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, 2005
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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
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JACLYN, INC.
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(Exact name of registrant as specified in its charter)
Delaware 22-1432053
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(State or other jurisdiction of (I.R.S. Employer 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 May 1, 2005
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Common Stock, par value $1 per share 2,625,956
JACLYN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands)
March 31, June 30,
2005 2004
(Unaudited) (See below)
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ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,184 $ 626
Accounts receivable, net 11,319 17,894
Inventory 5,689 7,877
Prepaid expenses and other current assets 1,650 1,536
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TOTAL CURRENT ASSETS 19,842 27,933
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PROPERTY PLANT AND EQUIPMENT, NET 1,159 1,069
GOODWILL 3,338 3,338
OTHER ASSETS 2,152 2,149
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TOTAL ASSETS $ 26,491 $ 34,489
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable - bank $ -- $ 4,220
Accounts payable 2,654 6,373
Other current liabilities 3,057 3,725
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TOTAL CURRENT LIABILITIES 5,711 14,318
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MORTGAGE PAYABLE 2,766 2,880
OTHER LONG TERM LIABILITIES -- 15
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock 3,369 3,369
Additional paid-in capital 9,715 10,390
Retained earnings 10,097 9,716
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23,181 23,475
Less: Common shares in treasury at cost 5,167 6,199
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TOTAL STOCKHOLDERS' EQUITY 18,014 17,276
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 26,491 $ 34,489
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The June 30, 2004 Balance Sheet is derived from audited financial statements.
See notes to condensed consolidated financial statements.
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JACLYN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In Thousands, Except Share and Per Share Amounts)
Three Months Ended Nine Months Ended
March 31, March 31,
2005 2004 2005 2004
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Net sales $ 22,476 $ 26,413 $ 96,722 $ 95,054
Cost of goods sold 17,271 19,692 75,041 71,415
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Gross profit 5,205 6,721 21,681 23,639
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Shipping, selling and administrative expenses 6,115 6,940 20,278 21,235
Interest expense 98 107 558 485
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6,213 7,047 20,836 21,720
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(Loss) earnings before income taxes (1,008) (326) 845 1,919
(Benefit) provision for income taxes (368) (86) 464 902
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Net (loss) earnings $ (640) $ (240) $ 381 $ 1,017
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Net (loss) earnings per common share - basic $ (.24) $ (.09) $ .15 $ .40
============ ============ ============ ============
Weighted average number of shares outstanding - basic 2,624,000 2,542,000 2,589,000 2,542,000
============ ============ ============ ============
Net (loss) earnings per common share - diluted $ (.24) $ (.09) $ .14 $ .37
============ ============ ============ ============
Weighted average number of shares outstanding - diluted 2,624,000 2,542,000 2,704,000 2,722,000
============ ============ ============ ============
See notes to condensed consolidated financial statements.
-3-
JACLYN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In Thousands)
Nine Months Ended
March 31,
2005 2004
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Cash Flows From Operating Activities:
Net Earnings $ 381 $ 1,017
Adjustments to reconcile net earnings to net cash provided by (used in)
operating activities:
Depreciation and amortization 322 280
Changes in assets and liabilities:
Decrease (increase) in accounts receivable, net 6,575 (3,007)
Decrease in inventory 2,188 4,352
Increase in prepaid expenses and other assets (125) (409)
Decrease in accounts payable and other current liabilities (4,270) (4,180)
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Net cash provided by (used in) operating activities 5,071 (1,947)
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Cash Flows From Investing Activities:
Purchase of property and equipment (404) (194)
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Net cash used in investing activities (404) (194)
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Cash Flows From Financing Activities:
Net (decrease) increase in loans payable - bank (4,220) 2,575
Payment of mortgage loan (106) (97)
Repurchase of common stock (98) (337)
Exercise of stock options 315 174
Net cash (used in) provided by financing activities (4,109) 2,315
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Net Increase in Cash and Cash Equivalents 558 174
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Cash and Cash Equivalents, beginning of period $ 626 $ 66
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Cash and Cash Equivalents, end of period $ 1,184 $ 240
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Supplemental Information:
Interest paid $ 569 $ 480
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Taxes paid $ 1,000 $ 761
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Non-cash items:
Common stock repurchase and exercise of stock options $ 45 $ 569
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Tax benefit of non-qualified stock option exercise $ 140 $ --
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See notes to condensed consolidated financial statements.
