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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For Quarterly Period Ended March 31, 2006
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 |_|
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer |_| Accelerated filer |_| Non-accelerated filer |X|
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Act). |_| Yes |X| No
As of May 11, 2006, 11,996,485 shares of common stock, par value $.0001 per
share, ("Common Stock") of the Registrant were outstanding.
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1
I. C. ISAACS & COMPANY, INC.
FORM 10-Q
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION Page(s)
-------
ITEM 1. FINANCIAL STATEMENTS 3 - 12
Consolidated Condensed Balance Sheets 3
Consolidated Condensed Statements of Operations 4
Consolidated Condensed Statements of Cash Flows 5
Notes to Consolidated Condensed Financial Statements 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 13 - 18
Important information Regarding Forward-Looking Statements 13
Significant Accounting Policies and Estimates 13
Results of Operations 14
Liquidity and Capital Resources 16
Backlog and Seasonality 17
Limited Dependence on Certain Customers 18
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 19
ITEM 4. CONTROLS AND PROCEDURES 19
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS 20
SIGNATURES 21
2
PART I--FINANCIAL INFORMATION
I.C. Isaacs & Company, Inc.
Consolidated Condensed Balance Sheets (Unaudited)
Item 1. Financial Statements.
March 31, December 31,
2006 2005
-------------- -------------
Assets
Current
Cash, including temporary investments of $158,000 and $561,000 $ 1,529,634 $ 943,422
Accounts receivable, less allowance for doubtful accounts of
$640,000 and $700,000 15,796,103 14,829,496
Inventories (Note 3) 4,545,581 5,287,483
Deferred tax asset (Note 6) 2,835,000 2,517,000
Prepaid expenses and other 522,111 404,151
------------- ------------
Total current assets 25,228,429 23,981,552
Property, plant and equipment, at cost, less accumulated
depreciation and amortization 2,722,485 2,838,627
Other assets 317,130 322,656
------------- ------------
$ 28,268,044 $ 27,142,835
============= ============
Liabilities And Stockholders' Equity
Current
Overdrafts $ -- $ 447,001
Revolving line of credit (Note 4) -- --
Current maturities of long-term debt (Note 4) 3,028,599 2,893,128
Accounts payable 3,037,335 2,063,521
Accrued expenses and other current liabilities (Note 5) 3,512,060 5,492,104
------------- ------------
Total current liabilities 9,577,994 10,895,754
------------- ------------
Long-term debt (Note 4) 1,340,995 1,726,466
------------- ------------
Minimum pension liability (Note 10) 1,509,000 1,377,000
------------- ------------
Commitments and Contingencies (Note 9)
Stockholders' Equity (Note 7 and 8)
Preferred stock; $.0001 par value; 5,000,000 shares authorized,
none outstanding -- --
Common stock; $.0001 par value; 50,000,000 shares authorized,
13,173,194 shares issued; 11,996,485 shares outstanding 1,317 1,317
Additional paid-in capital 44,447,190 44,294,782
Accumulated deficit (20,669,581) (23,213,613)
Accumulated other comprehensive income (5,616,000) (5,616,000)
Treasury stock, at cost (1,176,709 shares) (2,322,871) (2,322,871)
------------- ------------
Total stockholders' equity 15,840,055 13,143,615
------------- ------------
$ 28,268,044 $ 27,142,835
============= ============
See accompanying notes to consolidated condensed financial statements.
3
I.C. Isaacs & Company, Inc.
Consolidated Condensed Statements of Operations (Unaudited)
Three Months Ended
March 31,
-----------------------------
2006 2005
------------ ------------
Net sales $ 21,263,117 $ 23,701,942
Cost of sales 12,196,704 13,750,928
------------ ------------
Gross profit 9,066,413 9,951,014
------------ ------------
Operating Expenses
Selling 2,694,262 2,999,180
License fees 1,377,537 1,488,000
Distribution and shipping 611,416 550,538
General and administrative 2,038,453 2,249,069
------------ ------------
Total operating expenses 6,721,668 7,286,787
------------ ------------
Operating income 2,344,745 2,664,227
------------ ------------
Other income (expense)
Interest, net of interest income (81,559) (110,201)
Other, net 3,397 230
------------ ------------
Total other expense (78,162) (109,971)
------------ ------------
Income before income taxes 2,266,583 2,554,256
Net income tax benefit (expense) (Note 6) 277,449 (51,000)
------------ ------------
Net income $ 2,544,032 $ 2,503,256
------------ ------------
Basic earnings per share $ 0.21 $ 0.21
Basic weighted average shares outstanding 11,996,485 11,650,802
Diluted earnings per share $ 0.20 $ 0.18
Diluted weighted average shares outstanding 12,664,397 13,651,907
See accompanying notes to consolidated condensed financial statements.
4
I.C. Isaacs & Company, Inc.
