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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 Quarterly Period Ended June 30, 2006
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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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 August 14, 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 - 19
Important information Regarding Forward-Looking Statements 13
Significant Accounting Policies and Estimates 13
Results of Operations 14
Liquidity and Capital Resources 18
Backlog and Seasonality 20
Limited Dependence on Certain Customers 20
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 21
ITEM 4. CONTROLS AND PROCEDURES 21
PART II - OTHER INFORMATION
ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS 22
ITEM 6. EXHIBITS 22
SIGNATURES 23
2
PART I--FINANCIAL INFORMATION
I.C. Isaacs & Company, Inc.
Consolidated Condensed Balance Sheets (Unaudited)
Item 1. Financial Statements.
June 30, December 31,
2006 2005
-------- -----------
Assets
Current
Cash, including temporary investments of $76,000 and $561,000....... $ 449,748 $ 943,422
Accounts receivable, less allowance for doubtful accounts of
$693,000 and $700,000............................................ 19,598,331 14,829,496
Inventories (Note 3)................................................ 11,053,183 5,287,483
Deferred tax asset (Note 6)......................................... 3,167,000 2,517,000
Prepaid expenses and other.......................................... 509,611 404,151
---------- ----------
Total current assets............................................. 34,777,873 23,981,552
Property, plant and equipment, at cost, less accumulated depreciation
and amortization.................................................... 2,699,780 2,838,627
Other assets........................................................... 311,547 322,656
---------- ----------
$37,789,200 $27,142,835
=========== ============
Liabilities And Stockholders' Equity
Current
Overdrafts.......................................................... $ -- $ 447,001
Revolving line of credit (Note 4)................................... 6,346,218 --
Current maturities of long-term debt (Note 4)....................... 2,565,316 2,893,128
Accounts payable.................................................... 4,025,420 2,063,521
Accrued expenses and other current liabilities (Note 5)............. 3,498,568 5,492,104
---------- ----------
Total current liabilities........................................ 16,435,522 10,895,754
---------- ----------
Long-term debt (Note 4)................................................ 948,113 1,726,466
---------- ----------
Minimum pension liability (Note 10)................................... 1,598,100 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.......................................... 45,069,190 44,294,782
Accumulated deficit.................................................(18,324,171) (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....................................... 18,807,465 13,143,615
---------- ----------
$37,789,200 $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 Six Months Ended
June 30, June 30,
------------------------------------------------------------------
2006 2005 2006 2005
------------------------------------------------------------------
Net sales................................. $ 24,040,540 $ 21,749,284 $ 45,303,657 $ 45,451,226
Cost of sales............................. 14,270,313 12,906,814 26,467,017 26,657,742
-------------- ------------- -------------- -------------
Gross profit.............................. 9,770,227 8,842,470 18,836,640 18,793,484
-------------- ------------- -------------- -------------
Operating Expenses
Selling................................ 2,599,173 2,691,050 5,293,435 5,690,230
License fees........................... 1,581,396 1,235,000 2,958,933 2,723,000
Distribution and shipping.............. 618,409 579,669 1,229,825 1,130,207
General and administrative............. 2,799,687 2,135,922 4,838,140 4,384,991
-------------- ------------- -------------- -------------
Total operating expenses.................. 7,598,665 6,641,641 14,320,333 13,928,428
-------------- ------------- -------------- -------------
Operating income.......................... 2,171,562 2,200,829 4,516,307 4,865,056
-------------- ------------- -------------- -------------
Other income (expense)
Interest, net of interest income....... (98,163) (139,965) (179,722) (250,166)
Other, net............................. 11 9 3,408 239
-------------- ------------- -------------- -------------
Total other expense....................... (98,152) (139,956) (176,314) (249,927)
-------------- ------------- -------------- -------------
Income before income taxes................ 2,073,410 2,060,873 4,339,993 4,615,129
Income tax benefit (expense) (Note 4)..... 272,000 (41,000) 549,449 (92,000)
Net income................................ $ 2,345,410 $ 2,019,873 $ 4,889,442 $ 4,523,129
-------------- ------------- -------------- -------------
Basic earnings per share................. $ 0.20 $ 0.17 $ 0.41 $ 0.39
Basic weighted average shares outstanding. 11,996,485 11,713,211 11,996,485 11,682,405
Diluted earnings per share................ $ 0.19 $ 0.15 $ 0.39 $ 0.34
Diluted weighted average shares
outstanding............................ 12,664,565 13,407,257 12,665,822 13,407,257
See accompanying notes to consolidated condensed financial statements.
