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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-KSB
[X] Annual Report under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Fiscal Year Ended October 31, 1998
OR
[ ] Transition Report under Section 13 or 15(d)
of the Securities Exchange Act of 1934
Commission File No.: 0-19000
JLM COUTURE, INC.
(Name of Small Business Issuer in its charter)
Delaware 13-3337553
(State or other Jurisdiction (IRS Employer
of Incorporation or Organization) Identification Number)
225 West 37th Street, 5th Floor, New York, New York 10018
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (212) 921-7058
Securities registered pursuant to Section 12(b) of the Exchange Act: None
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock, par value $.0002 per share
(Title of class)
Check whether the issuer (1) filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act during the past 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
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B is contained herein, and no disclosure will 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-KSB or any amendment to this Form 10-KSB [X].
The issuer's revenues for its most recent fiscal year were
$15,704,889.
The aggregate market value of the shares of Common Stock held by
non-affiliates as reported by NASDAQ on February 8, 1999 was
approximately $2,879,436.
As of January 25, 1999, the registrant had outstanding 1,871,681
shares of Common Stock, par value $.0002 per share.
The Proxy Statement of the registrant to be filed on or before
February 28, 1999 is incorporated herein by reference.
Transitional Small Business Disclosure Format: Yes No X
PART I
Item 1. Description of Business.
(a) Background. JLM Couture, Inc. and subsidiary (the
"Company"), a Delaware corporation whose name was changed from Jim
Hjelm's Private Collection, Ltd. in July 1997, was organized in
April 1986 to design, manufacture and market high quality bridal
wear and related accessories, including bridesmaid gowns.
In May 1997, the Company acquired Alvina Valenta Couture
Collection, Inc. ("Alvina"), a New York corporation. Alvina
designs, manufactures and markets couture-quality bridal wear.
(b) Business. The Company is engaged in the design,
manufacture and distribution of bridal gowns, veils and bridesmaid
gowns.
The Company's couture lines of bridal gowns, bridesmaid gowns,
veils and related items (the "Private Collection," "Lazaro" and
"Alvina Valenta" lines) emphasize contemporary and traditional
styles characterized by ankle or floor length gowns, with or
without trains, and are principally constructed in satin, silk and
lace. The Company's designs reflect its emphasis on quality and
design originality. Wholesale prices for the Company's bridesmaid
and bridal gowns range from $90 to $120 and $725 to $1,250,
respectively, with suggested retail prices ranging from $180 to
$240 for bridesmaid gowns and $1,500 to $2,500 for bridal gowns.
The Company added the Alvina Valenta line through its
acquisition of Alvina during its fiscal year ended October 31,
1997. The Company also produces a line of less expensive bridal
gowns called "Visions," which is styled similar to the Company's
couture lines, but is constructed from less expensive fabrics. The
wholesale prices for bridal gowns in the "Visions" line range from
$350 to $550 and the retail prices range from $700 to $1,100.
The Company utilizes the efforts of its employees and several
independent contractors to assemble its dresses. The Company
maintains strict quality control over the contractors and supplies
the contractors with cut pattern pieces. There are no written
agreements between the Company and these contractors, enabling the
Company to utilize each contractor on an as-needed basis. The
Company also makes custom alterations on its basic designs at a
customer's request. The Company charges the customer for custom
alterations.
The Company has identified bridal boutiques or bridal
departments in women's clothing stores to market its products.
Since the Company's acquisition of Alvina, distribution of the
Alvina line has increased from 25 stores to over 55 stores. During
fiscal 1998 and 1997, no customer accounted for more than ten
percent of the Company's sales.
The Company's lines of gowns for its new seasons are generally
introduced at fashion shows held at the Company's showroom or at
fashion shows held at a New York City hotel. There are generally
two seasons per year, the Spring Season and the Fall Season. The
Company also displays its products at regional markets and periodic
bridal fashion shows sponsored by its retail customers at the
retail customer's showroom, sometimes called "trunk shows." These
trunk shows are generally supported with local advertising paid for
by the Company's retail customer.
The Company has three principal designers. Mr. Jim Hjelm has
been designing bridal gowns and related items for approximately 25
years. He began his career as a bridal designer with the House of
Bianchi, and then served as the head designer of Priscilla of
Boston, for 18 years. From 1980 until he left in 1986 to co-found
the Company with Mr. Joseph L. Murphy, he was a principal designer
for Galina Bouquet, New York, another couture quality bridal gown
manufacturer.
Mr. Lazaro Perez is another of the Company's bridal gown
designers. Lazaro (the name under which Mr. Perez designs) had
previously designed for Riccio, and studied at Chicago's Ray
College of Design, where he won an award for "Best New Bridal
Designer." Lazaro's designs have enabled the Company to diversify
and add depth to its product lines. For both 1997 and 1998, he was
awarded the 1997 Distinctive Excellence in the Bridal Industry
Award in the category of Style Innovator for Bridal Gowns. This
award recognized Lazaro as a leading designer of contemporary-
classic bridal styling, which represents one of the fastest growing
sectors of the bridal industry. Lazaro's dresses are marketed by
the Company under the name "Lazaro."
Victoria McMillan is the designer for the Company's Alvina
Valenta line of upscale wedding gowns. Ms. McMillan has been the
designer for Alvina since 1989.
The Company's designers are frequently featured in articles
and advertisements published in Bride's and Your New Home and
Modern Bride magazines. Major fashion department stores and bridal
boutiques have featured all three designers and their work in
advertisements, in store customer showings, and in retail area
displays.
The Company also markets its products through its five
internet sites and generates customer demand through distribution
of its bridal and bridesmaids catalogs.
Each designer also participates in the Company's marketing
efforts by appearing at seasonal bridal fashion shows and trunk
shows, and otherwise being available for showing the Company's
lines of bridal products. The Company also employs a full-time
sales manager and four salespeople.
The Company advertises in periodicals and other publications
dealing with the bridal industry in advance of and during each
bridal season. The Company's dresses have been advertised in
Bride's and Your New Home and Modern Bride magazines. This
advertising is directed toward displaying the Company's products in
a manner that enhances the general perception of the quality of the
Company's gowns and the Company's reputation.
The primary raw materials necessary for the Company's business
are quality fabrics, such as silks, taffetas and laces. The
Company maintains a minimum inventory of these raw materials.
Generally, the Company is able to obtain necessary materials
relatively easily.
