UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

 

For the Quarter Ended June 30, 2002

Commission File No. 1-9502

 

JKC GROUP, INC.

(Exact name of registrant as specified in its charter)

 

 

Registrant’s telephone number, including area code: (212) 840-0880

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes   ý   No   o

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

 

	Title of Class				Outstanding at July 31, 2002
Common Stock				36,397,267

 

 

JKC GROUP, INC.

(Formerly STAGE II APPAREL CORP.)

 

 

INDEX

 

Item I.  Financial Information

Condensed Balance Sheets — June 30, 2002 (unaudited) and December 31, 2001

Condensed Statements of Loss — Three months and Six Months Ended June 30, 2002 and 2001 (unaudited)

Statements of Comprehensive Loss — Three months and Six Months Ended June 30, 2002 and 2001 (unaudited)

Condensed Statements of Cash Flows — Six months Ended June 30, 2002 and 2001 (unaudited)

Notes to Condensed Financial Statements

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

Item 3.  Quantitative and Qualitative Disclosure About Market Risk

Part II.  Other Information

 

1

 

PART I.  FINANCIAL INFORMATION

 

JKC GROUP, INC.

(Formerly STAGE II APPAREL CORP.)

 

CONDENSED BALANCE SHEETS

 

(In thousands)

 

		June 30, 2002			Dec. 31, 2001
		(Unaudited)
ASSETS:
Current assets:
Cash		$	866		$	3
Marketable securities		—			6
Accounts receivable		8			240
Miscellaneous receivables		200			—
Finished goods inventory		—			35
Prepaid expenses and other current assets		23			—
Total current assets		1,097			284
Trademark, less accumulated amortization of $80 at June 30, 2002 and $67 at December 31, 2001		195			208
TOTAL ASSETS		$	1,292		$	492
LIABILITIES:
Current liabilities:
Due to factor		$	—		$	514
Note payable to affiliate		176			403
Accounts payable		41			278
Due to affiliate		6			72
Other current liabilities		67			90
Total current liabilities		290			1,357
COMMITMENTS AND CONTINGENCIES (See Note 3)
SHAREHOLDERS’ EQUITY (DEFICIT)
Preferred stock, $.01 par value, 1,000 shares authorized; none issued and outstanding		—			—
Common stock, $.01 par value, 100,000 shares authorized at June 30, 2002 and 9,000 shares authorized at December 31, 2001; 36,397 shares issued and outstanding at June 30, 2002 and 5,016 shares issued and 4,127 shares outstanding at December 31, 2001		364			50
Additional paid-in capital		9,513			7,366
Accumulated deficit		(8,875		)	(6,402		)
		1,002			1,014
Less treasury stock, at cost; none at June 30, 2002 and 889 shares at December 31, 2001		—			(1,879		)
TOTAL SHAREHOLDERS’ EQUITY (DEFICIT)		1,002			(865		)
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT)		$	1,292		$	492

 

See Notes to Condensed Financial Statements.

 

2

 

JKC GROUP, INC.

(Formerly STAGE II APPAREL CORP.)

 

CONDENSED STATEMENTS OF LOSS

 

(Unaudited)

 

(In thousands, except per share data)

 

		Three Months Ended June 30,						Six Months Ended June 30,
		2002			2001			2002			2001
Net sales		$	4		$	1,026		$	21		$	1,690
Cost of goods sold		8			1,111			$	35		1,770
Gross loss		(4		)	(85		)	(14		)	(80		)
Royalty and other income		22			18			45			21
		18			(67		)	31			(59		)
Selling, general and administrative expenses		107			325			255			829
Compensation from replacement options		959			—			959			—
Gain on settlement of litigation, net of legal expenses		(526		)	—			(526		)	—
Operating loss		(522		)	(392		)	(657		)	(888		)
Other income (expenses):
Interest income		1			2			1			9
Interest and factoring expenses		3			(72		)	(12		)	(152		)
Gain on sale of marketable securities		—			36			30			1
Net loss		$	(518	)	$	(426	)	$	(638	)	$	(1,030	)
Loss per common share:
Basic and diluted		$	(.02	)	$	(.10	)	$	(.04	)	$	(.25	)
Weighted average common shares outstanding		30,985			4,127			17,630			4,127

 

See Notes to Condensed Financial Statements.

