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock Based Compensation" ("SFAS
125"), but applies the intrinsic value method set forth in Accounting Principles
Board Opinion No. 25. For stock options granted to employees, ICI 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 March 31, 1999 is
nine years.
8
I.C. ISAACS & COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. STOCK OPTIONS (CONTINUED)
If ICI 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
loss per share would have been changed to the pro forma amount indicated below:
THREE MONTHS ENDED
MARCH 31, 1999
-------------------
Net loss:
As reported............................................................ $ (2,852,340)
Pro forma.............................................................. (3,135,952)
Basic and diluted loss per share:
As reported............................................................ $ (0.42)
Pro forma.............................................................. (0.46)
7. COMMITMENTS AND CONTINGENCIES
In November 1997 and as further amended in March 1998, the Company entered
into an exclusive license agreement with Girbaud Design, Inc. and its affiliate
to manufacture and market men's jeanswear, casual wear, outerwear and active
influenced sportswear under the Girbaud-Registered Trademark- brand and certain
related trademarks in the United States, Puerto Rico and the U.S. Virgin
Islands. The agreement has an initial term of two years and may be extended at
the option of the Company for up to a total of ten 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 of $1,500,000 in 1999.
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 was required to spend at least $350,000 in
advertising for the men's Girbaud-Registered Trademark- brand in 1998 and is
required to spend at least $500,000 each year thereafter while the agreement is
in effect.
In March 1998, the Company entered into an exclusive license agreement with
Girbaud Design, Inc. and its affiliate to manufacture and market women's
jeanswear, casual wear and active influenced sportswear under the
Girbaud-Registered Trademark- brand and certain related trademarks in the United
States, Puerto Rico and the U.S. Virgin Islands. The agreement has an initial
term of two years and may be extended at the option of the Company for up to a
total of ten years. The Company paid an initial license fee of $600,000. 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:
1999.............................................................. $ 700,000
2000.............................................................. $ 800,000
Beginning with the first quarter of 1999, the Company is obligated to pay
the greater of actual royalties earned or the minimum guaranteed royalties for
that year. The Company was required to spend at least $550,000 in advertising
for the women's Girbaud-Registered Trademark- brand in 1998 and is required to
spend at least $400,000 each year thereafter while the agreement is in effect.
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
9
I.C. ISAACS & COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. COMMITMENTS AND CONTINGENCIES (CONTINUED)
expenditures related to the Girbaud-Registered Trademark- brand. In December
1998, the Girbaud 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 May 1998, the Company entered into a license agreement with BHPC
Marketing, Inc., to manufacture and market boy's 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 agreement the Company is
required to make payments to the licensor in an amount equal to 5.0% of net
sales. Payments are subject to guaranteed minimum annual royalties as follows:
1999.............................................................. $ 636,000
2000.............................................................. $ 661,000
2001.............................................................. $ 736,000
On August 15, 1996, I.C. Isaacs Europe, S.L., a Spanish limited corporation
and wholly-owned subsidiary of the Company, entered into retail and wholesale
license agreements (collectively, the "International Agreements") for use of the
Beverly Hills Polo Club-Registered Trademark- Trademark in Europe. The
International Agreements, as amended, provide certain exclusive rights to use
the Beverly Hills Polo Club-Registered Trademark- Trademark in all countries in
Europe for an initial term of three years ending December 31, 1999, renewable at
the Company's option, provided the Company is not in breach thereof at the time
the renewal notice is given, through three consecutive extensions ending
December 31, 2004. The International Agreements are subject to substantially the
same terms and conditions as the Beverly Hills Polo Club-Registered Trademark-
Agreements described above. Effective March 1, 1999, BHPC Marketing, Inc.
amended the international agreements to eliminate all royalties through December
31, 1999 and to revise the formula related to royalty payments in 2000.
10
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 indications regarding the strength of
upcoming collections, statements regarding anticipated cost savings, disclosures
regarding the Company's year 2000 readiness, expenditures and plans, the
Company's anticipated working capital needs and the Company's expectations for
1999. Words such as "believes," "anticipates," "expects," "intends," "plans,"
and similar expressions are used to identify forward-looking statements but are
the exclusive means of identifying such statements. Forward-looking statements
are subject to a variety of risks and uncertainties, many of which are beyond
the Company's control, which could cause actual results to differ materially
from those contemplated in such forward-looking statements, including in
particular the risks and uncertainties described under "Risk Factors" in the
Company's Prospectus which include, among other things, (i) changes in the
marketplace for the Company's products, including customer tastes, (ii) the
introduction of new products or pricing changes by the Company's competitors,
(iii) changes in the economy, and (iv) termination of one or more of its
agreements for use of the BOSS-Registered Trademark-, Beverly Hills Polo
Club-Registered Trademark- and Girbaud-Registered Trademark- brand names and
images in the manufacture and sale of the Company's products. Existing and
prospective investors are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date 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.