Although the bridal industry is seasonal, with showings to
retail buyers in advance of the Spring and Fall seasons, the
Company's business has only experienced slight seasonal
fluctuations, with a slight decrease in its fourth quarter.
The bridal wear industry is highly competitive. In marketing
its bridalwear and bridesmaid gowns, the Company competes directly
with the House of Bianchi, Priscilla of Boston, Amsale, Richard
Glasgow, the Diamond Collection, Watters & Watters, Bari Jay, and
others who currently market high fashion traditional bridal wear.
Competition with these firms is intense. Although the Company's
sales represent a small percentage of the bridal gown market (less
than one percent), the Company competes on the basis of prestige,
design, quality, service and price.
In its marketing efforts, the Company emphasizes the couture
quality of its products and the public recognition of Jim Hjelm,
Lazaro, and Alvina Valenta, including their experience and
reputation in the industry. In the Company's view, the ability of
the Company to continue to successfully compete is dependent upon
the continued development and maintenance of a line of high
quality, fashionable bridal wear and the promotion of the
reputations of Jim Hjelm, Lazaro, Victoria McMillan and other
recognized designers that the Company employs.
In an effort to establish a presence in Europe, the Company
hired a sales representative located in England to market its
Occasions Bridesmaids and Lazaro and Visions bridal gowns to the
European community.
The Company employs approximately 60 full-time employees.
ITEM 2. Description of Property.
The Company's executive offices and manufacturing facility are
located at 225 West 37th Street, New York, New York. This space is
located in Manhattan's "garment center." which primarily contains
garment manufacturers and office space. The premises are occupied
pursuant to a lease with an unaffiliated party, which expires in
January 2003. The Company's manufacturing facility consists of a
fully-equipped design and production area, which includes cutting
tables, sewing machines and other equipment required to manufacture
the Company's products. The Company also maintains showroom space
at 501 Seventh Avenue, New York, New York, pursuant to a lease with
an unaffiliated party, which expires in 2002. This space is
primarily utilized to display the Company's products to buyers.
The Company maintains a permanent showroom in the Chicago bridal
mart building pursuant to a lease that runs through March 31, 2001,
with an unaffiliated party.
ITEM 3. Legal Proceedings.
The Company is not a party to any material pending legal
proceedings, and to the best knowledge of the Company, no such
proceedings have been threatened.
ITEM 4. Submission of Matters to a Vote of Security Holders.
The Company's Annual Meeting of Shareholder's (the "Meeting")
was held on October 30, 1998. At the Meeting, the Company's
Shareholders voted on a proposal to amend the Company's 1996 Stock
Option Plan (the "1996 Plan") to increase the number of shares of
Common Stock of the Company for which options are authorized to be
granted under the 1996 Plan from 100,000 to 250,000 shares, par
value $.0002 per share (the "Amendment"). The following table sets
forth the results of the vote:
Proposal For Against Abstain
Approval of Amendment 1,050,033 208,426 3,900
PART II
ITEM 5. Market for Registrant's Common Equity and Related
Stockholder Matters.
(a) The Common Stock is traded in the Over-the-Counter market
and is quoted on the NASDAQ System.
The following table sets forth, for the Company's last two
fiscal years, high and low bid quotations for its Common Stock.
The market quotations represent prices between dealers, do not
include retail markup, markdown, or commissions and may not
represent actual transactions.
Quarter Ended High Bid Low Bid
Fiscal 1998
January 31, 1998 $6.625 $3.75
April 30, 1998 4.3125 3.375
July 31, 1998 4.15625 2.375
October 31, 1998 3.00 2.125
Fiscal 1997
January 31, 1997 $5.875 $4.125
April 30, 1997 6.00 4.375
July 31, 1997 6.25 4.25
October 31, 1997 6.125 4.625
On January 25, 1999, the closing bid and ask prices in the
Over-the-Counter market for the Common Stock as reported by NASDAQ
were $3.00 and $3.25, respectively.
(b) At January 25, 1998, there were approximately 158 holders
of record of the Company's Common Stock. The Company believes that
there are significantly more beneficial holders of the Common Stock
as many of the shares of Common Stock are held in "street" names.
(c) No cash dividends have been paid on the Common Stock, and
the Company does not anticipate paying cash dividends in the
foreseeable future.
ITEM 6. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
Disclosure Regarding Forward Looking Statements
The following discussion should be read in conjunction with
the Company's financial statements and notes thereto appearing
elsewhere in this Form 10-KSB. In addition to the historical
information contained herein, the discussion in this Form 10-KSB
contains certain forward looking statements that involves risks and
uncertainties, such as statements of the Company's plans,
objectives, expectations and intentions. The Company's actual
results could differ materially from management's current
expectations.
Results of Operations - Fiscal year ended October 31, 1998 ("Fiscal
1998") as Compared to Fiscal 1997.
For fiscal 1998, revenues were $15,704,889 as compared to
$14,028,791 in fiscal 1997, an increase of $1,676,098 or 11.9%.
The increase is attributable to a full year of revenues in fiscal
1998 from Alvina which was acquired during fiscal 1997. In fiscal
1997, sales totaled approximately $470,000 for the six months that
JLM owned Alvina. For fiscal 1998, Alvina contributed
approximately $1,200,000 to sales. The fiscal 1997 results of
operations of Alvina prior to its acquisition were not material to
the Company's consolidated results of operations. Increases in
sales volume for the Lazaro line and the Occasions line accounted
for the balance of the increase.
The Company's gross profit margin decreased in fiscal 1998 to
39.7% from 43.2% in fiscal 1997. The Company attributes the
decline in its gross profit margin to increased salary costs that
were not passed on to customers.
Selling, general and administrative ("SG&A") expenses
increased to 33.2% of net sales in fiscal 1998 as compared to 31.4%
of sales in fiscal 1997. This was primarily due to an aggressive
marketing strategy that the Company employed during fiscal 1998,
which resulted in increased marketing and advertising costs, as
well as increased salary costs.
The Company generated net income of $547,108, or $0.30 per
share ($0.28 on a diluted basis), for fiscal 1998 as compared to
net income of $789,923, or $0.45 per share ($0.41 on a diluted
basis) for fiscal 1997. The decrease in net income for fiscal 1998
was due primarily to the increased salary and marketing costs
discussed above and costs incurred related to the opening of the
Company's European sales office.