Consolidated Condensed Statements of Cash Flows (Unaudited)
Three Months Ended
March 31,
----------------------------
2006 2005
------------- -------------
Operating Activities
Net income $ 2,544,032 $ 2,503,256
Adjustments to reconcile net income to cash provided by (used in)
operating activities
Provision for doubtful accounts 22,070 126,470
Write off of accounts receivable (82,070) (77,470)
Provision for sales returns and discounts 246,675 802,485
Sales returns and discounts (755,802) (883,485)
Deferred tax asset (318,000) --
Depreciation and amortization 131,999 132,615
Stock based compensation 152,408 --
(Increase) decrease in assets
Accounts receivable (397,480) (2,933,583)
Inventories 741,902 2,621,297
Prepaid expenses and other (117,960) 129,348
Other assets (1,089) 131,375
Increase (decrease) in liabilities
Accounts payable 973,814 (1,635,034)
Accrued expenses and other current liabilities (1,980,044) 169,445
Minimum pension liability 132,000 --
------------ ------------
Cash provided by operating activities 1,292,455 1,086,719
------------ ------------
Investing Activities
Capital expenditures (9,242) (706,450)
------------ ------------
Cash used in investing activities (9,242) (706,450)
------------ ------------
Financing Activities
Overdrafts (447,001) --
Principle payments on long-term debt (250,000) --
Net payments on revolving line of credit -- (223,283)
Issuance of common stock -- 99,063
------------ ------------
Cash used in by financing activities (697,001) (124,220)
------------ ------------
Increase in cash and cash equivalents 586,212 256,049
Cash and Cash Equivalents, at beginning of period 943,422 1,045,905
------------ ------------
Cash and Cash Equivalents, at end of period $ 1,529,634 $ 1,301,954
------------ ------------
See accompanying notes to consolidated condensed financial statements.
5
I.C. Isaacs & Company, Inc.
Notes to Consolidated Condensed Financial Statements
1. Basis of Presentation
The accompanying interim consolidated condensed financial statements
include the accounts of I. C. Isaacs & Company, Inc. ("ICI"), I.C. Isaacs &
Company L.P. (the "Partnership"), Isaacs Design, Inc. ("Design") and I. C.
Isaacs Far East Ltd. (collectively, the "Company"). I.C. Isaacs Far East Ltd.
did not have any significant revenue or expenses in 2005 or thus far in 2006.
All intercompany balances and transactions have been eliminated.
The accompanying interim consolidated condensed financial statements
have been prepared in conformity with United States (U.S.) generally accepted
accounting principles, consistent in all material respects with those applied in
the Company's Annual Report on Form 10-K for the year ended December 31, 2005,
except for the adoption of Statement of Financial Accounting Standards (SFAS)
No. 123(R), "Share-Based Payment," as noted in "Note 8: Stock Options & Stock
Based Compensation". The preparation of financial statements in conformity with
U.S. generally accepted accounting principles requires management to make
estimates and judgments that affect the amounts reported in the financial
statements and accompanying notes. The accounting estimates that require
management's most significant, difficult and subjective judgments include the
provisions for doubtful accounts, returns, merchandise allowances, unsold
inventory, and tax asset valuation as well as accruals for bonuses, pension
liabilities and stock based compensation expense . The actual results
experienced by the Company may differ from management's estimates.
The interim financial information is unaudited, but reflects all normal
adjustments that are, in the opinion of management, necessary to provide a fair
statement of results for the interim periods presented. The interim financial
statements should be read in connection with the financial statements in the
Company's Annual Report on Form 10-K for the year ended December 31, 2005.
Stock-Based Compensation Expense
Effective January 1, 2006, the Company adopted the fair value
recognition provisions of SFAS 123(R), using the modified prospective transition
method, and therefore the results of prior periods have not been restated. Under
this method the Company recognizes compensation expense for all stock-based
payments granted after January 1, 2006 and prior to but not yet vested as of
January 1, 2006, in accordance with SFAS 123(R). Prior to the adoption of SFAS
123(R), the Company accounted for stock-based payments under Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB 25") and accordingly, the Company was not required to recognize
compensation expense for options granted that had an exercise price equal to the
market value of the underlying common stock on the date of grant.
Determining the appropriate fair value model and calculating the fair
value of stock-based payment awards require the input of highly subjective
assumptions, including the expected life of the stock-based payment awards and
stock price volatility. The Company utilizes the Black-Scholes option-pricing
model to value compensation expense. The assumptions used in calculating the
fair value of stock-based payment awards represent management's best estimates,
but the estimates involve inherent uncertainties and the application of
management judgment. If factors change and, as a result, management utilizes
different assumptions, stock-based compensation expense could be materially
different in the future. See Note 8 to the Consolidated Condensed Financial
Statements for a further discussion on stock-based compensation.
2. Recent Accounting Pronouncements
In February 2006, the FASB issued FASB Statement No. 155, "Accounting
for Certain Hybrid Financial Instruments" (SFAS155), which nullifies and amends
various accounting guidance relating to accounting for derivative instruments
and securitization transactions. In general, these changes will reduce the
operational complexity associated with bifurcating embedded derivatives, and
increase the number of beneficial interests in securitization transactions. This
statement is effective for all financial instruments acquired or issued after
the beginning of our first fiscal year that begins after September 15, 2006. The
Company does not have any material derivative instruments or securitization
transactions; therefore it believes there will be no material impact on its
financial condition or results of operations.
6
In March 2006, the FASB issued FASB Statement No. 156, "Accounting for
Servicing of Financial Assets--an amendment of FASB Statement No. 140". This
Statement amends FASB Statement No. 140, Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities, with respect to the
accounting for separately recognized servicing assets and servicing liabilities.
The Company does not have any servicing assets or liabilities; therefore it
believes there will be no material impact on its financial condition, results of
operations or cash flows.
