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, 2004
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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 ________
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
Incorporation or organization) Identification No.)
635 59th Street, West New York, New Jersey 07093
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(Address of principal executive offices) (Zip Code)
(201) 868-9400
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(Registrant's telephone number, including area code)
NONE
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all the reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [ ] No [X]
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date.
Class Outstanding at May 1, 2004
- ------------------------------------ --------------------------
Common Stock, par value $1 per share 2,514,814
JACLYN, INC. AND SUBSIDIARIES
INDEX
Part I. Financial Information
Item 1 Condensed Consolidated Balance Sheets -
March 31, 2004 (unaudited) and June 30, 2003 (derived from
audited financial statements) 3
Condensed Consolidated Statements of Operations -
Three and Nine Months Ended March 31, 2004 and 2003 (unaudited) 4
Condensed Consolidated Statements of Cash Flows - Nine Months
Ended March 31, 2004 and 2003 (unaudited) 5
Notes to Condensed Consolidated Unaudited Financial Statements 6
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Item 3 Quantitative and Qualitative Disclosures about Market Risk 19
Item 4 Controls and Procedures 19
Part II. Other Information:
Item 2 Changes in Securities and Use of Proceeds 20
Item 6 Exhibits and Reports on Form 8-K 21
Signatures 22
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JACLYN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands)
March 31, June 30,
2004 2003
(Unaudited) (See below)
------------ ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 240 $ 66
Accounts receivable - net 17,785 14,778
Inventory 5,313 9,665
Prepaid expenses and other current assets 3,327 2,967
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TOTAL CURRENT ASSETS 26,665 27,476
------------ ------------
PROPERTY PLANT AND EQUIPMENT, NET 1,061 1,147
GOODWILL 3,338 3,338
OTHER ASSETS 1,093 1,044
------------ ------------
TOTAL ASSETS $ 32,157 $ 33,005
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable - bank $ 6,550 $ 3,975
Accounts payable 2,230 7,405
Other current liabilities 3,013 2,018
Mortgage payable - current portion 140 131
------------ ------------
TOTAL CURRENT LIABILITIES 11,933 13,529
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MORTGAGE PAYABLE 2,917 3,023
OTHER LONG TERM LIABILITIES 233 233
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock 3,369 3,369
Additional paid-in capital 10,390 12,117
Retained earnings 9,275 8,258
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23,034 23,744
Less: Common shares in treasury at cost 5,960 7,524
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TOTAL STOCKHOLDERS' EQUITY 17,074 16,220
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 32,157 $ 33,005
============ ============
The June 30, 2003 Balance Sheet is derived from audited financial statements.
See notes to condensed consolidated financial statements.
-3-
JACLYN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In Thousands, Except Share Amounts)
Three Months Ended Nine Months Ended
March 31, March 31,
2004 2003 2004 2003
------------ ------------ ------------ ------------
Net sales $ 26,413 $ 20,816 $ 95,054 $ 86,450
Cost of goods sold 19,692 15,416 71,415 66,255
------------ ------------ ------------ ------------
Gross profit 6,721 5,400 23,639 20,195
------------ ------------ ------------ ------------
Shipping, selling and administrative expenses 6,940 5,616 21,235 18,328
Interest expense 107 117 485 474
------------ ------------ ------------ ------------
7,047 5,733 21,720 18,802
------------ ------------ ------------ ------------
(Loss) earnings before income taxes (326) (333) 1,919 1,393
(Benefit) provision for income taxes (86) (120) 902 501
------------ ------------ ------------ ------------
Net (loss) earnings $ (240) $ (213) $ 1,017 $ 892
============ ============ ============ ============
Net (loss) earnings per common share - basic $ (.09) $ (.09) $ .40 $ .35
============ ============ ============ ============
Weighted average number of shares outstanding - basic 2,542,000 2,496,000 2,542,000 2,540,000
============ ============ ============ ============
Net (loss) earnings per common share - diluted $ (.09) $ (.09) $ .37 $ .34
============ ============ ============ ============
Weighted average number of shares outstanding - diluted 2,542,000 2,496,000 2,722,000 2,601,000
============ ============ ============ ============
See notes to condensed consolidated financial statements.