Liquidity and Capital Resources
The Company's working capital increased to $3,192,265 at
October 31, 1998 from $2,929,325 at October 31, 1997, an increase
of $262,940. The Company's current ratio was 2.2 to 1 at both
October 31, 1998 and October 31, 1997.
During fiscal 1998, net cash used in the Company's operating
activities was $280,193 as compared to cash provided by operating
activities of $392,404 in fiscal 1997. Cash flow from operations
decreased in fiscal 1998 primarily due to the reduction in the
amount of net income ($242,815), an increase in prepaid expenses
and other current assets ($265,780) and a decrease in income taxes
payable ($516,914) offset by an increase in accrued expenses and
other current liabilities ($467,986).
Cash used in investing activities in fiscal 1998 was
$57,315 as compared to $304,763 in fiscal 1997. In fiscal 1997,
the Company acquired Alvina and used $193,800 to acquire the
business.
Cash used in financing activities in fiscal 1998 was $28,473
as compared to cash provided by financing activities of $302,246 in
fiscal 1997. In fiscal 1997, the Company issued common stock in
connection with the acquisition of Alvina Valenta Couture
Collection, Inc. which generated cash of $172,900. The Company
also generated $330,979 from the sale of Common Stock during fiscal
1997.
In March 1998, the Company entered into a $2,000,000 loan
agreement with Israel Discount Bank of New York (the "Credit
Line"). The loan agreement calls for interest to be charged at the
prime interest rate. The loan is secured by a first lien on all of
the Company's accounts receivable, cash, securities, deposits and
general intangibles.
In November 1996, the Company, through a private placement,
raised $300,979 in additional equity by the issuance of an
aggregate of 75,000 shares of Common Stock and an aggregate of
22,500 warrants to purchase additional shares of Common Stock at
prices ranging from $4.37 to $6.62.
Funds generated from operations along with the Credit Line are
expected to be sufficient for the Company to meet its cash flow
requirements.
Introduction Of The Euro
On January 1, 1999, eleven of the fifteen member countries of
the European Union established fixed conversion rates between their
existing sovereign currencies and a new currency called the "Euro."
These countries agreed to adopt the Euro as their common legal
currency on that date. The Euro trades on currency exchanges and
is available for non-cash transactions. Until January 1, 2002, the
existing sovereign currencies will remain legal tender in these
countries. On January 1, 2002, the Euro is scheduled to replace
the sovereign legal currencies of these countries. The Company's
initial international expansion will be in the United Kingdom,
which has not adopted the Euro. The Company will evaluate the
impact the implementation of the Euro will have on its business
operations and no assurances can be given that the implementation
of the Euro will not have material adverse affect on the Company's
business, financial condition and results of operations. However,
the Company does not expect the Euro to have a material effect on
its competitive position. In addition, the Company cannot
accurately predict the impact the Euro will have on currency
exchange rates or the Company's currency exchange risk.
Year 2000 Compliance
The Company is on schedule with a project that addresses the
Year 2000 (Y2K) issue of computer systems and other equipment with
embedded chips or processors not being able to properly recognize
and process date-sensitive information after December 31, 1999.
The Company has completed all programming changes required to make
its computer system Y2K complaint. JLM's computer systems are able
to recognize date sensitive information with dates after December
31, 1999. The total cost incurred to convert the system had a
minimal impact on earnings. Many systems use only two digits
rather than four to define the year and these systems will not be
able to distinguish between the year 1900 and the year 2000. This
may lead to disruption in the operations of business and
governmental entities resulting from miscalculations or system
failures. This project is designed to ensure the compliance of all
of the Company's applications, operating systems and hardware
platforms, and to address the compliance of key business partners.
Key business partners are those customers and vendors that have a
material impact on the Company's operations. The total estimated
cost of the required modifications to become Y2K compliant should
not be material to the Company's financial position.
Failure to make all internal business systems Y2K compliant
could result in an interruption in, or failure of, some of the
Company's business activities or operations. Y2K disruption in the
operations of key vendors could impact the Company's ability to
obtain components necessary for the manufacture of products and
fulfillment of contractual obligations. If one or more of these
situations occur, the Company's results of operations, liquidity
and financial conditions could be materially and adversely
affected. The Company is unable to determine the readiness of its
key business partners at this time and is therefore unable to
determine whether the consequences of Y2K failures will have a
material impact on the Company's result of operations, liquidity or
financial condition. The Y2K project is expected to reduce the
Company's level of uncertainty about the Y2K problem and reduce the
possibility of significant interruptions of normal business
operations.
Recent Accounting Pronouncements
In 1997, the Financial Accounting Standards Board issued SFAS
No. 130, "Reporting Comprehensive Income." This standard
establishes requirements for the reporting and display of
comprehensive income and its components in a full set of general
purpose financial statements. Comprehensive income is the total of
net income and all other nonowner changes in equity. The objective
of this statement is to report a measure of all changes in equity
of a company that result from transactions and other economic
events in the period other than transactions with owners. This
standard is effective for the Company's fiscal year beginning
November 1, 1998. The Company will make the necessary disclosures
when required. As this statement relates solely to disclosure
provisions, the Company believes that the adoption of this standard
will not have an effect on its financial position or results of
operations.
In June 1997, the Financial Accounting Standards Board issued
SFAS No. 131, "Disclosures About Segments of an Enterprise and
Related Information," ("SFAS 131"). This pronouncement establishes
standards for companies to report information about operating
segments in financial statements based on the approach that
management utilizes to organize the segments within the company for
management reporting and decision making. In addition, SFAS No.
131 requires that companies report disclosures about products and
services, geographic areas and major customers. SFAS No. 131 is
effective for the Company's fiscal year beginning November 1, 1998.
Financial statement disclosures for prior periods are required to
be restated. As this statement relates solely to disclosure
provisions, the Company believes that the adoption of this
statement will not have an effect on its financial position or
results of operations.
Safe Harbor Statement
Statements which are not historical facts, including
statements about the Company's confidence and strategies and its
expectations about new and existing products, technologies and
opportunities, market and industry segment growth, demand and
acceptance of new and existing products are forward looking
statements that involve risks and uncertainties. These include,
but are not limited to, product demand and market acceptance risks;
the impact of competitive products and pricing; the results of
financing efforts; the loss of any significant customers of any
business; the effect of the Company's accounting policies; the
effects of economic conditions and trade, legal, social, and
economic risks, such as import, licensing, and trade restrictions;
the results of the Company's business plan and the impact on the
Company of its relationship with its lenders.
ITEM 7. Financial Statements.
