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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 September 30, 2003
------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 1-5863
JACLYN, INC.
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(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
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(Address of principal executive offices)
(Zip Code)
(201) 868-9400
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(Registrant's telephone number, including area code)
NONE
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(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 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 November 1, 2003
- ------------------------------------ -------------------------------
Common Stock, par value $1 per share 2,552,132
JACLYN, INC. AND SUBSIDIARIES
INDEX
Part I. Financial Information
Item 1
Condensed Consolidated Balance Sheets -
September 30, 2003 (unaudited) and June 30, 2003
(derived from audited financial statements) 3
Condensed Consolidated Statements of Earnings - Three
Months Ended September 30, 2003 and 2002 (unaudited) 4
Condensed Consolidated Statements of Cash Flows - Three
Months Ended September 30, 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 11
Item 3
Quantitative and Qualitative Disclosures about Market Risk 19
Item 4 Controls and Procedures 19
Part II. Other Information:
Item 2
Changes in Securities and Use of Proceeds 20
Item 6
Exhibits and reports on Form 8-K 20
Signatures 21
JACLYN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands)
September 30, June 30,
2003 2003
(Unaudited) (See below)
------------ ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 319 $ 66
Accounts receivable, net 19,917 14,778
Inventory 19,643 9,665
Prepaid expenses and other current assets 2,944 2,967
------------ ------------
TOTAL CURRENT ASSETS 42,823 27,476
------------ ------------
PROPERTY PLANT AND EQUIPMENT, NET 1,090 1,147
GOODWILL 3,338 3,338
OTHER ASSETS 1,040 1,044
------------ ------------
TOTAL ASSETS $ 48,291 $ 33,005
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable - bank $ 19,025 $ 3,975
Accounts payable 6,883 7,405
Other current liabilities 2,521 2,149
------------ ------------
TOTAL CURRENT LIABILITIES 28,429 13,529
------------ ------------
MORTGAGE PAYABLE 2,989 3,023
OTHER LONG TERM LIABILITIES 233 233
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock 3,369 3,369
Additional paid-in capital 10,545 12,117
Retained earnings 8,616 8,258
------------ ------------
22,530 23,744
Less: Common shares in treasury at cost 5,890 7,524
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 16,640 16,220
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 48,291 $ 33,005
============ ============
The June 30, 2003 Balance Sheet is derived from audited financial statements.
See notes to condensed consolidated financial statements.
-3-
JACLYN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
(In Thousands, Except Share Amounts)
Three Months Ended
September 30,
-----------------------
2003 2002
---------- ----------
Net sales $ 29,896 $ 29,945
Cost of goods sold 22,306 23,463
---------- ----------
Gross profit 7,590 6,482
---------- ----------
Shipping, selling and administrative expenses 6,772 5,846
Interest expense 155 159
---------- ----------
6,927 6,005
---------- ----------
Earnings before income taxes 663 477
Provision for income taxes 305 171
---------- ----------
Net earnings $ 358 $ 306
========== ==========
Net earnings per common share - basic $ .14 $ .12
========== ==========
Weighted average number of shares outstanding - basic 2,531,000 2,561,000
========== ==========
Net earnings per common share - diluted $ .13 $ .12
========== ==========
Weighted average number of shares outstanding - diluted 2,708,000 2,587,000
========== ==========
See notes to condensed consolidated financial statements.
-4-
JACLYN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In Thousands)
Three Months Ended
September 30,
------------------------
2003 2002
---------- ----------
Cash Flows From Operating Activities:
Net Earnings $ 358 $ 306
Adjustments to reconcile net earnings to net cash used in operating activities:
Depreciation and amortization 93 95
Changes in assets and liabilities:
Increase in accounts receivable, net (5,139) (6,317)
Increase in inventory (9,978) (145)
Decrease (increase) in prepaid expenses and other assets 27 (312)
Decrease in accounts payable and other current liabilities (150) (1,950)
---------- ----------
Net cash used in operating activities (14,789) (8,323)
---------- ----------
Cash Flows From Investing Activities:
Purchase of property and equipment (36) (112)
---------- ----------
Net cash used in investing activities (36) (112)
---------- ----------
Cash Flows From Financing Activities:
Increase in loans payable - bank 15,050 5,675
(Payment of) proceeds from mortgage loan (34) 3,240
Repurchase of common stock (548) --
Exercise of stock options 610 --
Payment of acquisition notes -- (450)
---------- ----------
Net cash provided by financing activities 15,078 8,465
---------- ----------
Net Increase in Cash and Cash Equivalents 253 30
Cash and Cash Equivalents, beginning of period 66 95
---------- ----------
Cash and Cash Equivalents, end of period $ 319 $ 125
---------- ----------
Supplemental Information:
Interest paid $ 131 $ 152
---------- ----------
Taxes paid $ 570 $ 67
---------- ----------
See notes to 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
September 30, 2003, the condensed consolidated statements of earnings and cash
flows for the three month periods ended September 30, 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 2003 Annual Report to Stockholders. The
results of operations for the period ended September 30, 2003 are not
necessarily indicative of operating results for the full fiscal year.