3. Inventories
March 31, December 31,
Inventories consist of the following: 2006 2005
------------ ------------
Work-in-process............................... $ 1,174,785 $ 1,115,107
Finished Goods................................ 3,370,796 4,172,376
------------ ------------
$ 4,545,581 $ 5,287,483
============ ============
4. Long-Term Debt
On December 30, 2004, the Company entered into a three year credit
facility (the "Credit Facility") with Wachovia Bank, National Association
("Wachovia"). The Credit Facility provides that the Company may borrow, using as
collateral, up to 85% of eligible accounts receivable and a portion of eligible
inventory, both as defined by the Credit Facility. Borrowings under the Credit
Facility may not exceed $25.0 million including outstanding letters of credit
which are limited to $8.0 million at any one time. There were approximately $4.1
million of outstanding letters of credit at March 31, 2006. The Credit Facility
accords to the Company the right, at its election, to borrow these amounts as
either Prime Rate Loans or LIBOR Loans. Prime Rate Loans bear interest at the
prime rate plus the applicable margin in effect from time to time. LIBOR Loans
are limited to three in total, must be a minimum of $1,000,000 each and in
integral multiples of $500,000 in excess of that amount, and bear interest at
the LIBOR rate plus the applicable margin in effect from time to time. The
applicable margins, as defined by the Credit Facility, fluctuate from 0.00% to
0.75% for the Prime Loans and 2.00% to 2.75% for LIBOR Loans. The applicable
margins are inversely affected by fluctuations in the amount of "excess
availability" - the unused portion of the amount available under the facility -
which are in staggered increments from less then $2.5 million to $7.5 million.
The Credit Facility also requires the Company to comply with certain covenants
expressed as fixed charge coverage ratios and tangible liability to net worth
ratios. In January and February 2006, as a result of the litigation settlement
the Company accrued at the end of December 2005, the Company was in violation of
the fixed charged coverage ratio covenant of the Credit Facility and has
received a waiver from Wachovia for these violations. The Company was in
compliance with these covenants at March 31, 2006. As collateral security for
the Company's obligations under the Credit Facility, the Company granted a first
priority security interest in all of its assets to Wachovia. In 2004, the
Company paid $79,379 as a facility fee to Wachovia in connection with the
consummation of the Credit Facility. That fee was deferred and is being
amortized over the life of the Credit Facility.
On May 6, 2002, Textile Investment International S.A. ("Textile"), an
affiliate of Latitude Licensing Corp. ("Latitude"), the licensor of the Girbaud
Marks to the Company, acquired a note that the Company had issued to a former
licensor. On May 21, 2002, Textile exchanged that note for an amended and
restated note bearing interest at the rate of 8% per annum, (the "Replacement
Note"), which
o subordinated Textile's rights under the note to the rights of Congress
Financial Corporation ("Congress") who was the provider of the
accounts receivable and inventory based credit facility the Company
was then using,
o deferred the original note's principal payments and
o extended the maturity date of the note until 2007.
7
In connection with the execution of the Credit Facility, the
Replacement Note was further amended and restated to subordinate Textile's
rights to the rights of Wachovia under the Credit Facility (the "Amended and
Restated Replacement Note" and together with the Replacement Note, the "Textile
Notes"). The payments that otherwise would have been due under the Textile Notes
during each calendar quarter from December 31, 2002 through March 31, 2005 were
deferred pursuant to the subordination provisions of those notes. The
non-payment and deferral of those payments did not constitute a default under
the provisions of the Textile Notes. The obligations under the Textile Notes
have been classified as current or long-term based upon the respective original
due dates of the quarterly payments specified in the Replacement Note or the
Amended and Restated Replacement Note, as the case may be. Subject to the
subordination provisions of the Amended and Restated Replacement Note, the
aggregate amount of all payments that had been deferred under the Textile Notes
is being paid in installments at the rate of $250,000 per month. The Company
made one $250,000 principle payment in the first quarter of 2006. In connection
with the covenant violations in January and February 2006 mentioned above, and
pursuant to the provisions of the Textile Notes, two deferred monthly payments
due were not made in the first quarter of 2006. Pursuant and subject to the
provisions of the Textile Notes, the Company will incorporate that deferred
$500,000 into the balance of the previously deferred unpaid amounts.
5. Accrued Expenses
Accrued expenses consist of the following: March 31, 2006 December 31, 2005
-------------- -----------------
Accrued interest $ 1,375,970 $ 1,312,134
Royalties & other licensor obligations, Note 9 773,743 771,537
Accrued taxes 365,742 318,607
Accrued professional fees 259,424 289,769
Accrued rent expense 178,232 166,603
Sales commissions payable 177,069 157,039
Customer credit balances 141,584 60,224
Accrued compensation 101,984 145,692
Management & selling bonuses 97,797 470,047
Payroll tax withholdings 4,255 14,193
Litigation settlement -- 1,750,000
Other 36,260 36,259
-------------- -----------------
$ 3,512,060 $ 5,492,104
============== =================
6. Income Taxes
As of March 31, 2006 and 2005, the Company has net operating loss carry
forwards for income tax reporting purposes of approximately $34,706,000 and
$41,353,000 respectively, which represent deferred tax assets of approximately
$13,633,000 and $15,908,000 respectively. These net operating losses begin to
expire in 2014. The Company evaluates these net operating losses and the related
valuation allowances both quarterly and yearly. As a result of the income the
Company generated in 2005 and 2004 and based on its net income for in the first
quarter of 2006 and projected future taxable income, the Company recognized, for
the first time on an interim basis, an income tax benefit of $318,000 (before
the alternative minimum tax expense of $40,560) for the three months ended March
31, 2006. As a result of the evaluation conducted during the same period of
2005, management determined, at that time, that no income tax benefit should be
recognized for the three month period ended March 31, 2005.
8
7. Earnings Per Share
The following table presents a reconciliation of the basic and diluted
earnings per share with regard to the weighted average shares outstanding for
the three months ended March 31, 2006 and 2005.
