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 December 31, 2002
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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
- ------------------------------- ---------------------------------
(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 the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date.
Class Outstanding at February 1, 2003
- ------------------------------------ -------------------------------
Common Stock, par value $1 per share 2,491,080
JACLYN, INC. AND SUBSIDIARIES
INDEX
Page No.
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Part I. Financial Information
Item 1
Condensed Consolidated Balance Sheets -
December 31, 2002 (unaudited) and June 30, 2002
(derived from audited financial statements) 3
Condensed Consolidated Statements of Operations -
Three and Six Months Ended December 31, 2002 and
2001 (unaudited) 4
Condensed Consolidated Statements of Cash Flows -
Six Months Ended December 31, 2002 and 2001 (unaudited) 5
Notes to Condensed Consolidated 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 18
Item 4.
Controls and Procedures 19
Part II. Other Information:
Item 4
Submission of Matters to a Vote of Stockholders 19
Item 6
Exhibits and reports on Form 8-K 20
Signatures 21
Certifications 22
2
JACLYN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands)
December 31, June 30,
2002 2002
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(Unaudited) (See below)
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ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,464 $ 95
Accounts receivable, net 18,773 14,667
Inventory 6,607 11,395
Prepaid expenses and other current assets 2,568 2,594
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TOTAL CURRENT ASSETS 29,412 28,751
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PROPERTY, PLANT AND EQUIPMENT, net 1,188 1,211
GOODWILL 3,338 3,342
OTHER ASSETS 1,963 2,114
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TOTAL ASSETS $ 35,901 $ 35,418
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable - bank $ 7,250 $ 9,095
Accounts payable 4,124 7,081
Other current liabilities 3,919 2,828
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TOTAL CURRENT LIABILITIES 15,293 19,004
------------ ------------
MORTGAGE PAYABLE 3,092 -
OTHER LONG TERM LIABILITIES 590 590
COMMITMENTS
STOCKHOLDERS' EQUITY:
Common stock 3,369 3,369
Additional paid-in capital 12,117 12,117
Retained earnings 8,680 7,575
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24,166 23,061
Less: Common shares in treasury at cost 7,240 7,237
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TOTAL STOCKHOLDERS' EQUITY 16,926 15,824
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 35,901 $ 35,418
============ ============
The June 30, 2002 Balance Sheet is derived from audited financial statements.
See notes to condensed consolidated financial statements.
3
JACLYN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In Thousands, Except Share Amounts)
Three Months Ended Six Months Ended
December 31, December 31,
2002 2001 2002 2001
----------- ----------- ----------- -----------
Net sales $ 35,689 $ 15,658 $ 65,634 $ 33,878
Cost of goods sold 27,376 11,953 50,839 25,607
----------- ----------- ----------- -----------
Gross profit 8,313 3,705 14,795 8,271
----------- ----------- ----------- -----------
Shipping, selling and administrative expenses 6,870 3,814 12,716 8,241
Interest expense 198 75 357 131
Interest income 4 2 4 2
----------- ----------- ----------- -----------
7,064 3,887 13,069 8,370
----------- ----------- ----------- -----------
Earnings (loss) before income taxes 1,249 (182) 1,726 (99)
----------- ----------- ----------- -----------
Provision (benefit) for income taxes 450 (66) 621 (36)
----------- ----------- ----------- -----------
Net earnings (loss) $ 799 $ (116) $ 1,105 $ (63)
=========== =========== =========== ===========
Net earnings (loss) per common share - basic $ .31 $ (.04) $ .43 $ (.02)
=========== =========== =========== ===========
Weighted average number of shares outstanding - basic 2,561,000 2,561,000 2,561,000 2,561,000
=========== =========== =========== ===========
Net earnings (loss) per common share - diluted $ .30 $ (.04) $ .42 $ (.02)
=========== =========== =========== ===========
Weighted average number of shares outstanding - diluted 2,662,000 2,561,000 2,625,000 2,561,000
=========== =========== =========== ===========
See notes to condensed consolidated financial statements.