"BOSS-Registered Trademark-" and "I.C. Isaacs-Registered Trademark-" are
trademarks of the Company. All other trademarks and service marks appearing
herein, including "Girbaud-Registered Trademark-" and "Beverly Hills Polo
Club-Registered Trademark-" are property of their respective owners and are not
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.
THREE MONTHS
ENDED
MARCH 31,
--------------------
1998 1999
--------- ---------
Net sales.................................................................... 100.0% 100.0%
Cost of sales................................................................ 68.8 70.4
--------- ---------
Gross profit................................................................. 31.2 29.6
Selling expenses............................................................. 12.6 18.6
License fees................................................................. 5.2 8.6
Distribution and shipping expenses........................................... 3.1 3.8
General and administrative expenses.......................................... 6.9 9.5
--------- ---------
Operating Income (loss)...................................................... 3.4% (10.9)%
--------- ---------
--------- ---------
THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THREE MONTHS ENDED MARCH 31, 1998
NET SALES.
Net sales decreased 34.4% to $22.5 million in the three months ended March
31, 1999 from $34.3 million in the three months ended March 31, 1998. The
decrease was primarily due to lower volume shipments of
BOSS-Registered Trademark- and Beverly Hills Polo Club-Registered Trademark-
men's sportswear partially offset by increases in shipments of the
Girbaud-Registered Trademark- brand. Net sales of BOSS-Registered Trademark-
sportswear decreased $13.5 million or 52.7% to $12.1 million due to intense
competition in the jeanswear market, particularly with respect to the
BOSS-Registered Trademark-
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brand. Net sales of the BOSS-Registered Trademark- jeans and tops segments were
$4.4 million and $4.5 million, respectively, in the three months ended March 31,
1999 versus $9.4 million and $11.9 million, respectively, in the three months
ended March 31, 1998. Net sales of Beverly Hills Polo Club-Registered Trademark-
sportswear decreased $1.0 million or 19.2% to $4.2 million due to lower demand
for men's bottoms and tops. The Company's women's private label sales decreased
$0.6 million or 17.6% to $2.8 million from March 31, 1998 to March 31, 1999. Net
sales of Girbaud sportswear were $3.4 million in the three months ended March
31, 1999. The Company began to recognize revenue from shipments of
Girbaud-Registered Trademark- men's sportswear in the second quarter of 1998 and
from shipments of Girbaud-Registered Trademark- women's sportswear in the last
quarter of 1998. In May 1998, the Company entered into an exclusive license
agreement to manufacture and market boys' sportswear under the Beverly Hills
Polo Club-Registered Trademark- brand in the United States and Puerto Rico. The
Company began marketing boys' sportswear under the Beverly Hills Polo
Club-Registered Trademark- brand in the first quarter of 1999. In November 1998,
the Company entered into exclusive international license agreements to
manufacture and market men's and women's sportswear under the Girbaud brand in
selected countries in Central and South America and in the Caribbean.
International sales were insignificant for the three months ended March 31, 1998
and 1999.
GROSS PROFIT.
Gross profit decreased 37.4% to $6.7 million in the three months ended March
31, 1999 from $10.7 million in the three months ended March 31, 1998. Gross
profit as a percentage of net sales decreased from 31.2% to 29.6% over the same
period. The decrease in gross profit was due to the following factors: reduced
margins due to excess capacity at the Company's Carthage manufacturing facility,
which was closed during the first quarter of 1999; reduced margins on the
shipment of inventory that was previously written down offset by sales of
Girbaud-Registered Trademark- products, which generate higher margins in
relation to the Company's other products. The decline in gross profit was offset
somewhat by the continued shift of production of denim bottoms from the United
States to Mexico to take advantage of the lower labor and overhead costs.
SELLING, DISTRIBUTION, GENERAL AND ADMINISTRATIVE EXPENSES.
Selling, distribution, general, and administrative expenses ("SG&A")
decreased 4.0% to $7.2 million in the three months ended March 31, 1999 from
$7.5 million in the three months ended March 31, 1998. As a percentage of net
sales, SG&A expenses increased to 31.9% from 22.6% over the same period due to
lower net sales coupled with higher advertising expenditures as well as salary
and office expenses related to the new Girbaud division offset somewhat by lower
commissions to the Company's salespersons. Advertising expenditures increased
$.4 million to $1.2 million as the Company continued to focus on enhancing the
identity and image of its brands through increased media exposure. Also, the
Company is required to spend at least $0.9 million in advertising for the
women's and men's Girbaud-Registered Trademark- brands in 1999 as well as $1.8
million on sales and marketing in 1999. Distribution and shipping expenses
decreased $0.2 million to $0.9 million for the three months ended March 31, 1999
from $1.1 million for the three months ended March 31, 1998. The Company
experienced a reduction in overtime wages, due to decreased merchandise
shipments, which was offset by salary increases for existing employees. General
and administrative expenses remained essentially unchanged at $2.1 million.
