FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2003
--------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission File Number 1-5863
------
JACLYN, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 22-1432053
------------------------------- ---------------------------------
(State or other jurisdiction of (I.R.S. Employer Incorporation or
organization) Identification No.)
635 59th Street, West New York, New Jersey 07093
------------------------------------------------
(Address of principal executive offices)
(Zip Code)
(201) 868-9400
----------------------------------------------------
(Registrant's telephone number, including area code)
NONE
----------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all the reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No: [X]
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date.
Class Outstanding at May 1, 2003
- ------------------------------------ --------------------------
Common Stock, par value $1 per share 2,463,880
JACLYN, INC. AND SUBSIDIARIES
INDEX
Page No.
--------
Part I. Financial Information
Item 1
Condensed Consolidated Balance Sheets -
March 31, 2003 (unaudited) and June 30, 2002
(derived from audited financial statements) 3
Condensed Consolidated Statements of Operations -
Three and Nine Months Ended March 31, 2003 and
2002 (unaudited) 4
Condensed Consolidated Statements of Cash Flows -
Nine Months Ended March 31, 2003 and 2002 (unaudited) 5
Notes to Condensed Consolidated Unaudited Financial Statements 6
Item 2
Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
Item 3
Quantitative and Qualitative Disclosures about Market Risk 20
Item 4
Controls and Procedures 20
Part II. Other Information:
Item 6
Exhibits and reports on Form 8-K 21
Signatures 22
Certifications 23
2
JACLYN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands)
March 31, June 30,
2003 2002
(Unaudited) (See below)
----------- -----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 186 $ 95
Accounts receivable, net 12,075 14,667
Inventory 4,993 11,395
Prepaid expenses and other current assets 2,769 2,594
----------- -----------
TOTAL CURRENT ASSETS 20,023 28,751
----------- -----------
PROPERTY, PLANT AND EQUIPMENT, net 1,174 1,211
GOODWILL 3,338 3,342
OTHER ASSETS 1,976 2,114
----------- -----------
TOTAL ASSETS $ 26,511 $ 35,418
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable - bank $ 375 $ 9,095
Accounts payable 3,158 7,081
Other current liabilities 2,926 2,828
----------- -----------
TOTAL CURRENT LIABILITIES 6,459 19,004
----------- -----------
MORTGAGE PAYABLE 3,057 --
----------- -----------
OTHER LONG TERM LIABILITIES 529 590
----------- -----------
COMMITMENTS
STOCKHOLDERS' EQUITY:
Common stock 3,369 3,369
Additional paid-in capital 12,117 12,117
Retained earnings 8,467 7,575
----------- -----------
23,953 23,061
Less: Common shares in treasury at cost 7,487 7,237
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 16,466 15,824
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 26,511 $ 35,418
=========== ===========
The June 30, 2002 condensed consolidated balance sheet is derived from audited
financial statements. See notes to the condensed consolidated financial
statements.
3
JACLYN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In Thousands, Except Share Amounts)
Three Months Ended Nine Months Ended
March 31, March 31,
-------------------------- -------------------------
2003 2002 2003 2002
----------- ----------- ----------- -----------
Net sales $ 20,816 $ 22,020 $ 86,450 $ 55,898
Cost of goods sold * 15,416 17,188 66,255 42,795
----------- ----------- ----------- -----------
Gross profit 5,400 4,832 20,195 13,103
----------- ----------- ----------- -----------
Shipping, selling and administrative expenses * 5,617 5,577 18,333 13,818
Interest expense 117 45 474 176
Interest income 1 1 5 3
----------- ----------- ----------- -----------
5,733 5,621 18,802 13,991
----------- ----------- ----------- -----------
(Loss) earnings before income taxes (333) (789) 1,393 (888)
(Benefit) provision for income taxes (120) (284) 501 (320)
----------- ----------- ----------- -----------
Net (loss) earnings $ (213) $ (505) $ 892 $ (568)
=========== =========== =========== ===========
Net (loss) earnings per share - basic $ (.09) $ (.20) $ .35 $ (.22)
=========== =========== =========== ===========
Weighted average number of shares outstanding -
basic 2,496,000 2,561,000 2,540,000 2,561,000
=========== =========== =========== ===========
Net (loss) earnings per share - diluted $ (.09) $ (.20) $ .34 $ (.22)
=========== =========== =========== ===========
Weighted average number of shares outstanding -
diluted 2,496,000 2,561,000 2,601,000 2,561,000
=========== =========== =========== ===========
* Note: See Note 8 to Notes to Condensed Consolidated Financial Statements for
additional details.