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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,
2005, the condensed consolidated statements of operations for the three and nine
month periods ended March 31, 2005 and 2004 and the condensed consolidated
statements of cash flows for the nine months ended March 31, 2005 and 2004, 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. These condensed consolidated financial statements should be read
in conjunction with the audited financial statements and notes thereto included
in the Company's 2004 Annual Report to Stockholders for the year ended June 30,
2004, which are included in the Company's Annual Report on Form 10-K filed with
the SEC on September 28, 2004. The Company's significant accounting policies are
described in Note A to the Consolidated Financial Statements included in the
2004 Report on Form 10-K. The results of operations for the period ended March
31, 2005 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. If options are granted to employees below fair market value,
compensation expense would be recognized. 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 (loss) earnings would have been (in thousands, except per
share):
-5-
Three Months Nine Months
Ended Ended
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March 31, March 31,
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2005 2004 2005 2004
Net (loss) earnings
As reported $ (640) $ (240) $ 381 $ 1,017
Deduct: Total stock based employee compensation expense
determined under fair value based method, net of taxes -- -- 36 27
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Pro forma net (loss) earnings $ (640) $ (240) $ 345 $ 990
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Basic net (loss) earnings per common share:
As reported $ (.24) $ (.09) $ .15 $ .40
Pro forma $ (.24) $ (.09) $ .13 $ .39
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Diluted net (loss) earnings per common share:
As reported $ (.24) $ (.09) $ .14 $ .37
Pro forma $ (.24) $ (.09) $ .13 $ .36
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There were no options granted during the three-month periods ended March 31,
2005 or March 31, 2004.
3. Earnings (Loss) Per Share:
The following table sets forth the computation of Basic and Diluted Net
(Loss) Earnings Per Common Share follows (in thousands, except share
amounts):
Three Months Ended Nine Months Ended
March 31, March 31,
2005 2004 2005 2004
------------ ------------ ------------ ------------
Basic Net (Loss) Earnings Per Common Share:
Net (Loss) Earnings $ (640) $ (240) $ 381 $ 1,017
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Basic Weighted Average Shares Outstanding 2,624,000 2,542,000 2,589,000 2,542,000
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Basic Net (Loss) Earnings Per Common Share $ (.24) $ (.09) $ .15 $ .40
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-6-
Three Months Ended Nine Months Ended
March 31, March 31,
2005 2004 2005 2004
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Diluted Net (Loss) Earnings Per Common Share:
Net (Loss) Earnings $ (640) $ (240) $ 381 $ 1,017
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Basic Weighted Average Shares Outstanding 2,624,000 2,542,000 2,589,000 2,542,000
Add: Dilutive Options -- -- 115,000 180,000
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Diluted Weighted Average Shares Outstanding 2,624,000 2,542,000 2,704,000 2,722,000
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Diluted Net (Loss) Earnings Per Common Share $ (.24) $ (.09) $ .14 $ .37
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For the three month periods ended March 31, 2005 and March 31, 2004, all options
have been excluded from earnings per share since the Company incurred a loss and
therefore would be anti-dilutive.
There were 10,000 options outstanding to purchase share of the Company's
common stock for the nine- month period ended March 31, 2005 that were
anti-dilutive. Options to purchase an additional 14,000 common shares at a
prices of $4.85 to $5.125 were outstanding for the nine-month period ended
March 31, 2004. These shares 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):
March 31, 2005 June 30, 2004
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Raw materials $ 72 $ 2,932
Work in process 74 450
Finished Goods 5,543 4,495
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$ 5,689 $ 7,877
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5. Repurchase of Common Stock and Exercise of Stock Options:
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 and nine-month periods ended
March 31, 2005, the Company purchased
-7-
approximately 10,000 shares and 13,000 shares of its Common Stock at a cost of
approximately $82,000 and $98,000, respectively. As of March 31, 2005, the
Company purchased a total of 238,151 shares of its Common Stock at a cost of
approximately $962,000 in connection with the repurchase program.