4
JACLYN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In Thousands)
Six Months Ended
December 31,
2002 2001
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Cash Flows From Operating Activities:
Net earnings (loss) $ 1,105 $ (63)
Adjustments to reconcile net earnings (loss) to net cash (used in) provided by
operating activities:
Depreciation and amortization 191 148
Changes in assets and liabilities:
(Increase) decrease in accounts receivable, net (4,106) 4,115
Decrease in inventory 4,788 1,883
Decrease (increase) in prepaid expenses and other assets 183 (456)
Decrease in accounts payable and other current liabilities (1,193) (2,157)
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Net cash provided by operating activities 968 3,470
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Cash Flows From Investing Activities:
Purchase of property and equipment (168) (34)
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Net cash used in investing activities (168) (34)
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Cash Flows From Financing Activities:
Decrease in notes payable - bank (1,845) (255)
Payment of acquisition notes (800) -
Proceeds from mortgage loan 3,211 -
Repurchase of common stock 3 -
Decrease in notes payable and other liabilities - (100)
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Net cash provided by (used in) financing activities 569 (355)
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Net Increase in Cash and Cash Equivalents 1,369 3,081
Cash and Cash Equivalents, beginning of period 95 66
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Cash and Cash Equivalents, end of period $ 1,464 $ 3,147
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Supplemental Information:
Interest paid $ 362 $ 139
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Taxes paid $ 70 $ 308
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See notes to condensed consolidated financial statements.
5
JACLYN, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Basis of Presentation:
The accompanying unaudited condensed consolidated balance sheet as of December
31, 2002, the condensed consolidated statements of operations and cash flows for
the three and six month periods ended December 31, 2002 and 2001, have been
prepared in accordance with accounting principles generally accepted in the
United States of America for interim financial information. Accordingly, they do
not include all of the information and footnotes required by accounting
principles generally accepted in the United States of America for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. It is suggested that these condensed consolidated financial
statements be read in conjunction with the audited financial statements and
notes thereto included in the Company's 2002 Annual Report to Stockholders. The
results of operations for the period ended December 31, 2002 are not necessarily
indicative of operating results for the full fiscal year.
1. Recently Issued Accounting Standards:
In June 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 146, "Accounting
for Costs Associated with Exit or Disposal Activities", replacing Emerging
Issues Task Force (EITF) Issue No. 94-3, "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)." SFAS No. 146
requires that a liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred instead of at the
date an entity commits to an exit plan. This statement also established
that fair value is the objective for the initial measurement of the
liability. SFAS No. 146 will be effective for exit or disposal activities
that are initiated after December 31, 2002. The Company does not expect
that adopting this statement will have a material impact on its financial
position or the results of operations.
In November 2002, the Financial Accounting Standards Board (FASB) issued
Interpretation 45, Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others. The
Interpretation elaborates on the existing disclosure requirements for most
guarantees, including loan guarantees such as standby letters of credit. It
also clarifies that at the time a company issues a guarantee, the company
must recognize an initial liability for the fair value, or market value, of
the obligations it assumes under the guarantee and
6
must disclose that information in its interim and annual financial
statements. The provisions related to recognizing a liability at inception
of the guarantee for the fair value of the guarantor's obligations does not
apply to product warranties or to guarantees accounted for as derivatives.
The initial recognition and initial measurement provisions apply on a
prospective basis to guarantees issued or modified after December 31, 2002.
The Company does not expect adopting the initial recognition and initial
measurement provisions of this interpretation will have a material impact
on its financial position or the results of operations.
In December 2002, the FASB issued SFAS No. 148 "Accounting for Stock-Based
Compensation". SFAS No. 148 provides alternative methods of transition for
a voluntary change to the fair value based method of accounting for
stock-based employee compensation. In addition, SFAS No. 148 amends the
disclosure requirements of SFAS No. 123 to require more prominent and more
frequent disclosures in financial statements about the effects of
stock-based compensation. The Company has not yet determined if it will
change its accounting policy for stock options to a fair value method.