4
I.C. Isaacs & Company, Inc.
Consolidated Condensed Statements of Cash Flows (Unaudited)
Six Months Ended June 30,
-----------------------------------
2006 2005
-----------------------------------
Operating Activities
Net income.................................................................. $ 4,889,442 $ 4,523,129
Adjustments to reconcile net income to cash used in operating activities
Provision for doubtful accounts.............................................. 135,059 272,320
Write off of accounts receivable............................................. (142,059) (113,032)
Provision for sales returns and discounts.................................... 1,120,420 1,542,313
Sales returns and discounts.................................................. (1,699,293) (1,894,313)
Deferred tax asset........................................................... (650,000) --
Depreciation and amortization................................................ 255,665 265,750
Stock based compensation..................................................... 774,408 --
(Increase) decrease in assets
Accounts receivable.......................................................... (4,182,962) (4,422,391)
Inventories.................................................................. (5,765,700) 1,786,847
Prepaid expenses and other................................................... (105,460) 112,044
Other assets................................................................. 4,494 (52,120)
Increase (decrease) in liabilities
Accounts payable............................................................. 1,961,899 (1,278,731)
Accrued expenses and other current liabilities............................... (1,993,536) (2,247,586)
Minimum pension liability.................................................... 221,100 --
----------- -----------
Cash used in operating activities............................................... (5,176,523) (1,505,770)
----------- -----------
Investing Activities
Capital expenditures......................................................... (110,203) (1,015,238)
----------- -----------
Cash used in investing activities............................................... (110,203) (1,015,238)
----------- -----------
Financing Activities
Net change in Overdrafts..................................................... (447,001) 943,107
Principle payments on long-term debt......................................... (1,106,165) --
Net borrowings on revolving line of credit................................... 6,346,218 1,092,106
Issuance of common stock..................................................... -- 138,128
----------- -----------
Cash provided by financing activities........................................... 4,793,052 2,173,341
----------- -----------
Decrease in cash and cash equivalents........................................... (493,674) (347,667)
Cash and Cash Equivalents, at beginning of period............................... 943,422 1,045,905
----------- -----------
Cash and Cash Equivalents, at end of period..................................... $ 449,748 $ 698,238
----------- -----------
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 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, as amended, 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 placecountry-regionU.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 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, as amended, 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. 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's 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 Financial Accounting Standards Board, or FASB, issued
SFAS No. 155, "Accounting for Certain Hybrid Financial Instruments", 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 derivative
instruments or securitization transactions; therefore it believes there will be
no impact on its financial condition or results of operations.
6
In March 2006, the FASB issued SFAS No. 156, "Accounting for Servicing of
Financial Assets--an amendment of SFAS 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.
In June 2006, the FASB issued FASB Interpretation No. 48 ("FIN 48"),
"Accounting for Uncertainty in Income Taxes - an interpretation of FASB
Statement No. 109," which establishes that the financial statement effects of a
tax position taken or expected to be taken in a tax return are to be recognized
in the financial statements when it is more likely than not, based on the
technical merits, that the position will be sustained upon examination. FIN 48
is effective for fiscal years beginning after December 15, 2006. The adoption of
FIN 48 is not expected to have a material impact on our results of operations or
our financial position.
3. Inventories
June 30, December 31,
Inventories consist of the following: 2006 2005
------------ ------------
Work-in-process............................ $ 2,266,719 $ 1,115,107
Finished Goods............................. 8,786,464 4,172,376
------------ ------------
$ 11,053,183 $ 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 $3.6 million
of outstanding letters of credit at June 30, 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 received a waiver
from Wachovia for the violations. The Company was in compliance with these
covenants at June 30, 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
7
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.