2. Stock-Based Compensation
The Company periodically grants stock options to employees. 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-only provisions of
Financial Accounting Standards Board Statement No. 123, "Accounting for Stock
Based Compensation," as amended by Financial Accounting Standards Board
Statement No. 148, "Accounting for Stock Based Compensation - Transition and
Disclosure, an Amendment of FASB Statement No.123." If compensation cost for the
Company's stock option plans had been determined in accordance with the fair
value method prescribed by SFAS No. 123, the Company's net earnings would have
been (in thousands, except per share):
-6-
Three Months Ended
- -------------------------------------------------------------------------------------------
September 30,
- -------------------------------------------------------------------------------------------
2003 2002
Net earnings
As reported $ 358 $ 306
Deduct: Total stock based employee compensation expense
determined under fair value based method, net of taxes -- 153
- -------------------------------------------------------------------------------------------
Pro forma Net Earnings $ 358 $ 153
- -------------------------------------------------------------------------------------------
Basic net earnings per share:
As reported $ .14 $ .12
Pro forma $ .14 $ .06
- -------------------------------------------------------------------------------------------
Diluted net earnings per share:
As reported $ .13 $ .12
Pro forma $ .13 $ .06
- -------------------------------------------------------------------------------------------
3. Earnings Per Share:
The Company's calculation of Basic and Diluted Net Earnings Per Common
Share follows (in thousands, except share amounts):
Three Months Ended
September 30,
-------------------------
2003 2002
---------- ----------
Basic Net Earnings Per Common Share:
Net Earnings $ 358 $ 306
---------- ----------
Basic Weighted Average Shares Outstanding 2,531,000 2,561,000
---------- ----------
Basic Net Earnings Per Common Share $ .14 $ .12
---------- ----------
Three Months Ended
September 30,
-------------------------
2003 2002
---------- ----------
Diluted Net Earnings Per Common Share:
Net Earnings $ 358 $ 306
---------- ----------
Basic Weighted Average Shares Outstanding 2,531,000 2,561,000
Add: Dilutive Options 177,000 26,000
---------- ----------
Diluted Weighted Average Shares Outstanding 2,708,000 2,587,000
---------- ----------
Diluted Net Earnings Per Common Share $ .13 $ .12
---------- ----------
-7-
Options to purchase an additional 113,000 and 458,000 common shares at
prices ranging from $4.06 to $12.38 per share, were outstanding at September 30,
2003 and 2002, respectively, but were not included in the computation of diluted
earnings per share because the exercise price of the options exceeded the
average market price and would have been anti-dilutive.
4. Inventories:
Inventories consist of the following components (in thousands):
September 30, 2003 June 30, 2003
------------------ ------------------
Raw materials $ 2,464 $ 3,874
Work in process 1,421 1,506
Finished Goods 15,758 4,285
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$ 19,643 $ 9,665
================== ==================
5. Repurchase of Common Stock
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. For the three-month period ended September
30, 2003, the Company purchased 21,500 shares of its Common Stock at a cost of
approximately $62,000. As of September 30, 2003, the Company purchased a total
of 121,200 shares of its Common Stock at a cost of approximately $349,000 in
connection with the repurchase program.
During the quarter ended September 30, 2003, certain officers of the
Company exercised options to purchase 260,500 shares of the Company's Common
Stock. As permitted by the applicable stock option plan and contracts governing
the options, the officers tendered to the Company and the Company purchased in
partial payment of the exercise price for 185,500 of these options, 144,200
mature shares of Common Stock at a market value of $467,208.