-4-
JACLYN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In Thousands)
Nine Months Ended
March 31,
2004 2003
------------ ------------
Cash Flows From Operating Activities:
Net Earnings $ 1,017 $ 892
Adjustments to reconcile net earnings to net cash (used in)
provided by operating activities:
Depreciation and amortization 280 286
Changes in assets and liabilities:
(Increase) decrease in accounts receivable, net (3,007) 2,592
Decrease in inventory 4,352 6,402
Increase in prepaid expenses and other assets (409) (33)
Decrease in accounts payable and other current liabilities (4,180) (2,886)
------------ ------------
Net cash (used in) provided by operating activities (1,947) 7,253
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Cash Flows From Investing Activities:
Purchase of property and equipment (194) (249)
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Net cash used in investing activities (194) (249)
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Cash Flows From Financing Activities:
Increase (decrease) in notes payable - bank 2,575 (8,720)
(Payment of) proceeds from mortgage loan (97) 3,057
Repurchase of common stock (337) (250)
Exercise of stock options 174 --
Payment of acquisition notes -- (1,000)
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Net cash provided by (used in) financing activities 2,315 (6,913)
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Net Increase in Cash and Cash Equivalents 174 91
Cash and Cash Equivalents, beginning of period 66 95
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Cash and Cash Equivalents, end of period $ 240 $ 186
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Supplemental Information:
Interest paid $ 480 $ 498
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Taxes paid $ 761 $ 88
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Non-cash financing activities - common stock
repurchase and exercise of stock options $ 569 --
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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,
2004, the condensed consolidated statements of operations for the three and nine
month periods ended March 31, 2004 and 2003 and the condensed consolidated
statements of cash flows for the nine months ended March 31, 2004 and 2003, 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 2003 Annual Report to Stockholders for the year ended June 30,
2003. The results of operations for the period ended March 31, 2004 are not
necessarily indicative of operating results for the full fiscal year.
2. Stock-Based Compensation
The Company periodically grants stock options to employees. Pursuant to
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees", the Company accounts for stock-based employee compensation
arrangements using the intrinsic value method. Accordingly, no compensation
expense has been recorded in the Consolidated Financial Statements with respect
to option grants. The Company has adopted the disclosure-only provisions of
Financial Accounting Standards Board Statement No. 123, "Accounting for Stock
Based Compensation," as amended by Financial Accounting Standards Board
Statement No. 148, "Accounting for Stock Based Compensation - Transition and
Disclosure, an Amendment of FASB Statement No.123." If compensation cost for the
Company's stock option plans had been determined in accordance with the fair
value method prescribed by SFAS No. 123, the Company's net earnings (loss) would
have been (in thousands, except per share):
-6-
Three Months Nine Months
Ended Ended
March 31, March 31,
----------------------- -----------------------
2004 2003 2004 2003
---------- ---------- ---------- ----------
Net (loss) earnings
As reported $ (240) $ (213) $ 1,017 $ 892
Deduct: Total stock based employee compensation expense
determined under fair value based method, net of taxes -- -- 27 153
---------- ---------- ---------- ----------
Pro forma Net (Loss) Earnings $ (240) $ (213) $ 990 $ 639
---------- ---------- ---------- ----------
Net (loss) earnings per common share:
As reported $ (.09) $ (.09) $ .40 $ .35
Pro forma $ (.09) $ (.09) $ .39 $ .25
---------- ---------- ---------- ----------
Diluted net (loss) earnings per common share:
As reported $ (.09) $ (.09) $ .37 $ .34
Pro forma $ (.09) $ (.09) $ .36 $ .25
---------- ---------- ---------- ----------
There were no options granted during the third quarter of fiscal 2004 and
fiscal 2003.