LICENSE FEES.
License fees increased $0.1 million to $1.9 million in the three months
ended March 31, 1999 from $1.8 million in the three months ended March 31, 1998.
As a percentage of net sales, license fees increased from 5.2% to 8.6%. Due to
higher royalty rates and guaranteed minimum fees, license fees increased despite
declining sales.
12
OPERATING INCOME.
Operating income decreased 300.0% to $(2.4) million in the three months
ended March 31, 1999 from $1.2 million in the three months ended March 31, 1998.
The decline was due to lower sales and gross profit offset by a decrease in
operating expenses. The Company generated a net loss of approximately $2.9
million, or $0.42 per share, for the quarter ended March 31, 1999. The Company
expects to report a net loss for the quarter ending June 30, 1999 similar to the
loss reported for the quarter ended March 31, 1999.
INTEREST EXPENSE.
Interest expense increased $0.2 million to $0.4 million in the three months
ended March 31, 1999. The Company began borrowing under its asset-based line of
credit in the third quarter of 1998 and has continued to borrow in the first
quarter of 1999. In addition, the Company incurred interest expense related to
the $11.25 million note payable associated with its purchase of the
BOSS-Registered Trademark- trademark in November 1997.
OTHER INCOME.
The Company recognized $0.3 million of income in the three months ended
March 31, 1998 related to a refund of excess premiums paid on its employee
health insurance plan. There was no comparable refund in 1999.
INCOME TAXES.
The Company has estimated its annual effective tax rate at 0% due to the
uncertainty over the level of earnings in 1999. Also, the Company has net
operating loss carryforwards of approximately $17.0 million for income tax
reporting purposes for which no income tax benefit has been recorded due to the
uncertainty over the generation of taxable income in 1999.
LIQUIDITY AND CAPITAL RESOURCES
The Company has relied primarily on internally generated funds, trade credit
and asset-based borrowings to finance its operations. The Company's capital
requirements primarily result from working capital needed to support increases
in inventory and accounts receivable. The Company's working capital decreased
significantly during the first three months of 1999 compared to the first three
months of 1998, primarily due to a cumulative net loss of $20.4 million over the
four quarters ended March 31, 1999. As of March 31, 1999, the Company had cash,
including temporary investments, of $0.9 million and working capital of $28.9
million compared to $9.2 million and $51.1 million, respectively, as of March
31, 1998.
OPERATING CASH FLOW
Cash used by operations totaled $1.0 million for the first three months of
1999 due to the net loss of $2.9 million offset by increases in accounts
receivable and decreases in inventories and accounts payable. Cash used for
investing activities for the first three months of 1999 were minimal. Cash
provided by financing activities totaled $0.5 million for the first three months
of 1999, resulting primarily from borrowings on the Company's revolving line of
credit.
Accounts receivable increased $1.2 million from December 31, 1998 to March
31, 1999 compared to $2.0 million from December 31, 1997 to March 31, 1998. The
continued increases in a time of declining sales stems from slower than expected
cash collections. Inventory decreased $3.1 million from December 31, 1998 to
March 31, 1999 compared to an increase of $2.7 million from December 31, 1997 to
March 31, 1998. The Company has strengthened its control over inventory in order
to reduce growth in inventory in a time of declining sales. The decrease in
accounts payable of $2.1 million is directly related to the decrease in
inventory levels.
13
Capital expenditures were $0.1 million for the first three months of 1999
compared with $1.0 million for the first three months of 1998. The Company does
not expect to incur significant capital expenditures during the rest of 1999.
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 will pay Congress a financing fee of
$125,000, one half of which was paid at the time of closing and the other half
of which will be paid on June 30, 2000. The financing fee will be amortized over
21 months.
In November 1997, the Company borrowed $11.25 million from Ambra, Inc. to
finance the acquisition of certain BOSS-Registered Trademark- trademark rights.
This obligation is evidenced by a secured limited recourse promissory note which
matures on December 31, 2007 (the "Note"). The Note bears interest at 10.0% per
annum, payable quarterly; principal is payable in full upon maturity of the
Note.