-8-
6. Financing Agreements
On December 23, 2002, the Company entered into a line of credit agreement
with a new bank. This credit facility, which expires December 1, 2004, provides
for short-term loans and the issuance of letters of credit in an aggregate
amount not to exceed $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. On October 23, 2003 the Company amended its line of credit
agreement. The amended agreement provides for an increase in the aggregate
amount of borrowing and letters of credit to $40,000,000 and an increase in
direct borrowing of up to $25,000,000. The borrowing formula was also modified
to allow for an additional amount of borrowing during the Company's peak
borrowing season. The amended agreement also includes an extension of one year
and now expires on December 1, 2005. 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
September 30, 2003, borrowing on the short-term line of credit was $19,025,000
(with peak borrowing of $21,550,000 during the first quarter), and the Company
had $2,000,000 of additional availability (based on the borrowing formula) under
the credit facility. At September 30, 2003, the Company was contingently
obligated on open letters of credit for approximately $10,975,000. Interest on
borrowings under the line of credit is at the bank's prime rate or at LIBOR plus
250 basis points, at the option of the Company. The bank's prime rate at
September 30, 2003 was 4.00%.
In August 2002, the Company consummated a mortgage loan with a bank lender
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
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.
-9-
Recently Issued Accounting Standards:
In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"), Consolidation
of Variable Interest Entities with the objective of improving financial
reporting by companies involved with variable interest entities. A variable
interest entity is a corporation, partnership, trust, or any other legal
structure used for business purposes that either (a) does not have equity
investors with voting rights, or (b) has equity investors that do not provide
sufficient financial resources for the entity to support its activities.
Historically, entities generally were not consolidated unless the entity was
controlled through voting interests. FIN 46 changes that by requiring a variable
interest entity to be consolidated by a company if that company is subject to a
majority of the risk of loss from the variable interest entity's activities or
entitled to receive a majority of the entity's residual returns or both. A
company that consolidates a variable interest entity is called the "primary
beneficiary" of that entity. FIN 46 also requires disclosures about variable
interest entities that a company is not required to consolidate but in which it
has a significant variable interest. The consolidation requirements of FIN 46
apply immediately to variable interest entities created after January 31, 2003.
The consolidation requirements of FIN 46 apply to existing entities in the first
fiscal year or interim period after January 31, 2003, regardless of when the
variable interest entity was established. 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, since the Company is
not the primary beneficiary of any variable interest entity.
In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities. This statement amends and
clarifies financial reporting for derivative instruments, including certain
derivative instruments embedded in other contracts and for hedging activities.
This statement is effective for contracts entered into or modified after June
30, 2003. This pronouncement does not have a material impact on our consolidated
financial position and results of operations.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity. This statement
establishes standards for how a company classifies and measures certain
financial instruments with characteristics of both liabilities and equity. This
statement is effective for financial instruments entered into or modified after
May 31, 2003 and otherwise is effective at the beginning of the first interim
period beginning after June 15, 2003. The statement will be implemented by
reporting the cumulative effect of a change in accounting principle for
financial instruments created before the issuance date of the statement and
still existing at the beginning of the period of adoption. This statement has no
material impact on our consolidated financial statements.
-10-
Item 2. 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 application of accounting policies, and the estimates
inherently required by the policies, are reasonable. These accounting policies
and estimates are constantly 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 do not differ materially from those determined using necessary
estimates.
The Company's accounting policies are more fully described in Note A to the June
30, 2003 consolidated financial statements, located in the Annual Report on Form
10-K filed with the Securities and Exchange Commission on September 30, 2003.
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.
-11-
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.
Finite Long-lived assets.
In the evaluation of the fair value and future benefits of finite-lived assets,
we perform an analysis of the anticipated undiscounted future net cash flows of
the related finite long-lived assets. If the carrying value of the related asset
exceeds the undiscounted cash flows, the carrying value is reduced to its fair
value. Various factors including future sales growth and profit margins are
included in this analysis. To the extent these future projections change, the
conclusion regarding impairment may differ from the current estimates.
Goodwill.
We evaluate goodwill annually or 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, we would
then be required to record a charge which would impact earnings.
Deferred taxes.
Should the Company determine that it becomes more likely than not that it would
not be able to realize all or part of its 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.
-12-
Liquidity and Capital Resources
The Company's cash and cash equivalents increased $253,000 during the
three-month period ended September 30, 2003 to $319,000 from $66,000 at June 30,
2003.
Net cash used in operating activities totaled $14,789,000, primarily from an
increase in inventory levels totaling $9,978,000 in anticipation of higher
second quarter shipping, and an increase in accounts receivable of $5,139,000
which reflects much higher shipping in September 2003 compared to June 2003.