3. Earnings (Loss) Per Share:
The Company's calculation of Basic and Diluted Net Earnings (Loss) Per
Common Share follows (in thousands, except share amounts):
Three Months Nine Months
Ended Ended
March 31, March 31,
----------------------- -----------------------
2004 2003 2004 2003
---------- ---------- ---------- ----------
Basic Net Earnings (Loss) Per Common Share:
Net (Loss) Earnings $ (240) $ (213) $ 1,017 $ 892
---------- ---------- ---------- ----------
Basic Weighted Average Shares Outstanding 2,542,000 2,496,000 2,542,000 2,540,000
---------- ---------- ---------- ----------
Basic Net (Loss) Earnings Per Common Share $ (.09) $ (.09) $ .40 $ .35
---------- ---------- ---------- ----------
-7-
Three Months Nine Months
Ended Ended
March 31, March 31,
----------------------- -----------------------
2004 2003 2004 2003
---------- ---------- ---------- ----------
Diluted Net Earnings (Loss) Per Common Share:
Net (Loss) Earnings $ (240) $ (213) $ 1,017 $ 892
---------- ---------- ---------- ----------
Basic Weighted Average Shares Outstanding 2,542,000 2,496,000 2,542,000 2,540,000
Add: Dilutive Options -- -- 180,000 61,000
---------- ---------- ---------- ----------
Diluted Weighted Average Shares Outstanding 2,542,000 2,496,000 2,722,000 2,601,000
---------- ---------- ---------- ----------
Diluted Net (Loss) Earnings Per Common Share $ (.09) $ (.09) $ .37 $ .34
---------- ---------- ---------- ----------
The following 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. Options to purchase
an additional 14,000 common shares at a price ranging from $4.85 to $5.125
were outstanding at March 31, 2004. Options to purchase an additional
178,161 common shares at a prices ranging from $2.875 to $12.875 were
outstanding at March 31, 2003.
4. Inventories
Inventories consist of the following components (in thousands):
March 31, 2004 June 30, 2003
-------------- --------------
Raw materials $ 540 $ 3,874
Work-in-process 109 1,506
Finished Goods 4,664 4,285
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$ 5,313 $ 9,665
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5. Repurchase of Common Stock
The Company previously announced that the Board of Directors authorized the
repurchase by the Company of up to 350,000 shares of the Company's Common Stock.
Purchases may be made from time to time in the open market and through privately
negotiated transactions, subject to general market and other conditions. The
Company intends to finance these repurchases from its own funds from operations
and/or from its bank credit facility. For the nine-month period ended March 31,
2004, the Company purchased 74,477 shares of its Common Stock at a cost of
approximately $317,000. As of March 31, 2004, the Company purchased a total of
174,777 shares of its Common Stock at a cost of approximately $605,000 in
connection with the repurchase program.
-8-
6. Financing Agreements
On October 23, 2003, the Company amended its bank line of credit agreement. This
amended credit facility, which expires on December 1, 2005, provides 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 was also modified to allow for an additional
amount of borrowing during the Company's peak borrowing season from July to
November. 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 has a financial
covenant which requires that the Company maintain a minimum tangible net worth
of $12,000,000 through June 30, 2004. The Company was in compliance with this
covenant as of March 31, 2004. As of March 31, 2004, borrowing on the short-term
line of credit was $ 6,550,000 (with peak borrowing of $21,550,000 during the
first nine months of fiscal 2004), and the Company had $11,242,000 of additional
availability (based on the borrowing formula) under the credit facility. At
March 31, 2004, the Company was contingently obligated on open letters of credit
for approximately $8,270,000. Interest on borrowing under the line of credit is
at the bank's prime rate or at LIBOR plus 250 basis points, at the option of the
Company. The bank's prime rate at March 31, 2004 was 4.00%.
In August 2002, the Company consummated a bank mortgage loan in the amount of
$3,250,000. The financing is secured by a mortgage of the Company's West New
York, New Jersey headquarters and warehouse facility. The 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.
7. Contingencies
The Company recently entered into an amendment to its collective bargaining
agreement with Local 62-32, UNITE, AFL-CIO, which covers 18 of Jaclyn's union
employees. The term of the agreement has been extended until October 31, 2006.
The agreement allows the Company, in its discretion, 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
Company would continue to be required to contribute to the union's 401-K plan.
The Company has not yet decided whether to withdraw from the pension plan and,
as such, has not recorded any charge relating to this contingency in its
consolidated financial statements. If the Company withdraws from the pension
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plan, the Company would have an obligation for a portion of the Company's
unfunded pension obligation. The final determination of the contingency will be
impacted by, among other things, the timing of any decision 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 (which the Company has not independently verified), as of
December 31, 2003, the estimated present value of the contingency is
approximately $463,000.
Recently Issued Accounting Standards:
In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities." FIN 46 requires a variable
interest entity to be consolidated by a company if that company is subject to a
majority of the risk of loss from the variable interest entity's activities, or
entitled to receive a majority of the entity's residual returns, or both. FIN 46
also requires disclosures about variable interest entities that a company is not
required to consolidate but in which it has a significant variable interest. The
consolidation requirements of FIN 46 apply immediately to variable interest
entities created after January 31, 2003. The consolidation requirements of FIN
46 apply to existing entities in the first fiscal year or interim period after
January 31, 2003, regardless of when the variable interest entity was
established. We have evaluated the accounting provisions of the interpretations
and there was no material impact on our financial condition, results of
operations or cash flows, since the Company is not the primary beneficiary of
any variable interest entity.