The financial statements listed below are included on pages-F-
1 through F-23 following the signature page.
Title of Document Page
Report of Independent Public Accountants F-1
Balance Sheets as of October 31, 1998 F-2 - F-3
and 1997
Consolidated Statements of Operations for the
Years Ended October 31, 1998 and 1997 F-4
Consolidated Statements of Shareholders' Equity
for the Years Ended October 31, 1998 and 1997 F-5
Consolidated Statements of Cash Flows for the
Years Ended October 31, 1998 and 1997 F-6 - F-7
Notes to Consolidated Financial Statements F-8 - F-23
ITEM 8. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.
None.
PART III
The information required by Items 9, 10, 11 and 12 of this
Part will be incorporated by reference to the Proxy Statement of
the Company to be filed with the Securities and Exchange Commission
on or before February 28, 1999.
PART IV
ITEM 13. Exhibits and Reports on Form 8-K.
(a) Exhibits.
3.1 The Company's Certificate of Incorporation, as amended,
dated December 30, 1994, incorporated by reference to
Exhibit 3.1 of the Company's Annual Report on Form 10-KSB
filed for its fiscal year ended October 31, 1995 (the
"1995 10-K").
3.2 The Company's By-Laws are incorporated by reference to
Exhibit 3.03 of Registration Statement No. 33-10278 NY
filed on Form S-18 ("Form S-18").
10.1 Form of Stock Option Plan is incorporated by reference to
Exhibit 10.02 to the Form S-18.
10.2 Amendment No. 1 dated November 1, 1998 to Employment
Agreement dated January 1, 1996 between the Company and
Mr. Lazaro Perez.
10.3 Security Agreement between Israel Discount Bank of New
York and JLM Couture, Inc. dated March 1998.
10.4 Amendment No. 2 dated May 19, 1998 to Employment
Agreement dated February 1, 1995 between the Company and
Mr. Joseph L. Murphy.
23.1 Consent of Arthur Andersen LLP dated February 11, 1999.
27 Financial Data Schedule
(b) Reports on Form 8-K.
During the last quarter of Fiscal 1998, the Company filed no
reports on Form 8-K.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
JLM COUTURE, INC.
Dated: February 16, 1999 By:/s/ Joseph L. Murphy
Joseph L. Murphy,
President
Pursuant to the requirement of the Securities Exchange Act of
1934, as amended, the Company has duly caused this report to be
signed on its behalf by the following persons on behalf of the
Company and in the capacities and on the dates indicated:
Name Capacity Date
/s/ Daniel M. Sullivan Chairman of the Board February 16, 1999
Daniel M. Sullivan of Directors
/s/ Joseph L. Murphy President and Director February 16, 1999
Joseph L. Murphy (principal executive and
financial officer)
/s/ Joseph E. O'Grady Director February 16, 1999
Joseph E. O'Grady
N:\RSKLAW\HJELM\10KSB-98.O31
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To JLM Couture, Inc.
We have audited the accompanying consolidated balance sheets of
JLM Couture, Inc. (a Delaware corporation) and subsidiary as of
October 31, 1998 and 1997, and the related consolidated statements of
operations, shareholders' equity and cash flows for the years then
ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position of
JLM Couture, Inc. and subsidiary as of October 31, 1998 and 1997, and
the results of their operations and their cash flows for the years
then ended in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
New York, New York
February 5, 1999
JLM COUTURE, INC. AND SUBSIDIARY
Consolidated Balance Sheets as of
October 31, 1998 and 1997
1998 1997
Current Assets:
Cash $ 107,713 $ 473,694
Accounts receivable, net of
allowance for doubtful
accounts, trade discounts
and sales returns of $315,000
at October 31, 1998 and $355,000
at October 31, 1997 2,516,511 2,542,782
Inventories 2,464,944 1,912,049
Prepaid expenses and other
current assets 706,240 364,991
Total current assets 5,795,408 5,293,516
Equipment and leasehold
improvements, net 275,555 286,439
Goodwill, net 267,608 281,693
Samples, net of accumulated
amortization of $63,746 at
October 31, 1998 and
$64,712 at October 31, 1997 357,596 233,102
Other assets 215,116 128,551
$6,911,283 $6,223,301
The accompanying notes to consolidated financial statements are an
integral part of these balance sheets.
JLM COUTURE, INC. AND SUBSIDIARY
Consolidated Balance Sheets as of
October 31, 1998 and 1997
(continued)
1998 1997
Current Liabilities:
Revolving line of credit $ 900,000 $ 792,707
Current portion of long-term debt - 19,428
Accounts payable 1,397,639 956,849
Accrued expenses and
other current liabilities 230,068 164,722
Income taxes payable 75,436 430,485
Total current liabilities 2,603,143 2,364,191
Long-term Debt 0 64,523
Other Liabilities 47,639 61,581
Commitments and Contingencies
(Note 12)
Shareholders' Equity:
Preferred stock, $.0001 par
value: Authorized 1,000,000
shares; Issued and outstanding
- none
Common stock, $.0002 par - -
value: Authorized 10,000,000
shares; Issued 1,873,348 at
October 31, 1998 and 1,828,973
at October 31, 1997;
Outstanding 1,853,181 at
October 31, 1998 and 1,827,306 at
October 31, 1997 374 365
Additional paid-in capital 2,769,657 2,678,774
Retained earnings 1,668,040 1,120,932
4,438,071 3,800,071
Less: Note receivable and
accrued interest (69,015) (62,075)
Treasury stock, at cost:
34,443 shares at October 31,
1998 and 1,667 shares at
October 31, 1997 (108,555) (4,990)
Total shareholders' equity 4,260,501 3,733,006
$6,911,283 $6,223,301
The accompanying notes to consolidated financial statements
are an integral part of these balance sheets.
JLM COUTURE, INC. AND SUBSIDIARY
Consolidated Statements of Operations
For the Years Ended October 31, 1998 and 1997
1998 1997
Net sales $15,704,889 $14,028,791
Cost of goods sold 9,476,902 7,971,512
Gross profit 6,227,987 6,057,279
Selling, general and
administrative expenses 5,220,197 4,398,252
Operating income 1,007,790 1,659,027
Interest expense, net of interest
income of $12,856 and $12,373 for
1998 and 1997, respectively (93,739) ( 136,979)
Income before provision for
income taxes 914,051 1,522,048
Provision for income taxes 366,943 732,125
Net income $ 547,108 $ 789,923
Net income per weighted
average number of common and
common equivalent share:
Basic $0.30 $0.45
Diluted $0.28 $0.41
Weighted average number of
common and common equivalent
shares outstanding:
Basic 1,833,827 1,760,444
Diluted 1,956,093 1,940,002
The accompanying notes to consolidated financial statements are an
integral part of these financial statements.