Funds provided by financing activities of $15,078,000 were mostly the result of
$15,050,000 in borrowing from the Company's bank under its line of credit
facility. These funds were used to finance the higher level of additional and
seasonal business activity. In addition, the Company issued 263,500 shares of
Common Stock from its treasury with an average cost of $2,182,000 in relation to
the exercise of employee stock options for $610,000. A total of approximately
$548,000 of funds were also used to purchase 170,425 shares of the Company's
Common Stock which were delivered in payment to the Company of a portion of the
exercise price of certain employee stock options, as well as shares purchased
under the Company's stock repurchase program (discussed below), and shares
purchased from employees who received distributions under the Company's Employee
Stock Ownership Program. Net cash used in investing activities of $36,000 was
for purchases of property and equipment.
On December 23, 2002, the Company entered into a line of credit agreement with a
new bank. This credit facility, which expires December 1, 2004, provides for
short-term loans and the issuance of letters of credit in an aggregate amount
not to exceed $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. On October 23, 2003 the Company amended its line of credit agreement.
The amended agreement provides for an increase in the aggregate amount to
$40,000,000 and an increase in direct borrowing of up to $25,000,000. The
borrowing formula was also modified to allow for an additional amount of
borrowing during the Company's peak borrowing season and extends the agreement
one year to expire on December 1, 2005. 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
September 30, 2003, borrowing on the short-term line of credit was $19,025,000 (
with peak borrowing of $21,550,000 during the first quarter), and the Company
had $2,000,000 of additional availability (based on the borrowing formula) under
the credit facility. At September 30, 2003, the Company was contingently
obligated on open letters of credit for approximately $10,975,000. Interest on
borrowings under the line of credit is at the bank's prime rate, or at LIBOR
plus 250 basis points, at the option of the Company. The bank's prime rate at
September 30, 2003 was 4.00%.
-13-
On August 14, 2002, the Company consummated a mortgage loan with a bank lender
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
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 Company believes that funds provided by operations, existing working
capital, and the Company's bank line of credit and mortgage financing will be
sufficient to meet foreseeable working capital needs.
There were no material commitments for capital expenditures at September 30,
2003.
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. For the three-month period ended September
30, 2003, the Company purchased 21,500 shares of its Common Stock at a cost of
approximately $62,000. As of September 30, 2003, the Company purchased a total
of 121,200 shares of its Common Stock at a cost of approximately $349,000 in
connection with the repurchase program.
-14-
Contractual Obligations and Commercial Commitments
To facilitate an understanding of our contractual obligations and commercial
commitments, the following data is provided as of September 30, 2003:
* * * * Payments Due by Period * * * *
Contractual Obligations Total 1 Year 2-3 Years 4-5 Years After 5 Years
Notes Payable $19,025,000 $19,025,000 $ -- $ -- $ --
Mortgage Payable 3,124,000 135,000 303,000 348,000 2,338,000
Royalties 798,000 269,000 329,000 200,000 --
Operating Leases 2,664,000 613,000 973,000 725,000 353,000
----------- ----------- ----------- ----------- -----------
Total Contractual
Obligations $25,611,000 $20,042,000 $ 1,605,000 $ 1,273,000 $ 2,691,000
----------- ----------- ----------- ----------- -----------
* * * * * * * * After * * * * * * * *
Other Commercial Total Within 1
Commitments Commitments Year 1 Year 2-3 Years 4-5 Years 5 Years
- ----------------------------------------------------------------------------------------------------------------
Letters of Credit $10,975,000 $10,975,000 -- -- -- --
---------------------------------------------------------------------------------
Total Commercial Commitments $10,975,000 $10,975,000 -- -- -- --
---------------------------------------------------------------------------------
Off-Balance Sheet Arrangements
The Company has not created, and is not a party to, any special-purpose or
off-balance sheet entities for the purpose of raising capital, incurring debt or
operating the Company's business. The Company does not have any arrangements or
relationships with entities that are not consolidated into the financial
statements that are reasonably likely to materially affect the Company's
liquidity or the availability of capital resources.
RESULTS OF OPERATIONS
Net sales were $29,896,000 during the three-month period ended September 30,
2003, compared to $29,945,000, compared to the prior fiscal three-month period.