Per Share
Three Months Ended March 31, 2006: Net Income Shares Amount
----------- ---------- ---------
Basic earnings per share.................. $ 2,544,032 11,996,485 $0.21
Effect of dilutive options and warrants... 667,912
Diluted earnings per share................ $ 2,544,032 12,664,397 $0.20
Per Share
Three Months Ended March 31, 2005: Net Income Shares Amount
----------- ---------- ---------
Basic earnings per share.................. $ 2,503,256 11,650,802 $0.21
Effect of dilutive options and warrants... 2,001,105
Diluted earnings per share................ $ 2,503,256 13,651,907 $0.18
8. Stock Options & Stock Based Compensation
Under the Company's Amended and Restated Omnibus Stock Plan (the
"Company Plan"), the Company may grant qualified and nonqualified stock options,
stock appreciation rights, restricted stock or performance awards, payable in
cash or shares of common stock, to selected employees. The Company reserved
2,200,000 shares of common stock for issuance under the Company Plan. Options to
purchase 25,000 and 75,000 shares of common stock were granted in the first
three months of 2006 and 2005 respectively. During the first three months of
2005, options to purchase 72,000 shares of common stock were exercised, and the
Company was paid $99,063 in connection therewith. No options to purchase shares
of common stock were exercised in the first three months of 2006. No options to
purchase shares of common stock were terminated in the first three months of
2006 or 2005. There were outstanding options to purchase 1,199,167 and 1,465,817
shares of common stock at March 31, 2006 and 2005, respectively. These options
have a maximum term of 10 years from the date of grant. There were outstanding
warrants to purchase 250,000 and 500,000 shares of common stock at March 31,
2006 and 2005 respectively.
Under the Company's 2005 Non-Employee Directors Stock Option Plan (the
"Directors Plan") non-employee directors receive automatic grants of options to
purchase common stock in amounts that are specified by such plan. The exercise
prices of all options granted under the Directors Plan are fixed at 100% of the
market price of the common stock on each grant date. The Company has reserved
450,000 shares of common stock for issuance under the Directors Plan. There were
outstanding options to purchase 120,000 shares of common stock at March 31, 2006
all of which were vested. These options have a maximum term of 10 years from the
date of grant. No options to purchase shares of common stock were outstanding at
March 31, 2005.
On January 1, 2006 the Company adopted the fair value recognition
provisions of SFAS No. 123(R). Prior to January 1, 2006, the Company had
accounted for stock-based payments under the recognition and measurement
provisions of Accounting Principles Board ("APB") Opinion 25 and related
interpretations, as permitted by SFAS No. 123, "Accounting for Stock-Based
Compensation." In accordance with APB 25, no compensation expense was required
to be recognized for options granted that had an exercise price equal to the
market value of the underlying common stock on the date of grant.
Under the modified prospective method of SFAS No. 123(R), compensation
expense of $152,408 was recognized during the three months ended March 31, 2006
and includes compensation expense for all stock-based payments granted prior to,
but not yet vested as of January 1, 2006, based on the grant date fair value
estimated in accordance with the original provisions of SFAS No. 123 and
compensation expense for all stock based payments granted after January 1, 2006
based on the grant date fair value estimated in accordance with the provisions
of SFAS No. 123(R). The Company's financial results for the prior periods have
not been restated.
9
As a result of adopting SFAS No. 123(R), during the three months ended
March 31, 2006, the Company's net income is $152,408 lower than if it had
continued to account for stock based compensation under APB 25 as it did for the
three months ended March 31, 2005. Basic and diluted earnings per share for the
three months ended March 31, 2006 would have been $0.22 and $0.21, respectively,
if the Company had not adopted SFAS No. 123(R), compared to basic and diluted
earnings per share of $0.21 and $0.18 for the same period of 2005. Compensation
expense was included as general and administrative expense for the period.
Consistent with the valuation method used for the disclosure only
provisions of SFAS No. 123, the Company is using the Black-Scholes
option-pricing model to value compensation expense associated with equity awards
(i.e. options and warrants). The expected term of equity awards granted is
derived using a simplified method using an average of the vesting term and the
contractual term. The risk-free interest rate is based on the U.S. Treasury
rates at the date of grant. The forfeiture rate is based on past turnover
experience of the Company. Expected volatility is based on the historical
volatility of the Company's stock. For the three months ended March 31, 2006 and
2005 equity awards granted were valued assuming a risk-free interest rate of
4.5%, volatility of 118%, zero dividend yield, forfeiture rate of 5% and
expected lives ranging from 2.8 to 6.5 years. The weighted average grant date
fair value price of equity awards granted during the three month period ended
March 31, 2006 and 2005 was $3.61 and $5.26 respectively. The total fair value
of equity awards granted during the three months ended March 31, 2006 and 2005
was $90,000 and $394,000, respectively.
The Company records stock compensation expense over the vesting period,
which is generally three years. As of March 31, 2006, the Company had
approximately $754,000 of unrecognized compensation expense that is expected to
be recognized over a weighted average period of approximately 1.3 years. That
expectation does not take into account the potential effects of equity awards
that may be granted in subsequent periods.
There were 1,569,167 equity awards outstanding at March 31, 2006 with a
weighted average remaining life of 4.33 years, a weighted-average exercise price
of $2.06 and an aggregate intrinsic value of approximately $2.6 million. There
were 1,099,167 fully vested equity awards outstanding at March 31, 2006 with a
weighted average remaining life of 3.81 years, a weighted-average exercise price
of $1.64 and an aggregate intrinsic value of approximately $1.4 million. Equity
award activity during the three months ended March 31, 2006 is summarized as
follows:
Shares to be Weighted-Average
purchased Exercise Price
---------------- ----------------
Equity awards outstanding at beginning of period 1,544,167 $2.05
Granted 25,000 3.00
Exercised -- --
Canceled or expired -- --
---------------------------------
Equity awards at end of period 1,569,167 $2.06
=================================
Equity awards exercisable at end of period 1,099,167 $1.64
=================================
10
Pro forma information for the three months ended March 31, 2005 has
been presented below to reflect the impact of the adoption of SFAS No. 123(R)
had the Company been required to adopt this standard for the three months ended
March 31, 2005.