JLM COUTURE, INC. AND SUBSIDIARY
Statements of Shareholders' Equity
For the Years Ended October 31, 1998 and 1997
Notes Total
Additional Receivable Share-
Common Stock Paid-in Retained and Accrued Treasury holders'
Shares Amount Capital Earnings Interest Stock Equity
Balance October 31, 1,637,823 $328 $2,071,572 $331,009 $(58,750) $(4,990) $2,339,169
1996
Sale of Common Stock 95,000 19 330,960 - - - 330,979
Exercise of Common 59,750 11 79,796 - - - 79,807
Stock Options
Issuance of Shares 36,400 7 172,893 - - - 172,900
for Acquisition of
Business
Accrued Interest on - - - - (3,325) - (3,325)
Notes Receivable
Tax Benefit From - - 23,553 - - - 23,553
Exercise of Common
Stock Options
Net Income - - - 789,923 - - 789,923
Balance October 31, 1,828,973 365 2,678,774 1,120,932 (62,075) (4,990) 3,733,006
1997
Purchase of Treasury - - - - - (103,565) (103,565)
Stock
Compensation Expense - - 7,109 - - - 7,109
Related to the
Issuance of Common
Stock and Stock Options
Exercise of Common 44,375 9 55,547 - - - 55,556
Stock Options
Accrued Interest on - - - - (3,134) - (3,134)
Notes Receivable
Note Receivable Due From - - - - (3,806) - (3,806)
Employees Issued
Upon Exercise
of Options
Tax Benefit From - - 28,227 - - - 28,227
Exercise of Common
Stock Options
Net Income - - - 547,108 - - 547,108
Balance October 31, 1,873,348 $374 $2,769,657 $1,668,040 $ (69,015) $(108,555) $4,260,501
1998
The accompanying notes to consolidated financial statements are an
integral part of these financial statements.
JLM COUTURE, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
For the Years Ended October 31, 1998 and 1997
1998 1997
Cash flows from operating activities:
Net income $ 547,108 $ 789,923
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 82,283 57,416
Provision for doubtful accounts 235,570 286,261
Accrued interest income on note
receivable (3,134) (3,325)
Compensation expense on issuance
of stock options and common stock 7,109 -
Changes in assets and liabilities:
(Increase) in accounts receivable (209,299) (182,155)
(Increase) in inventories (552,895) (140,671)
(Increase) in prepaid expenses
and other current assets (341,249) (75,469)
(Increase) in samples and
other assets (211,057) (166,958)
Increase in accounts
payable 440,789 50,286
Increase (decrease) in accrued
expenses and other current
liabilities 65,346 (402,640)
(Decrease) increase in income taxes
payable (326,822) 190,092
(Decrease) in other long-term
liabilities (13,942) (10,356)
Net cash (used in) provided by
operating activities (280,193) 392,404
Cash flows from investing activities:
Purchase of property and equipment (57,315) (110,963)
Purchase of business, net of cash
acquired - (193,800)
Net cash used in investing activ-
ities $ (57,315) $(304,763)
JLM COUTURE, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
For the Years Ended October 31, 1998 and 1997
(Continued)
1998 1997
Cash flows from financing activities:
Net borrowings (reductions) of revolving
line of credit $ 107,293 $ (272,248)
Repayments of notes payable (83,951) (9,192)
Proceeds from sale of Common Stock - 330,979
Proceeds from stock option exercise - 79,807
Issuance of Common Stock in
connection with purchase of
business - 172,900
Purchase of Treasury Stock (51,815) -
Net cash (used in) provided by
financing activities (28,473) 302,246
Net (decrease) increase in cash (365,981) 389,887
Cash, beginning of year 473,694 83,807
Cash, end of year $107,713 $473,694
Supplemental Disclosures of Cash Flow Information
Cash paid during the year for:
Interest $ 96,045 $144,898
Income taxes 518,034 618,000
Non-cash transactions
Tax benefit from exercise of
stock options $ 28,227 $ 23,553
Common Stock issued in exchange
for note receivable from employees 3,806 -
The accompanying notes to consolidated financial statements are an
integral part of these fi nancial statements.
JLM COUTURE, INC. AND SUB SIDIARY
Notes to Consolidated Fin ancial Statements
For the Years Ended Octob er 31, 1998 and 1997
Note 1. The Company
JLM Couture, Inc. and subsidiary (the "Company") is
engaged in the design and manufacture of traditional,
high quality bridal wear and related accessories,
including bridesmaid gowns. Products are sold to
specialty bridal shops located throughout the continental
United States and England.
Note 2. Summary of Significant Accounting Policies
Basis of Presentation
The consolidated financial statements include the
accounts of JLM Couture, Inc. and its wholly-owned
subsidiary, Alvina Valenta Couture Collection, Inc. All
significant intercompany balances and transactions have
been eliminated.
Use of Estimates
The preparation of financial statements in conformity
with generally accepted accounting principles requires
management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts
of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Allowance for Doubtful Accounts
The allowance for doubtful accounts is determined based
upon estimates made by management and maintained at a
level considered adequate to provide for future
uncollectable amounts. Actual results could differ from
these estimates.
Inventories
Inventories are valued at the lower of cost (first-in,
first-out) or market and include material, labor and
overhead.
Prepaid Advertising and Marketing Costs
Prepaid advertising and marketing costs include costs of
advertisements that have not been published and printed
JLM COUTURE, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
For the Years Ended October 31, 1998 and 1997
(continued)
catalogues that have not been distributed to its
customers. Upon publishing of an advertisement, the
related cost is expensed by the Company. Catalogue costs
are capitalized and amortized to expense over the period
of distribution (one year).
Equipment and Leasehold Improvements
Depreciation of equipment is computed using the
straight-line method over the estimated useful lives of
the respective assets, which range from five to ten
years. Amortization of leasehold improvements and leased
equipment is computed using the straight-line method over
the lesser of the lease term or estimated useful lives of
the assets. Major additions and improvements are
capitalized, and repairs and maintenance are charged to
operations as incurred.