 

3

 

JKC GROUP, INC.

(Formerly STAGE II APPAREL CORP.)

 

STATEMENTS OF COMPREHENSIVE LOSS

 

(Unaudited)

 

(In thousands)

 

		Three Months Ended June 30,						Six Months Ended June 30,
		2002			2001			2002			2001
Net income (loss)		$	(522	)	$	(426	)	$	(638	)	$	(1,030	)
Other comprehensive income (loss):
Unrealized gains on marketable securities		—			30			—			74
Reclassification adjustment for gains included in net loss		—			(36		)	(30		)	(1		)
		—			(6		)	(30		)	73
Comprehensive income (loss)		$	(522	)	$	(432	)	$	(668	)	$	(957	)

 

See Notes to Condensed Financial Statements.

 

4

 

JKC GROUP, INC.

(Formerly STAGE II APPAREL CORP.)

 

CONDENSED STATEMENTS OF CASH FLOWS

 

(Unaudited)

 

(In thousands)

 

 

		Six Months Ended June 30,
		2002			2001
Net cash provided by operating activities		$	22		618
Investing Activities:
Sale or redemption of marketable securities		36			530
Decrease in cash surrender value		—			63
Net cash provided by investing activities		36			593
Financing Activities:
Factor financing, net		(514		)	(1,308		)
Issuance of common stock		1,546			—
Increase (decrease) in note payable - affiliate		(227		)	56
Net cash provided by (used in) financing activities		805			(1,252		)
Net increase (decrease) in cash and cash equivalents		863			(41		)
Cash and cash equivalents at beginning of year		3			104
Cash and cash equivalents at end of period		$	866		$	63
Supplemental disclosure of cash flow information:
Cash paid for income taxes		$	5		$	18
Cash paid for interest, excluding factoring fees		$	6		$	121

 

See Notes to Condensed Financial Statements.

 

5

 

JKC GROUP, INC.

(Formerly STAGE II APPAREL CORP.)

 

NOTES TO CONDENSED FINANCIAL STATEMENTS

 

Note 1.   Basis of Presentation

 

The accompanying unaudited condensed financial statements of JKC Group, Inc., formerly Stage II Apparel Corp. (the “Company”), have been prepared in accordance with accounting principles generally accepted in the United States of America and, in the opinion of management, reflect all adjustments (consisting of normal recurring adjustments) necessary to fairly present the Company’s financial position at June 30, 2002 and its results of operations, comprehensive loss and cash flows for the interim periods presented.  The accounting policies followed by the Company are set forth in Note 1 to the Consolidated Financial Statements included in its Annual Report on Form 10-K for the year ended December 31, 2001 and are incorporated herein by reference.

 

Note 2.   Earnings Per Share

 

The Company follows Statement of Financial Accounting Standards No. 128, Earnings Per Share (“FAS 128”).  Under FAS 128, companies that are publicly held or have complex capital structures are required to present basic and diluted earnings per share (“EPS”) on the face of the income statement.  Basic EPS excludes dilution and is computed by dividing income (loss) available to common shareholders by the weighted average number of common shares outstanding for the period.  Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted and the resulting additional shares are dilutive because their inclusion decreases the amount of EPS.

 

Note 3.   Commitments and Contingencies

 

Litigation Settlement.  The Company licensed its Cross Colours trademark for domestic sales of boys’ sportswear apparel under an agreement with a three-year term scheduled to end in 2002.  In 2000, following the licensee’s failure to pay minimum royalties, the Company brought an action in New York County Supreme Court against the licensee for damages in excess of $1.5 million under the license agreement.  Minimum royalties to the Company required under the agreement were $420,000 in 2001 and $660,000 in 2002.  In April 2002, the Company accepted a settlement offer of $535,000 in its litigation against the domestic licensee.  The settlement is payable in a contemporaneous installment of $335,000 and the balance of $200,000 in January 2003.  The Company assigned its rights to the January 2003 settlement installment in satisfaction of its remaining obligations under a note payable to an affiliate.

 

Miscellaneous Claims.  Various miscellaneous claims and suits arising in the ordinary course of business have been filed against the Company.  In the opinion of management, none of these matters will have a material adverse effect on the results of operations or the financial position of the Company.

