SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K

Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934

For the fiscal year ended December 31, 2002

Commission File No. 0-23379

I.C. ISAACS & COMPANY, INC.
(Exact name of registrant as specified in charter)

Registrant’s telephone number, including area code: (410) 342-8200

Securities Registered Pursuant to Section 12(b) of the Act:
None

Securities Registered Pursuant to Section 12(g) of the Act:
Title of Class:

Common Stock, $.0001 par value per share

        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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K. Yes      No  X 

        Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes      No  X 

        As of March 28, 2003, the aggregate market value of the outstanding shares of the Registrant’s Common Stock held by non-affiliates was approximately $6,012,715 based on the average closing price of the Common Stock as reported by the OTC Bulletin Board on March 28, 2003. Determination of affiliate status for this purpose is not a determination of affiliate status for any other purpose.

        As of March 28, 2003, 11,134,657 shares of Common Stock were outstanding.

Document Incorporated by Reference

        Specified portions of the definitive Proxy Statement for the 2003 Annual Meeting of Stockholders of I.C. Isaacs & Company, Inc. to be held on June 11, 2003 are incorporated by reference into Part III hereof.

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I.C. ISAACS & COMPANY, INC.

FORM 10-K

TABLE OF CONTENTS

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        “I.C. Isaacs” and “I.G. Design” are trademarks of the Company. The Company has filed a federal trademark application for the mark “Urban Expedition (UBX).” All other trademarks or service marks, including “Girbaud” and “Marithé and Francois Girbaud”, “BOSS” and “Beverly Hills Polo Club” appearing in this Annual Report on Form 10-K are the property of their respective owners and are not the property of the Company.

        The various companies that hold and license the Girbaud trademarks, and that engage in the design and licensing of Girbaud branded apparel, as well as the affiliates and associates of those companies, are hereinafter collectively referred to as “Girbaud.”

IMPORTANT INFORMATION REGARDING FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K 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 statements regarding the intent, belief or current expectations of the Company and its management, including the Company’s belief regarding the prominence of branded, licensed apparel, in general, and the Girbaud brand, in particular, in the Company’s future, ,its expectations regarding the renewal of its licenses for men’s and women’s sportswear and jeanswear by Girbaud, and its expectations that substantially all of its net sales will come from sales of Girbaud apparel, the Company’s beliefs regarding the relationship with its employees, the conditions of its facilities, number of manufacturers capable of supplying the Company with products that meet the Company’s quality standards, the Company’s beliefs regarding its ordering flexibility as a result of transferring production to Asia, and the basis on which it competes for business, the Company’s environmental obligations and its expectations regarding the Company’s product offerings,. Words such as “believes,” “anticipates,” “expects,” “intends,” “plans,” and similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such statements. Such statements are forward-looking statements which are subject to a variety of risks and uncertainties, many of which are beyond the Company’s control, which could cause actual results to differ materially from those contemplated in such forward-looking statements, including in particular the following risks and uncertainties; (i) changes in the marketplace for the Company’s products, including customer tastes, (ii) the introduction of new products or pricing changes by the Company’s competitors, (iii) changes in the economy, and (iv) termination of one or more of its agreements for use of the Girbaud brand name 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 Annual Report on Form 10-K, whether as a result of new information, future events or circumstances or otherwise.

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PART I

Introduction

        I.C. Isaacs & Company, Inc. (together with its predecessors and subsidiaries, including I.C. Isaacs & Company L.P., the “Company”) is a designer and marketer of branded jeanswear and sportswear. Founded in 1913, the Company offers collections of men’s and women’s jeanswear and sportswear under the Girbaud designer brand in the United States, Puerto Rico and Canada. The Girbaud brand is an internationally recognized designer label with a distinct European influence. The Company has positioned the Girbaud line with a broad assortment of products, styles and fabrications reflecting a contemporary European look. The Company markets a full collection of men’s jeanswear and sportswear under the Girbaud brand, including a broad array of bottoms, tops and outerwear. In August 1998, the Company introduced a women’s sportswear collection under the Girbaud brand, which also includes a wide assortment of bottoms, tops and outerwear. In May 2000, the Company acquired an exclusive license to market certain men’s and women’s jeanswear and sportswear under the Girbaud brand in Canada and began making shipments in December 2000. Net sales of Girbaud products accounted for 100% and 84.9% of the Company’s net sales in 2002 and 2001, respectively.