In August 2004, a sales representative of the Company exercised non-qualified
stock options to purchase 120,000 shares of the Company's Common Stock at $2.10
per share, or $252,000. The shares related to these options were issued from the
Company's treasury shares at an average cost of $6.94 per share, or
approximately $832,800. The Company recorded a tax benefit by reducing Federal
Income Taxes Payable (included in Other Current Liabilities), and increasing
Additional Paid-In Capital by $140,000, associated with the exercise of these
non-qualified stock options.
The Company issued an aggregate of 50,000 shares of its common stock during the
period from October 1, 2004 through March 31, 2005 upon the exercise by eight
employees of the Company (the "optionees") of stock options previously granted.
The Company received an aggregate of $63,258 in cash from the optionees in
partial payment of the exercise price for the issued shares. The Company also
received an aggregate of 6,632 mature shares of Common Stock from the optionees
in partial payment of the exercise price for the issued shares under terms of
the stock option plan under which the stock options were granted. The stock
option plan permits the use of previously acquired shares of Common Stock in
full or partial payment of the applicable exercise price.
6. Financing Agreements
In May 2005, the Company amended its bank credit facility. The amended facility,
which will now expire December 1, 2007, continues to provide for short-term
loans and the issuance of letters of credit in an aggregate amount not to exceed
$40,000,000. Based on a borrowing formula, the Company may borrow up to
$25,000,000 in short-term loans and up to $40,000,000 including letters of
credit. The borrowing formula allows for an additional amount of borrowing
during the Company's peak borrowing season from June to October. 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, as defined, and effective June 30, 2005, imposes certain
debt to equity ratio requirements. The Company was in compliance with all
applicable financial covenants as of March 31, 2005. As of March 31, 2005, there
was no borrowing on the short-term line of credit, and the Company had
$10,449,000 of additional availability (based on the borrowing formula) under
its credit facility. At March 31, 2005, the Company was contingently obligated
on open letters of credit with an aggregate face amount of approximately
$8,737,000. 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, 2005 was 5.5%.
-8-
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, or partially paid down from time to time during the term of the financing.
7. Contractual Obligations and Commercial Commitments :
The Company leases office facilities under non-cancelable leases that expire in
various years through the year ended June 30, 2009.
Future minimum payments by fiscal year under non-cancelable operating leases
with initial or remaining terms of one year or more, are as follows:
Year Ended Office and Showroom
June 30, Facilities
2005 $ 263,000
2006 984,000
2007 729,000
2008 532,000
2009 355,000
The Company has entered into licensing arrangements with several companies. The
Company is obligated, in certain instances, to pay minimum royalties over the
term of the licensing agreements which expire in various years through 2008.
Aggregate minimum commitments by fiscal year are as follows:
Year Ended Minimum
June 30, Commitments
2005 $ 59,000
2006 277,000
2007 303,000
2008 89,000
-9-
From time to time, the Company and its subsidiaries may become a party to legal
proceeding which arise in the normal course of business. At March 31, 2005,
there were no material, pending legal proceedings to which the Company was a
party. In the opinion of management, disposition of all legal proceedings is not
expected to materially affect the Company's financial position, cash flows or
results of operations.
The Company has not provided any financial guarantees as of March 31, 2005.
8. Retirement Plans:
Pension expenses includes the following components:
Three Month Period Ended Nine Month Period Ended
March 31, March 31,
2005 2004 2005 2004
COMPONENTS OF NET PERIODIC
BENEFIT COST:
Service cost $ 87,700 $ 77,750 $ 375,700 $ 233,250
Interest cost 39,400 65,000 280,400 195,000
Expected return on assets (37,600) (64,750) (236,600) (194,250)
Amortization of prior service cost 500 250 1,000 750
Amortization of transition assets (3,100) (9,750) (42,100) (29,250)
Amortization of actuarial loss 600 21,250 9,100 63,750
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Net periodic cost $ 87,500 $ 89,750 $ 387,500 $ 269,250
============================================================
The Company contributed approximately $752,000 to its pension plan
during the third quarter of fiscal 2005.
Recently Issued Accounting Standards:
In December 2004, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 123R, "Share-Based Payment", which is an amendment to FASB
Statement No. 123, "Accounting for Stock-Based Compensation." Statement 123R
requires all share-based payments to employees, including grants of
-10-
employee stock options, to be recognized in the income statement based on their
fair values, and would be effective for interim or annual reporting periods
beginning after June 15, 2005. We are continuing to evaluate the full impact of
SFAS No. 123R for its adoption in the first quarter of fiscal 2006.