2. Earnings per Share:
The Company's calculation of Basic and Diluted Net Earnings Per Common
Share follows
7
(In thousands, except per share amounts):
Three Months Ended Six Months Ended
December 31, December 31,
2002 2001 2002 2001
---------- ---------- ---------- ----------
Basic Net (Loss) Earnings Per Common Share:
Net (Loss) Earnings $ 799 $ (116) $ 1,105 $ (63)
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Basic Weighted Average Shares Outstanding 2,561,000 2,561,000 2,561,000 2,561,000
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Basic Net (Loss) Earnings Per Common Share $ .31 $ (.04) $ .43 $ (.02)
========== ========== ========== ==========
Diluted Net (Loss) Earnings Per Common Share:
Net (Loss) Earnings $ 799 $ (116) $ 1,105 $ (63)
---------- ---------- ---------- ----------
Basic Weighted Average Shares Outstanding 2,561,000 2,561,000 2,561,000 2,561,000
Add: Dilutive Options 101,000 - 64,000 -
---------- ---------- ---------- ----------
Diluted Weighted Average Shares Outstanding 2,662,000 2,561,000 2,625,000 2,561,000
---------- ---------- ---------- ----------
Diluted Net (Loss) Earnings Per Common Share $ .30 $ (.04) $ .42 $ (.02)
========== ========== ========== ==========
Options to purchase 178,000 common shares were outstanding at December 31,
2002, 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. Options to purchase 422,000 common
shares were outstanding at December 31, 2001 and were not included that
period because of a loss and as such would have been anti-dilutive.
3. Inventories:
Inventories consist of the following components (in thousands):
December 31, June 30,
2002 2002
------------ ------------
$ 1,812
Raw materials $ 4,816
Work in process 1,718 1,482
Finished goods 3,077 5,097
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$ 6,607 $ 11,395
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8
4. Stock Repurchases
On December 5, 2002 the Company announced that the Board of Directors
authorized the repurchase by the Company of up to 350,000 shares of the
Company's Common Stock. Purchases may be made from time to time in the open
market and through privately negotiated transactions, subject to general
market and other conditions. The Company is financing these repurchases
from its own funds and/or from its new bank credit facility. As of December
31, 2002 the Company repurchased 1,200 shares of its Common Stock at a cost
of $3,500. Subsequent to December 31, 2002 an additional 69,100 shares were
of Common Stock were purchased at a cost of $210,000.
5. Financing Agreements:
On December 23, 2002 the Company entered into a new bank line of credit.
The new credit facility, which expires December 1, 2004, provides for
short-term loans and letters of credit in an aggregate amount not exceeding
$32,000,000. Based on a borrowing formula, the Company may borrow up to
$22,000,000 in short-term loans and up to $32,000,000 including letters of
credit. Substantially all of the Company's assets are pledged to the bank
as collateral (except for the West New York, New Jersey facility, which has
been separately mortgaged as noted below). The line of credit requires that
the Company maintain a minimum tangible net worth of $11,000,000 through
June 30, 2003 and $12,000,000 through June 30, 2004. Borrowing on the
short-term line of credit was $7,250,000 as of December 31, 2002. At
December 31, 2002, the Company was contingently obligated on open letters
of credit for approximately $3,646,000. 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 December 31, 2002 was 4.25%.
On August 14, 2002, the Company consummated a mortgage loan with our new
bank in the amount of $3,250,000. The financing is secured by a mortgage of
the Company's West New York, New Jersey headquarters and warehouse
facility. The $3,250,000 loan bears interest at a fixed rate of 7% per
annum. The financing has a fifteen-year term, but is callable by the bank
lender at any time after September 1, 2007 and may be prepaid by the
Company, along with a prepayment fee, from time to time during the term of
the financing. The proceeds of the financing are being used for general
working capital purposes. The amount of the mortgage loan was temporarily
increased by $1,000,000 in October 2002, and was repaid prior to December
31, 2002. The $1,000,000 temporary increase bore interest at the bank's
prime interest rate.