 

Note 4. - Equity Infusion

 

On April 16, 2002, as part of the planned redirection of its business, the Company completed a $1.5 million equity infusion by Alpha Omega Group, Inc., a private investment group (“AOG”), pursuant to a stock purchase agreement with AOG dated as of August 23, 2001 (the “AOG Agreement”).  In accordance with the AOG Agreement, the Company issued 30 million shares of its common stock to AOG at $.05 per share and an additional 2.1 million shares to AOG’s advisory firm, representing 83% and 6%, respectively, of 36,227,267 shares of the Company’s common stock outstanding after the issuance.  The parties also consummated various related transactions covered by the AOG Agreement (the “AOG Transactions”), including the reconstitution of the Company’s board of directors with three designees of AOG, an increase in the Company’s authorized common stock to 100 million shares, transitional services from members of existing management and replacement of outstanding stock options with new options for the same number of shares exercisable for three years at the lower of $.50 per share or the exercise price of the replaced options (the “Replacement Options”), a change in the name of the Company to “JKC Group, Inc.” and a related change in the American Stock Exchange (“AMEX”) trading symbol for its common stock to “JKC,” effective April 18, 2002.

 

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Note 5 - Stock-Based Compensation.

 

Although the Company follows APB Opinion 25, Accounting for Stock Issued to Employees, and has elected to account for options issued under employee stock option plans based on the disclosure only alternative provided in Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (“FAS 123”), the disclosure only alternative is not an available accounting method for the Replacement Options.  Under FAS 123, the Replacement Options must be valued on a quarterly basis, and the compensation cost must be recognized and adjusted quarterly for vested options or ratably over the vesting period for unvested options.  Replacement Options covering a total of 1,907,000 shares of the Company’s common stock were fully vested on issuance and are exercisable at prices ranging from $.30 to $.50 per share.  Based on the AMEX closing price of $.99 per share for the common stock on June 30, 2002, the Company recorded compensation expense of $959,000 as of that date, reflecting the difference between the aggregate exercise price of the Replacement Options and the market price of the underlying shares.  The compensation expense is subject to quarterly adjustment based on changes in the market price of the Company’s common stock as long as the Replacement Options remain outstanding.

 

Note 6. - Letter of Intent for Acquisition

 

On June 5, 2002, the Company entered into a letter of intent with Zi Corporation, a Canadian provider of intelligent interface solutions (“Zi”), for the Company’s purchase of Magic Lantern Communications Ltd. (“MLC”) and its subsidiaries (collectively, the “Lantern Group”).  Founded in 1975, MLC is a Canadian distributor of educational and learning content in video and other electronic formats.  The Lantern Group also provides internet based educational content on a subscription basis through a wholly owned subsidiary of MLC and digital video encoding services on a fee basis through a 75% owned subsidiary of MLC.  See Note 7 - Subsequent Event.

 

Note 7. - Subsequent Event

 

On August 2, 2002, the Company entered into a stock purchase agreement (the “ZI Agreement”) with Zi and a wholly owned subsidiary of the Company organized in Canada to facilitate Zi’s tax planning for its sale of the Lantern Group (the “Acquisition Sub”).  The Purchase Agreement provides for the Company’s acquisition of the Lantern Group through the purchase from Zi of all the outstanding capital stock of MagicVision Media Inc., MLC’s parent holding company (“MagicVision”), in consideration for a three-year promissory note of the Company in the principal amount of $3,000,000 and 29,750,000 shares of the Acquisition Sub’s exchangeable preferred stock (“Exchangeable Shares”).  The Exchangeable Shares are exchangeable for the same number of shares of the Company’s common stock, which would represent 45% of its currently outstanding shares.  Prior to closing, Zi may elect to receive 29,750,000 shares of the Company’s common stock instead of the Exchangeable Shares.  Additional stock and cash consideration or offsets against the Company’s promissory note are provided for under earnout and claw-back arrangements based on the Lantern Group’s post-acquisition operating results.

 

The Purchase Agreement also provides for related closing transactions, including the addition of three Zi designees to the Company’s board of directors (“Zi Designees”), the reincorporation of the Company from New York to Delaware under the name Magic Lantern Corporation or similar name and approval of a new stock option plan for management of the Lantern Group, MagicVision and the Zi Designees.  The closing of the transactions contemplated by the Zi Agreement is subject to various conditions, including approval of the transactions by holders of a majority of the Company’s outstanding common stock, completion of due diligence and regulatory clearances.