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. As of June 30,
2006, these deferred amounts totaled $1,990,000 of which $678,000 was classified
as current maturities of long-term debt and $1,312,000 was classified as accrued
interest (see Note 5). In connection with the waived covenant violations in
January and February 2006 mentioned above and to not fall into non-compliance
with these covenants for April 2006 and pursuant to the provisions of the
Textile Notes, the January, February and April 2006 deferred monthly payments
due were not made in the first half of 2006. Pursuant and subject to the
provisions of the Textile Notes, the Company will incorporate that deferred
$750,000 into the balance of the previously deferred unpaid amounts. The June
2006 obligations of $420,000 and $250,000 were paid subsequent to June 30, 2006.
5. Accrued Expenses
Accrued expenses consist of the following: June 30, December 31,
2006 2005
----------- ------------
Accrued interest, Note 4 $ 1,369,476 $ 1,312,134
Royalties & other licensor obligations, Note 9 828,197 771,537
Accrued taxes 345,826 318,607
Sales commissions payable 231,823 157,039
Accrued rent expense 189,861 166,603
Management & selling bonuses 176,944 470,047
Accrued compensation 146,103 145,692
Customer credit balances 102,574 60,224
Accrued professional fees 67,768 289,769
Payroll tax withholdings 3,736 14,193
Litigation settlement -- 1,750,000
Other 36,260 36,259
--------------- ----------------
$ 3,498,568 $ 5,492,104
=============== ================
6. Income Taxes
As of June 30, 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
half of 2006 and projected future taxable income, the Company began recognizing
income tax benefits on an interim basis for the first time during 2006. The
estimated income tax benefit was $332,000 and $650,000 (before the alternative
minimum tax expense of $60,000 and $100,551) for the three and six months ended
June 30, 2006 respectively. 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 same periods of 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 and six months ended June 30, 2006 and 2005.
Three Months Ended June 30, 2006: Per Share
Net Income Shares Amount
---------- ---------- ----------
Basic earnings per share............................. $ 2,345,410 11,996,485 $ 0.20
Effect of dilutive options and warrants.............. 668,080
Diluted earnings per share........................... $ 2,345,410 12,664,565 $ 0.19
Per Share
Three Months Ended June 30, 2005: Net Income Shares Amount
---------- ---------- ----------
Basic earnings per share............................. $ 2,019,873 11,713,211 $ 0.17
Effect of dilutive options and warrants.............. 1,694,046
Diluted earnings per share........................... $ 2,019,873 13,407,257 $ 0.15
Per Share
Six Months Ended June 30, 2006: Net Income Shares Amount
---------- ---------- ----------
Basic earnings per share............................. $ 4,889,442 11,996,485 $0.41
Effect of dilutive options and warrants.............. 669,337
Diluted earnings per share........................... $ 4,889,442 12,665,822 $0.39
Per Share
Six Months Ended June 30, 2005: Net Income Shares Amount
---------- ---------- ----------
Basic earnings per share............................. $ 4,523,129 11,682,405 $ 0.39
Effect of dilutive options and warrants.............. 1,724,852
Diluted earnings per share........................... $ 4,523,129 13,407,257 $ 0.34
8. Stock Options and 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
40,000 and 75,000 shares of common stock were granted in the first six months of
2006 and 2005 respectively. No options to purchase shares of common stock were
exercised or terminated in the first six months of 2006. During the first six
months of 2005, options to purchase 131,500 shares of common stock were
exercised, and the Company was paid $138,128 in connection therewith. During the
first six months of 2005, options to purchase 372,650 shares of common stock
were terminated. There were outstanding options to purchase 1,214,167 and
1,161,667 shares of common stock at June 30, 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
June 30, 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. Options to
purchase 105,000 and 120,000 shares of common stock were granted in the first
six months of 2006 and 2005 respectively. There were outstanding options to
purchase 225,000 and 120,000 shares of common stock at June 30, 2006 and 2005
respectively under this plan, all of which were fully vested at time of
issuance. These options have a maximum term of 10 years from the date of grant.
9
Under the modified prospective method of SFAS No. 123(R), compensation
expense of $622,000 and $774,400 was recognized during the three and six months
ended June 30, 2006 respectively. This 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. As a result of adopting
SFAS No. 123(R) in 2006, the Company's net income for the three and six months
ended June 30, 2006 is $622,000 and $774,400 lower than if it had continued to
account for stock based compensation under APB 25 as it did for the same periods
in 2005.