See notes to the condensed consolidated financial statements.
4
JACLYN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In Thousands)
Nine Months Ended
March 31,
--------------------------
2003 2002
----------- -----------
Cash Flows From Operating Activities:
Net earnings (loss) $ 892 $ (568)
Adjustments to reconcile net earnings (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 286 660
Changes in assets and liabilities:
Decrease (increase) in accounts receivable, net 2,592 (5,258)
Decrease in inventory 6,402 3,924
Increase in prepaid expenses and other assets (33) (789)
Decrease in accounts payable and other current liabilities (2,886) (580)
----------- -----------
Net cash provided by (used in) operating activities 7,253 (2,611)
----------- -----------
Cash Flows From Investing Activities:
Purchase of property and equipment (249) (60)
Acquisition Cost -- (2,153)
----------- -----------
Net cash used in investing activities (249) (2,213)
----------- -----------
Cash Flows From Financing Activities:
Notes payable - bank (8,720) 5,020
Payment of acquisition notes (1,000) (150)
Repurchase of common stock (250) --
Increase in mortgage payable 3,057 --
----------- -----------
Net cash (used in) provided by financing activities (6,913) 4,870
----------- -----------
Net Increase in Cash and Cash Equivalents 91 46
Cash and Cash Equivalents, beginning of period 95 66
----------- -----------
Cash and Cash Equivalents, end of period $ 186 $ 112
----------- -----------
Supplemental Information:
Interest paid $ 498 $ 194
----------- -----------
Taxes paid $ 88 $ 320
----------- -----------
See notes to the condensed consolidated financial statements.
5
JACLYN, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
1. Basis of Presentation:
The accompanying unaudited condensed consolidated balance sheet as of
March 31, 2003, the condensed consolidated statements of operations for
the three and nine month periods ended March 31, 2003 and 2002, and the
condensed consolidated statements of cash flows for the nine-month
periods ended March 31, 2003 and 2002, have been prepared in accordance
with accounting principles generally accepted in the United States of
America for interim financial information. Accordingly, they do not
include all of the information and footnotes required by accounting
principles generally accepted in the United States of America for
complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. It is suggested
that these condensed consolidated financial statements be read in
conjunction with the audited financial statements and notes thereto
included in the Company's 2002 Annual Report to Stockholders on Form
10-K. The results of operations for the period ended March 31, 2003 are
not necessarily indicative of operating results for the full fiscal year.
2. Recently Issued Accounting Standards:
In June 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 146, "Accounting
for Costs Associated with Exit or Disposal Activities", replacing
Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability Recognition
for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)." SFAS No.
146 requires that a liability for a cost associated with an exit or
disposal activity be recognized when the liability is incurred instead of
at the date an entity commits to an exit plan. This statement also
established that fair value is the objective for the initial measurement
of the liability. SFAS No. 146 is effective for exit or disposal
activities that are initiated after December 31, 2002. The Company has
adopted this statement and it did not have a material impact on its
financial position or the results of operations.
In November 2002, the Financial Accounting Standards Board (FASB) issued
Interpretation 45, "Guarantor's Accounting and Disclosure Requirements
for Guarantees, Including Indirect Guarantees of Indebtedness of Others."
The interpretation elaborates on the existing disclosure requirements for
most guarantees, including loan guarantees such as standby letters of
credit. It also clarifies that at the time a company issues a guarantee,
the company must recognize an initial liability for the fair value, or
market value, of the obligations it assumes under the guarantee and must
disclose that information in its interim and annual financial statements.
The provisions related to recognizing a liability at inception of the
6
guarantee for the fair value of the guarantor's obligations does not
apply to product warranties or to guarantees accounted for as
derivatives. We have evaluated the accounting provisions of the
interpretations and there was no material impact on our financial
condition, results of operations or cash flows for the period ending
March 31, 2003.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation" ("SFAS No. 148"). SFAS No. 148 provides
alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation.
In addition, SFAS No. 148 amends the disclosure requirements of SFAS No.