        Until December 2001, the Company offered collections of sportswear for men and boys under the Beverly Hills Polo Club brand in the United States, Puerto Rico and Europe. The Company allowed these licenses to expire on December 31, 2001. Net sales of Beverly Hills Polo Club sportswear accounted for 8.6% of the Company’s net sales in 2001. The Company also offered women’s pants and jeans under various Company owned brand names as well as under third party private labels for sale to major chain stores and catalogs. In 1999, the Company introduced a collection of men’s sportswear under the Company owned Urban Expedition (UBX) brand in the United States and Europe. The Company also offered collections of jeanswear and sportswear for young men, women and boys under the BOSS brand in the United States and Puerto Rico. In the fourth quarter of 2000, the Company began restructuring its product lines in an effort to focus on growth potential and eliminate poorly performing lines. The Company terminated its license agreement for the design and marketing of the BOSS brand of sportswear for men and boys in the United States in 2001 and ceased shipping products under the brand in October 2001. The Company discontinued production of the women’s Company-owned and private label lines and the Urban Expedition (UBX) line in 2001. Substantially all remaining inventories of these products were shipped during 2001. See “Management’s Discussion and Analysis”.

Products

        The Company’s jeanswear and sportswear collections under the Girbaud brand include a broad range of product offerings for young men and women, including a variety of tops, bottoms and outerwear. These collections are targeted to consumers who are seeking quality, fashionable products at competitive prices. Girbaud is an internationally recognized designer brand. The Company markets innovative European-inspired men’s and women’s jeanswear and sportswear collections under the Girbaud label. The Girbaud collections include full lines of bottoms consisting of jeans and casual pants in a variety of fabrications, including denim, stretch denim, cotton twill and nylon, cotton t-shirts, polo shirts, knit and woven tops, sweaters, outerwear and leather sportswear. Reflecting contemporary European design, each of these collections is characterized by innovative styling and fabrication and is targeted to consumers ages 16 to 50. Estimated retail prices range from $24 to $30 for t-shirts, $50 to $90 for tops and bottoms, $60 to $90 for sweaters and $80 to $300 for outerwear. The Company is positioning the women’s Girbaud collection as two separate collections, one for streetwear and the other as a contemporary line.

Customers and Sales

        The Company’s products are sold in over 3,600 specialty stores, specialty store chains and department stores. The Company uses both sales representatives and distributors for the sale of its products. Sales representatives include employees of the Company as well as independent contractors. Each of the Company’s distributors and non-employee sales representatives has an agreement with the Company pursuant to which the distributor or sales representative serves as the exclusive distributor or sales representative of specified products of the Company within a specified territory. The Company does not have long-term contracts with any of its customers. Instead, its customers purchase the Company’s products pursuant to purchase orders and are under no obligation to continue to purchase the Company’s products.

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        The Company began marketing men’s sportswear under the Girbaud brand in February 1998 and introduced a women’s sportswear collection under the Girbaud brand in the second quarter of 1998. The Company’s Girbaud men’s products are sold to more than 2,700 stores in the United States and Puerto Rico, including major department stores such as Bloomingdales, Macy’s East, Macy’s West, Burdines, Saks, Inc., Dayton Hudson and Carson Pirie Scott, and many prominent specialty stores such as The Atrium in New York and The Lark. The Company’s Girbaud women’s line is sold to more than 900 stores. None of the Company’s customers accounted for 10% or more of sales in 2002 or 2001. The Company’s Girbaud brand products are sold and marketed domestically under the direction of an 11-person sales force headquartered in New York.

Design and Merchandising

        The Company’s designers and merchandisers travel around the world to monitor emerging fashion trends and search for styling inspiration and fabrics. These sources, together with new styling and graphics developed by the Company’s designers, serve as the primary creative influences for the Company’s product lines. In addition, merchandisers and designers involved with the development of Girbaud products are provided with the Girbaud collections from Europe twice a year and collaborate with Marithé and François Girbaud and their staff in the development of the Company’s Girbaud product lines for sale in the United States. Merchandisers also regularly meet with sales management to gain additional market insight and further refine the products to be consistent with the needs of each of the Company’s markets. The Company’s in-house design and product development is carried out by merchandising departments in New York. Many of the Company’s products are developed using computer-aided design equipment, which allows designers to view and easily modify images of a new design. The Company currently has 6 people on the design staff in New York City. Design expenditures were approximately $1.1 million in 2001 and $1.2 million in 2002.