9
6. Acquisition:
On January 10, 2002, the Company acquired all of the issued and outstanding
stock of Topsville, Inc., a New York City based manufacturer and
distributor of private label infants' and children's clothing. The tangible
and intangible assets acquired include, among other things, finished goods,
work-in-process and raw material inventory, customer orders, trade names,
office leases in New York City and Hong Kong, an office/warehouse facility
in Florida, and office equipment, furniture and fixtures. The Company used
its existing line of bank credit to pay for a portion of the purchase price
at closing. The aggregate purchase price for the acquisition was
$3,246,000, of which $1,746,000 was paid at the closing of the transaction
and the remainder of which is to be paid during the fifteen-month period
after closing. At December 31, 2002, $300,000 was unpaid under the terms of
the purchase agreement
On January 19, 2001, the Company completed the acquisition of certain
assets of I. Appel Corporation, which manufactures and distributes robes,
dusters and loungewear to department stores. The aggregate purchase price
for the acquisition was approximately $700,000 for goodwill, certain
tangible fixed assets and including $100,000 in acquisition costs. The
entire obligation has been paid as of December 31, 2002.
The changes in the carrying amount of goodwill for the six months ended
December 31, 2002 is as follows (in thousands):
Six Months Ended
December 31,
2002
----------------
Balance as at June 30, 2002 $ 3,342
----------------
Goodwill adjusted during the period (4)
----------------
Balance as at December 31, 2002 $ 3,338
----------------
Assuming Topsville was acquired on January 1, 2001, the pro forma results
would have been as follows (in thousands, except per share amounts):
Three Months Ended Six Months Ended
December 31, December 31,
2002 2001 2002 2001
------------ ------------ ------------ ------------
Net Sales $ 35,689 $ 23,768 $ 65,634 $ 51,734
------------ ------------ ------------ ------------
Net Profit $ 799 $ 85 $ 1,155 $ 535
------------ ------------ ------------ ------------
Earnings per Share - diluted $ .30 $ .03 $ .44 $ .21
------------ ------------ ------------ ------------
10
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 it's 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 have not differed materially from those determined using necessary
estimates.
The Company's accounting policies are more fully described in Note 1 to the
consolidated financial statements, included in the June 30, 2002 Annual Report
on Form 10-K filed with the Securities and Exchange Commission. Management has
identified certain critical accounting policies that are described below.
Merchandise inventory
The Company's merchandise inventory is carried at the lower of cost, on a
first-in, first-out basis, or market. The Company writes down its inventory for
estimated obsolescence or unmarketable inventory equal to the difference between
the cost of inventory and the estimated market value based upon assumptions
about future demand and market conditions. If actual market conditions are less
favorable than those projected by management, additional inventory write-downs
may be required.
Allowance for doubtful accounts
The Company maintains allowances for doubtful accounts for estimated losses
resulting from the inability of its customers to make required payments. If the
financial condition of its customers were to deteriorate, resulting in an
impairment of their ability to make payments, additional allowances may be
required.
11
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.
Long-lived assets, excluding goodwill
In evaluating the fair value and future benefits of long-lived assets, the
Company performs an analysis of the anticipated undiscounted future net cash
flows of the related long-lived assets. If the carrying value of the related
asset exceeds the undiscounted cash flows, the Company reduces the carrying
value to its fair value.
The Company believes at this time that the long-lived asset's carrying values
and useful lives continues to be appropriate. Future adverse changes in market
conditions or poor operating results of underlying investments could result in
an inability to recover the carrying value of the investments that may not be
reflected in an investment's current carrying value, thereby possibly requiring
an impairment charge in the future.
Goodwill
Goodwill is reviewed for impairment annually. The carrying value of goodwill
would be impaired if the estimate of future discounted cash flows is less than
carrying value. To the extent these future projections or the Company's
strategies change, the conclusion regarding impairment may differ from the
current estimates.
Deferred taxes
Should the Company determine 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.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents increased $1,369,000 during the
six-month period ended December 31, 2002 to $1,464,000 from $95,000 at June 30,
2002.