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 six months ended June 30, 2006 and
2005 equity awards granted were valued assuming a risk-free interest rate
between 4.5% and 5.0% per annum, volatility between 110% and 120%, 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 six month period ended June 30, 2006 and 2005 was $4.46 and $4.92
respectively. The total fair value of equity awards granted during the six
months ended June 30, 2006 and 2005 was $646,000 and $959,500, respectively.
The Company records stock compensation expense over the vesting period,
which is generally three years. As of June 30, 2006, the Company had
approximately $669,000 of unrecognized compensation expense that is expected to
be recognized over a weighted average period of approximately 1.1 years. That
expectation does not take into account the potential effects of equity awards
that may be granted in subsequent periods.
There were 1,689,167 equity awards outstanding at June 30, 2006 with a
weighted average remaining life of 5.0 years, a weighted-average exercise price
of $2.33 and an aggregate intrinsic value of approximately $3.2 million. There
were 1,204,167 fully vested equity awards outstanding at June 30, 2006 with a
weighted average remaining life of 5.1 years, a weighted-average exercise price
of $2.00 and an aggregate intrinsic value of approximately $1.9 million. Equity
award activity during the six months ended June 30, 2006 is summarized as
follows:
Weighted-
Shares to be Average
purchased Exercise Price
------------ --------------
Equity awards outstanding at beginning of period 1,544,167 $2.05
Granted 145,000 5.43
Exercised -- --
Canceled or expired -- --
----------------------------
Equity awards at end of period 1,689,167 $2.33
============================
Equity awards exercisable at end of period 1,204,167 $2.00
============================
10
Pro forma information for the three and six months ended June 30, 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 and six
months ended June 30, 2005.
Three Months Six Months
Ended June 30, Ended June 30,
2005 2005
--------------------------------
Net income, as reported $ 2,019,873 $ 4,523,129
Less: Total stock based employee compensation expense
determined under the fair value method for all awards (687,124) (754,470)
--------------------------------
Pro forma net income attributable to common stockholders $ 1,332,749 $ 3,768,659
================================
Basic net income per common share
As reported $ 0.17 $ 0.39
Pro forma $ 0.11 $ 0.32
Diluted net income per common share
As reported $ 0.15 $ 0.34
Pro forma $ 0.10 $ 0.28
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 country-regionUnited States, placePuerto
Rico and the U.S. Virgin Islands;
o provide for royalty payments to Latitude, subject to the annual minimum
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 June 30,
2006:
Summary schedule of commitments: Payments Due By Period
--------------------------------------------------------------
Total Current 1-3 years 4-5 years After 5 years
--------------- --------------- --------------- ------------ --------------
Operating leases $ 4,131,222 $ 480,047 $ 904,743 $ 959,173 $ 1,787,259
Employment agreements 1,915,250 1,165,250 750,000 -- --
Licensing agreement fee
obligations (*) 7,202,648 4,952,648 2,250,000 -- --
Licensing agreement
fashion show obligations(*) 675,000 525,000 150,000 -- --
Licensing agreement
creative & advertising fee
obligations (*) 405,000 310,000 95,000 -- --
Promotional expense
license requirement(*) 1,964,000 1,314,000 650,000 -- --
--------------- --------------- --------------- ------------ --------------
Total contractual $ 16,293,120 $ 8,746,945 $ 4,799,743 $ 959,173 $ 1,787,259
obligations =============== =============== =============== ============ ==============
(*) License agreement obligations include amounts accrued but unpaid at June
30, 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 six months of 2006 or 2005. Pension expense and the
related components for the three and six month periods ended June 30, 2006 and
2005 are as follows:
Components of net periodic pension expense Three Months Ended
---------------------------------
2006 2005
--------------- --------------
Service cost of current period $ 17,000 $ 16,000
Interest on the above service cost 1,100 1,000
Interest on the projected benefit obligation 122,000 143,000
Expected return on plan assets (110,000) (132,000)
Amortization of prior service cost 9,000 11,000
Amortization of loss 50,000 93,000
----------------- -------------
Pension expense $ 89,100 $ 132,000
=============== ============
Six Months Ended
---------------------------------
2006 2005
--------------- --------------
Service cost of current period $ 39,000 $ 32,000
Interest on the above service cost 2,100 2,000
Interest on the projected benefit obligation 267,000 285,000
Expected return on plan assets (242,000) (264,000)
Amortization of prior service cost 20,000 22,000
Amortization of loss 134,000 187,000
----------------- -------------
Pension expense $ 221,100 $ 264,000
=============== ============
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 of America 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.