 

7

 

Item 2

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

General

 

JKC Group, Inc., formerly Stage II Apparel Corp. (the “Company”), was historically engaged primarily as a distributor of proprietary and licensed brandname casual apparel, activewear and collection sportswear for men and boys.  In response to a decline in its apparel distribution operations from increasing softness in the retail market and associated order cancellations, the Company elected to contract those operations during the last two years and emphasize trademark licensing as part of a strategy of reducing the costs and inventory risks associated with its core business.

 

Business Redirection

 

Licensing.  To initiate its business redirection, the Company granted an exclusive license to the Kid’s Headquarters division of Wear Me Apparel in October 1999 for domestic distribution of boys’ sportswear lines under the Company’s Cross Colours label.  In January 2001, the Company entered into its first international licensing arrangement with a Japanese apparel company for sales of men’s and ladies’ apparel under the Cross Colours brand throughout Japan and its territories and possessions.

 

In view of timing requirements for the introduction of licensed apparel lines, the Company’s licensing program alone was not expected to reverse its financial downturn in the near term.  In addition to inherent timing constraints, the Company was faced early in 2000 with unanticipated performance defaults by its domestic licensee under the Cross Colours license agreement.  In February 2001, the Company brought an action for unpaid royalties against the licensee.  Although the litigation was settled in April 2002 for $535,000, payable $335,000 at the time of settlement and the balance in January 2003, the absence of the anticipated revenue stream during the first two years of the license substantially impaired the Company’s financial flexibility for executing its planned business redirection.

 

Equity Infusion.  To address these developments, the Company’s management entered into various discussions in 2001 for a potential strategic alliance or equity infusion.  Those discussions culminated in August 2001 with the execution of a stock purchase agreement (the “AOG Agreement”) with Alpha Omega Group, Inc., a private investor group (“AOG”), for the issuance of 30 million shares of the Company’s common stock to AOG at $.05 per share or a total of $1.5 million.  In addition to the equity infusion, the AOG Agreement provided for related closing transactions (collectively, the “AOG Transactions”), including:

 

•                  Reconstitution of the Company’s board of directors with three designees of AOG;

•                  Increase in the Company’s authorized common stock to 100 million shares;

•                  Transitional services from members of existing management;

•                  Replacement of outstanding stock options with new options for the same number of shares exercisable for three years at the lower of $.50 per share or the exercise price of the replaced options (the “Replacement Options”); and

•                  Change in the name of the Company to “JKC Group, Inc.” and a related change in the American Stock Exchange (“AMEX”) trading symbol for its common stock to “JKC,” effective April 18, 2002.

 

The AOG Transactions were approved by the Company’s shareholders at a special meeting on December 27, 2001.  The closing of the AOG Transactions was completed on April 16, 2002 following AMEX approval of the Company’s additional listing application for the new shares.  The shares acquired by AOG and an additional 2.1 million shares issued to AOG’s advisor represent 83% and 6%, respectively, of the Company’s common stock outstanding after the closing of the AOG Transactions.  Following the closing, the Company plans to continue its business redirection through one or more acquisitions, with a view toward expanding existing licensing operations and adding compatible business lines.

 

Stock-Based Compensation.  Although the Company follows APB Opinion 25, Accounting for Stock Issued to Employees, and has elected to account for options issued under employee stock option plans based on the

 

8

 

disclosure only alternative provided in Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (“FAS 123”), the disclosure only alternative is not an available accounting method for the Replacement Options.  Under FAS 123, the Replacement Options must be valued on a quarterly basis, and the compensation cost must be recognized and adjusted quarterly for vested options or ratably over the vesting period for unvested options.  Replacement Options covering a total of 1,907,000 shares of the Company’s common stock were fully vested on issuance and are exercisable at prices ranging from $.30 to $.50 per share.  Based on the AMEX closing price of $.99 per share for the common stock on June 30, 2002, the Company recorded compensation expense of $959,000 as of that date, reflecting the difference between the aggregate exercise price of the Replacement Options and the market price of the underlying shares.  The compensation expense is subject to quarterly adjustment based on changes in the market price of the Company’s common stock as long as the Replacement Options remain outstanding.