Three
Months
Ended March
31, 2005
---------------
Net income, as reported $ 2,503,256
Less: Total stock based employee compensation expense
determined under the fair value method for all awards (50,473)
---------------
Pro forma net income attributable to common stockholders $ 2,452,783
===============
Basic net income per common share
As reported $ 0.21
Pro forma $ 0.21
Diluted net income per common share
As reported $ 0.18
Pro forma $ 0.18
9. Commitments and Contingencies
Girbaud Licensing Agreements
The Company has entered into two exclusive license agreements with
Latitude to manufacture and market men's and women's apparel under the Girbaud
brand and certain related trademarks. Both agreements:
o cover the territory comprising the United States, Puerto Rico and the
U.S. Virgin Islands;
o provide for royalty payments to Latitude, subject to the minimum
payment obligations in the amounts of $3.0 million and $1.5 million
for men's and women's license agreements respectively, of 6.25% of net
sales of regular licensed merchandise and 3.0% of certain irregular
and closeout licensed merchandise;
o will expire at the end of 2007 and each provides an option to the
Company to extend the term through the end of 2011;
o provide for the expenditure of 3% of net sales in 2006, subject to the
minimum payment obligations of $500,000 and $400,000 for the men's and
women's license agreements respectively, on advertising and related
expenses promoting Girbaud brand products for each ; and
o provide for the expenditure of 3% of net sales in each of 2007, 2008
and 2009 (if extended), subject to the minimum payment obligations of
$700,000 and $600,000 for the men's and women's license agreements
respectively, on advertising and related expenses promoting Girbaud
brand products for each.
11
Following is a summary of the Company's commitment obligations as of March 31,
2006:
Summary schedule of commitments: Payments Due By Period
-------------------------------------------------
After 5
Total Current 1-3 years 4-5 years years
------------- ----------- ----------- ------------ ------------
Operating leases $ 4,260,931 $ 499,855 $ 897,934 $953,766 $1,909,375
Employment agreements 2,563,500 1,576,000 987,500 -- --
Licensing agreement fee obligations (*) 8,123,917 4,748,917 3,375,000 -- --
Licensing agreement fashion show
obligations(*) 825,000 600,000 225,000 -- --
Licensing agreement creative &
advertising fee obligations (*) 410,000 265,000 145,000 -- --
Promotional expense license
requirement(*) 2,200,000 1,225,000 975,000 -- --
------------- ----------- ----------- ------------ ------------
Total contractual obligations $18,383,348 $8,914,772 $6,605,434 $953,766 $1,909,375
============= =========== =========== ============ ============
(*) License agreement obligations include amounts accrued but unpaid at March 31, 2006 as well as
obligation commitments for years subsequent to that date.
10. Retirement Plan
The Company maintains a defined benefit pension plan (the "Pension
Plan") for its employees. The Company did not make any contributions into the
Pension Plan during the first three months of 2006 or 2005. The Company has
recognized pension expense of $132,000 and $132,000 for the three months ended
March 31, 2006 and 2005, respectively.
Components of net periodic pension cost Three Months Ended
-------------------------------
2006 2005
-------------- -------------
Service cost of current period $ 22,000 $ 16,000
Interest on the above service cost 2,000 1,000
Interest on the projected benefit obligation 145,000 143,000
Expected return on plan assets (132,000) (132,000)
Amortization of prior service cost 11,000 11,000
Amortization of loss 84,000 93,000
-------------- -------------
Pension cost $ 132,000 $ 132,000
============== =============
12
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
In this report, the term "ICI" means I. C. Isaacs & Company, Inc.,
individually, the terms "Partnership," "Design" and "Far East" mean ICI's wholly
owned subsidiaries, I.C. Isaacs & Company L.P., Isaacs Design, Inc. and I.C.
Isaacs (Far East) Limited, respectively, and the term "Company" means ICI, the
Partnership, Design and Far East, collectively.
"I.C. Isaacs" is a trademark of the Company. All other trademarks or
service marks, including "Girbaud " and "Marithe and Francois Girbaud"
(collectively, "Girbaud"), appearing in this Form 10-Q are the property of their
respective owners and are not the property of the Company.
Important Information Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. Those statements
include indications regarding the intent, belief or current expectations of the
Company and its management, including the Company's plans with respect to the
sourcing, manufacturing, marketing and distribution of its products, the
strength of the Company's backlog, the belief that current levels of cash and
cash equivalents together with cash from operations and existing credit
facilities will be sufficient to meet its working capital requirements for the
next twelve months, its expectations with respect to the performance of the
counterparties to its letter of credit agreements, its collection of accounts
receivable, its beliefs and intent with respect to and the effect of changes in
financial accounting rules on its financial statements. Such statements are
subject to a variety of risks and uncertainties, many of which are beyond the
Company's control, which could cause actual results to differ materially from
those contemplated in such forward-looking statements, including, but not
limited to, (i) changes in the marketplace for the Company's products, including
customer tastes, (ii) the introduction of new products or pricing changes by the
Company's competitors, (iii) changes in the economy, (iv) the risk that the
backlog of orders may not be indicative of eventual actual shipments, and (v)
termination of one or more of its agreements for use of the Girbaud brand names
and images in the manufacture and sale of the Company's products. Existing and
prospective investors are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date hereof. The Company
undertakes no obligation to update or revise the information contained in this
Quarterly Report on Form 10-Q, whether as a result of new information, future
events or circumstances or otherwise.