123 "Accounting for Stock-Based Compensation" to require more prominent
and more frequent disclosures in financial statements about the effects
of stock-based compensation. SFAS 148 also amends the disclosure
provisions of SFAS 123. We have adopted the disclosure provisions of SFAS
148 as of December 31, 2002 (See Note 3).
3. Stock-Based Compensation
The Company's Board of Directors and stockholders adopted a Stock Option
Plan pursuant to which all full-time employees and non-employee Directors
of the Company and its subsidiaries and affiliates are eligible to
receive stock options. Options granted under the Stock Option Plan
generally have a ten year life and typically vest immediately. As of
March 31, 2003, the aggregate number of shares of Common Stock for which
stock options may be granted under the Stock Option Plan is 427,161. As
of March 31, 2003, 611,161 shares of Common Stock were available for the
grant of options under the Stock Option Plan.
Pursuant to Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," the Company accounts for stock-based employee
compensation arrangements using the intrinsic value method. Accordingly,
no compensation expense has been recorded in the consolidated financial
statements with respect to option grants. The Company has adopted the
disclosure provisions of Financial Accounting Standards Board Statement
No. 123, "Accounting for Stock Based Compensation," as amended by
Financial Accounting Standards Board Statement No. 148.
Had the Company elected to recognize compensation expense for stock-based
compensation using the fair value method net earnings (loss) basic and
diluted net earnings (loss) per share would have been as follows:
7
Three Months Nine Months
Ended Ended
-------------------------- -------------------------
2003 2002 2003 2002
----------- ----------- ----------- -----------
Net (loss) earnings $ (213,000) $ (505,000) $ 892,000 $ (568,000)
Fair value method compensation expense
attributable to stock-based compensation, net of taxes 0 0 85,000 250,000
Pro forma net (loss) earnings (213,000) (505,000) 807,000 (818,000)
Basic (loss) earnings per common share (.09) (.20) .35 (.22)
Pro forma basic (loss) earnings per common share (.09) (.19) .32 (.32)
Diluted (loss) earnings per common share (.09) (.20) .34 (.22)
Pro forma diluted (loss) earnings per common share (.09) (.19) .31 (.32)
The weighted average fair value of the Company's stock options was
calculated using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for grants in 2003: no dividend yield;
expected volatility of 35% risk-free interest rate of 3.5% and expected life
of ten years. The weighted average fair value of options granted during the
nine months ended March 31, 2003 was $.86.
8
4. Earnings per Share:
The Company's calculation of Basic and Diluted Net Earnings Per Common
Share follows
Three Months Ended Nine Months Ended
March 31, March 31,
-------------------------- -------------------------
2003 2002 2003 2002
----------- ----------- ----------- -----------
Basic:
Net (Loss) Earnings $ (213,000) $ (505,000) $ 892,000 $ (568,000)
----------- ----------- ----------- -----------
Basic Weighted Average Shares Outstanding 2,496,000 2,561,000 2,540,000 2,561,000
----------- ----------- ----------- -----------
Basic Net (Loss) Earnings $ (.09) $ (.20) $ .35 $ (.22)
----------- ----------- ----------- -----------
Diluted:
Net (Loss) Earnings $ (213,000) $ (505,000) $ 892,000 $ (568,000)
Basic Weighted Average Shares Outstanding 2,496,000 2,561,000 2,540,000 2,561,000
----------- ----------- ----------- -----------
Add: Dilutive Options a b 61,000 b
----------- ----------- ----------- -----------
Diluted Weighted Average Shares Outstanding 2,496,000 2,561,000 2,601,000 2,561,000
----------- ----------- ----------- -----------
Diluted Net (Loss) Earnings $ (.09) $ (.20) $ .34 $ (.22)
----------- ----------- ----------- -----------
(a) Options to purchase 178,161 common shares at prices ranging from $2.875 to
$12.875 per share were outstanding at March 31, 2003, but were not included
in the computation of dilutive computation because the loss in the period
causes the options to be anti-dilutive. Additionally, options to acquire
249,000 common shares were not included because the average market price
was below the option price.
(b) Options to purchase 427,161 common shares at prices ranging from $2.25 to
$12.875 per share were outstanding at March 31, 2002, but were not included
in the computation of dilutive loss per share because to do so would have
been anti-dilutive as the average market price was below the option price.