 

Pending Acquisition.  Following the closing under the AOG Agreement, the Company continued to pursue its business redirection by exploring potential acquisition opportunities, with a view toward expanding existing licensing operations or adding compatible business lines.  On June 5, 2002, the Company entered into a letter of intent with Zi Corporation, a Canadian provider of intelligent interface solutions (“Zi”), for the Company’s purchase of Magic Lantern Communications Ltd. (“MLC”) and its subsidiaries (collectively, the “Lantern Group”).  Founded in 1975, MLC is a Canadian distributor of educational and learning content in video and other electronic formats.  The Lantern Group also provides internet based educational content on a subscription basis through a wholly owned subsidiary of MLC and digital video encoding services on a fee basis through a 75% owned subsidiary of MLC.

 

On August 2, 2002, the Company entered into a stock purchase agreement (the “ZI Agreement”) with Zi and a wholly owned subsidiary of the Company organized in Canada to facilitate Zi’s tax planning for its sale of the Lantern Group (the “Acquisition Sub”).  The Purchase Agreement provides for the Company’s acquisition of the Lantern Group through the purchase from Zi of all the outstanding capital stock of MagicVision Media Inc., MLC’s parent holding company (“MagicVision”), in consideration for a three-year promissory note of the Company in the principal amount of $3,000,000 and 29,750,000 shares of the Acquisition Sub’s exchangeable preferred stock (“Exchangeable Shares”).  The Exchangeable Shares are exchangeable for the same number of shares of the Company’s common stock, which would represent 45% of its currently outstanding shares.  Prior to closing, Zi may elect to receive 29,750,000 shares of the Company’s common stock instead of the Exchangeable Shares.  Additional stock and cash consideration or offsets against the Company’s promissory note are provided for under earnout and claw-back arrangements based on post-acquisition operating results.

 

The Purchase Agreement also provides for related closing transactions, including the addition of three Zi designees to the Company’s board of directors, the reincorporation of the Company from New York to Delaware under the name Magic Lantern Corporation or similar name and approval of a new stock option plan for management of the Lantern Group.  The closing of the transactions contemplated by the Zi Agreement is subject to various conditions, including approval of the transactions by holders of a majority of the Company’s outstanding common stock, completion of due diligence and regulatory clearances.

 

Results of Operations

 

Quarters Ended June 30, 2002 and 2001.  Net sales were $4,000 for the second quarter of 2002 compared to $1.0 million in the corresponding quarter of 2001.  The decrease primarily reflects a contraction of the Company’s apparel distribution business as part of its strategy to focus on licensing opportunities.

 

Cost of goods sold as a percentage of sales increased to 200% in the second quarter of 2002 compared to 108.3% in the same quarter last year.  Both quarters reflect off-price sales of discontinued brands as part of the Company’s efforts to reduce inventory and redirect its business to focus on licensing opportunities.

 

Selling, general and administrative (“SG&A”) expenses of $107,000 for the second quarter of 2002 decreased by 67.1% from $325,000 for the second quarter of 2001, primarily reflecting a contraction of the Company’s apparel distribution business as part of its strategy to focus on licensing opportunities.

 

Interest income, net of factoring expenses, was $4,000 in the second quarter of 2002 compared to factoring expenses, net of interest income, of $70,000 in the corresponding quarter last year, reflecting repayment of amounts outstanding under the Company’s credit facility with its factor from proceeds of the AOG Transactions in April

 

9

 

2002.  See “Business Redirection - Equity Infusion” above and “Liquidity and Capital Resources - Capital Resources.”

 

Because the issuance of Replacement Options covering a total of 1,907,000 shares of the Company’s common stock as part of the AOG Transactions involved a compensation component that must be expensed under FAS 123, the Company recognized a non-cash charge of $959,000 at June 30, 2002.  The charge reflects the difference between the aggregate exercise price of the Replacement Options and the market price of the underlying shares on that date.  See “Business Redirection - Stock-Based Compensation.”  The impact of the charge was partially offset by a gain of $526,000 net of legal expenses recorded in the second quarter of 2002 on settlement of the Company’s litigation against the domestic licensee of its Cross Colours trademark.  See “Business Redirection - Licensing.”