Significant Accounting Policies and Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted within the United States requires management to
make estimates and assumptions in certain circumstances that affect amounts
reported in the accompanying financial statements and related notes. In
preparing these financial statements, management has made its best estimates and
judgments of certain amounts included in the financial statements, giving due
consideration to materiality. The Company does not believe there is a great
likelihood that materially different amounts would be reported related to the
accounting policies described below; however, application of these accounting
policies involves the exercise of judgment and the use of assumptions as to
future uncertainties and, as a result, actual results could differ from these
estimates.
The Company evaluates the adequacy of its allowance for doubtful
accounts at the end of each quarter. In performing this evaluation, the Company
analyzes the payment history of its significant past due accounts, subsequent
cash collections on these accounts and comparative accounts receivable aging
statistics. Based on this information, along with consideration of the general
strength of the economy, the Company develops what it considers to be a
reasonable estimate of the uncollectible amounts included in accounts
receivable. This estimate involves significant judgment by the management of the
Company. Actual uncollectible amounts may differ from the Company's estimate.
Net revenue is recognized upon the transfer of title and risk of
ownership to customers, which is generally upon shipment as terms are FOB
shipping point. Revenue is recorded net of discounts, as well as provisions for
estimated returns and allowances. The Company estimates the provision for
returns by reviewing trends and returns on a historical basis. On a seasonal
basis, the Company negotiates price adjustments with its retail customers as
sales incentives. The Company estimates the cost of such adjustments on an
ongoing basis considering historical trends, projected seasonal results and an
evaluation of current economic conditions.
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Sales are recognized upon shipment of products. Allowances for
estimated returns are provided by the Company when sales are recorded by
reviewing trends and returns on a historical basis. Shipping and handling fees
billed to customers are classified in net sales in the consolidated statements
of operations. Shipping and handling costs incurred are classified in
distribution and shipping in the consolidated statements of operations.
The Company includes in cost of goods sold all costs and expenses
related to obtaining merchandise incurred prior to the receipt of finished goods
at the Company's distribution facilities. These costs include, but are not
limited to, product cost, inbound freight charges, purchasing and receiving
costs, inspection costs, warehousing costs and internal transfer costs, as well
as insurance, duties, brokers' fees and consolidators' fees. The Company
includes in selling, general and administrative expenses costs incurred
subsequent to the receipt of finished goods at its distribution facilities, such
as the cost of picking and packing goods for delivery to customers. In addition,
selling, general and administrative expenses include product design costs,
selling and store service costs, marketing expenses and general and
administrative expenses.
The Company estimates inventory markdowns based on customer orders sold
below cost, to be shipped in the following period and on the amount of similar
unsold inventory at period end. The Company analyzes recent sales orders and
subsequent sales and the related gross margins on unsold inventory at month end
in further estimating inventory markdowns. These specific markdowns are
reflected in cost of sales and the related gross margins at the conclusion of
the appropriate selling season. This estimate involves significant judgment by
the management of the Company. Actual gross margins on sales of excess inventory
may differ from the Company's estimate.
Results of Operations
The following table sets forth the percentage relationship to net sales
of certain items in the Company's consolidated financial statements for the
periods indicated.
Three Months
Ended
March 31,
--------------------
2006 2005
-------- -------
Net sales...................................... 100.0% 100.0%
Cost of sales.................................. 57.4 58.0
-------- -------
Gross profit................................... 42.6 42.0
Selling expenses............................... 12.7 12.7
License fees................................... 6.5 6.3
Distribution and shipping expenses............. 2.9 2.3
General and administrative expenses............ 9.5 9.5
-------- -------
Operating income............................... 11.0% 11.2%
-------- -------
Three Months Ended March 31, 2006 Compared to Three Months Ended March 31, 2005
Net Sales and gross profit.
Net sales decreased 10.3% to $21.3 million in the first quarter of 2006
from $23.7 million in the same period of 2005. Net sales of the Girbaud men's
product line decreased $0.8 million, or 4.6%, to $18.5 million while the Girbaud
women's product line decreased $1.6 million, or 35.5%, to $2.8 million.
Gross profit decreased 8.9% to $9.1 million in the first quarter of
2006 from $10.0 million in the same period of 2005. Gross margin, or gross
profit as a percentage of net sales, increased to 42.6% from 42.0% over the same
period.
Gross units sold remained relatively unchanged at 1.1 million units in
the first quarter of 2006 and 2005. Gross sales (sales before adjustment for
returns and allowances) decreased 12.9% to $22.2 million in the first quarter of
2006 compared to $25.5 million in the same period of 2005. The related gross
margins on these sales (unadjusted for returns and allowances) decreased $1.3
million to $9.8 million in the first quarter of 2006 from $11.1 million in the
same period of 2005. Returns and allowances decreased to 4.1% of gross sales in
the first quarter of 2006 from 7.1% in the first quarter of 2005.
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The main contributing factors to the decrease in gross sales and gross
profit and the increase in gross margin were as follows:
o Sales of goods sold at regular prices - Sales of goods sold at regular
prices decreased 13.7% or $3.2 million to $20.2 million during the
first quarter of 2006 (from $23.4 million in the same period of 2005).
Gross profit margin on these sales (before adjustments for returns and
allowances) was 47.7% in the first quarter of 2006 compared to 49.3%
in the same period of 2005.
o Sales of goods sold at off-price liquidations - Sales of goods sold at
off-price liquidations decreased 9.5% or $0.2 million to $1.9 million
in the first quarter of 2006 (from $2.1 million in the same period of
2005). Gross profit margin on these sales (before adjustments for
returns and allowances) was 6.0% during the first quarter of 2006
compared to a loss percentage of (25.2)% in the first quarter of 2005.
Operating Expenses.