In June 2004, the Financial Accounting Standards Board (SFAS) issued an
interpretation of SFAS No. 143, Accounting for Asset Retirement Obligations.
This interpretation clarifies the scope and timing of liability recognition for
conditional asset retirement obligations under FASB No. 143, and is effective no
later than the end of our 2005 fiscal year. We have determined that this
interpretation, and the adoption of SFAS No. 143, will not have a material
impact on our consolidated financial statements or cash flows.
-11-
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
The Company and its subsidiaries are engaged in the design, manufacture,
distribution and sale of women's and children's apparel, and fabric handbags,
sport bags, backpacks, cosmetic bags, and related products. Our apparel lines
include women's loungewear, sleepwear, dresses and sportswear, and lingerie, as
well as infants' and children's clothing. For the most part, our products are
made to order, and are marketed and sold primarily to national mass
merchandisers, as well as to a range of other retailers.
Our business is subject to substantial seasonal variations.
Historically, we have realized a significant portion of net sales and net income
for the year during the first and second fiscal quarters during which time our
customers generally increase inventory levels in anticipation of both
back-to-school and holiday sales. We expect that trend to continue during fiscal
2005. The Company believes this seasonality is consistent with the general
pattern associated with sales to the retail industry and we expect this pattern
to continue. Consequently, the results for any one period in a fiscal year are
not necessarily indicative of results for the whole year. The Company's
quarterly results of operations may also fluctuate significantly as a result of
a number of other factors, including the timing of shipments to customers and
economic conditions. Accordingly, comparisons between quarters may not
necessarily be meaningful, and the results for any one quarter are not
necessarily indicative of future quarterly results or of full-year performance.
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 the application of its 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, 2004 consolidated financial statements, located in the Annual
Report on Form 10-K filed with the Securities and Exchange Commission on
September 28, 2004. Management has identified certain critical accounting
policies that are described below.
-12-
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 based upon 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
and also maintains accounts receivable insurance on certain of its customers. 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.
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Liquidity and Capital Resources
The Company's cash and cash equivalents increased $558,000 during the
nine-month period ended March 31, 2005 to $1,184,000 from $626,000 at June 30,
2004.
Net cash provided by operating activities totaled $5,071,000, primarily
from an decrease in accounts receivable totaling $6,575,000 which reflects much
lower shipping in the March 2005 fiscal quarter compared to the June 2004 fiscal
quarter. Net cash flows provided by operating activities was higher by about
$7,000,000 for the nine-month period ended March 31, 2005 compared to the same
period in 2004, relating primarily to approximately $9,600,000 cash provided
from accounts receivable collections in the current period, since we had much
higher net sales in this year's first 6 months coupled with much lower
comparative third quarter net sales this year versus last year. This was partly
offset by a smaller decrease in inventory for the nine-month period ended March
31, 2005 ($2,188,000) versus the same nine-month period in fiscal 2004
($4,352,000). Funds used in financing activities of $4,109,000 were mostly the
result of $4,220,000 in net repayments under the Company's bank credit facility,
$106,000 used for principal mortgage payments, $98,000 for stock repurchases,
offset by $315,000 in proceeds from the exercise of stock options.
Net cash used in investing activities of $404,000 was for purchases of
property and equipment.
On May 5, 2005, the Company amended its bank credit facility. The
amended facility, which now expires December 1, 2007, continues to provide for
short-term loans and the issuance of letters of credit in an aggregate amount
not to exceed $40,000,000. Based on a borrowing formula, the Company may borrow
up to $25,000,000 in short-term loans and up to $40,000,000 including letters of
credit. The borrowing formula allows for an additional amount of borrowing
during the Company's peak borrowing season from June to October. 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, as defined, and effective June 30, 2005, imposes certain
debt to equity ratio requirements. The Company was in compliance with all
applicable financial covenants as of March 31, 2005. As of March 31, 2005, there
was no borrowing on the short-term line of credit, and the Company had
$10,449,000 of additional availability (based on the borrowing formula) under
its credit facility. At March 31, 2005, the Company was contingently obligated
on open letters of credit with an aggregate face amount of approximately
$8,737,000. 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, 2005 was 5.5 %.