Sales by category were as follows:
Net sales for the Apparel category were $23,019,000, or $898,000 higher than the
prior fiscal year. This 4.1% increase was primarily due to increased customer
orders from new and existing customers of the women's sleepwear business and the
introduction of new items within this business, offset almost entirely by much
lower children's apparel sales due to a somewhat lower level of orders in the
current three-month period versus last year's same period. In addition, slightly
higher levels of shipping in the catalogue business added to this year's first
quarter Apparel category increase.
-15-
Net sales totaling $6,877,000 for the Handbags category decreased 12.1% in the
first quarter of fiscal 2004 compared to the prior fiscal year's same fiscal
quarter total of $7,824,000. The sales decrease mostly reflected continuing
lower sales in the children's handbag division, partly offset by higher premium
business sales.
Gross margins were 25.4% in the first quarter of fiscal 2004 compared to 21.6%
in the first quarter of 2003. Gross margins by category were as follows:
Gross margin for the Apparel category increased to 26.7% in the first
three months of fiscal 2004 from 21.4% in the first quarter of fiscal
2003. The 5.3% increase was primarily the result of better 2004 first
quarter margins in the women's sleepwear business for licensed product
shipped (offset by royalty expense in shipping, selling and
administrative expenses, discussed below), as well as higher margins in
the children's apparel business attributable to product mix.
Gross margin for the Handbags category in 2004 decreased to 20.9% in
2004 from 22.4% in 2003. This decrease was mainly due lower children's
handbag margins, offset by somewhat higher premium margins.
As a percentage of net sales, shipping, selling and administrative expenses
increased to 22.7% from 19.5%. Shipping, selling and administrative expenses
increased by $926,000 in the first quarter of fiscal 2004 compared to the prior
year comparable period, mainly due to approximately $360,000 of higher royalty
expense relating to two new licensing agreements, higher product development
costs totaling $198,000 in conjunction with a new line of children's sleepwear,
and $262,000 of higher commission expense for the women's sleepwear business in
the first quarter of fiscal 2004 relating to the increase in sales volume for
this business.
Interest expense in the first quarter of fiscal 2004 decreased to $155,000 from
$159,000, or $4,000 below the last year's first quarter, primarily the result of
a lower level of average borrowing and lower interest rates on the Company's
line of credit borrowing, not completely offset by higher mortgage interest
expense in the current three month period compared to the same three-month
period in fiscal 2003.
The increase of $186,000 in earnings before income taxes for the three month
period ended September 30, 2003 to $663,000 from earnings before income taxes of
$477,000 in the prior fiscal comparable period was primarily due to higher gross
margins, partly offset by higher shipping, selling and administrative expenses
as discussed above. For the three- month period ended September 30, 2003, the
Company had an effective tax rate of 46% compared to 36% in the first three
month period of the prior year, primarily the result of expired foreign tax
credits. Net earnings increased $52,000 to $358,000 for the three month period
ended September 30, 2003 from $306,000 in the prior comparable period.
-16-
RECENTLY ISSUED ACCOUNTING STANDARDS
In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"), Consolidation
of Variable Interest Entities with the objective of improving financial
reporting by companies involved with variable interest entities. A variable
interest entity is a corporation, partnership, trust, or any other legal
structure used for business purposes that either (a) does not have equity
investors with voting rights, or (b) has equity investors that do not provide
sufficient financial resources for the entity to support its activities.
Historically, entities generally were not consolidated unless the entity was
controlled through voting interests. FIN 46 changes that by requiring a variable
interest entity to be consolidated by a company if that company is subject to a
majority of the risk of loss from the variable interest entity's activities or
entitled to receive a majority of the entity's residual returns or both. A
company that consolidates a variable interest entity is called the "primary
beneficiary" of that entity. FIN 46 also requires disclosures about variable
interest entities that a company is not required to consolidate but in which it
has a significant variable interest. The consolidation requirements of FIN 46
apply immediately to variable interest entities created after January 31, 2003.
The consolidation requirements of FIN 46 apply to existing entities in the first
fiscal year or interim period after January 31, 2003, regardless of when the
variable interest entity was established. 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, since the Company is
not the primary beneficiary of any variable interest entity.
In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities. This statement amends and
clarifies financial reporting for derivative instruments, including certain
derivative instruments embedded in other contracts and for hedging activities.