-10-
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 vinyl, leather 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. Our products are, for the
most part, made to order, marketed and sold to a range of retailers; primarily
national mass merchandisers. 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. That trend has continued during fiscal
2004. 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 quarter 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
its application of accounting policies, and the estimates inherently required by
the policies, are reasonable. These accounting policies and estimates are
constantly reevaluated, and adjustments are made when facts and circumstances
dictate a change. Historically, management has found the application of
accounting policies to be appropriate, and actual results generally do not
differ materially from those determined using necessary estimates. The Company's
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accounting policies are more fully described in Note A to the June 30, 2003
consolidated financial statements, located in the Annual Report on Form 10-K
filed with the Securities and Exchange Commission on September 24, 2003.
Management has identified certain critical accounting policies that are
described below.
Merchandise inventory.
The Company's merchandise inventory is carried at the lower of cost on a
first-in, first-out basis, or market. The Company writes down its inventory for
estimated obsolescence or unmarketable inventory equal to the difference between
the cost of inventory and the estimated market value based upon assumptions
about future demand and market conditions. If actual market conditions are less
favorable than those projected by management, additional inventory write-downs
may be required.
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.
Customer Incentives
The Company offers various sales discounts and incentives to its customers.
These discounts and incentives are recorded at the time of sale as a reduction
of sales based on historical experience and the terms of agreements, if any,
between the Company and its customers.
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.
-12-
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. 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.
-13-
Liquidity and Capital Resources
The Company's cash and cash equivalents increased $174,000 during the nine-month
period ended March 31, 2004 to $240,000 from $66,000 at June 30, 2003.
Net cash used in operating activities totaled $1,947,000, primarily from a
decrease in accounts payable and other current liabilities totaling $4,180,000,
and an increase in accounts receivable of $3,007,000 reflecting higher shipping
in the March 2004 quarter compared to the June 2003 quarter due to the
seasonality of our business, offset by a decrease of $4,352,000 in inventory.
Funds provided by financing activities, totaling $2,315,000, were mostly the
result of $2,575,000 in borrowing under the Company's credit facility. These
funds were used to finance the higher level of additional and seasonal business
activity. During the period ended March 31, 2004, the Company issued 303,500
shares of Common Stock upon the exercise of stock options for $742,000, which
included approximately $174,000 in cash and 161,141 mature shares of Common
Stock (shares outstanding for more than 6 months) with a market value of
approximately $569,000. The issued shares were treasury shares with a cost basis
of $2,470,000. During the nine-month period ended March 31, 2004, the Company
purchased a total of 74,477 shares under the Company's stock repurchase program,
and 4,848 shares from employees who received distributions under the Company's
Employee Stock Ownership Program, totaling $337,000. Net cash used in investing
activities of $194,000 was for purchases of property and equipment.
On October 23, 2003, the Company amended its bank line of credit agreement. This
amended bank credit facility, which expires on December 1, 2005, provides 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 was also modified to allow for an additional
amount of borrowing during the Company's peak borrowing season from July to
November. 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 has a financial
covenant which requires that the Company maintain a minimum tangible net worth
of $12,000,000 through June 30, 2004. The Company was in compliance with this
covenant as of March 31, 2004. As of March 31, 2004, borrowing on the short-term
line of credit was $6,550,000 (with peak borrowing of $21,550,000 during the
first nine months of fiscal 2004), and the Company had $11,242,000 of additional
availability (based on the borrowing formula) under the credit facility. At
March 31, 2004, the Company was contingently obligated on open letters of credit
for approximately $8,270,000. Interest on borrowings under the line of credit is
at the bank's prime rate, or at LIBOR plus 250 basis points, at the option of
the Company. The bank's prime rate at March 31, 2004 was 4.00%.
-14-
In August 2002, the Company consummated a mortgage loan with a bank lender in
the amount of $3,250,000. The financing is secured by a mortgage of the
Company's West New York, New Jersey headquarters and warehouse facility. The
loan bears interest at a fixed rate of 7% per annum. The financing has a
fifteen-year term, but is callable by the bank lender at any time after
September 1, 2007 and may be prepaid by the Company, along with a prepayment
fee, from time to time during the term of the financing.