12
Net cash provided by operating activities totaled $968,000 resulting primarily
from a decrease in inventory totaling $4,788,000 and from net earnings of
$1,105,000, offset by an increase in accounts receivable of $4,106,000 and a
reduction of accounts payable and other current liabilities of $1,193,000. In
addition, funds provided by financing activities totaling $569,000 were the
result of $3,211,000 of net mortgage loan proceeds, offset by a $1,845,000
reduction in notes payable under the Company's credit facility, and payments of
acquisition notes totaling $800,000. Net cash used in investing activities of
$168,000 was for the purchase of property and equipment.
The Company previously announced that the Board of Directors authorized the
repurchase by the Company of up to 350,000 shares of the Company's Common Stock.
Purchases may be made from time to time in the open market and through privately
negotiated transactions, subject to general market and other conditions. The
Company intends to finance these repurchases from its own funds and/or from its
bank credit facility. As of December 31, 2002, the Company purchased 1,200
shares of its Common Stock at a cost of approximately $3,000. Subsequent to
December 31, 2002 an additional 69,100 shares of Common Stock were purchased at
a cost of $210,000.
On December 23, 2002, the Company completed an agreement with a new bank for an
increased line of credit which extends through December 1, 2004. The new credit
facility provides the Company with up to $22,000,000 in short-term loans and up
to $32,000,000 including letters of credit , based on a borrowing formula.
Borrowing during the year, was at the bank's prime rate or below at the option
of the Company as provided for under the terms of the loan agreement.
Substantially all of the Company's assets are pledged to the bank as collateral
(except for the West New York, New Jersey facility, which has been separately
mortgaged, as noted below). The line of credit requires that the Company
maintain a minimum tangible net worth of $11,000,000 through June 30, 2003 and
$12,000,000 through June 30, 2004. Borrowing on the line of credit was
$7,250,000 as of December 31, 2002. At December 31, 2002, the Company was
contingently obligated on open letters of credit for approximately $3,646,000.
The bank's prime rate at December 31, 2002 was 4.25%.
On August 14, 2002, the Company consummated a mortgage loan on its West New
York, New Jersey headquarters facility in the principal amount of $3,250,000.
The amount of the mortgage loan was temporarily increased by $1,000,000 in
October 2002 at the prime interest rate (the proceeds were used for general
working capital purposes), and has been repaid prior to December 31, 2002.
The Company believes that funds provided by operations, existing working capital
and the Company's new bank line of credit should be sufficient to meet
foreseeable working capital needs.
There are no plans for significant capital expenditures in the near term.
Contractual Obligations and Commercial Commitments
13
To facilitate an understanding of our contractual obligations and commercial
commitments, the following data is provided as of December 31, 2002 :
* * * * Payments Due by Period * * * *
Contractual Obligations Total 1 Year 2-3 Years 4-5 Years After 5 Years
----------- ----------- ----------- ----------- -------------
Notes Payable-Bank $ 7,250,000 $ 7,250,000 - - -
Acquisition Notes 300,000 300,000 - - -
Mortgage Payable 3,220,000 128,000 420,000 356,000 2,316,000
Royalties 329,000 82,000 247,000
Operating Leases 2,991,000 788,000 1,134,000 654,000 415,000
----------- ----------- ----------- ----------- -----------
Total Contractual Obligations $14,090,000 $ 8,548,000 $ 1,801,000 $ 1,010,000 $ 2,731,000
----------- ----------- ----------- ----------- -----------
* * * * * * * * After * * * * * * * *
Other
Commercial Total Within 1 2-3 4-5
Commitments Commitments Year 1 Year Years Years 5 Years
- ---------------- ----------- ----------- ----------- ----------- ----------- -----------
Letters of
Credit $ 3,646,000 $ 3,646,000 - - - -
----------- ----------- ----------- ----------- ----------- -----------
Total
Commercial
Commitments $ 3,646,000 $ 3,646,000 - - - -
----------- ----------- ----------- ----------- ----------- -----------
14
RESULTS OF OPERATIONS
Net sales were $35,689,000 and $65,634,000 during the three and six-month
periods ended December 31, 2002 compared to $15,658,000 and $33,878,000 in the
three and six-month periods ended December 31, 2001, respectively. This year's
increase in net sales for both the three and six month periods was mostly the
result of higher sales volume in the Company's Apparel category.