The Company extends credit to its customers. Accordingly, the Company may
have significant risk in collecting accounts receivable from its customers. The
Company has credit policies and procedures which it uses to minimize exposure to
credit losses. The Company's collection personnel regularly contact customers
with receivable balances outstanding beyond 30 days to expedite collection. If
these collection efforts are unsuccessful, the Company may discontinue
merchandise shipments until the outstanding balance is paid. Ultimately, the
Company may engage an outside collection organization to collect past due
accounts. Timely contact with customers by collection personnel has been
effective in reducing credit losses to an immaterial amount. In the first
quarter of 1998 and 1999, the Company's credit losses were $0.3 million. In each
of these periods, the Company's actual credit losses as a percentage of net
sales has been less than one and one-half percent.
The Company believes that current levels of cash and cash equivalents ($0.9
million at March 31, 1999) together with cash from operations and existing
credit facilities, will be sufficient to meet its working capital requirements
for the next 12 months.
YEAR 2000 COMPLIANCE AND EXPENDITURES
The Company has determined that it will be required to modify or replace
portions of its information technology systems, both hardware and software, so
that they will properly recognize and utilize dates beyond December 31, 1999
(the "Year 2000 issue"). As a result, the Company has developed a plan to review
and, as appropriate, modify or replace the software (and replace some hardware)
in its computer systems. The Company presently believes that with modifications
to existing software, conversions to new software and replacement of some
hardware, the Year 2000 issue will be satisfactorily resolved in its own
systems. The Company has established an internal auditing process to track and
verify the results of its plan and tests. The Company has substantially
completed the renovation, validation and implementation phases of its plan with
respect to its mission-critical systems. The Company is also working with key
external parties with whom it has important financial and operational
relationships, including banks, utilities and other vendors and third party
payors, to assess the remediation efforts made by these parties with respect to
their own systems and to determine the extent to which such systems are
vulnerable to the Year 2000 issue. The Company has not yet received sufficient
information from these parties about their
14
remediation plans to predict the outcome of their efforts. The Company is also
developing a contingency plan that is expected to address financial and
operational problems that might arise on and around January 1, 2000. This
contingency plan would include identifying back-up processes that do not rely on
computers whenever possible. The Company has incurred and expects to continue to
incur expenses allocable to internal staff, as well as costs for outside
consultants, and computer systems' remediation and replacement in order to
achieve Year 2000 compliance. The Company completed the conversion of its
primary software programs in November 1998 and testing occurred in the first
quarter of 1999. The Company currently estimates that these costs will total
approximately $0.5 million, $0.2 million of which was incurred in 1998. The
costs of the year 2000 program and the date on which the Company plans to
complete Year 2000 modifications are based on current estimates, which reflect
numerous assumptions about future events, including the continued availability
of certain resources, the timing and effectiveness of third-party remediation
plans and other factors. The Company can give no assurance that these estimates
will be achieved, and actual results could differ materially from the Company's
plans. Specific factors that might cause such material differences include, but
are not limited to, the availability and cost of personnel trained in this area,
the ability to locate and correct relevant computer source codes and embedded
technology, the results of internal and external testing and the timelessness
and the effectiveness of remediation efforts of third parties.
If the modifications and conversions referred to above are not made or are
not completed on a timely basis, the Year 2000 issue could have a material
adverse effect on the Company's business, financial condition and results of
operations. Moreover, even if these changes are successful, failure of third
parties to which the Company is financially or operationally linked to address
their own system problems could have a material adverse effect on the Company.
SEASONALITY
The Company's business is impacted by the general seasonal trends that are
characteristic of the apparel and retail industries. In the Company's segment of
the apparel industry, sales are generally higher in the first and third
quarters. Historically, the Company has taken greater markdowns in the second
and fourth quarters. The Company generally receives orders for its products
three to five months prior to the time the products are delivered to stores. As
of March 31, 1999, the Company had unfilled orders of approximately $23.0
million, compared to approximately $32.0 million of such orders as of March 31,
1998. 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.
Presently, the Company does not use derivative instruments either in hedging
activities or as investments. Accordingly, the Company believes that adoption of
SFAS 133 will have no impact on its financial position or results of operations.
15
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.
16
PART II--OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
None
(b) Reports on Form 8-K.
None
17
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 AND
CHIEF EXECUTIVE OFFICER
Dated: May 17, 1999
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
- ------------------------------ --------------------------- -------------------
Chairman of the Board,
Chief
/s/ ROBERT J. ARNOT Executive Officer and
- ------------------------------ Director May 17, 1999
Robert J. Arnot (Principal Executive
Officer)
Vice President and Chief
Financial
/s/ EUGENE C. WIELEPSKI Officer and Director
- ------------------------------ (Principal May 17, 1999
Eugene C. Wielepski Financial and Accounting
Officer)
18