Advertising and Marketing

        The Company aggressively communicates and reinforces the brand and image of its Girbaud products through creative and innovative advertising and marketing efforts. The Company’s advertising and marketing strategies are directed by its national sales offices and developed in collaboration with its advertising agencies and with Girbaud’s European offices and Paris advertising agency. The Company’s advertising strategy is geared toward its youthful and contemporary consumers, whose lifestyles are influenced by music, sports and fashion. Its advertising campaigns have evolved from trade magazines to a wide variety of media, including billboards, fashion magazines, radio and special events. The Company spent approximately $2.0 million or 2.9% of net sales on advertising in 2002. In 2001, the Company’s expenditures for advertising and marketing activities totaled $1.8 million or 2.2% of net sales. In 2003, the Company will continue to utilize advertising media to promote its products, but expects to do so at a substantially reduced level of spending.

        The Company has a multifaceted marketing campaign for its Girbaud brand, which includes print advertisement, outdoor advertising, including billboards, point of sale materials and promotions, and celebrity wardrobing. As a first tier designer brand, Girbaud also presents international runway shows and appears in major trade shows. Recognizing that point of sale brand presentation and images are highly effective, the Company also provides an array of in-store signage, fixtures and product videos for its Girbaud products.

Product Sourcing

        General

        During 2002, the Company used both domestic and foreign contractors for the production of its products. Substantially all of the Company’s manufacturing and sourcing in 2002 was done by third parties through arrangements with independent contractors. Each of the Company’s independent contractors and independent buying agents has an agreement with the Company pursuant to which it performs manufacturing or purchasing services for the Company on a non-exclusive basis. The Company evaluates its contractors frequently and believes that there are a number of manufacturers capable of producing products that meet the Company’s quality standards. The Company represents all or a significant portion of many of its contractors’ production and has the ability to terminate its arrangements with any of its contractors at any time. A change in suppliers, however, could cause a delay in manufacturing and a possible loss of sales which could adversely affect operating results.

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        Asia

        Virtually all of the Company’s sportswear products other than t-shirts are produced by approximately 15 different manufacturers in 6 countries in Asia. During 2002, three of the Company’s Asian contractors accounted for approximately 26%, 21% and 10% of the Company’s total unit production in 2002. The Company has well established relationships with many of its contractors, although it does not have written agreements with them. The Company retains independent buying agents in various countries in Asia to assist in selecting and overseeing independent manufacturers, sourcing fabric, trim and other materials and monitoring quotas. Independent buying agents also perform quality control functions on behalf of the Company, including inspecting materials and manufactured products prior to accepting delivery. The sourcing and merchandising staffs in the Company’s New York offices oversee Asian fabric and product development, apparel manufacturing, price negotiation and quality control, as well as the research and development of new Asian sources of supply. Asian production represented approximately 61% of the Company’s total unit production in 2002. Purchasing from Asian contractors requires the Company to estimate sales and issue purchase orders for inventory well in advance of receiving firm orders from its customers. A risk to the Company is that its estimates may differ from actual orders. If this happens, the Company may miss sales because it did not order enough, or it may have to sell excess inventory at reduced prices.

        The Company seeks to achieve the most efficient means for the timely delivery of its high quality products. With rare exceptions, the Company does not purchase fabrics but instead negotiates a finished garment price from its contractors in Asia. The contractor must then purchase the approved fabric as part of the package. All of the Company’s products manufactured abroad are paid for in United States dollars. Accordingly, the Company does not engage in any currency hedging transactions.

        United States and Mexico

        Until 2001, the Company utilized third party independent contractors in Mexico for production of slacks, jeans shorts and skirts. During 2001, Mexican production represented approximately 13% of the Company’s total production, however, the Company discontinued the use of these independent contractors in Mexico and has shifted this production to Asia.

        To take advantage of the shorter production time associated with t-shirt products, the Company purchases substantially all of its t-shirt blanks from suppliers in Mexico, warehousing sufficient quantities at a location managed by its Milford, Delaware warehouse facility. T-shirt blanks are sent to various independent contractors within the United States to be screen printed, embroidered or both, before being sent back as a finished product to fulfill orders. T-shirt production represented approximately 39% of the Company’s total unit production in 2002. During 2002, two of the Company’s domestic contractors accounted for approximately 19% and 16% of the Company’s total unit production in 2002.

Warehousing and Distribution

        The Company services its United States customers utilizing the 70,000 square foot Company-owned and operated distribution center in Milford, Delaware. The Company has established a computerized “Warehouse Management System” with real-time internal tracking information and the ability to provide its customers with electronically transmitted “Advance Shipping Notices.” The accuracy of shipments is increased by the ability to scan coded garments at the packing operation. This process also provides for computerized routing and customer invoicing. The vast majority of shipments are handled by UPS, common carriers or parcel post.