13
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.
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.
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.
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 Six Months
Ended Ended
June 30, June 30,
----------------- -----------------
2006 2005 2006 2005
---- ---- ---- ----
Net sales.............................................. 100.0% 100.0% 100.0% 100.0%
Cost of sales.......................................... 59.4 59.4 58.5 58.7
---- ---- ---- ----
Gross profit........................................... 40.6 40.6 41.5 41.3
Selling expenses....................................... 10.8 12.4 11.7 12.5
License fees........................................... 6.6 5.5 6.5 5.9
Distribution and shipping expenses..................... 2.6 2.8 2.7 2.4
General and administrative expenses.................... 11.6 9.8 10.7 9.7
---- ---- ---- ----
Operating income....................................... 9.0% 10.1% 9.9% 10.8%
---- ---- ---- ----
14
Overview
Net income increased 15% to $2.3 million during the three months ended June
30, 2006 from $2.0 million during the comparable period of 2005. During the six
month period ended June 30, 2006, net income increased 8.9% to $4.9 million from
$4.5 million in the same period of 2005.
On January 1, 2006, the Company began to recognize the fair value of
share-based payments made to employees and to non-employee directors under the
provisions of SFAS 123(R). In periods prior to January 1, 2006, pursuant to
Accounting Principles Board Opinion 25, the Company was not required to
recognize any compensation expense with regard to the stock based compensation
grants it had made (see Note 8, Stock Options and Stock Based Compensation, in
the accompanying notes to consolidated financial statements included in Part I,
Item 1 of this Report). In order to facilitate a comparative review of the
cumulative effect of the non-cash charge to the Company's earnings that resulted
in this change in accounting methodology, we have provided the following table
which reflects for the periods presented our net income and net income per share
in accordance with generally accepted accounting principles, and on a pro forma
basis as though the stock based compensation accounting methodology we were
permitted to employ during the three and six month periods ended June 30, 2005
was also employed during the comparable periods of 2006.
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------- -----------------------------
2006 2005 2006 2005
-------------- ---------------- -------------- --------------
Net Income $ 2,345,410 $ 2,019,873 $ 4,889,442 $ 4,523,129
Effect of stock-based compensation expense 622,000 - 774,000 -
-------------- ---------------- -------------- --------------
Pro Forma Net Income $ 2,967,410 $ 2,019,873 $ 5,663,442 $ 4,523,129
============== ================ ============== ==============
Net Income Per Share - Basic $0.20 $0.17 $0.41 $0.39
Effect of stock-based compensation expense 0.05 - 0.06 -
-------------- ---------------- -------------- --------------
Pro Forma Net Income per Share - Basic $0.25 $0.17 $0.47 $0.39
============== ================ ============== ==============
Net Income per Share - Diluted $0.19 $0.15 $0.39 $0.34
Effect of stock-based compensation expense 0.04 - 0.06 -
-------------- ---------------- -------------- --------------
Pro Forma Net Income per Share - Diluted $0.23 $0.15 $0.45 $0.34
============== ================ ============== ==============
Three Months Ended June 30, 2006 Compared to Three Months Ended June 30, 2005
Net Sales and gross profit.
Net sales increased 10.5% to $24.0 million in the second quarter of 2006
from $21.7 million in the same period of 2005. Net sales of the Girbaud men's
product line increased $3.8 million, or 21.7%, to $21.3 million while the
Girbaud women's product line decreased $1.5 million, or 34.9%, to $2.8 million.
Gross profit increased 10.5% to $9.8 million in the second quarter of 2006
from $8.8 million in the same period of 2005. Gross margin, or gross profit as a
percentage of net sales, was 40.6% during the second quarter of 2006 and 2005.
Gross units sold increased to 1.3 million units in the second quarter of
2006 compared to 1.2 million units in the same period of 2005. Gross sales
(sales before adjustment for returns and allowances) increased 8.5% to $25.4
million in the second quarter of 2006 compared to $23.4 million in the same
period of 2005. The related gross margins on these sales (unadjusted for returns
and allowances) increased $1.5 million to $10.9 million in the second quarter of
2006 from $9.4 million in the same period of 2005. Returns and allowances
decreased to 5.1% of gross sales in the second quarter of 2006 from 7.1% in the
second quarter of 2005.