Operating expenses decreased 8.2% to $6.7 million in the first quarter
of 2006 from $7.3 million in the same period of 2005. As a percentage of net
sales, operating expenses increased to 31.6% from 30.8% over the same period.
The decrease in operating expenses resulted primarily from lower selling and
general and administrative expenses.
Selling expenses decreased $0.3 million to $2.7 million in the first
quarter of 2006 primarily as a result of lower design expenses. Design expense
decreased to $0.8 million in the first quarter of 2006 compared to $0.9 million
in the same period of 2005 primarily as a result of decreased sample expense.
Commission expense remained relatively unchanged at $0.8 million in the first
quarters of 2006 and 2005. Advertising and promotional related expenses
decreased to $0.4 million in the first quarter of 2006 compared to $0.5 million
in the same period of 2005.
License fees decreased $0.1 million to $1.4 million in the first
quarter of 2006 from $1.5 million in the same period of 2005. As a percentage of
net sales, license fees increased to 6.5% in the first quarter of 2006 compared
to 6.3% in the same period of 2005.
Distribution and shipping expense remained relatively unchanged at $0.6
million in the first quarters of 2006 and 2005. General and administrative
expenses decreased $0.2 million to $2.0 million in the first quarter of 2006
from $2.0 million in the same period of 2005. The decrease was mainly
attributable to decrease in the first quarter of 2006 in provisions provided for
bad debt, bonus and severance expenses (totaling $0.5 million of decreases
collectively in the first quarter of 2006 compared to the same period of 2005)
partially offset by an increase in administrative salaries ($0.1 million higher
in the first quarter if 2006 compared to the same period of 2005) and the
recognition of $152,000 of stock option expense in the first quarter of 2006 as
a result of the Company's adoption of SFAS 123(R) - "Share-Based Payment".
Operating Income
Operating income was $2.3 million in the first three months of 2006
compared to $2.7 million for the same period of 2005. The decrease in operating
income was attributable to the decrease in gross profit associated with the
decrease in net sales partially offset by a decrease in operating expenses.
Excluding the effect of $152,000 in stock option expense recognized, operating
income would have been 2.5 million for the first three months of 2006.
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Interest Expense, net
Interest expense, net was relatively unchanged at $0.1 million for the
three months ended March 31, 2006 and 2005. Due to the improved cash flows from
operations, the Company paid down the borrowings on its revolving line of credit
at March 31, 2006.
Income Taxes
As of March 31, 2006 and 2005, the Company has net operating loss carry
forwards for income tax reporting purposes of approximately $34.7 million and
$41.4 million respectively, which represent deferred tax assets of approximately
$13.6 million and $15.9 million respectively. These net operating losses begin
to expire in 2014. The Company recognized an income tax benefit of $0.3 million
for the three months ended March 31, 2006. No income tax benefit was recognized
during the comparable period of 2005.
Liquidity and Capital Resources
The Company has relied primarily on asset-based borrowings, internally
generated funds and trade credit to finance its operations. The Company's
capital requirements primarily result from working capital needed to fund
inventory and accounts receivable. As of March 31, 2006, the Company had cash
and cash equivalents, including temporary investments, of $1.5 million and
working capital of $15.5 million compared to $1.3 million and $10.4 million,
respectively, as of March 31, 2005.
Cash Flows
Cash provided by operations totaled $1.3 million and $1.1 million for
the first three months of 2006 and 2005, respectively. Cash used by investing
activities was insignificant in the first 3 months of 2006 and was $0.7 million
for the same period of 2005. Cash used in financing activities was $0.7 million
and $0.1 million for the first three months of 2006 and 2005, respectively. .
Accounts receivable increased $0.4 million from December 31, 2005 to
March 31, 2006 compared to an increase of $2.9 million from December 31, 2004 to
March 31, 2005. Inventory decreased $0.7 million from December 31, 2005 to March
31, 2006 compared to a decrease of $2.6 million from December 31, 2004 to March
31, 2005. Capital expenditures were $0.7 million for the first three months of
2005 due to the build out of the new office space in New York.
Credit Facilities and Subordinated Note
Wachovia Bank, National Association, or Wachovia, has granted a $25
million credit facility to the Company. Borrowings under the credit facility
are based on the amount of eligible accounts receivable and eligible inventory
outstanding when each loan is made, and may not exceed an aggregate of $25.0
million including outstanding letters of credit which are limited to $8.0
million at any one time. At the Company's option, the interest rates at which
it borrows funds under the credit facility can be tied to an applicable prime
rate or the LIBOR rate in effect at the time when each loan is made. At March
31, 2006, a total of $3.7 million of letters of credit were outstanding and
there were no borrowings under the credit facility. The Company must comply
with certain covenants expressed as fixed charge coverage ratios and tangible
liability to net worth ratios in order to be eligible to borrow funds under the
credit facility. In January and February 2006, as a result of the litigation
settlement the Company accrued at the end of December 2005, the Company was in
violation of the fixed charged coverage ratio covenant of the Credit Facility
and has received a waiver from Wachovia for these violations. The Company was
in compliance with all of the credit facility's covenants at March 31, 2006.
The Company extends credit to its customers. Accordingly, the Company
may have significant risk in collecting accounts receivable from its customers.
The Company has credit policies and procedures which it uses to minimize
exposure to credit losses. The Company's collection personnel regularly contact
customers with receivable balances outstanding beyond 30 days to expedite
collection. If these collection efforts are unsuccessful, the Company may
discontinue merchandise shipments until the outstanding balance is paid.
Ultimately, the Company may engage an outside collection organization to collect
past due accounts. Timely contact with customers has been effective in reducing
credit losses. For the three month period ending March 31, 2006 and 2005, the
Company's account receivable write-off's were $0.1 million each and as a
percentage of net sales were 0.5% and 0.4%, respectively.