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Quality Control

        The Company’s quality control program is designed to ensure that all of the Company’s products meet its high quality standards. Frequent visits are made by the Company’s agents and product development staff to outside contractors to ensure compliance with the Company’s quality standards. Audits are also performed by quality control personnel at the Milford, Delaware distribution center on all categories of incoming merchandise.

        All garments produced for the Company in Asia must be produced in accordance with the Company’s specifications. The Company’s import quality control program is designed to ensure that the Company’s products meet its high quality standards. The Company monitors the quality of fabrics prior to the production of garments and inspects prototypes of products before production runs are commenced. In some cases, the Company requires its agents or manufacturers to submit fabric to an independent outside laboratory for testing prior to production. The Company requires each agent to perform both in-line and final quality control checks during and after production before the garments leave the contractor. Personnel from the Company’s New York office also visit Asia to conduct inspections.

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. The Company generally receives orders for its products three to five months prior to the time the products are delivered to the stores. As of December 31, 2002, the Company had unfilled orders of approximately $17 million, compared to approximately $24 million of such orders as of December 31, 2001. The Company expects to fill substantially all of these orders in 2003. 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. All such orders are subject to cancellation for causes such as late delivery. Accordingly, a comparison of backlogs of orders from period to period is not necessarily meaningful and may not be indicative of eventual actual shipments.

Licenses and Other Rights Agreements

        Beverly Hills Polo Club

        In the fall of 1993, the Company entered into license agreements for the use of the Beverly Hills Polo Club brand name on men’s sportswear in the United States and Puerto Rico. License rights were expanded to include Europe in 1996. However, the company decided not to renew those licenses and permitted them to expire on December 31, 2001.

        Girbaud

        In November 1997, the Company entered into an exclusive license agreement (the “Girbaud Men's Agreement”) with Girbaud Design, Inc. and its affiliate Wurzburg Holding S.A. (“Wurzburg”) to manufacture and market men’s jeanswear, casualwear and outerwear under the Girbaud brand and certain related trademarks (the “Girbaud Marks”) in all channels of distribution in the United States, including Puerto Rico and the U.S. Virgin Islands. In March 1998, the Girbaud Men's Agreement was amended and restated to include active influenced sportswear as a licensed product category and to name Latitude Licensing Corp. as the licensor (the “Licensor”). Also in March 1998, the Company entered into an exclusive license agreement (the “Girbaud Women’s Agreement” and, together with the Girbaud Men’s Agreement, the “Girbaud Agreements”) with the Licensor to manufacture and market women’s jeanswear, casualwear and outerwear, including active influenced sportswear, under the Girbaud Marks in all channels of distribution in the United States, including Puerto Rico and the U.S. Virgin Islands. The Girbaud Agreements include the right to manufacture the licensed products in a number of foreign countries, and both had initial terms of two years.

        Hugo Boss

        In October 1999, the Company, Ambra Inc. (“Ambra”) and Hugo Boss A.G. (“Hugo Boss”) entered into certain agreements including (i) a license agreement (the “BOSS License Agreement”) granting the Company rights to manufacture and sell apparel using the BOSS brand name and (ii) an agreement pursuant to which the Company issued to Ambra an aggregate of 3.3 million shares of Series A Convertible Preferred Stock, par value $.0001 per share, of the Company (the “Preferred Stock”) and 666,667 shares of the Company’s common stock.

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        The BOSS License Agreement had an initial term through December 31, 2003 and carried minimum annual royalties of approximately $3.2 million in each of 2000 and 2001, $2.6 million in 2002 and $2.1 million in 2003.

        Except as set forth below, the Preferred Stock had all of the same preferences, rights and voting powers as the common stock. The Preferred Stock was not entitled to vote on any matters to be voted upon by the stockholders of the Company, except that the holders of the Preferred Stock were entitled to vote as a separate class, and the vote of a majority of the outstanding shares of Preferred Stock was required for the creation of an equity security senior to the Preferred Stock or the amendment of the certificate of incorporation or by-laws of the Company to the detriment of the holders of the Preferred Stock. The Preferred Stock had a liquidation preference of $1.00 per share plus any declared but unpaid dividends on the Preferred Stock. The Company could have redeemed, from March 15, 2001 to June 30, 2002, any or all of the Preferred Stock (i) at any time prior to July 1, 2002, at a redemption price of $1.00 per share (ii) at any time from July 1, 2002, through December 31, 2002, for the greater of $1.00 per share or an amount equal to the market value of the number of shares of common stock that the holder of the Preferred Stock would have held had the shares of Preferred Stock to be redeemed been converted into common stock immediately prior to such redemption. Upon the occurrence of an event of default under the $7.2 million note issued by the Company to Ambra in connection with the License Rights Termination Agreement, Ambra could have demanded a redemption of the Preferred Stock at a redemption price of $1.00 per share. The Preferred Stock was convertible by Ambra from January 1, 2003, through December 31, 2006, into (at Ambra’s election), (i) a promissory note of the Company at an amount equal to the number of shares of Preferred Stock converted multiplied by $1.00, carrying interest at a rate of 12% per annum and payable over a term of 21 months or (ii) common stock of the Company at a 1:1 conversion ratio. For financial reporting purposes, the Preferred Stock was considered redeemable Preferred Stock and was classified outside of stockholders’ equity.