15
The main contributing factors affecting gross sales, gross profit and gross
margin were as follows:
o Sales of goods sold at regular prices - Sales of goods sold at regular
prices increased 9.0% or $1.9 million to $23.0 million during the second
quarter of 2006 (from $21.1 million in the same period of 2005). Gross
profit margin on these sales (before adjustments for returns and
allowances) was 46.6% in the second quarter of 2006 compared to 43.3% in
the same period of 2005.
o Sales of goods sold at off-price liquidations - Sales of goods sold at
off-price liquidations increased 4.3% or $0.1 million to $2.4 million in
the second quarter of 2006 (from $2.3 million in the same period of 2005).
Gross profit margin on these sales (before adjustments for returns and
allowances) was 8.5% during the second quarter of 2006 compared to a loss
percentage of (34.8)% in the second quarter of 2005.
Operating Expenses.
Operating expenses increased 14.4% to $7.6 million in the second quarter of
2006 from $6.6 million in the same period of 2005. As a percentage of net sales,
operating expenses increased to 31.7% from 30.4% over the same period. The
increase in operating expenses resulted primarily from license fees and an
increase in general and administrative expenses.
Selling expenses decreased $0.1 million to $2.6 million in the second
quarter of 2006 primarily as a result of lower sales and design expenses
partially offset by higher commission expense. Sales expense decreased to $0.6
million in the second quarter of 2006 from $0.7 million in the same period of
2005 as a result of reduced sales department personnel. Design expense decreased
to $0.8 million in the second quarter of 2006 compared to $1.0 million in the
same period of 2005 primarily as a result of decreased sample expense.
Commission expense increased to $0.9 million in the second quarter of 2006
compared to $0.6 million in the same period of 2005. Advertising and promotional
related expenses remained relatively unchanged at $0.2 million in the second
quarters of 2006 and 2005.
License fees increased $0.4 million to $1.6 million in the second quarter
of 2006 from $1.2 million in the same period of 2005. As a percentage of net
sales, license fees increased to 6.6% in the second quarter of 2006 compared to
5.7% in the same period of 2005. The increase is associated with the increase in
men's product sales.
Distribution and shipping expense remained relatively unchanged at $0.6
million in the second quarters of 2006 and 2005. General and administrative
expenses increased $0.7 million to $2.8 million in the second quarter of 2006
from $2.1 million in the same period of 2005. The increase was mainly
attributable to an increase in the second quarter of 2006 for administrative
salaries, stock option expense and professional fees (totaling $0.5 million of
increases collectively in the second quarter of 2006 compared to the same period
of 2005) partially offset by a decrease in bonus expense and franchise taxes
($0.3 million lower in the second quarter of 2006 compared to the same period of
2005).
Operating Income
Operating income was $2.2 million in the second quarter of 2006 compared to
$2.2 million for the same period of 2005. The operating income was affected by
the increase in gross profit associated with the increase in net sales was
partially offset by an increase in operating expenses.
Interest Expense, net
Interest expense, net was relatively unchanged at $0.1 million for the
three months ended June 30, 2006 and 2005.
16
Income Taxes
As of June 30, 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 June 30, 2006. No income tax benefit was recognized
during the comparable period of 2005.
Six Months Ended June 30, 2006 Compared to Six Months Ended June 30, 2005
Net Sales and gross profit.
Net sales slightly decreased 0.4% to $45.3 million in the first half of
2006 from $45.5 million in the same period of 2005. Net sales of the Girbaud
men's product line increased $2.9 million, or 7.3%, to $39.7 million while the
Girbaud women's product line decreased $3.1 million, or 35.6%, to $5.6 million.
Gross profit remained relatively unchanged at $18.8 million in the first
half of 2006 compared to the same period of 2005. Gross margin, or gross profit
as a percentage of net sales, was 41.5% during the first half of 2006 compared
to 41.3% over the same period of 2005.