Debt Issuance Costs
The costs incurred to obtain financing are included in
other assets in the accompanying consolidated financial
statements and are being amortized over the life of the
related financing (one year).
Goodwill
Goodwill represents the excess of the purchase price over
the fair value of the net assets of the business acquired
and is being amortized on a straight-line basis over 20
years.
Samples
The Company produces samples of each dress line to be
used for displaying the Company's dresses at stores where
they are sold and at fashion shows. Samples are
amortized over their estimated useful lives (4 years).
Long-Lived Assets
During fiscal 1997, the Company adopted the provisions of
Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets,"
("SFAS 121"). SFAS 121 requires, among other things,
that an entity review its long-lived assets and certain
JLM COUTURE, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
For t he Years Ended October 31, 1998 and 1997
(cont inued)
related intangibles for impairment whenever changes in
circumstances indicate that the carrying amount of an
asset may not be fully recoverable. As a result of its
review, the Company does not believe that any such change
has occurred.
Revenue Recognition
Revenue is recognized upon shipment and acceptance by the
customer.
Income Taxes
Income taxes are accounted for in accordance with
Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" ("SFAS 109"). Under SFAS
109, an asset and liability approach is required. Such
approach results in the recognition of deferred tax
assets and liabilities for the expected future tax
consequences of temporary differences between the book
carrying amounts and the tax basis of assets and
liabilities.
Stock-Based Compensation
In October 1995, the Financial Accounting Standards Board
issued SFAS No. 123, "Accounting for Stock-Based
Compensation," ("SFAS 123"). This statement establishes
a fair value based method of accounting for an employee
stock option or similar equity instrument. However, SFAS
123 allows an entity to continue to measure compensation
cost for employee stock-based compensation plans using
the intrinsic value method of accounting prescribed by
APB Opinion No. 25, "Accounting for Stock Issued to
Employees," ("Opinion 25"). Entities electing to
continue to follow the accounting under Opinion 25 are
required to make pro forma disclosures of net income and
earnings per share as if the fair value based method of
accounting under SFAS 123 had been applied. The Company
has elected to continue to account for employee stock-
based compensation under Opinion 25 and provide the
required pro forma disclosures.
Earnings per Share
Statement of Financial Accounting Standards No. 128,
JLM COUTURE, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
For the Years Ended October 31, 1998 and 1997
(continued)
"Earnings Per Share," which the Company adopted effective
November 1, 1998, establishes new standards for computing
and presenting earnings per share ("EPS"). The new
standard requires the presentation of basic EPS and
diluted EPS. Basic EPS is calculated by dividing income
available to common shareholders by the weighted average
number of common shares outstanding during the period.
Diluted EPS is calculated by dividing income available
to common shareholders by the weighted average number of
common shares outstanding adjusted to reflect potentially
dilutive securities. Previously reported EPS amounts for
fiscal 1997 have been restated in the accompanying
consolidated financial statements to reflect the adoption
of this new standard.
A reconciliation of the weighted average number of shares
of common stock outstanding to the weighted average
number of shares of common stock outstanding assuming
dilution is as follows:
Years Ended October 31,
1998 1997
Basic weighted average 1,833,827 1,760,444
common shares outstanding
Effect of dilutive securities:
Stock options 121,898 178,223
Warrants 368 1,335
Diluted weighted average
common shares outstanding 1,956,093 1,940,002
Recent Accounting Pronouncements
In 1997, the Financial Accounting Standards Board issued
SFAS No. 130, "Reporting Comprehensive Income." This
standard establishes requirements for the reporting and
display of comprehensive income and its components in a
full set of general purpose financial statements.
Comprehensive income is the total of net income and all
other nonowner changes in equity. The objective of this
statement is to report a measure of all changes in equity
of a company that result from transactions and other
economic events in the period other than transactions
with owners. This standard is effective for the
Company's fiscal year beginning November 1, 1998. The
JLM COUTURE, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
For the Years Ended October 31, 1998 and 1997
(continued)
Company will make the necessary disclosures when
required. As this statement relates solely to disclosure
provisions, the Company believes that the adoption of
this standard will not have an effect on its financial
position or results of operations.
In June 1997, the Financial Accounting Standards Board
issued SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information," ("SFAS 131"). This
pronouncement establishes standards for companies to
report information about operating segments in financial
statements based on the approach that management utilizes
to organize the segments within the company for
management reporting and decision making. In addition,
SFAS No. 131 requires that companies report disclosures
about products and services, geographic areas and major
customers. SFAS No. 131 is effective for the Company's
fiscal year beginning November 1, 1998. Financial
statement disclosures for prior periods are required to
be restated. As this statement relates solely to
disclosure provisions, the Company believes that the
adoption of this statement will not have an effect on its
financial position or results of operations.
Reclassifications
Certain amounts in the fiscal 1997 financial statements
have been reclassified to conform with the fiscal 1998
presentation.
Note 3. Acquisition of Business
On May 1, 1997, the Company acquired Alvina Valenta
Couture Collection, Inc. for a combination of cash and
shares of the Company's common stock. The cash portion
of the purchase price totaled $25,000 and the stock
portion of the purchase price totaled $172,900 and
consisted of 36,400 shares of the Company's common stock
valued at $4.75 per share (market price of the Company's
common stock immediately preceding the acquisition date).
The acquisition was accounted for using the purchase
method of accounting, and, accordingly, the purchase
price has been allocated to the assets purchased and the
JLM COUTURE, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
For t he Years Ended October 31, 1998 and 1997
(cont inued)
liabilities assumed based upon the fair values at the
date of acquisition. The results of operations of the
acquired business prior to its acquisition is not
material to the Company's Consolidated Statements of
Operations. The table below summarizes the purchase
price allocation:
Current assets $98,000
Equipment and leasehold improvements 2,000
Current liabilities (59,000)
Debt (93,000)
The excess purchase price over net assets acquired of
approximately $282,000 includes $30,000 of transaction
costs and has been reflected as goodwill in the
accompanying consolidated balance sheets. The results
of the acquired business have been reflected in the
accompanying consolidated statement of operations since
May 1, 1997.