Net sales for the Apparel category were $28,479,000 for quarter ended December
31, 2002, an increase in net sales of $19,629,000, or 222%, from the same
quarter in fiscal 2001. The sales increase for this category was primarily due
to net sales from the Topsville children's apparel business, acquired in January
2002. In addition, increased customer orders from existing customers of the
women's sleepwear business also contributed to the increase. For the six-month
period ended December 31, 2002 net sales for the Apparel category were
$50,600,000, or 171% better than the prior fiscal year's same period, mostly
attributable to higher sales volume in the Topsville children's apparel
business.
Net sales for the Handbags category were $7,210,000 for the three-month period
ended December 31, 2002, an increase of $402,000, or about 6% above the same
three-month period in the prior year, mostly reflecting a higher than expected
premium business, not fully offset by the non-renewal of the Anne Klein license.
Fiscal 2003's six-month period ended December 31, 2002 had net sales of
$15,034,000, or 1% less than the prior comparable six-month fiscal period, which
totaled $15,203,000. For the six month period, the drop in net sales resulted
from the non-renewal of the Anne Klein license, offset by sales increases in
both the premium and children's bag businesses.
Gross margins were 23.3% and 22.5% in the three-month and six-month periods
ended December 31, 2002 compared to 23.7% and 24.4% in the comparable periods
ended December 31, 2001, respectively.
Gross margin for the Apparel category in the three-month period ended December
31, 2002, improved by 4.6% to 24.0% from 19.4% in the prior comparable
three-month period, primarily attributable to higher margins contributed by the
January 2002 acquisition of the Topsville children's apparel business. For the
six-month period ended December 31, 2002, gross margins were 22.8 % for this
category versus 19.8% in the prior year comparable period for the same reason.
15
Gross margin for the Handbags category was 20.6% in the quarter ended December
31, 2002 compared to 29.2% in the similar prior year quarter. This lower gross
margin reflects lower competitive margins in the Company's premium and
children's bag businesses and the non-renewal of the Anne Klein licensing
business. For the six-month period ended December 31, 2002, the Handbags
category gross profit decreased to 21.5% from 30.1%, for the same reasons.
Shipping, selling and administrative expenses totaling $6,870,000 were
$3,056,000 more than the second quarter in the prior year's comparable period.
However, as a percentage of net sales, shipping, selling and administrative
expenses decreased to 19.2% from 24.4%, mainly due to the relative level of
fixed costs compared with much higher net sales. Shipping, selling and
administrative expenses for the six-month period ended December 31, 2002 were
$12,716,000 (19.4% of net sales), or $4,475,000 higher than the same six-month
period in the prior fiscal year which totaled $8,241,000 (24.3% of net sales).
Interest expense of $198,000 in the second quarter of fiscal 2003 compares to
$75,000 in the prior comparable period. The increase of $123,000 reflects a much
higher level of borrowing in the current period to support much higher sales
volume, compared to last year's second quarter. For the six month period ended
December 31, 2002, interest expense totaled $357,000 versus $131,000, primarily
due to much higher average borrowing in the current period compared to last
year's comparable period for the same reason.
Earnings before income taxes the three-month and six-month periods ended
December 31, 2002, as compared to the loss before income taxes in the equivalent
prior fiscal periods, was due primarily to significantly higher sales and gross
profit, not completely offset by lower shipping, selling and administrative
expenses and interest expense, as discussed above. The net earnings for the
three month period ended December 31, 2002 of $799,000 compared to a net loss
for the same period last year of $116,000. For the six-month period ended
December 31, 2002, net earnings were $1,105,000, against a net loss of $63,000
in the prior comparable period.
16
RECENTLY ISSUED ACCOUNTING STANDARDS
Accounting and Reporting Changes
In June 2002, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standard ("SFAS") No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities", replacing Emerging Issues Task
Force (EITF) Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)." SFAS No. 146 requires that a liability for
a cost associated with an exit or disposal activity be recognized when the
liability is incurred instead of at the date an entity commits to an exit plan.