9
5. Inventories:
Inventories consist of the following components:
March 31, June 30,
2003 2003
----------- -----------
Raw materials $ 862,000 $ 4,816,000
Work in process 297,000 1,482,000
Finished goods 3,834,000 5,097,000
----------- -----------
$ 4,993,000 $11,395,000
----------- -----------
6. Stock Repurchases
On December 5, 2002 the Company announced that the Board of Directors
authorized the repurchase by the Company of up to 350,000 shares of the
Company's Common Stock. Purchases may be made from time to time in the
open market and through privately negotiated transactions, subject to
general market and other conditions. The Company is financing these
repurchases from its own funds and/or from its new bank credit facility.
As of March 31, 2003 the Company repurchased 85,200 shares of its Common
Stock at a cost of approximately $250,000.
7. Financing Agreements:
On December 23, 2002 the Company entered into a line of credit agreement
with a new bank. The new credit facility, which expires December 1, 2004,
provides for short-term loans and the issuance of letters of credit in an
aggregate amount not exceeding $32,000,000. Based on a borrowing formula,
the Company may borrow up to $22,000,000 in short-term loans and up to
$32,000,000 including letters of credit. Substantially all of the
Company's assets are pledged to the bank as collateral (except for the
West New York, New Jersey facility, which has been separately mortgaged
as noted below). The line of credit requires that the Company maintain a
minimum tangible net worth of $11,000,000 through June 30, 2003 and
$12,000,000 through June 30, 2004. As of March 31, 2003, borrowing on the
short-term line of credit was $375,000, and the Company had $9,916,000 of
additional availability (based on the borrowing formula) under its credit
facility. At March 31, 2003, the Company was contingently obligated on
open letters of credit for approximately $8,517,000. Borrowing during the
year was at the bank's prime rate or below, at the option of the Company.
The bank's prime rate at March 31, 2003 was 4.25%.
On August 14, 2002, the Company consummated a mortgage loan in the amount
of $3,250,000. The financing is secured by a mortgage of the Company's
West New York, New Jersey headquarters and warehouse facility. The
$3,250,000 loan bears interest at a fixed rate of 7% per annum. The
financing has a fifteen-year term, but is callable by the bank lender at
any time after September 1, 2007 and may be prepaid by the Company, along
with a prepayment fee, from time to time during the term of the
financing. The proceeds of the financing are being used for general
working capital purposes.
10
8. Acquisition:
On January 10, 2002, the Company acquired all of the issued and
outstanding stock of Topsville, Inc., a New York City based manufacturer
and distributor of private label infants' and children's clothing. The
tangible and intangible assets acquired include, among other things,
finished goods, work-in-process and raw material inventory, customer
orders, trade names, office leases in New York City and Hong Kong, an
office/warehouse facility in Florida, and office equipment, furniture and
fixtures. The aggregate purchase price for the acquisition was
$3,246,000, of which $1,746,000 was paid at the closing of the
transaction, with the remainder to be paid during the fifteen-month
period after closing. The Company used its line of bank credit to pay for
a portion of the purchase price at closing. At March 31, 2003, $100,000
was unpaid under the terms of the purchase agreement.
For the three months and nine months ended March 31, 2002, the Company
recorded an amortization charge of $809,000 ($389,000 in cost of goods
sold and $420,000 in selling and administrative expenses). These charges
primarily represent the allocation of a portion of the purchase price to
fair value the inventory and open orders (backlog) purchased from
Topsville, Inc., which were shipped from the date of acquisition to March
31, 2002. The Company incurred additional amortization of $480,000 the
fourth quarter of fiscal year 2002, with a final amount, totaling
$79,000, charged to earnings in fiscal 2003's first quarter ended
September 30, 2002.
The changes in the carrying amount of goodwill for the nine months ended
March 31, 2003 is as follows:
Nine Months Ended
March 31, 2003
--------------
Balance as at June 30, 2002 $ 3,342,000
Goodwill adjusted during the period (4,000)
--------------
Balance as at March 31, 2003 $ 3,338,000
--------------
Assuming Topsville was acquired on July 1, 2000, the pro forma results
for the Company would have been as follows:
11
Three Months Ended Nine Months Ended
March 31, March 31,
---------------------------- ---------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
Net sales $ 20,816,000 $ 22,020,000 $ 86,450,000 $ 73,754,000
Net (loss) earnings $ (213,000) $ 13,000 $ 892,000 $ 598,000
Net (loss) earnings per share - diluted $ (.09) $ .00 $ .34 $ .23
12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires the appropriate application of certain accounting
policies, many of which require estimates and assumptions about future events
and their impact on amounts reported in the financial statements and related
notes. Since future events and their impact cannot be determined with certainty,
the actual results will inevitably differ from our estimates. Such differences
could be material to the consolidated financial statements.