        In March 2001, the Company, Ambra and Hugo Boss executed an agreement to terminate the Company’s rights under the BOSS License Agreement (the “License Rights Termination Agreement”). Pursuant to the License Rights Termination Agreement, (i) the Company issued to Ambra a subordinated secured promissory note (the “Note”) of the Company in the principal amount of $7.2 million, with principal and interest at an annual rate of 8% payable in twenty-four (24) quarterly installments in the amount of (a) $205,500 each through December 31, 2001, (b) $420,000 each from March 31, 2002 through September 30, 2006 and (c) $407,085 on December 31, 2006; (ii) the Company’s rights under the BOSS License Agreement (and the Company’s obligation to pay any royalties thereunder) were terminated; (iii) the Company agreed to sell or dispose of existing BOSS inventory by October 31, 2001; and (iv) the Preferred Stock became (a) redeemable by the Company until June 30, 2002 for $1.00 per share, (b) redeemable by the Company from July 1, 2002 through December 31, 2002 for the greater of $1.00 per share or an amount equal to the market value of the number of shares of common stock which the holder of the Preferred Stock would have held had the shares of Preferred Stock being redeemed been converted to common stock immediately prior to such redemption; (c) redeemable by Ambra at any time upon an event of default under the Note; and (d) convertible by Ambra from January 1, 2003 through December 31, 2006 into (at Ambra’s election): (x) a subordinated secured promissory note of the Company in the amount equal to the number of shares of Preferred Stock converted multiplied by $1.00, carrying an interest rate of 12% per annum and payable over a term of twenty-one (21) months or (y) common stock of the Company at a 1:1 conversion ratio. The Company also executed a security agreement in favor of Ambra and agreed to grant a mortgage or deed of trust on the Company’s real estate in Milford, Delaware and Baltimore, Maryland as security for the Company’s obligations under the Note.

        Ambra-Girbaud Transaction

        On May 6, 2002, Textile Investment International S.A. (“Textile”), an affiliate of the Licensor, acquired the Preferred Stock, the 666,667 shares of common stock and the Note from Ambra. Pursuant to the terms of a Framework Agreement (the “Framework Agreement”) entered into on May 14, 2002 by the Company, Textile, the Licensor and Wurzburg, the Company

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        As a result of those transactions, Textile and Wurzburg (which owns 500,000 shares of the Company’s common stock) own approximately 40% of the Company’s common stock and, as the Company’s largest stockholders, they may designate five of the nine nominees for election as directors of the Company.

        The Company’s business is dependent upon its use of the Girbaud brand names and images, which are in turn dependent upon the existence and continuation of certain licenses as described below.

        Girbaud Domestic Licenses

        Unless extended in accordance with the options added to the Girbaud Agreements pursuant to the Framework Agreement, the terms of the Girbaud Agreements will expire at the end of 2007. The Girbaud Agreements generally allow the Company to use the Girbaud Marks on apparel designed by or for the Company or based on designs and styles previously associated with the Girbaud brand, subject to quality control by the Licensor over the final designs of the products, marketing and advertising material and manufacturing premises. The Girbaud Agreements provide that they may be terminated by the Licensor upon the occurrence of certain events, including, but not limited to, a breach by the Company of certain obligations under the agreements that remain uncured following certain specified grace periods.

        Under the Girbaud Men’s Agreement as amended the Company is required to make royalty payments to the Licensor in an amount equal to 6.25% of the Company’s net sales of regular licensed merchandise and 3.0% in the case of certain irregular and closeout licensed merchandise. The Company is obligated to pay the greater of actual royalties earned or minimum guaranteed annual royalties of $3,000,000 through 2007. On a monthly basis during the term, the Company is obligated to pay 8.3% of the minimum guaranteed royalties for that year. On a quarterly basis during the term, the Company is required to pay the amount that the actual royalties exceed the total minimum guaranteed royalties for that quarter. The Company is required to spend the greater of an amount equal to 3% of Girbaud men’s net sales or $500,000 in advertising and related expenses promoting the men’s Girbaud brand products in each year through the term of the Girbaud men’s agreement.