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, or partially paid down from time to time during the term of the financing.
-14-
During fiscal 2004, the Company recorded a charge based on a decision
to withdraw from the Union's multi-employer pension plan. A withdrawal would
terminate the Company's obligations to make future contributions to the pension
plan, although the decision obligates the Company for a portion of the unfunded
pension obligation under the plan and the Company would be required to
contribute to the union's 401-K plan. The final determination of the amount of
the Company's portion of the unfunded pension obligation is impacted by the
timing of the final settlement by the Company to withdraw from the plan and the
continued participation of other companies that contribute to the pension plan.
Based on the latest information provided to the Company by the union, the
estimated present value is approximately $500,000.
During fiscal 2005, the Company continued to shift certain production
requirements to Far East manufacturers in an effort to take advantage of cost
savings associated with the purchase of finished goods and with the related
reduction in the investment of capital resources in piece goods and other raw
materials.
The Company believes that funds provided by operations, existing working
capital, and the Company's bank line of credit will be sufficient to meet
foreseeable working capital needs.
There were no material commitments for capital expenditures at March 31,
2005.
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 and
nine-month periods ended March 31, 2005, the Company purchased approximately
10,000 shares and 13,000 shares of its Common Stock at a cost of approximately
$82,000 and $98,000, respectively. As of March 31, 2005, the Company purchased a
total of 238,151 shares of its Common Stock at a cost of approximately $962,000
in connection with the repurchase program.
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, 2005 to
June 30, 2005 for the period under the caption "Less than 1 Year" and,
thereafter, each subsequent fiscal year of the Company:
-15-
* * * * Payments Due by Period * * * *
Contractual Obligations Total Less than 1 2-3Years 4-5 Years After 5 Years
Year
Notes Payable $ -- $ -- $ -- $ -- $ --
Mortgage Payable 2,917,000 36,000 318,000 360,000 2,203,000
Royalties 728,000 59,000 580,000 89,000 --
Operating Leases 2,863,000 263,000 1,713,000 887,000 --
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Total Contractual
Obligations $ 6,508,000 $ 358,000 $ 2,611,000 $ 1,336,000 $ 2,203,000
-----------------------------------------------------------------------------
* * * * * * * * After * * * * * * * *
Other Commercial Less than
Commitments Total 1 Year 2-3Years 4-5 Years After 5 Years
- -----------------------------------------------------------------------------------------------------------
Letters of Credit $ 8,737,000 $ 8,737,000 $ -- $ -- $ --
-----------------------------------------------------------------------------
Total Commercial
Commitments $ 8,737,000 $ 8,737,000 $ -- $ -- $ --
-----------------------------------------------------------------------------
The Company enters into arrangements with vendors to purchase
merchandise up to three months in advance of expected delivery. These purchase
orders do not contain any significant termination payments or other penalties if
cancelled.
Our rent expense under operating leases provides for escalation clauses
and other lease concessions as applicable in each lease. The minimum lease
payments are recognized on a straight-line basis over the term of each
individual underlying lease.
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
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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 $22,476,000 and $96,722,000 during the three and nine-month
periods ended March 31, 2005 compared to $26,413,000 and $95,054,000 in the
three and nine-month periods ended March 31, 2004, respectively. The decrease in
net sales for the three-month period was mostly the result of much lower sales
volume in the Company's Apparel category, only partly offset by higher Handbags
category sales volume. The nine-month period ended March 31, 2005 reflected
slightly higher net sales versus the comparable prior period attributable to
increased handbag net sales, not fully offset by lower apparel net sales.
Net sales for the Apparel category were $15,121,000 for the three-month period
ended March 31, 2005, a decrease in net sales of $5,366,000, or 26.2%, from the
same quarter in fiscal 2004. Substantially all of the sales decrease for this
category was due to lower net sales from the women's sleepwear business, which
resulted primarily from a reduction of repeat orders from one of its customers.