Management believes that its application of accounting policies, and the
estimates inherently required by the policies are reasonable. These accounting
policies and estimates are periodically reevaluated, and adjustments are made
when facts and circumstances dictate a change. Historically, management has
found the application of accounting policies to be appropriate, and actual
results generally have not differed materially from those determined using
necessary estimates.
The Company's accounting policies are more fully described in Note 1 to the
Consolidated Financial Statements, included in the June 30, 2002 Annual Report
on Form 10-K filed with the Securities and Exchange Commission. Management has
identified certain critical accounting policies that are described below.
Merchandise inventory
The Company's merchandise inventory is carried at the lower of cost on a
first-in, first-out basis, or market. The Company writes down its inventory for
estimated obsolescence or unmarketable inventory equal to the difference between
the cost of inventory and the estimated market value based upon assumptions
about future demand and market conditions. If actual market conditions are less
favorable than those projected by management, additional inventory write-downs
may be required.
Allowance for doubtful accounts
The Company maintains allowances for doubtful accounts for estimated losses
resulting from the inability of its customers to make required payments. If the
financial condition of its customers were to deteriorate, resulting in an
impairment of their ability to make payments, additional allowances may be
required.
Market development accruals
The Company estimates reductions to revenue for customer programs and incentive
offerings including special pricing agreements, price protection, promotions and
other volume-based incentives. If market conditions were to decline, the Company
may take actions to increase customer incentive offerings possibly resulting in
an incremental reduction of revenue at the time the incentive is offered.
13
Long-lived assets, excluding goodwill
In evaluating the fair value and future benefits of long-lived assets, the
Company performs an analysis of the anticipated undiscounted future net cash
flows of the related long-lived assets. If the carrying value of the related
asset exceeds the undiscounted cash flows, the Company reduces the carrying
value to its fair value.
Goodwill
Goodwill is annually reviewed for impairment and whenever events and changes in
circumstances suggest that the carrying amount may not be recoverable from its
estimated future cash flows. In making this assessment, management relies on a
number of factors including operating results, business plans, economic
projections, anticipated future cash flows and marketplace data. A change in
these underlying assumptions may cause a change in the results of the tests and,
as such, could cause fair value to be less than the carrying value. In such
event, the Company would then be required to record a charge, which would impact
earnings. The Company will continue to review the carrying value of goodwill for
impairment on an annual basis or more frequently if circumstances indicate
impairment may have occurred.
Deferred taxes
In assessing the need for a deferred tax valuation allowance, we consider future
taxable income and ongoing prudent and feasible tax planning strategies. Since
we were able to determine that we would be able to realize our deferred tax
assets in the future, in excess of its recorded amount, an adjustment to the
deferred tax asset was not deemed necessary. Likewise, should we determine that
we would not be able to realize all or part of our net deferred tax asset in the
future, an adjustment to the deferred tax asset would be charged to income in
the period such determination was made.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents increased $91,000 during the nine-month
period ended March 31, 2003 to $186,000 from $95,000 at June 30, 2002.
Net cash provided by operating activities totaled $7,253,000 resulting primarily
from a decrease in inventory totaling $6,402,000 and a decrease in accounts
receivable of $2,592,000, partly offset by a reduction of accounts payable and
other current liabilities totaling $2,886,000. In addition, funds used in
financing activities totaling $6,913,000 were, for the most part, the result of
an $8,720,000 repayment under the Company's credit facility, and payments of
acquisition notes totaling $1,000,000, offset by $3,057,000 of mortgage loan
proceeds. Net cash used in investing activities of $249,000 was for the purchase
of property and equipment.
The Company previously announced that the Board of Directors authorized the
repurchase by the Company of up to 350,000 shares of the Company's Common Stock.
Purchases may be made from time to time in the open market and through privately
negotiated transactions, subject to general market and other conditions. The
Company intends to finance these repurchases from its own funds from operations
and/or from its bank credit facility. As of March 31, 2003, the Company
purchased 85,200 shares of its Common Stock at a cost of approximately $250,000.