Gross units sold increased to 2.4 million units in the first half of 2006
compared to 2.32 million units in the same period of 2005. Gross sales (sales
before adjustment for returns and allowances) decreased 2.7% to $47.6 million in
the first half of 2006 compared to $48.9 million in the same period of 2005. The
related gross margins on these sales (unadjusted for returns and allowances)
increased $0.3 million to $20.7 million in the first half of 2006 from $20.4
million in the same period of 2005. Returns and allowances decreased to 4.7% of
gross sales in the first half of 2006 from 7.1% in the same period of 2005.
The main contributing factors affecting gross sales, gross profit and gross
margin were as follows:
o Sales of goods sold at regular prices - Sales of goods sold at regular
prices decreased 4.9% or $2.2 million to $43.3 million during the
first half of 2006 (from $44.5 million in the same period of 2005).
Gross profit margin on these sales (before adjustments for returns and
allowances) was 47.1% in the first half of 2006 compared to 48.9% in
the same period of 2005.
o Sales of goods sold at off-price liquidations - Sales of goods sold at
off-price liquidations decreased 2.3% or $0.1 million to $4.3 million
in the first half of 2006 (from $4.4 million in the same period of
2005). Gross profit margin on these sales (before adjustments for
returns and allowances) was 7.4% during the first half of 2006
compared to a loss percentage of (30.2)% in the first half of 2005.
Operating Expenses.
Operating expenses increased 2.9% to $14.3 million in the first half of
2006 from $13.9 million in the same period of 2005. As a percentage of net
sales, operating expenses increased to 31.5% in the first half of 2006 compared
to 30.5% in the comparable period of 2005. The increase in operating expenses
resulted primarily from by an increase in license fees and increases in
distribution and shipping expenses and general and administration expenses
partially offset by a decrease in selling expenses.
Selling expenses decreased $0.4 million to $5.3 million in the first half
of 2006 primarily as a result of lower sales and design expenses partially
offset by higher commission expense. Sales expense decreased to $1.3 million in
the first half of 2006 from $1.6 million in the same period of 2005 as a result
of reduced sales department personnel. Design expense decreased to $1.6 million
in the first half of 2006 compared to $1.9 million in the same period of 2005
primarily as a result of decreased sample expense partially offset by an
increase in design personnel costs. Commission expense increased to $1.7 million
in the first half of 2006 compared to $1.4 million in the same period of 2005.
Advertising and promotional related expenses decreased to $0.6 million in the
first half of 2006 compared to $0.7 million in the same period of 2005.
17
License fees increased $0.3 million to $3.0 million in the first half of
2006 from $2.7 million in the same period of 2005. As a percentage of net sales,
license fees increased to 6.6% in the first half of 2006 compared to 5.9% in the
same period of 2005. The increase is associated with the increase in men's
product sales.
Distribution and shipping expense increased slightly to $1.2 million in the
first half of 2006 compared to $1.1 million in the same period of 2005. General
and administrative expenses increased $0.4 million to $4.8 million in the second
quarter of 2006 from $4.4 million in the same period of 2005. The increase was
mainly attributable to increases in administrative salaries, stock option
expense and professional fees (totaling $0.8 million of increases collectively
in the first half of 2006 compared to the same period of 2005) which were
partially offset by decreases in bonus, severance, bad debt and franchise tax
expenses ($0.8 million lower in the first half quarter of 2006 compared to the
same period of 2005).
Operating Income
Operating income was $4.5 million in the first half of 2006 compared to
$4.9 million for the same period of 2005. Excluding the effect of $$0.8 million
in stock option expense, operating income would have been $5.3 million for the
first half of 2006.
Interest Expense, net
Interest expense, net was relatively unchanged at $0.2 million for the
first half of 2006 and 2005
Income Taxes
As of June 30, 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 $0.65 million
for the first half of 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 June 30, 2006, the Company had cash and
cash equivalents, including temporary investments, of $0.4 million and working
capital of $18.3 million compared to $0.7 million and $11.7 million,
respectively, as of June 30, 2005.
Cash Flows
Cash used in operations totaled $5.2 million and $1.5 million for the first
six months of 2006 and 2005, respectively. Cash used by investing activities was
$0.1 million in the first six months of 2006 and was $1.0 million for the same
period of 2005. Cash provided by financing activities was $4.8 million and $2.2
million for the first six months of 2006 and 2005, respectively primarily due to
the increase in the revolving line of credit used to finance the increase in
inventory.