In addition, net sales in the catalog business dropped 15.1% compared to last
year's three-month comparable period, continuing a trend of a lower level of
reorders from customers of this division, based, in turn, on lower demand for
mail-order apparel. Net sales in the children's apparel business was about equal
with last year's sales results for the same quarter. For the nine-month period
ended March 31, 2005, net sales for the Apparel category were $70,094,000, or
8.3% below the same period in the prior fiscal year, for the same reasons
regarding the women's sleepwear business and the Company's catalog business
(described above), partly offset by better children's apparel sales from
increased customer orders, as well as the introduction of new items within this
business.
Net sales for the Handbags category were $7,355,000 for the three-month period
ended March 31, 2005, an increase of $1,429,000, or about 24.1 % above the same
three-month period in the prior year, reflecting continued growth with the
premium business' most significant customer, slightly offset by other handbag
business, which experienced decreased sales for the quarter. Fiscal 2004's
nine-month period ended March 31, 2005 had net sales of $26,628,000, or 43.1%
more than the prior comparable nine-month fiscal period, which totaled
$18,604,000, with the premium business contributing about 86% of the overall net
sales increase.
Gross margins were 23.2 % and 22.4% in the three-month and nine-month periods
ended March 31, 2005 compared to 25.4 % and 24.9% in the comparable periods
ended March 31, 2004, respectively.
Gross margin for the Apparel category in the three-month period ended March 31,
2005, increased slightly to 27.8 % from 27.4 % in last year's comparable
three-month period, primarily attributable to higher margins contributed by the
women's sleepwear business, not entirely offset by lower margins in the
children's apparel business which experienced higher customer allowances, and
slightly lower margins in the catalog business. For the nine-month period ended
March 31, 2005, gross margins were 25.3 % for this
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category versus 26.2 % in the prior year comparable period, primarily due to
lower children's apparel margins related to required higher customer allowances
than last year's nine-month comparable period.
Gross margin for the Handbags category was 13.5 % in the quarter ended March 31,
2005 compared to 18.8% in the similar prior year quarter. The much lower gross
margin for the most part reflects marketplace competition as a result of which
the Company reduced its gross profit margin in order to maintain sales, as well
as lower handbag business margins due to lower sales of licensed products (which
normally carry a higher margin), in the current quarter compared to the same
quarter in fiscal 2004. For the nine-month period ended March 31, 2005 the
Handbags category gross profit decreased to 14.8 % from 19.5 %, for the same
reasons.
Shipping, selling and administrative expenses totaling $6,115,000 were $825,000
lower than the third quarter in the prior year's comparable period. As a
percentage of net sales, shipping, selling and administrative expenses increased
slightly to 27.2 % from 26.3 %, due to the relatively higher level of fixed
expenses compared to lower net sales in the current three-month period.
Shipping, selling and administrative expenses for the nine-month period ended
March 31, 2005 were $20,278,000 (21.0 % of net sales), or $957,000 lower than
the same nine-month period in the prior fiscal year which totaled $21,235,000
(22.3 % of net sales), the result of both lower royalty expense relating to the
sale of licensed product, and lower selling commissions attributable to sales
mix.
Interest expense of $98,000 in the third quarter of fiscal 2005 compares to
$107,000 in the prior comparable period, resulting from a lower level of
borrowing during the current three-month period versus last year's comparable
quarter. For the nine month period ended March 31, 2005, interest expense
totaled $558,000 versus $485,000. The increase in the nine-month period ended
March 31, 2005 principally reflects a higher interest rate and a higher level of
borrowing to support higher overall sales volume compared to last year's
comparable period.
The decrease in earnings before income taxes for both the three-month and
nine-month periods ended March 31, 2005, as compared to the equivalent prior
fiscal periods, was due primarily to lower gross profit margins and higher
interest expense, which was not completely offset by lower shipping, selling and
administrative expenses, as discussed above. For the period ended March 31,
2005, the Company had an effective tax rate of 54.9 %, mostly attributable to
expiring foreign tax credits which can not be utilized, compared to 47.0 % in
the same period of the prior year. Net loss for the three month period ended
March 31, 2005 of $640,000 was greater compared to a net loss for the same
period last year of $240,000. For the nine-month period ended March 31, 2005,
net earnings were $381,000, against net earnings of $1,017,000 in the prior
nine-month comparable period.
Recently Issued Accounting Standards
In December 2004, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 123R, "Share-Based Payment", which is an amendment to FASB Statement No.