        Under the Girbaud Women’s Agreement as amended, the Company is required to make royalty payments to the Licensor in an amount equal to 6.25% of net sales of regular licensed merchandise and 3.0% of certain irregular and closeout licensed merchandise. The Company is obligated to pay the greater of actual royalties earned or minimum guaranteed annual royalties of $1,500,000 through 2007. On a monthly basis during the term, the Company is obligated to pay 8.3% of the minimum guaranteed royalties for that year. On a yearly basis, the Company is required to pay the amount that the actual royalties exceed the total minimum guaranteed royalties for that year.

        The Company is required to spend the greater of an amount equal to 3% of Girbaud women’s net sales or $400,000 in advertising and related expenses promoting the women’s Girbaud brand products in each year through the term of the Girbaud Women’s Agreement. In addition, over the term of the Girbaud Women’s Agreement the Company is required to contribute $190,000 per year to the Licensor’s advertising and promotional expenditures for the Girbaud brand.

        The Girbaud Women’s Agreement initially required the Company to open a Girbaud flagship store for the sale of the Company’s Girbaud men’s and women’s lines and other Girbaud licensed merchandise in New York City by the end of 1998. In December 1998, the Girbaud Women’s Agreement was amended to defer this requirement for one year and to provide that the Company would spend an additional $1.8 million on enhanced sales and marketing in 1999. In August, 1999, the Company issued 500,000 shares of restricted common stock to the Licensor (which was subsequently transferred to Wurzburg) in connection with an amendment of the Girbaud Women’s Agreement to further defer the obligation to open a Girbaud retail store. Under the new agreement, if the Company had not signed a lease agreement for a Girbaud retail store by July 31, 2002, it would become obligated to pay the Licensor an additional $500,000 in royalties. During 2001, the Company decided not to sign a lease agreement for a Girbaud retail store and paid $175,000 of this royalty, the remainder of which was paid by July 31, 2002. The entire amount was expensed in the fourth quarter of 2001.

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        In January 2000, the Company entered into a global sourcing agreement with G.I. Promotions, a Girbaud affiliate, to act as a non-exclusive sourcing agent to licensees of the Girbaud trademarks for the manufacture of Girbaud jeanswear and sportswear. The global sourcing agreement extended until December 31, 2003 and provided that the Company shall net a facilitation fee of 5.0% of the total FOB pricing for each order shipped to licensees under the agreement. Also in January 2000, the Company entered into a license agreement with Wurzburg. The license has a term of three years and provides that the Company shall pay Wurzburg a royalty of 1.0% of the total FOB pricing for each order shipped to a licensee under the global sourcing agreement. In August of 2002, the global sourcing agreement was terminated by the parties effective October 1, 2002.

        The Company is obligated to pay a minimum of $5.6 million during 2003 in the form of minimum royalty payments, advertising and promotional expenses pursuant to the Girbaud license agreements. In 2003, the Company expects that substantially all of its net sales will come from apparel associated with the Girbaud licenses.

        Western Glove Works

        In May 2000, the Company entered into an exclusive distribution agreement for Girbaud men’s and women’s jeanswear and sportswear products in Canada. The Company sold to Western Glove Works (“Distributor”) Girbaud products produced in North America at cost plus 12.0%, which was less than its normal profit margins on sales of comparable products to the Company’s retail customers. For products purchased by the Distributor from overseas, the Distributor paid a distributor’s fee equal to 6.75% of net sales to the Company. Under the agreement, the Distributor paid a royalty fee equal to 6.25% of net sales to the Company, which in turn, paid the royalty to the Licensor. The initial term of the agreement expired on December 31, 2001. Under the agreement, the Distributor was entitled to renew the agreement for six additional one-year terms. The Distributor renewed the agreement with the Company for an additional one-year term that expired on December 31, 2002. However, the Distributor did not renew the agreement with the Company for 2003. The minimum sales level for calendar year 2002 was $2,000,000 (Canadian Dollars), which resulted in a minimum distribution fee payable to the Company of $60,000 (Canadian Dollars). The minimum sales level for calendar year 2001 was $1,600,000 (Canadian Dollars), which resulted in a minimum distribution fee payable to the Company of $48,000 (Canadian Dollars).