There were no material commitments for capital expenditures at March 31, 2004.
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 nine-month period ended March 31,
2004, the Company purchased 74,477 shares of its Common Stock at a cost of
approximately $317,000. As of March 31, 2004, the Company purchased a total of
174,777 shares of its Common Stock at a cost of approximately $605,000 in
connection with the repurchase program.
The Company recently entered into an amendment to its collective bargaining
agreement with Local 62-32, UNITE, AFL-CIO, which covers 18 of Jaclyn's union
employees. The term of the agreement has been extended until October 31, 2006.
The agreement allows the Company, in its discretion, 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
Company would continue to be required to contribute to the union's 401-K plan.
The Company has not yet decided whether to withdraw from the pension plan and as
such, has not recorded any charge relating to this contingency in its
consolidated financial statements. If the Company withdraws from the pension
plan, the Company would have an obligation for a portion of the Company's
unfunded pension obligation. The final determination of the contingency will be
impacted by the timing of any decision 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 (which the Company has not independently verified), as of December 31,
2003, the estimated present value of the contingency is approximately $463,000.
-15-
The Company believes that funds provided by operations, existing working
capital, and the Company's bank line of credit and mortgage financing will be
sufficient to meet foreseeable working capital needs.
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, 2004:
* * * * Payments Due by Period * * * *
Contractual Obligations Total 1 Year 2-3 Years 4-5 Years After 5 Years
- ----------------------- ----------- ----------- ----------- ----------- -----------
Notes Payable $ 6,550,000 $ 6,550,000 -- -- --
Mortgage Payable 3,057,000 140,000 312,000 354,000 2,251,000
Royalties 529,000 154,000 375,000 -- --
Operating Leases 3,681,000 952,000 1,517,000 1,107,000 105,000
----------- ----------- ----------- ----------- -----------
Total Contractual
Obligations $13,817,000 $ 7,796,000 $ 2,204,000 $ 1,461,000 $ 2,356,000
----------- ----------- ----------- ----------- -----------
* * * * * * * * After * * * * * * * *
Other Commercial Total
Commitments Commitment 1 Year 2-3 Years 4-5 Years After 5 Years
- ----------- ----------- ----------- ----------- ----------- -----------
Letters of Credit $ 8,270,000 $ 8,270,000 -- -- --
----------- ----------- ----------- ----------- -----------
Total Commercial
Commitments $ 8,270,000 $ 8,270,000 -- -- --
----------- ----------- ----------- ----------- -----------
Off-Balance Sheet Arrangements
The Company has not created, and is not a party to, any special-purpose or
off-balance sheet entities for the purpose of raising capital, incurring debt or
operating the Company's business. The Company does not have any arrangements or
relationships with entities that are not consolidated into the financial
statements that are reasonably likely to materially affect the Company's
liquidity or the availability of capital resources.
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Results Of Operations
Net sales were $26,413,000 and $95,054,000 during the three and nine-month
periods ended March 31, 2004 compared to $20,816,000 and $86,450,000 in the
three and nine-month periods ended March 31, 2003, respectively. This year's
increase in net sales for both the three and nine month periods was mostly the
result of higher sales volume in the Company's Apparel category.
Net sales for the Apparel category were $20,487,000 for the quarter ended March
31, 2004, an increase in net sales of $4,018,000, or 24.4%, from the same
quarter in fiscal 2003. The sales increase for this category was primarily due
to a $6,122,000 increase in net sales from the women's sleepwear business, which
resulted mostly from increased orders from one customer based on prior season
sell-through. This significant increase was offset, in part, by an almost
$2,900,000 decrease in the catalog business reflecting continued lower demand
for mail-order apparel. For the nine-month period ended March 31, 2004, net
sales for the Apparel category were $76,450,000, or 14.0% better than the prior
fiscal year's same period, mostly attributable to a $17,220,000 increase in the
women's sleepwear business which was helped by sales of licensed product.
However, within the Apparel category, both the Company's catalog and children's
apparel business had much lower sales volume (about $4,000,000 in each
case),reflecting continued lower demand for mail-order apparel and with respect
to the children's apparel business, a lower level of reorders from one of its
customers.