123, "Accounting for Stock-Based Compensation." Statement
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123R requires all share-based payments to employees, including grants of
employee stock options, to be recognized in the income statement based on their
fair values, and would be effective for interim or annual reporting periods
beginning after June 15, 2005. We are continuing to evaluate the full impact of
SFAS No. 123R for its adoption in the first quarter of fiscal 2006.
In June 2004, the Financial Accounting Standards Board (SFAS) issued an
interpretation of SFAS No. 143, Accounting for Asset Retirement Obligations.
This interpretation clarifies the scope and timing of liability recognition for
conditional asset retirement obligations under FASB No. 143, and is effective no
later than the end of our 2005 fiscal year. We have determined that this
interpretation, and the adoption of SFAS No. 143, will not have a material
impact on our consolidated financial statements or cash flows.
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 earnings 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. In addition, results of
operations during any particular period in a fiscal year may not be necessarily
indicative of similar results for any other fiscal year. In that regard, the net
sales and net earnings for the third quarter of fiscal 2005 were much lower
compared to the comparable period of 2004. As the Company previously announced,
the Company expects net earnings for the second half of fiscal 2005 to be
significantly below last year's second half, and, as a result, full year results
are anticipated to be lower than in fiscal 2004.
The Company believes that seasonal and other variations are characteristic of
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 or other period are not necessarily
indicative of future results.
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.
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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,
2004.
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 March 31,
2005 that has materially affected, or is reasonably likely to materially affect,
the Company's internal control over financial reporting.
PART II. OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(a) During the three-month period ended March 31, 2005, the Company
issued an aggregate of 31,000 shares of its common stock, $1.00 par value per
share ("Common Stock"), upon the exercise of stock options previously granted
under a stockholder approval stock option plan of the Company. The Company
received an aggregate of $31,458 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 6,055 mature 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
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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 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 is placed on
each certificate representing the shares of Common Stock and stop transfer
instructions are placed on 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.
(b) Not Applicable
(c) Issuer Purchases of Equity Securities
The following sets forth certain information with respect to purchases
by the Company of shares of Common Stock during the three months ended March 31,
2005:
Maximum Number
Total Number of Shares of Shares that May
Total Average Purchased as Part Of Yet Be Purchased
Number of Shares Price Paid Publicly Announced Under the Plans or
Period Purchased (1) (2) per Share Plans Or Programs Programs
------------------------------------------------------------------------------------
January 1, 2005-
January 31, 2005 15,150 $8.00 10,150 111,990
February 1, 2005-
February 28, 2005 141 4.80 141 111,849
March 1, 2005-
March 31, 2005 1,055 4.45 -- 111,849
Total 16,346 10,291 111,849
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(1) On December 3, 2002, the Company publicly announced that the Board of
Directors authorized the repurchase by us of up to 350,000 shares of Common
Stock, and that purchases would be made from time to time in the open market
and/or through privately negotiated transactions, subject to general market
and other conditions. Reference is made to "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and to Note 5 of
the Notes to Consolidated Unaudited Financial Statements on page 7 of this
Form 10-Q for additional information about repurchases of shares of Common
Stock.
(2) These amounts include 5,000 shares and 1,055 shares of Common Stock
received by the Company in January 2005 and March 2005, respectively, in
partial payment of the exercise price of stock options under the terms of a
stockholder approved stock option plan which permits the use of previously
acquired shares of Common Stock in full or partial payment of the applicable
exercise price of stock options.
Item 6. Exhibits
Exhibits Description
4(a) Second Amendment to Revolving Loan Agreement, Promissory Note and
Other Loan Documents dated May 5, 2005 between the Company an
Hudson United Bank.
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.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
JACLYN, INC.
------------
(Registrant)
------------
May 16, 2005 /s/ ALLAN GINSBURG
-----------------------------
Allan Ginsburg
Chairman of the Board
May 16, 2005 /s/ ANTHONY CHRISTON
-----------------------------
Anthony Christon
Vice President
Chief Financial Officer
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EXHIBIT INDEX
Exhibit No. Description Page
- ----------- ----------- ----
4(a) Second Amendment to Revolving Loan Agreement, Promissory Note and
Other Loan Documents dated May 5, 2005 between the Company and
Hudson United Bank.
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.
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