Credit Control

        The Company manages its own credit and collection functions and has never used a factoring service or outside credit insurance. The Company sells to approximately 2,300 accounts throughout the United States and Puerto Rico. All of the functions necessary to service this large volume of accounts are handled by the Company’s in-house credit department in Baltimore, Maryland. 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 currently employs three people in its credit department and believes that managing its own credit gives it unique flexibility as to which customers the Company should sell and how much business it should do with each. The Company obtains and periodically updates information regarding the financial condition and credit histories of customers. The Company’s collection personnel evaluate this information and, if appropriate, establish a line of credit. Credit personnel track payment activity for each customer using customized computer software and directly contact customers with receivable balances outstanding beyond 30 days. 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 to an immaterial amount. In 2002 and 2001, the Company’s credit losses were $0.5 million and $1.0 million, respectively and the Company’s actual credit losses as a percentage of net sales were 0.8% and 1.2%, respectively.

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Competition

        The apparel industry is highly competitive and fragmented and is subject to rapidly changing consumer demands and preferences. The Company believes that its continued success depends in large part upon its ability to anticipate, gauge and respond to changing consumer demands and fashion trends in a timely manner and upon the continued appeal to consumers of the Girbaud brand. The Company competes with numerous apparel brands and distributors (including Buffalo,Calvin Klein, Diesel, DKNY, Guess?, Nautica, Polo Jeans and Sean John). Many of the Company’s competitors have greater financial resources than the Company. Although the level and nature of competition differ among its product categories, the Company believes that it competes on the basis of its brand image, quality of design and value pricing. The Company continued to experience intense competition in 2002 from many established and new competitors at both the specialty store and department store channels of distribution. Under the Girbaud Agreements, certain third parties have retained the right to produce, distribute, advertise and sell, and to authorize others to produce, distribute, advertise and sell certain garments that are similar to some of the Company’s products. Any such production, distribution, advertisement or sale of such garments by such licensor or another authorized party could have a material adverse effect on the Company’s financial condition or results of operations.

Former International Operations

        In December, 2001, the Company sold I.C. Isaacs Europe, SL, its Spanish subsidiary (“Isaacs Europe”), to a management group of Isaacs Europe in exchange for repayment of $100,000 of intercompany debt and the assumption of liabilities. The Company recorded a net charge of $1.2 million in the fourth quarter of 2001 relating to the disposition of Isaacs Europe.

Management Information Systems

        The Company believes that advanced information processing is essential to maintaining its competitive position. The Company’s systems provide, among other things, comprehensive order processing, production, accounting and management information for the marketing, selling, manufacturing, retailing and distribution functions of the Company’s business. The Company’s software programs allow it to track, among other things, orders, manufacturing schedules, inventory and sales of its products. The programs include centralized management information systems, which provide the various operating departments with financial, sales, inventory and distribution related information. Via electronic data interchange, the Company is able to ship orders, from inventory on hand, to certain customers within 24 to 72 hours from the time of order receipt.

Employees

        As of March 28, 2003, the Company had approximately 100 full-time employees. The Company is not a party to any labor agreements, and none of its employees is represented by a labor union. The Company considers its relationship with its employees to be good and has not experienced any material interruption of its operations due to labor disputes.

        On February 3, 2003, Robert Arnot resigned as a director, Chief Executive Officer and President of the Company effective as of February 6, 2003. In connection with that resignation, Staffan Ahrenberg, a Director of the Company, became Chairman of the Board of Directors. The Company has also engaged the services of Robert Conologue as its Chief Operating and Chief Financial Officer, and of Sandra Finkelstein as Senior Vice President of Merchandising. Also in connection with this resignation, Daniel Gladstone, previously the President of the Girbaud Division and a Director of the Company, became the Acting Chief Executive Officer and was promoted as the President of the Company in March 2003.

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Environmental Matters

        The Company is subject to federal, state and local laws, regulations and ordinances that (i) govern activities or operations that may have adverse environmental effects (such as emissions to air, discharges to water, and the generation, handling, storage and disposal of solid and hazardous wastes) or (ii) impose liability for the costs of clean up or other remediation of contaminated property, including damages from spills, disposals or other releases of hazardous substances or wastes, in certain circumstances without regard to fault. Certain of the Company’s operations routinely involve the handling of chemicals and waste, some of which are or may become regulated as hazardous substances. The Company has not incurred any significant expenditures or liabilities for environmental matters. Although the Company believes that its environmental obligations will not have a material adverse effect on its financial condition or results of operations, environmental compliance matters are subject to inherent risks and uncertainties.

        Certain information concerning the Company’s principal facilities is set forth below:

The Company believes that its existing facilities are well maintained and in good operating condition. See “ITEM 1. Business—Warehousing and Distribution”. On June 6, 2002, subject to the Framework Agreement, the Company executed a security agreement in favor of Textile and agreed to grant a second mortgage or deed of trust on the Company’s real estate in Milford, Delaware and Baltimore, Maryland as security for the Company’s obligations under a note payable to Textile. See “Item 5. Market For The Company’s Common Equity And Related Stockholder Matters”.