 

The Company recognized a net loss of $518,000 or $.02 per share based on 30.9 million average shares outstanding for the three months ended June 30, 2002, compared to a net loss of $426,000 or $.10 per share based on 4.1 million average shares outstanding for the second quarter of 2001, reflecting the foregoing trends.

 

Six Months Ended June 30, 2002 and 2001.  Net sales were $21,000 for the first six months of 2002, compared to $1.7 million in the corresponding period in 2001.  The decrease primarily reflects a contraction of the Company’s apparel distribution business as part of its strategy to focus on licensing opportunities.

 

Cost of goods sold as a percentage of sales increased to 166.7% in the first half of 2002 compared to 104.7% in the same period last year, reflecting off-price sales of discontinued brands as part of the Company’s efforts to reduce inventory and redirect its business to focus on licensing opportunities.

 

SG&A expenses of $255,000 for the first half of 2002 decreased by 69.2% from $829,000 for the first half of 2001, primarily reflecting a contraction of the Company’s apparel distribution business as part of its strategy to focus on licensing opportunities.

 

Interest and factoring expenses, net of interest income, aggregated $11,000 or 52.4% of sales in the first half of 2002 compared to $143,000 or 8.5% of sales in the corresponding period last year, reflecting a reduction in amounts outstanding under the Company’s credit facility with its factor.  See “Liquidity and Capital Resources - Capital Resources” below.

 

Because the Replacement Options issued as part of the AOG Transaction involve a compensation component that must be expensed under FAS 123, the Company recognized a non-cash charge of $959,000 at June 30, 2002, reflecting the difference between the aggregate exercise price of the Replacement Options and the market price of the underlying shares on that date.  See “Business Redirection - Stock-Based Compensation.”  The impact of the charge was partially offset by a gain of $526,000 net of legal expenses recorded in the second quarter of 2002 on settlement of the Company’s litigation against the domestic licensee of its Cross Colours trademark.  See “Business Redirection - Licensing.”

 

The Company recognized a net loss of $638,000 or $.04 per share based on 17.5 million average shares outstanding for the six months ended June 30, 2002, compared to a net loss of $1.0 million or $.25 per share based on 4.1 million average shares outstanding for the first half of 2001, reflecting the foregoing trends.

 

Liquidity and Capital Resources

 

Liquidity.  The Company’s cash position increased to $866,000 at June 30, 2002, compared to $3,000 at December 31, 2001.  The increase primarily reflects the Company’s net proceeds from the AOG Transactions and its receipt of $335,000 in litigation settlement proceeds.  See “Business Redirection – Equity Infusion” and “- Licensing.”

 

Capital Resources.  Prior to the AOG Transactions, the Company maintained a credit facility with the CIT Group/Commercial Services, Inc.  The credit facility provided for the factor to purchase the Company’s accounts receivable that it preapproved, without recourse, except in cases of merchandise returns or billing or merchandise disputes in the normal course of business.  In addition, the factor was responsible for the accounting and collection of all accounts receivable sold to it by the Company.  The factor received a commission under the credit facility in an amount less than 1% of the net receivables it purchased.  The agreements covering the credit facility also

 

10

 

provided for the issuance of letters of credit to fund the Company’s foreign manufacturing orders and for short term borrowings at a floating interest rate equal to 1/2% above the prime rate.

 

The Company’s obligations under its credit facility were payable on demand and secured by its inventory and accounts receivable.  The aggregate amount of letters of credit and borrowings available under the credit facility were determined from time to time by the factor based upon the Company’s financing requirements and financial performance.  The agreements covering the credit facility were terminable without penalty by the Company on May 31, 2002 or the end of any subsequent contract year upon 60 days’ notice.

 

The Company’s factoring arrangements provided for the factor to establish credit availability based on the Company’s financing requirements and financial performance.  Based on these terms, the Company’s implementation of its strategy for contracting its apparel distribution operations and emphasizing trademark licensing as a means of reducing the costs and inventory risks associated with its core business had the anticipated effect of reducing its financial flexibility under its credit facility.  During 2001, the Company made no new borrowings under the credit facility and applied proceeds from a sell off of substantially all its remaining inventory to reduce its credit facility debt to $514,000 at year end.