Note 4. Inventories
Inventories consisted of the following:
October 31,
1998 1997
Raw materials $1,629,899 $1,180,107
Work-in-process 128,124 145,670
Finished goods 706,921 586,272
$2,464,944 $1,912,049
JLM COUTURE, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
For the Years Ended October 31, 1998 and 1997
(continued)
Note 5. Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consisted of
the following:
October 31,
1998 1997
Prepaid advertising and $ 640,488 $ 108,755
marketing costs
Deferred income taxes 0 91,313
Deferred design costs 52,180 151,285
Other 13,572 13,638
$ 706,240 $ 364,991
Note 6. Equipment and Leasehold Improvements
Equipment and leasehold improvements are summarized as
follows:
October 31,
1998 1997
Furniture and equipment $ 488,036 $ 430,721
Leasehold improvements 185,922 185,922
Leased equipment 34,261 34,261
708,219 650,904
Less: Accumulated
depreciation and
amortization (432,664) (364,465)
Equipment and leasehold
improvements, net $ 275,555 $ 286,439
JLM COUTURE, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
For the Years Ended October 31, 1998 and 1997
(continued)
Note 7. Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities are
summarized as follows:
October 31,
1998 1997
Payroll and related
expenses $ 85,952 $ 89,791
Deferred income taxes 97,674 0
Other 46,442 74,931
$ 230,068 $ 164,722
Note 8. Revolving Line of Credit and Long-term Debt
Revolving Line of Credit
At October 31, 1998 and 1997, the Company had lines of
credit agreements available for up to $2,000,000 and
$1,700,000, respectively. At October 31, 1998 and 1997,
the Company had borrowed $900,000 and $792,702,
respectively, under the lines of credit agreements.
In March 1998, the Company entered into a line of credit
agreement with Israel Discount Bank of New York ("IDB").
The proceeds of the credit facility were initially used
to repay amounts outstanding under the Company's previous
line of credit facility. Credit availability is based on
eligible amounts of accounts receivable, as defined, up
to a maximum of $2,000,000. Based on eligible accounts
receivable at October 31, 1998, $850,286 was available
for future borrowing. The line of credit facility is
secured by the Company's cash, accounts receivable,
securities, deposits and general intangibles. Interest
is charged at the prime rate (8% at October 31, 1998).
The line of credit agreement will automatically renew
each year unless either party provides 60 days notice to
terminate the line of credit agreement. Interest expense
charged to operations related to the IDB line of credit
facility totaled $56,412 for the year ended October 31,
1998.
JLM COUTURE, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
For t he Years Ended October 31, 1998 and 1997
(cont inued)
Prior to March 1998, the Company had a line of credit
agreement with another bank which also provided for
credit availability based on eligible amounts of accounts
receivable, as defined, up to a maximum of $1,700,000.
This line of credit facility was secured by the Company's
accounts receivable, chattel paper, general intangibles
and the personal guarantees of the officers and directors
of the Company. Interest was charged at prime plus 1%.
Interest expense charged to operations related to this
line of credit facility totaled $38,351 and $144,898 for
the years ended October 31, 1998 and 1997, respectively.
Long-Term Debt
Long-term debt, which was assumed in connection with
the acquisition of Alvina (see Note 3), consists of the
following:
October 31,
1998 1997
Small Business Administration
note payable dated December 20,
1996, with interest payable at
8.25% per annum. Monthly
principal payments of $952.
The note payable was repaid in
full in fiscal 1998. 0 $71,951
Small Business Administration
note payable dated May 4, 1994,
with interest payable at 8.5%
per annum. Monthly principal
payments of $667. The note
payable was repaid in full in
fiscal 1998. 0 12,000
0 83,951
Current portion of long-term
debt 0 (19,428)
Long-term debt 0 $64,523
JLM COUTURE, IN C. AND SUBSIDIARY
Notes to Consol idated Financial Statements
For the Years E nded October 31, 1998 and 1997
(continued)
Note 9. Income Taxes
The provision for income taxes for the years ended
October 31, 1998 and 1997, consist of the following:
1998 1997
Current:
Federal $153,635 $619,410
State and local 51,682 187,086
$205,317 $806,496
Deferred:
Federal $125,081 $(55,479)
State and local 36,545 (18,892)
$161,626 $(74,371)
$366,943 $732,125
A reconciliation of the statutory Federal income tax rate
to the effective income tax rate for the years ended
October 31, 1998 and 1997, is as follows:
1998 1997
Statutory Federal income tax at
applicable rates 34% 34%
State and local taxes, net of
federal tax benefit 6% 7%
Nondeductible expenses 2% 2%
Adjustment to opening valuation
allowance - 2%
Other (2%) 3%
40% 48%
JLM COUTURE, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
For the Years Ended October 31, 1998 and 1997
(continued)
The components of deferred income tax assets and liabilities are as
follows:
October 31,
1998 1997
Deferred Tax Assets:
Allowance for doubtful accounts $135,450 $159,530
Other liabilities and accruals 104,332 93,235
Total deferred tax assets 239,782 252,765
Deferred Tax Liabilities:
Prepaid advertising and
marketing expenses (275,410) (46,765)
Capitalized design costs (22,708) (65,053)
Total deferred tax liabilities (298,118) (111,818)
Net deferred tax (liability) asset ($58,336) $140,947
Deferred income taxes are provided on temporary
differences between financial statement and taxable
income. Realization of deferred income taxes is
dependent on generating sufficient taxable income in the
future. Although realization is not assured, management
believes it is more likely than not that its deferred tax
assets will be realized.
Note 10. Shareholders' Equity
During fiscal 1998, the Company repurchased 18,500 shares
of the Company's Common Stock in the open market at a
cost of $51,815 ($2.80 per share).
In November 1996, the Company, through a private
placement, issued 75,000 unregistered shares of Common
Stock, par value $.0002 per share for $328,125 to outside
parties. In addition, the Company granted to the
investors in the private placement,
JLM COUTURE, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
For the Years Ended October 31, 1998 and 1997
(continued)
warrants to purchase 7,500 shares of the Company's Common
Stock exercisable at $4.37 per share which expire
December 31, 2001 and warrants to purchase 15,000 shares
of the Company's Common Stock exercisable at $6.62 per
share which expire December 31, 2001. The investors were
granted registration rights whereby the Company agreed to
use its best efforts to include the shares in any
registration statement filed by the Company to publicly
offer the Company's securities.
Stock Option Plans
On November 17, 1986, the Company adopted a Stock Option
Plan, as amended (the "1986 Plan"). The 1986 Plan
provided for options and limited stock appreciation
rights ("Limited SARs") to be granted in tandem to
employees for a total of up to 100,000 shares of Common
Stock. Limited SARs may only be granted in conjunction
with related options. The exercise price of options
granted may not be less than the fair market value of the
shares on the date of the grant (110% of such fair market
value for a holder of more than 10% of the Company's
voting securities), nor may options be exercised more
than ten years from date of grant (5 years for a holder
of more than 10% of the Company's voting securities).