Net sales for the Handbags category were $5,926,000 for the three-month period
ended March 31, 2004, an increase of $1,579,000, or about 36% above the same
three-month period in the prior year, reflecting a $975,000 increase in the
premium business, and a $604,000 increase attributable to our handbag business
shipping new private label items to one of its customers. However, fiscal 2004's
nine-month period ended March 31, 2004 had net sales of $18,604,000, or 4.0%
less than the prior comparable nine- month fiscal period, which totaled
$19,381,000, resulting mostly from a $1,583,000 sales decreases in the handbag
business, where licensed products were in less demand. This decrease was not
fully offset by $806,000 in higher premium business sales.
Gross margins were 25.4% and 24.9% in the three-month and nine-month periods
ended March 31, 2004 compared to 25.9% and 23.4% in the comparable periods ended
March 31, 2003, respectively.
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Gross margin for the Apparel category in the three-month period ended March 31,
2004, improved by .9% to 27.4% from 26.5% in the prior comparable three-month
period. The increase was primarily attributable to higher margins contributed by
the children's apparel business helped by product mix, offset by lower margins
in the women's sleepwear business attributable to increased cotton and other raw
material prices in the Far East and an increase in the proportion of shipments
to discounters during this period. For the nine-month period ended March 31,
2004, gross margins were 26.2% for this category versus 23.8% in the prior year
comparable period for the same reasons.
Gross margin for the Handbags category was 18.8% in the quarter ended March 31,
2004 compared to 23.7% in the similar prior year quarter. A lower gross margin
in the handbag business, for the most part, reflects marketplace competition on
several programs causing this division to reduce its gross profit margin to an
acceptable level without losing the customer. The overall decrease was not
completely offset by slightly higher gross profit margins in the premium
business. For the nine-month period ended March 31, 2004 the Handbags category
gross profit decreased to 19.5% from 22.0%, for the same reasons.
Shipping, selling and administrative expenses for the quarter totaling
$6,940,000 were $1,324,000 more than the third quarter of fiscal 2003. Most of
the increase related to higher selling commissions as a result of changes in
sales mix (an increase of $449,000), higher royalty expense (an increase of
$253,000), relating to additional licensed product sales, and much higher
business and employee health care insurance premiums totaling $105,000. However,
as a percentage of net sales, shipping, selling and administrative expenses
decreased slightly to 26.3% from 27.0%. Shipping, selling and administrative
expenses for the nine-month period ended March 31, 2004 were $21,235,000 (22.4%
of net sales), or $2,907,000 higher than the same nine-month period in the prior
fiscal year which totaled $18,328,000 (21.2% of net sales), mainly due to volume
/ mix related expenses, including selling expenses (increased $678,000), sales
commissions (increased $648,000), product development ( increased $834,000),
offset by lower shipping (lower $148,000). In addition, royalty expense
increased $910,000 due to two new licenses in the current fiscal period compared
to last year's same period.
Interest expense of $107,000 in the third quarter of fiscal 2004 compares to
$117,000 in the prior comparable period. For the nine month period ended March
31, 2004, interest expense totaled $485,000 versus $474,000. The slight increase
in the nine-month period ended March 31, 2004, principally reflects a higher
level of borrowing in the current period to support higher sales volume,
compared to last year's comparable period, offset somewhat by about a one-half
percent lower average interest rate.
The increase in earnings before income taxes for the nine-month period ended
March 31, 2004, as compared to the equivalent prior fiscal period, was due
primarily to higher sales and gross profit, not completely offset by higher
shipping, selling and administrative expenses and interest expense, as discussed
above. For the period ended March 31, 2004, the Company had an effective tax
rate of 47% compared to 36% in the same period of the prior year, primarily the
result of expiring foreign tax credits. The net loss for the three month period
ended March 31, 2004 of $240,000 was greater compared to the net loss for the
same period last year of $213,000, due primarily to a slightly lower gross
profit percentage and higher shipping, selling and administrative expenses, as
discussed above. For the nine-month period ended March 31, 2004, net earnings
were $1,017,000, against net earnings of $892,000 in the prior comparable
period.
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Recently Issued Accounting Standards
In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities." FIN 46 requires a variable
interest entity to be consolidated by a company if that company is subject to a
majority of the risk of loss from the variable interest entity's activities or
entitled to receive a majority of the entity's residual returns or both. FIN 46
also requires disclosures about variable interest entities that a company is not
required to consolidate but in which it has a significant variable interest. The
consolidation requirements of FIN 46 apply immediately to variable interest
entities created after January 31, 2003. The consolidation requirements of FIN
46 apply to existing entities in the first fiscal year or interim period after
January 31, 2003, regardless of when the variable interest entity was
established. We have evaluated the accounting provisions of the interpretations
and there was no material impact on our financial condition, results of
operations or cash flows, since the Company is not the primary beneficiary of
any variable interest entity.