        The Company is not presently a party to any litigation.

        During the fourth quarter of 2002, there were no matters submitted to a vote of the Company’s stockholders.

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PART II

        The market for the Company’s Common Stock is not an exchange but is the OTC Bulletin Board, an established quotation service regulated by the National Association of Securities Dealers. As of March 28, 2003, the Company had approximately 1,000 holders of record of the Company’s Common Stock.

        Prior to July 19, 2001, the Company’s Common Stock was traded on the Nasdaq National Market under the Symbol “ISAC.” On July 19, 2001, the Company’s securities were delisted from the NASDAQ National Market. Shares of the Company’s Common Stock are now traded on the OTC Bulletin Board under the ticker symbol “ISAC.OB”. The reported last sale price of the Common Stock on the OTC Bulletin Board on March 28, 2003 was $0.54. The following table sets forth for the periods indicated the high and low closing sale prices for the Common Stock reported by the Nasdaq National Market and the OTC Bulletin Board:

        The Company anticipates that all earnings of the Company will be retained for the foreseeable future for use in the operation of the Company’s business. Any future determination as to the payment of dividends will be at the discretion of the Company’s Board of Directors and will depend upon the Company’s results of operations, financial condition, restrictions in the Company’s credit facilities and other factors deemed relevant by the Board of Directors.

        On May 15, 1997, the Board of Directors of the Company and the Company’s stockholders adopted the 1997 Omnibus Stock Plan (the “Plan”). The purpose of the Plan is to promote the long-term growth and profitability of the Company by providing key people with incentives to improve stockholder value and contribute to the growth and financial success of the Company, and by enabling the Company to attract, retain and reward the best-available persons for positions of substantial responsibility. The maximum number of shares of Common Stock that could be issued with respect to awards granted under the Plan was 500,000. The Company’s stockholders approved an increase in the shares of Common Stock that may be issued with respect to awards granted under the Plan to an aggregate of 1.1 million shares, at the 1999 annual meeting of stockholders and approved an additional increase to an aggregate of 1.6 million shares at the 2002 annual meeting of stockholders. The Plan is administered by the Compensation Committee of the Board of Directors. Participation in the Plan is open to all employees, officers, directors and consultants of the Company or any of its affiliates, as may be selected by the Compensation Committee from time to time. The Plan allows for stock options, stock appreciation rights, stock awards, phantom stock awards and performance awards to be granted. The Compensation Committee will determine the prices, vesting schedules, expiration dates and other material conditions upon which such awards may be exercised. Through December 31, 2002, the Company had granted stock options under the Plan exercisable upon vesting for an aggregate of 1,306,250 stock options. The weighted average exercise price of such options is $1.23 per share. Through December 31, 2002, none of those stock options had been exercised. The issuance of such stock options was exempt from the registration requirements of the Securities Act of 1933, as amended, pursuant to Section 4(2) thereunder. The Company previously filed a Registration Statement on Form S-8 (the “Form S-8”) to register shares of Common Stock issuable pursuant to awards granted under the Plan.

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        In November 1999 and May 2000, the Company issued the Preferred Stock to Ambra. See “Business — Licenses and Other Rights Agreements — Boss.” On May 6, 2002, Textile acquired the 666,6667 shares of common stock and the Note from Ambra. In December 2002, Textile converted all the Preferred Stock into 3.3 million shares of Common Stock of the Company. See, “Business — Licenses and Other Rights Agreements — Ambra-Girbaud Transaction. In September 2002, the Company, pursuant to the terms of the Framework Agreement, granted Textile warrants to purchase 500,000 shares of the Company’s Common Stock for $0.75 per share. The warrants were valued using the Black-Scholes option-pricing model and recorded as a preferred stock dividend at the time of issuance.

        The selected financial data set forth below have been derived from the consolidated financial statements of the Company and the related notes thereto. The statement of operations data for the years ended December 31, 2000, 2001 and 2002 and the balance sheet data as of December 31, 2001 and 2002 are derived from the consolidated financial statements of the Company which have been audited by BDO Seidman, LLP, independent certified public accountants, included elsewhere herein. The statement of operations data for the years ended December 31, 1998 and 1999 and the balance sheet data as of December 31, 1998, 1999 and 2000 are derived from the consolidated financial statements of the Company, which have been audited but are not contained herein. The following selected financial data should be read in conjunction with the Company’s consolidated financial statements and the related notes thereto and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” which are included elsewhere herein.

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