The 1986 Plan terminated in 1996, but the options
outstanding are valid pursuant to its terms.
On August 26, 1996, the Company adopted a Stock Option
Plan (the "1996 Plan"). The 1996 Plan provides for the
issuance of incentive and nonstatutory stock options to
employees, consultants, advisors and/or directors for a
total of up to 100,000 shares of Common Stock. In
September 1998, the 1996 Plan was amended to increase the
number of shares available for grant to 250,000 shares.
The exercise price of options granted may not be less
than the fair market value of the shares on the date of
grant (110% of such fair market value for a holder of
more than 10% of the Company's common stock). The 1996
Plan is scheduled to terminate on August 26, 2006.
JLM COUTURE, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
For the Years Ended October 31, 1998 and 1997
(continued)
The following table summarizes data relating to
non-incentive plan options and incentive plan options:
Incentive Non-Incentive
1998 1997 1998 1997
Options outstanding
at the beginning of
the year 40,000 84,750 259,666 149,666
Options granted 110,000 0 230,000 125,000
Options expired 0 0 (8,333) 0
Options exercised (4,375) (44,750) (38,333) (15,000)
Options outstanding
at the end of the
year 145,625 40,000 443,000 259,666
Options exercisable
at the end of the
year 72,292 40,000 273,000 259,666
The exercise prices of the options outstanding at October
31, 1998 and 1997 range from $.87 to $4.625. At October
31, 1998, there are 150,000 shares available for future
grant under the incentive stock option plan.
During fiscal 1998, an employee exercised stock options
to acquire 38,333 shares of the Company's common stock at
an exercise price of $1.35 per share, The employee
tendered 14,276 shares of common stock to the Company in
exchange for the option exercised, the shares tendered by
the employee had been outstanding for many years. The
tendered shares have been included in treasury stock in
the accompanying financial statements.
As a result of individuals exercising their non-incentive
stock options in fiscal 1998 and fiscal 1997, the Company
realized an income tax benefit of $28,227 and $23,553,
respectively. The benefits were utilized to reduce
current income taxes payable and the benefits were
recorded in additional paid-in capital in the
accompanying, consolidated balance sheets as of October
31, 1998 and 1997, respectively.
Effective November 1, 1996, the Company adopted the
provisions of SFAS 123, "Accounting for Stock
JLM COUTURE, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
For the Years Ended October 31, 1998 and 1997
(continued)
Compensation." As permitted by the statement, the
Company has elected to continue to account for stock-
based compensation using the intrinsic value method under
APB Opinion No. 25. Accordingly, no compensation expense
has been recognized for stock-based compensation given to
employees, since the options granted were at prices that
equaled or exceeded their fair market value at the date
of grant. If compensation expense for the Company's
stock options issued in fiscal 1998 and fiscal 1997 had
been determined based on the fair value method of
accounting, the Company's net income and earnings per
share would have been reduced to the pro forma amounts
indicated below:
For The Years Ended
October 31,
1998 1997
Net income --
As reported $547,108 $789,923
Pro forma $333,670 $640,942
Basic earnings
per share --
As reported $0.30 $0.45
Pro forma $0.18 $0.36
Diluted earnings
per share --
As reported $0.28 $0.41
Pro forma $0.17 $0.33
The fair value of issued stock options was estimated at
the date of grant using the Black-Scholes option pricing
model incorporating the following assumptions for options
granted:
JLM COUTURE, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
For the Years Ended October 31, 1998 and 1997
(continued)
For The Years Ended
October 31,
1998 1997
Weighted average
market price at
date of grant $2.64 $4.60
Risk free interest
rate 5.6% 6.5%
Volatility factor 81% 95%
Expected life of
the stock options 3.6 yrs. 3 yrs.
Note 11. Related Party Transactions
Notes Receivable - Sale of Stock
On October 15, 1990, the Company's former president
exercised a stock option to purchase 36,458 shares of the
Company's common stock at a purchase price of $.96 per
share. A $35,000 note was received for the purchase.
The note together with interest accruing at a prime rate
plus one percent per annum, is due on demand. The
outstanding principal and interest balance at October 31,
1998 and 1997 was $65,209 and $62,075, respectively.
Periodically, compensation expense has been recorded for
the difference between the original price and the current
fair value of the stock, which as of yet has not been
paid for by the executive.
Note 12. Commitments and Contingencies
Lease Commitments
The Company leases office, production, and retail
facilities under leases expiring through 2003. Minimum
annual rentals under such leases are as follows:
Year Ending
October 31,
1999 $213,028
2000 214,426
2001 203,840
2002 136,834
2003 28,500
$796,628
JLM COUTURE, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
For the Years Ended October 31, 1998 and 1997
(continued)
Rent expense charged to operations for the foregoing
lease and short-term rentals for the years ended October
31, 1998 and 1997, amounted to $290,402 and $269,874,
respectively.
Employment Agreements
The Company has employment agreements with three of its
key employees terminating from June 2001 to December
2005. Total compensation expense under the terms of
these agreements for the years ended October 31, 1998 and
1997 was $535,630 and $428,679, respectively. Future
minimum commitments under these employment agreements are
as follows:
Year Ending October 31,
1999 $ 398,000
2000 398,000
2001 325,000
2002 155,000
2003 155,000
Thereafter 205,000
$1,636,000
Note 13. Subsequent Event
On December 22, 1998, an executive of the Company
purchased on the open market 200,000 shares of the
Company's Common Stock at a price of $2.25 per share.
The purchase was financed by the executive executing a
ten year promissory note due to the Company in the amount
of $450,000. The promissory note bears interest at 5%
per annum and calls for annual principal payments of
$45,000 with accrued interest.
EXHIBIT INDEX
10.2 Amendment No. 1 dated November 1, 1998 to Employment
Agreement dated January 1, 1996 between the Company and
Mr. Lazaro Perez.
10.3 Security Agreement between Israel Discount Bank of New
York and JLM Couture, Inc. dated March 1998.
10.4 Amendment No. 2 dated May 19, 1998 to Employment
Agreement dated February 1, 1995 between the Company and
Mr. Joseph L. Murphy.
23.1 Consent of Arthur Andersen LLP dated February 11, 1999.
27 Financial Data Schedule
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