This statement is effective for contracts entered into or modified after June
30, 2003. This pronouncement does not have a material impact on our consolidated
financial position and results of operations.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity. This statement
establishes standards for how a company classifies and measures certain
financial instruments with characteristics of both liabilities and equity. This
statement is effective for financial instruments entered into or modified after
May 31, 2003 and otherwise is effective at the beginning of the first interim
period beginning after June 15, 2003. The statement will be implemented by
reporting the cumulative effect of a change in accounting principle for
financial instruments created before the issuance date of the statement and
still existing at the beginning of the period of adoption. This statement has no
material impact on our consolidated financial statements.
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. 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.
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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.
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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,
2003.
Item 4. Controls and Procedures.
At the end of the period covered by this report, the Company carried out an
evaluation, 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 was no change in the Company's
internal control over financial reporting during the quarter ended September 30,
2003 that has materially affected, or is reasonably likely to materially affect,
the Company's internal control over financial reporting.
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PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
On July 14, 2003 and July 28, 2003, the Company issued an aggregate of
260,500 shares of its common stock, $1.00 par value per share ("Common Stock"),
upon the exercise of stock options previously granted under a stockholder
approved stock option plan of the Company. The Company received an aggregate of
$137,168 in cash from the individuals exercising these options (the "Optionees")
in partial payment of the exercise price for the issued shares. The Company also
received an aggregate of 144,200 shares of Common Stock from the optionees under
terms of the stock option plan which permits the use of previously acquired
shares of Common Stock in full or partial payment of the applicable exercise
price.
The Company is relying on an exemption from registration contained in
Section 4(2) of the Securities Act of 1933, as amended (the "Securities Act"),
in connection with the issuance of the shares of Common Stock. Each Optionee has
represented, warranted and agreed, among other things, that the shares of Common
Stock issued upon the exercise of the applicable options have been acquired for
his own account, for investment only and not with a view to the resale or
distribution thereof; and understands that the shares of Common Stock must be
held indefinitely unless the sale or other transfer thereof is subsequently
registered under the Securities Act or an exemption from such registration is
available at that time. Each Optionee has also represented that he has such
knowledge and experience in financial and business matters that he is capable of
evaluating the merits and risks of his investment in the shares of Common Stock;
has adequate means of providing for his current needs and possible future
contingencies; is able to bear the economic risks of his investment in the
shares of Common Stock; is able to hold the shares of Common Stock for an
indefinite period of time and has a sufficient net worth to sustain a loss of
his investment in the shares of Common Stock in the event any loss should occur,
and has had access to and received such documents and information concerning the
Company as he has requested. A Securities Act restrictive legend will be placed
on any certificate representing the shares of Common Stock and stop transfer
instructions will be placed on any such certificates as may be necessary or
appropriate to, among other things, prevent a violation of, or to perfect an
exemption from, the registration requirements of the Securities Act and any
applicable state securities laws.
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits Description
4(a) First Amendment to Revolving Credit Agreement dated October 23,
2003 between the Company and Hudson United Bank ("HUB").
4(b) Restated Secured Promissory Note of the Company dated October
23, 2003 payable to the order of HUB in the principal amount of
$40,000,000.
31(a) Rule 13a-14(a) Certification of Robert Chestnov, President and
Chief Executive Officer of the Company.
31(b) Rule 13a-14(a) Certification of Anthony Christon, Principal
Financial Officer of the Company.
32 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
b) Reports on Form 8-K.
The Company filed a Current Report on Form 8-K on September 25,
2003 with respect to an event reported under Item 12 - "Results
of Operations and Financial Condition".
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has dul caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
JACLYN, INC.
------------
(Registrant)
November 13, 2003 /s/ ALLAN GINSBURG
-------------------------------
Allan Ginsburg
Chairman of the Board
November 13, 2003 /s/ ANTHONY CHRISTON
-------------------------------
Anthony Christon
Vice President
Chief Financial Officer
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EXHIBIT INDEX
-------------
Exhibit No. Description
- ----------- -----------
4(a) First Amendment to Revolving Credit Agreement
dated October 23, 2003 between the Company and
Hudson United Bank ("HUB").
4(b) Restated Secured Promissory Note of the Company
dated October 23, 2003 payable to the order of
HUB in the principal amount of $40,000,000.
31(a) Rule 13a-14(a) Certification of Robert Chestnov
President and Chief Executive Officer of the Company.
31(b) Rule 13a-14(a) Certification of Anthony Christon,
Principal Financial Officer of the Company.
32 Certification Pursuant to 18 U.S.C. Section
1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.