 

Because the Company’s planned business redirection involves implementation of branding strategies to exploit its existing trademarks and possible acquisitions of trademarks or other intangible assets that would not support additional factor debt, the Company did not expect the credit facility to provide a source of future financing for the redirection.  In April 2002, upon consummation of the AOG Transactions, the Company elected to terminate the agreements covering the credit facility after applying part of the proceeds from the AOG Transactions to repay the remainder of its outstanding factor debt and fees aggregating $265,000.

 

In April 2002, the Company accepted a settlement offer of $535,000 in its litigation against the domestic licensee of its Cross Colours trademark.  See “Business Redirection - Licensing” above.  The Company received an installment of $335,000 at the time of settlement, and the balance is due in January 2003.  The Company assigned its rights to the January 2003 settlement installment in satisfaction of its outstanding notes evidencing advances from an affiliate of Richard Siskind, a director, principal shareholder and the CEO of the Company.

 

The Company expects to account for its pending acquisition of the Lantern Group under the purchase method.  See “Business Redirection - Pending Acquisition.”  Upon the closing of the transactions contemplated by the Zi Agreement, the Company will allocate the purchase price for the acquired businesses among their assets and liabilities.  The purchase price consists of a three-year note in the amount of $3,000,000 issuable by the Company and 29,750,000 shares of subsidiary stock exchangeable for the same number of shares of the Company’s common stock, valued for this purpose at $9,223,000 based on its closing price immediately preceding the party’s signing of a letter of intent for the transaction in June 2002.

 

In March 2002, the Company was advised by the AMEX that its common stock will be subject to delisting proceedings unless it submitted an acceptable plan for regaining compliance with the applicable shareholders’ equity requirement of $4 million by September 30, 2002.  The Company submitted a response to the AMEX in April 2002 with the first phase of its plan for regaining compliance with the listing standards.  That phase was completed in April 2002 with the $1.5 million equity infusion under the AOG Agreement.

 

In June 2002, the AMEX granted the Company an extension for continuation of its AMEX listing through September  30, 2002 based on the second phase of its plan for increasing shareholders’ equity through the proposed Lantern Group acquisition.  If timely completed, the acquisition will increase the Company’s shareholders’ equity substantially above $4 million and satisfy its plan for regaining compliance with AMEX standards for the continued listing of its common stock.  If the Company fails to progress with or complete the planned acquisition or any comparable alternative for increasing its shareholders’ equity to that level by September 30, 2002, its common stock will be subject to delisting by the AMEX.  In that event, in addition to reduced liquidity in the outstanding common stock and related risks to shareholders, the Company’s ability to finance trademark acquisitions or other opportunities through equity transactions could be substantially impaired.

 

11

 

Forward Looking Statements

 

This Report includes forward looking statements within the meaning of Section 21E of the Securities Exchange Act relating to matters such as anticipated operating and financial performance, business prospects, developments and results of the Company.  Actual performance, prospects, developments and results may differ materially from anticipated results due to economic conditions and other risks, uncertainties and circumstances partly or totally outside the control of the Company, including risks of inflation, fluctuations in market demand for the Company’s products, changes in future cost of sales, customer and licensee performance risks, trademark valuation intangibles and uncertainties in the availability and cost of capital.  Words such as “anticipated,” “expect,” “intend,” “plan” and similar expressions are intended to identify forward looking statements, all of which are subject to these risks and uncertainties.

 

Item 3.    Quantitative and Qualitative Disclosure About Market Risk

 

The Company does not hold any derivative securities or other market rate sensitive instruments.

 

PART II.  OTHER INFORMATION

 

Item 6.   Exhibits and Reports on Form 8 - K.

 

(a)           Exhibits:

 

 

(b)           Reports on Form 8-K.

 

•                    Current Report on Form 8-K dated April 16, 2002 regarding completion of the transactions contemplated by the AOG Agreement.

 

•                    Current Report on Form 8-K dated June 14, 2002 regarding AMEX extension of continuation of common stock listing

 

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.

 

	JKC GROUP, INC.
Date: August 13, 2002	By:	/s/  Richard Siskind
		Richard Siskind
		Chief Executive Officer
		(Duly Authorized Officer)
		(Principal Executive Officer)

 

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