14
On December 23, 2002, the Company completed an agreement with a new bank for an
increased line of credit, which extends through December 1, 2004. The new credit
facility provides the Company with up to $22,000,000 in short-term loans and up
to $32,000,000 including letters of credit, based on a borrowing formula.
Borrowing was at the bank's prime rate or below at the option of the Company, as
provided for under the terms of the loan agreement. Substantially all of the
Company's assets are pledged to the bank as collateral (except for the West New
York, New Jersey facility, which has been separately mortgaged, as noted below).
The line of credit requires that the Company maintain a minimum tangible net
worth of $11,000,000 through June 30, 2003 and $12,000,000 through June 30,
2004. Borrowing on the line of credit was $375,000 as of March 31, 2003, and the
Company had $9,916,000 of additional availability (based on the borrowing
formula) under its credit facility. At March 31, 2003, the Company was
contingently obligated on open letters of credit for approximately $8,517,000.
The bank's prime rate at March 31, 2003 was 4.25%.
On August 14, 2002, the Company consummated a mortgage loan on its West New
York, New Jersey headquarters facility in the principal amount of $3,250,000.
The Company believes that funds provided by operations, existing working capital
and the Company's new bank line of credit should be sufficient to meet
foreseeable working capital needs.
There are no plans for significant capital expenditures in the near term.
Contractual Obligations and Commercial Commitments
To facilitate an understanding of our contractual obligations and commercial
commitments, the following data is provided as of March 31, 2003:
* * * * Payments Due by Period * * * *
Contractual Obligations Total 1 Year 2-3 Years 4-5 Years After 5 Years
Notes Payable - Bank $ 375,000 $ 375,000 $ -- $ -- $ --
Acquisition Notes 100,000 100,000 -- -- --
Mortgage Payable 3,187,000 130,000 294,000 336,000 2,427,000
Royalties 873,000 348,000 325,000 200,000 --
Operating Leases 3,066,000 851,000 1,248,000 747,000 220,000
-----------------------------------------------------------------------------
Total Contractual Obligations $ 7,601,000 $ 1,804,000 $ 1,867,000 $ 1,283,000 $ 2,647,000
-----------------------------------------------------------------------------
Total Within 1 Year 2-3 Years 4-5 Years After 5 Years
Letters of Credit $ 8,517,000 $ 8,517,000 $ -- $ -- $ --
-----------------------------------------------------------------------------
Total Commercial Commitments $ 8,517,000 $ 8,517,000 $ -- $ -- $ --
-----------------------------------------------------------------------------
15
RESULTS OF OPERATIONS
Net sales were $20,816,000 and $86,450,000 during the three and nine-month
periods ended March 31, 2003 compared to $22,020,000 and $55,898,000 in the
three and nine-month periods ended March 31, 2002, respectively.
Net sales for the Apparel category were $16,469,000 for the quarter ended March
31, 2003, an increase in net sales of $1,250,000, or 8.2 %, compared to the same
quarter in fiscal 2002. The sales increase for this category was primarily due
to increased customer orders from existing customers of the women's sleepwear
business. For the nine-month period ended March 31, 2003 net sales for the
Apparel category were $67,069,000, or 97.9% better than the prior fiscal year's
same period totaling $33,894,000, mostly attributable to the acquisition of the
Topsville children's apparel business in January 2002.
Net sales for the Handbags category were $4,347,000 for the three-month period
ended March 31, 2003, a decrease of $2,454,000, or about 36.1% below the same
three-month period in the prior year, primarily related to the non-renewal of
the Anne Klein license and lower sales for the Company's premium and children's
handbag businesses. Fiscal 2003's nine-month period ended March 31, 2003 had net
sales of $19,381,000, or 11.9% less than the prior comparable nine-month fiscal
period, which totaled $22,004,000. For the nine-month period, the drop in net
sales resulted from the non-renewal of the Anne Klein license, partly offset by
sales increases in both the children's and premium bag businesses.
Gross margins were 25.9% and 23.4% in the three-month and nine-month periods
ended March 31, 2003 compared to 21.9% and 23.4% in the comparable periods ended
March 31, 2002, respectively. However, the three and nine-month periods ended
March 31, 2002 include a $389,000 amortization expense related to the portion of
purchase costs allocated to inventory for the Topsville children's apparel
acquisition in January 2002 and had the effect of decreasing last year's gross
margins by 1.8% and .7%, respectively, as discussed below.