FORWARD-LOOKING STATEMENTS
This Form 10-Q may contain forward-looking statements that are being made
pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. The Company's actual performance and results may vary as a
result of a number of risks, uncertainties and other factors, both foreseen and
unforeseen, including general economic and business conditions, competition in
the accessories and apparel markets, continuing favorable sales patterns,
pricing and consumer buying trends. Additional uncertainty exists for the
potential negative impact that Severe Acute Respiratory Syndrome (SARS) may have
on our business, as it relates to our production in the Far East and other
countries in which we operate.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
There have been no material changes in the information set forth under the
caption "Item 7A-Quantitative and Qualitative Disclosures About Market Risk" in
the Company's Annual Report on Form 10-K for the fiscal year ended June 30,
2003.
Item 4. Controls and Procedures.
At the end of the period covered by this report, the Company carried out an
evaluation, with the participation of management of the Company, including the
Company's Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of the Company's disclosure controls
and procedures. Based on the Company's evaluation, the Company's Chief Executive
Officer and Chief Financial Officer concluded that the Company's disclosure
controls and procedures were effective. There was no change in the Company's
internal control over financial reporting during the quarter ended March 31,
2004 that has materially affected, or is reasonably likely to materially affect,
the Company's internal control over financial reporting.
-19-
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
The following sets forth certain information as to purchases by the Company of
its shares of Common Stock, $1.00 par value per share (the "Common Stock")
during the quarter ended March 31, 2004:
ISSUER PURCHASES OF EQUITY SECURITIES
(c) Total
Number of (d) Maximum
Shares Number
Purchased as of Shares
Part of that May Yet
(a) Total Publicly Be Purchased
Number of (b)Average Announced Under
Shares Price Paid Plans or the Plan or
Period Purchased per Share Programs Programs
------------ ------------ ------------ -----------
January 1,
2004 to
January 31,
2004 4,122(2) $ 4.98 4,000 207,177
February 1,
2004 to
February 29,
2004 24,754 $ 4.66 24,754 182,423
March 1,
2004 to
March 31,
2004 7,201(3) $ 4.66 7,200 175,223
Total (1) 36,077 $ 4.70 35,954 --
============ ============ ============ ===========
(1) On December 3, 2002, the Company publicly announced a share repurchase
program for the repurchase of up to 350,000 shares of Common Stock. To
date, 174,777 shares of Common Stock have been purchased under the program.
(2) Includes 122 shares offered to the Company by employees and/or former
employees of the Company who received distributions of shares under the
terms of the Company's Employee Stock Ownership Plan & Trust and which the
Company purchased as an accommodation to those employees.
(3) Includes 1 share offered to the Company by a former employee of the Company
who received a distribution under the terms of the Company's Employee Stock
Ownership Plan & Trust and which the Company purchased as an accommodation
to that former employee.
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Item 6. Exhibits and Reports on Form 8-K
a) Exhibits Description
31(a) Rule 13a-14(a) Certification of Robert Chestnov,
President and Chief Executive Officer of the Company.
31(b) Rule 13a-14(a) Certification of Anthony Christon,
Principal Financial Officer of the Company.
32 Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
b) Reports on Form 8-K.
The Company filed a Current Report on Form 8-K on February 13, 2004
with respect t an event reported under Item 12 - "Results of
Operations and Financial Condition".
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
JACLYN, INC.
(Registrant)
May 14, 2004 /s/ ALLAN GINSBURG
-----------------------------------------
Allan Ginsburg
Chairman of the Board
May 14, 2004 /s/ ANTHONY CHRISTON
-----------------------------------------
Anthony Christon
Vice President
Chief Financial Officer
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EXHIBIT INDEX
-------------
Exhibit No. Description Page
- ----------- ----------- ----
31(a) Rule 13a-14(a) Certification of Robert Chestnov 24
President and Chief Executive Officer of the
Company.
31(b) Rule 13a-14(a) Certification of Anthony Christon, 25
Principal Financial Officer of the Company.
32 Certification Pursuant to 18 U.S.C. Section 1350, 26
as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
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