Accounts receivable increased $4.2 million from December 31, 2005 to June
30, 2006 compared to an increase of $4.4 million from December 31, 2004 to June
30, 2005. Inventory increased $5.8 million from December 31, 2005 to June 30,
2006 compared to a decrease of $1.8 million from December 31, 2004 to June 30,
2005. Capital expenditures were $1.0 million for the first six months of 2005
due to the build out of the new office space in StateplaceNew York.
18
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 June 30, 2006, a total of
$3.6 million of letters of credit were outstanding and $6.3 million of
outstanding 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 June 30, 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 six month period ending June 30, 2006 and 2005, the Company's
account receivable write-off's were $0.1 million each and as a percentage of net
sales were 0.3% and 0.2%, respectively.
At June 30, 2006, the Company owed approximately $4.9 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.
During 2006, in connection with the credit facility covenant violations in
January and February 2006 mentioned above, and to not fall into non-compliance
with these covenants for April 2006 (as provided by the Textile note) the
Company deferred payment of the $250,000 monthly deferred payments that were to
be paid in for 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.
19
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 $ 6,346,218 $ 6,346,218 $ -- $ -- $ --
Long term debt (*) 5,068,689 4,089,999 978,690 -- --
Operating leases 4,131,222 480,047 904,743 959,173 1,787,259
Employment agreements 1,915,250 1,165,250 750,000 -- --
Girbaud license
obligations 7,202,648 4,952,648 2,250,000 -- --
Girbaud fashion shows 675,000 525,000 150,000 -- --
Girbaud creative & --
advertising fees 405,000 310,000 95,000 --
Promotional expense
license requirement 1,964,000 1,314,000 650,000 -- --
----------------- -------------- -------------- -------------- ----------------
Total contractual cash
obligations $ 27,708,027 $ 19,183,162 $ 5,778,433 $ 959,173 $ 1,787,259
================= ============== ============== ============== ================
(*) Long term debt includes principle of $3.5 million, accrued interest of $1.4
million and interest to be incurred in future periods of $0.2 million.
The Company believes that current levels of cash and cash equivalents ($0.4
million at June 30, 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 $26.9 million at June 30, 2006. 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.
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 June 30, 2006, the
Company had one customer who accounted for 10.8% of trade accounts receivable.
As of June 30, 2005, the Company had one customer who accounted for 15.0% of
trade accounts receivable. For the three months June 30, 2006 and for the six
months ended June 30, 2006 and 2005 sales to no one customer accounted for more
than 10.0% of net sales. For the three months June 30, 2005 sales to two
customers accounted for 10.1% of net sales each.
20
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.
21
PART II--OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The Company held its annual meeting of stockholders on June 26, 2006. As of
the May 23, 2006 record date of the meeting, there were a total of 11,996,485
shares of the Company's common stock outstanding and entitled to be voted at the
annual meeting. There were 11,441,307 shares (95.4%) present in person or by
proxy at the meeting.
At the meeting, the following directors were elected at the meeting to
serve until the 2006 Annual Meeting and until their respective successors shall
be duly elected and qualified:
Number of Shares
-------------------------------
Director For Withheld
------------------------------------ -------------- ------------
Olivier Bachellerie 10,964,507 476,800
Rene Faltz 10,939,507 501,800
Neal J. Fox 11,280,907 160,400
Francois Girbaud 10,964,507 476,800
Jon Hechler 11,280,907 160,400
John McCoy II 11,280,907 160,400
Peter J. Rizzo 11,124,500 316,800
Robert S. Stec 11,036,591 404,716
Also at the meeting, the stockholders ratified the selection of BDO
Seidman, LLP as the Company's independent accountants for the fiscal year ending
December 31, 2006 by a vote of 11,440,907 shares in favor (95.3%) and 400 shares
opposed to the proposal.
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: August 14, 2006 BY: /S/ PETER J. RIZZO
----------------------------------------
Peter J. Rizzo,
Chief Executive Officer
Dated: August 14, 2006 BY: /S/ GREGG A. HOLST
----------------------------------------
Gregg A. Holst, Chief Financial Officer
(Principal Financial Officer)
23
Exhibit Index
-------------
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
24