Gross margin for the Apparel category in the three-month period ended March 31,
2003, improved by 6.2% to 26.5% from 20.3% (and improved by 3.6% excluding the
above mentioned amortization expense) in the prior comparable three-month
period. This improvement was primarily attributable to higher margins in the
women's sleepwear business as well as higher margins attributable to the
Topsville children's apparel business. For the nine-month period ended March 31,
2003, gross margins were 23.8%, or 3.8% higher (and improved by 2.6% excluding
the above mentioned amortization expense), versus the prior year comparable
period, mostly the result of higher margins in the newly acquired children's
apparel business.
Gross margin for the Handbags category was 23.7 % in the quarter ended March 31,
2003 compared to 25.6% in the similar prior year quarter. This 1.9% lower gross
margin in the current period reflects the non-renewal of the Anne Klein
licensing business and lower competitive margins in the Company's premium
business, offset to some extent by better children's handbag margins. For the
nine-month period ended March 31, 2003, the Handbags category gross profit
decreased to 22.0% from 28.7 %, for the same reasons.
16
Shipping, selling and administrative expenses for the three month period ended
March 31, 2003, totaling $5,617,000, were $40,000 more than the third quarter in
the prior year's comparable period (and $460,000 more excluding the $420,000
amortization expense). The increase in shipping, selling and administrative
expenses is mostly attributable to an increase in selling commissions in the
Apparel category. As a percentage of net sales, shipping, selling and
administrative expenses increased to 27.0% from 25.3%, or 1.7% but was 3.6%
higher without the amortization expense, mainly due to the relative level of
fixed costs compared with lower net sales. Shipping, selling and administrative
expenses for the nine-month period ended March 31, 2003 were $18,333,000 (21.2%
of net sales), or $4,515,000 higher than the same nine-month period in the prior
fiscal year ($4,935,000 higher excluding the $420,000 amortization expense). The
period ended March 31, 2002 totaled $13,818,000 (24.7% of net sales). The
increase in the current nine month period is mostly attributable to shipping
selling and administrative expenses in the Topsville children's apparel business
acquired in January 2002.
Interest expense of $117,000 in the third quarter of fiscal 2003 compares to
$45,000 in the prior comparable period. The increase of $72,000 is mostly the
result of interest expense associated with the $3,250,000 building mortgage
consummated in August 2002. For the nine-month period ended March 31, 2003,
interest expense totaled $474,000 versus $176,000, primarily due to interest
expense attributable to the building mortgage in the current period, as
mentioned above.
The loss before income taxes for the three-month period ended March 31, 2003 of
$333,000, compares to a loss before income taxes in the equivalent prior fiscal
period totaling $789,000. However, the third quarter ended March 31, 2002
includes $809,000 of amortization expense related to (1) open orders (backlog)
totaling $420,000 and (2) fair value allocation of inventory totaling $389,000
for the Topsville acquisition in January 2002, respectively. Lower sales and
higher interest expense for the three month period ended March 31, 2003 versus
the similar year ago period, was partly offset by higher gross profit margin for
this year's third quarter compared to the comparable prior year three-month
period.
For the nine-month period ended March 31, 2003, pretax earnings of $1,393,000
compares to a loss in the prior comparable period of $888,000 (including in the
period ending March 31, 2002, $809,000 of amortization expense referred to
above). Significantly higher sales and gross profit dollars was not completely
offset by higher shipping, selling and administrative expenses, and interest
expense, as discussed above.
The net loss for the three-month period ended March 31, 2003 of $213,000
compared to a net loss for the same period last year of $505,000 (including an
after-tax charge of $518,000 of amortization expense discussed above). For the
nine-month period ended March 31, 2003, net earnings were $892,000, against a
net loss of $568,000 in the period ended March 31, 2002, including the $518,000
after-tax charge relating to the amortization expense, discussed above.
17
RECENTLY ISSUED ACCOUNTING STANDARDS
Accounting and Reporting Changes
In June 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 146, "Accounting
for Costs Associated with Exit or Disposal Activities", replacing
Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability Recognition
for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)." SFAS No.