16
At March 31, 2006, the Company owed approximately $5.8 million to
Textile Investment International S.A., or Textile, pursuant to the terms of an
amended and restated note in the original principal amount of approximately $6.6
million. The note bears interest at the rate of 8% per annum, and provides for
quarterly payments of principal and interest. Textile is an affiliate of
Latitude Licensing Corp., the company which granted the licenses under which the
Company designs, manufactures and sells its men's and women's lines of Girbaud
trademarked apparel. Textile's rights to receive payments under the note are
subordinated to Wachovia's rights under the Wachovia credit facility. Pursuant
to those subordination rights and similar rights that applied to the note that
was replaced by the amended and restated note, the Company, at various times in
the past, has been required to defer the payments that otherwise would have been
due under those notes. Whenever that has occurred, the deferred amount has
become due and payable in monthly installments over an ensuing 12 month period.
Most recently, in connection with the credit facility covenant violations in
January and February 2006 mentioned above, the Company deferred payment of the
$250,000 monthly deferred payments that were to be paid in each of those months.
The amended and restated note provides that the non-payment and deferral of all
amounts required to be deferred does not constitute a default under that note.
Schedule of contractual obligations:
Payments Due By Period
-----------------------------------------------------------------------------------
Total Less than 1 1-3 years 4-5 years After 5 years
year
----------------- -------------- -------------- -------------- ---------------
Revolving line of credit $ -- $ -- $ -- $ -- $ --
Long term debt (*) 5,988,690 4,590,000 1,398,690 -- --
Operating leases 4,260,930 499,855 897,934 953,766 1,909,375
Employment agreements 2,563,500 1,576,000 987,500 -- --
Girbaud license obligations 8,123,917 4,748,917 3,375,000 -- --
Girbaud fashion shows 825,000 600,000 225,000 -- --
Girbaud creative &
advertising fees 410,000 265,000 145,000 -- --
Promotional expense
license requirement 2,200,000 1,225,000 975,000 -- --
---------------- ------------- ------------- -------------- ---------------
Total contractual cash
obligations $ 24,372,037 $ 13,504,772 $ 8,004,124 $ 953,766 $ 1,909,375
================= ============= ============= ============== ===============
(*) Long term debt includes principle of $4.4 million, accrued interest of
$1.4 million and interest to be accrued in future periods of $0.2 million.
The Company believes that current levels of cash and cash equivalents
($1.5 million at March 31, 2006), together with funds available under its credit
facilities, will be sufficient to meet its capital requirements for the next 12
months.
Backlog and Seasonality
The Company's business is impacted by the general seasonal trends that
are characteristic of the apparel and retail industries. In the Company's
segment of the apparel industry, sales are generally higher in the first and
third quarters. Historically, the Company has taken greater markdowns in the
second and fourth quarters. The Company generally receives orders for its
products three to five months prior to the time the products are delivered to
stores. The Company had unfilled orders of $29.2 million at March 31, 2006, a
slight decrease of 3.3% compared to $30.2 million at March 31, 2005. The
Company's order backlog as of April 30, 2006 was approximately $34 million, up
22% from April 30, 2005. 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 time of the shipment of products
may vary from year to year, the results for any particular quarter may not be
indicative of the results for the comparable quarter of another year or for the
full year.
17
Limited Dependence on Certain Customers
Financial instruments which potentially expose the Company to
concentrations of credit risk consist primarily of trade accounts receivable.
The Company's customer base is not concentrated in any specific geographic
region, but is concentrated in the retail industry. As of March 31, 2006, no one
customer accounted for more than 10% of trade accounts receivable. As of March
31, 2005, the Company had two customers who accounted for 18.5% and 14.3% of
trade accounts receivable. For the three months ended March 31, 2006 and 2005
sales to no one customer accounted for more than 10.0% of net sales.
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Item 3. Quantitative and Qualitative Disclosures about Market Risk
The Company's principal market risk results from changes in floating
interest rates on short-term debt. The Company does not use interest rate swap
agreements to mitigate the risk of adverse changes in the prime interest rate.
However, the impact of a 100 basis point change in interest rates affecting the
Company's short-term debt would not be material to the net income, cash flow or
working capital. The Company does not hold long-term interest sensitive assets
and therefore is not exposed to interest rate fluctuations for its assets. The
Company does not hold or purchase any derivative financial instruments for
trading purposes.
Item 4. Controls and Procedures
The Company's management evaluated, with the participation of the Chief
Executive Officer and Chief Financial Officer, the effectiveness of the
Company's disclosure controls and procedures as of the end of the period covered
by this report. Based on that evaluation, the Chief Executive Officer and Chief
Financial Officer have concluded that the Company's disclosure controls and
procedures were effective as of the end of the period covered by this report.
There has been no change in the Company's internal control over financial
reporting that occurred during the quarter covered by this report that has
materially affected, or is reasonably likely to materially affect, the Company's
internal control over financial reporting.
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PART II--OTHER INFORMATION
Item 6. Exhibits.
Exhibit Number
31.1 Certification Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
31.2 Certification Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
32.1 Certification Pursuant to Section 1350 of chapter 63 of
Title 18 of the United States Code
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
I.C. ISAACS & COMPANY, INC
Dated: May 15, 2006 BY: /S/ PETER J. RIZZO
----------------------------------------------------
Peter J. Rizzo,
Chief Executive Officer
Dated: May 15, 2006 BY: /S/ GREGG A. HOLST
----------------------------------------------------
Gregg A. Holst, Chief Financial Officer (Principal
Financial Officer)
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