This statement also established that fair value is the objective for the initial
measurement of the liability. SFAS No. 146 will be effective for exit or
disposal activities that are initiated after December 31, 2002. The Company does
not expect adopting this statement will have a material impact on its financial
position or the results of operations.
In December 2002, the FASB issued SFAS No. 148 "Accounting for Stock-Based
Compensation". SFAS No. 148 provides alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based
employee compensation. In addition, SFAS No. 148 amends the disclosure
requirements of SFAS No. 123 to require more prominent and more frequent
disclosures in financial statements about the effects of stock-based
compensation. The Company has not yet determined the effect of the adoption of
this statement on the Company's financial position or results of operations.
In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" (FIN 45). FIN 45 requires that upon
issuance of a guarantee, a guarantor must recognize a liability for the fair
value of an obligation assumed under a guarantee. FIN 45 also requires
additional disclosures by a guarantor in its interim and annual financial
statements about the obligations associated with guarantees issued. The
recognition provisions of FIN 45 will be effective for any guarantees that are
issued or modified after December 31, 2002. The disclosure requirements are
effective for the current quarter. The Company does not expect adopting the
initial recognition and initial measurement provisions of this interpretation
will have a material impact on its financial position or the results of
operations.
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 sales to the retail industry and expects this
17
pattern will continue in the future. Consequently, comparisons between quarters
are not necessarily meaningful and the results for any quarter are most likely
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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
There have been no material changes in the information set forth under the
caption "Item 7A-Quantitative and Qualitative Disclosures About Market Risk" in
the Company's Annual Report on Form 10-K for the fiscal year ended June 30,
2002.
18
Item 4. Controls and Procedures.
Within the 90-day period prior to the filing date of this report, the Company
carried out an evaluation, under the supervision and with the participation of
management of the Company, including the Company's Chief Executive Officer and
Chief Financial Officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures. Based on the Company's evaluation,
the Company's Chief Executive Officer and Chief Financial Officer concluded that
the Company's disclosure controls and procedures were effective. There have been
no significant changes in the Company's internal controls or in other factors
that could significantly affect those controls subsequent to the date of the
Company's evaluation.
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Stockholders.
(a) Date of Annual Meeting of Stockholders - December 3, 2002.
(b) See item 4(c)(i) below.
(c) (i) The election of seven directors to serve until the next annual
meeting of stockholders.
Authority
Votes For to Vote
Name of Director Election Withheld
---------------- -------- --------
Abe Ginsburg 2,406,831 69,404
Allan Ginsburg 2,406,789 69,446
Robert Chestnov 2,408,075 68,160
Howard Ginsburg 2,408,046 68,189
Martin Brody 2,407,492 68,743
Richard Chestnov 2,406,847 69,388
Albert Safer 2,408,778 67,457
Norman Axelrod 2,410,778 65,457
(ii) Ratification of the appointment of Deloitte & Touche LLP as
independent accountants of the Company.
Votes Cast For: 2,433,539 Votes Against: 40,032
Abstentions: 2,664
(iii) Vote to approve a stockholder proposal relating to cumulative
voting.
Votes Cast For: 386,765 Votes Against: 1,387,455
Abstentions: 22,793
The matter was not approved.
19
Item 6. Exhibits and Reports on Form 8-K
a) Reports on Form 8-K. The registrant did not file any reports on Form
8-K during the three months ended December 31, 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)
February 13, 2003 /s/ Allan Ginsburg
----------------------------
Allan Ginsburg
Chairman of the Board
February 13, 2003 /s/ Anthony Christon
----------------------------
Anthony Christon
Vice President
Chief Financial Officer
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CERTIFICATIONS
--------------
I, Robert Chestnov, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Jaclyn, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report.
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: February 13, 2003
/s/ Robert Chestnov
- --------------------------------
Robert Chestnov, President and
Principal Executive Officer
22
I, Anthony Christon, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Jaclyn, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report.
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: February 13, 2003
/s/ Anthony Christon
- --------------------------------
Anthony Christon, Principal
Financial Officer
23