146 requires that a liability for a cost associated with an exit or
disposal activity be recognized when the liability is incurred instead of
at the date an entity commits to an exit plan. This statement also
established that fair value is the objective for the initial measurement
of the liability. SFAS No. 146 is effective for exit or disposal
activities that are initiated after December 31, 2002. The Company has
adopted this statement and it did not have a material impact on its
financial position or the results of operations.
In November 2002, the Financial Accounting Standards Board (FASB) issued
Interpretation 45, Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others. The
Interpretation elaborates on the existing disclosure requirements for
most guarantees, including loan guarantees such as standby letters of
credit. It also clarifies that at the time a company issues a guarantee,
the company must recognize an initial liability for the fair value, or
market value, of the obligations it assumes under the guarantee and must
disclose that information in its interim and annual financial statements.
The provisions related to recognizing a liability at inception of the
guarantee for the fair value of the guarantor's obligations does not
apply to product warranties or to guarantees accounted for as
derivatives. We have evaluated the accounting provisions of the
interpretations and there was no material impact on our financial
condition, results of operations or cash flows for the period ending
March 31, 2003.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation" ("SFAS No. 148"). SFAS No. 148 provides
alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation.
In addition, SFAS No. 148 amends the disclosure requirements of SFAS No.
123 "Accounting for Stock-Based Compensation" to require more prominent
and more frequent disclosures in financial statements about the effects
of stock-based compensation. SFAS 148 also amends the disclosure
provisions of SFAS 123. We have adopted the disclosure provisions of SFAS
148 as of December 31, 2002 (See Note 3).
Seasonality
The Company's business is subject to substantial seasonal variations.
Historically, the Company has generally realized a significant portion of
its net sales and net income for the year during the first and second
fiscal quarters. The Company's quarterly results of operations may also
fluctuate significantly as a result of a variety of other factors,
including the timing of shipments to customers and economic conditions.
18
The Company believes this is the general pattern associated with its
sales to the retail industry and expects this pattern will continue in
the future. Consequently, comparisons between quarters are not
necessarily meaningful and the results for any quarter are not
necessarily indicative of future results, or results for a full year.
Forward-Looking Statements
This Form 10-Q may contain forward-looking statements that are being made
pursuant to the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995. The Company's actual performance and
results may vary as a result of a number of risks, uncertainties and
other factors, both foreseen and unforeseen, including general economic
and business conditions, competition in the accessories and apparel
markets, continuing favorable sales patterns, pricing and consumer buying
trends. Additional uncertainty exists for the potential negative impact
that Severe Acute Respiratory Syndrome (SARS) may have on our business,
as it relates to our production in the Far East and other countries in
which we operate.
19
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
There have been no material changes in the information set forth under
the caption "Item 7A-Quantitative and Qualitative Disclosures About
Market Risk" in the Company's Annual Report on Form 10-K for the fiscal
year ended June 30, 2002.
Item 4. Controls and Procedures.
Within the 90-day period prior to the filing date of this report, the
Company carried out an evaluation, under the supervision and with the
participation of management of the Company, including the Company's Chief
Executive Officer and Chief Financial Officer, of the effectiveness of
the design and operation of the Company's disclosure controls and
procedures. Based on the Company's evaluation, the Company's Chief
Executive Officer and Chief Financial Officer concluded that the
Company's disclosure controls and procedures were effective. There have
been no significant changes in the Company's internal controls or in
other factors that could significantly affect those controls subsequent
to the date of the Company's evaluation.
20
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits. None
b) Reports on Form 8-K. The registrant did not file any reports on Form
8-K during the three months ended March 31, 2003.
21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
JACLYN, INC.
(Registrant)
May 15, 2003 /s/ ALLAN GINSBURG
----------------------------
Allan Ginsburg
Chairman of the Board
May 15, 2003 /s/ ANTHONY CHRISTON
----------------------------
Anthony Christon
Vice President
Chief Financial Officer
22
CERTIFICATIONS
--------------
I, Robert Chestnov, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Jaclyn, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report.
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: May 15, 2003
/s/ ROBERT CHESTNOV
- --------------------------------
Robert Chestnov, President and
Principal Executive Officer
23
I, Anthony Christon, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Jaclyn, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report.
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: May 15, 2003
/s/ ANTHONY CHRISTON
- -------------------------------
Anthony Christon
Principal Financial Officer
24