SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended June 30, 2004
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 No. 1-5863
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)
Registrant's telephone number, including area code: (201) 868-9400
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of Class on which registered
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Common Stock, $1 par value American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
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 [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [ ] No [X]
The aggregate market value of the voting common equity held by
non-affiliates of the Registrant as of the last business day of the
Company's most recently completed second fiscal quarter (December 31,
2003) was approximately $12,700,000.
There were 2,594,879 shares of Common Stock outstanding at September 15,
2004.
DOCUMENTS INCORPORATED BY REFERENCE
PART III Certain Portions of the Registrant's Proxy Statement for the
Registrant's Annual Meeting of Stockholders scheduled to be held on
November 30, 2004.
TABLE OF CONTENTS
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Item Page
---- ----
PART I 1. Business.................................................... 1
2. Properties.................................................. 4
3. Legal Proceedings........................................... 5
4. Submission of Matters to a Vote of Security Holders......... 5
PART II 5. Market for the Registrant's Common Equity and Related
Stockholder Matters, and Issuer Purchases of
Equity Securities........................................... 7
6. Selected Financial Data..................................... 9
7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 10
7A. Quantitative and Qualitative Disclosures About Market
& Risk...................................................... 17
8. Financial Statements and Supplementary Data................. 18
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure......................... 19
9A. Controls and Procedures..................................... 19
9B. Other Information........................................... 19
PART III 10. Directors and Executive Officers of the Registrant.......... 19
11. Executive Compensation...................................... 20
12. Security Ownership of Certain Beneficial Owners
and Management.............................................. 20
13. Certain Relationships and Related Transactions.............. 20
PART IV 14. Principal Accounting Fees and Services...................... 20
15. Exhibits, Financial Statement Schedules and Reports
on Form 8-K................................................. 20
Forward-Looking Statements
--------------------------
This Form 10-K contains certain forward-looking statements concerning,
among other things, the Company's anticipated results, and future plans and
objectives that are or may be deemed to be "forward- looking statements." The
Company's ability to do this has been fostered by the Private Securities
Litigation Reform Act of 1995 which provides a "safe harbor" for forward-looking
statements to encourage companies to provide prospective information so long as
those statements are accompanied by meaningful cautionary statements identifying
important factors that could cause actual results to differ materially from
those discussed. The Company's forward-looking statements are subject to a
number of known and unknown risks and uncertainties that could cause the
Company's actual results, performance or achievements to differ materially from
those described or implied in the forward-looking statements, including, but not
limited to, general economic and business conditions, including the impact on
consumer spending as a result of a slower consumer economy, competition in the
accessories and apparel markets, potential changes in customer spending,
acceptance of our product offerings and designs, a highly promotional retail
environment, any significant variations between actual amounts and the amounts
estimated for those matters identified as our critical accounting estimates as
well as other significant accounting estimates made in the preparation of our
financial statements, and the impact of the hostilities in the Middle East and
the possibility of hostilities in other geographic areas as well as other
geopolitical concerns. Additional uncertainty exists for the potential negative
impact that a recurrence of Severe Acute Respiratory Syndrome (SARS) in the Far
East and other foreign countries in which we source our products may have on our
business. In light of the uncertainty inherent in our forward-looking
statements, you should not consider their inclusion to be a representation that
such forward-looking matters will be achieved. The Company assumes no obligation
for updating any such forward-looking statements to reflect actual results,
changes in assumptions or changes in other factors affecting such
forward-looking statements.
PART I
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Item 1. Business.
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Jaclyn, Inc. (incorporated in the State of Delaware in 1968) and its
subsidiaries (collectively, "Jaclyn", "the Company", "we", "us", "our", or "the
Registrant") is primarily 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 (collectively,
"handbag products"). Our apparel lines are wide ranging and include women's
loungewear, sleepwear, dresses and sportswear, and lingerie, as well as infants'
and children's clothing. The Company markets its handbag products in a variety
of popularly priced fashions and designs, with an emphasis on casual, travel,
cosmetic and sport styles.
General. Styling is an important factor in the merchandising of all of
our products. The Company's staff of full-time designers studies fashion trends
in order to anticipate consumer demand. The design staff works closely with the
purchasing department to determine concepts and fabrics for its apparel products
as well as the styling and material components for its handbag products. The
design staff also works with the production and engineering staffs to determine
the costs of production and the technical problems involved in producing a new
style. We change most of our designs from season to season.
The Company has no manufacturing facilities. All of the Company's
products are manufactured by outside contractors. A substantial portion of
finished merchandise is received at independently owned outside warehouses
and/or Company-owned and leased facilities located in New Jersey, Florida,
California and Indiana. From these locations, products are shipped under
different selling names to customers all over the country. Certain products
manufactured for our apparel catalog business, and certain handbag products
manufactured in the Far East, are shipped from outside contractor locations
directly to the customer. Our handbag products are marketed primarily through
general merchandise, cosmetic companies, retail chain stores and department
stores. We market our apparel lines to department stores, retail chain stores,
as well as to major mail order catalogs and other specialty retailers. The
Company sells throughout the United States using both its own salesmen and
independent sales representatives.
The Company manufactures and markets apparel under the trade names
"Topsville", "I. Appel", "Smart Time", and "Emerson Road", each of which the
Company owns. We also manufacture apparel items for sale as private-label
merchandise. In addition, we are licensed to manufacture and market apparel
products under the names "Jordache(TM)" under an agreement which expires
December 31, 2005, "Charles Goodnight(TM)" and Chuckie Goodnight(TM)" under an
agreement which expires May 31, 2006, and "Vanity Fair(TM)" under an agreement
expiring December 31, 2006. The Company markets its handbag products under
trademarks and trade names which it owns, including "Shane" and "Aetna," "Susan
Gail," and "Robyn Lyn". In addition, we are licensed to manufacture and market
certain handbag products under the name Looney Tunes under an agreement which
expires December 31, 2004. During fiscal 2004, the Company was also licensed to
manufacture and market handbag products under the name "Looney Tunes(TM)" under
an agreement which expired March 30, 2004, and was a party to a license
agreement with Warner Bros. to manufacture denim backpacks, handbags and
accessories relating to the "Harry Potter(TM)" series of books under an
agreement which expired on December 31, 2003. We consider our owned and licensed
trademarks and trade names, as well as our other, related intellectual property
rights, to be of significant value in the marketing of our products.
Sales of apparel items during each of the fiscal years ended June 30,
2004, 2003 and 2002 represented 77%, 76%, and 60%, respectively, of consolidated
net sales. Sales of handbag products represented the remainder of our
consolidated net sales. Our sales are customarily offered on credit terms. We do
not have long-term contracts with any of our customers.
In fiscal 2004, our imports of apparel and handbag products accounted
for approximately 96% of consolidated net sales, compared to approximately 92%
of consolidated net sales in fiscal 2003 and 90% in fiscal 2002. Generally,
imports offer us the benefit of diversification of styling and the benefit of
cost savings related to such purchases. While our operations are subject to the
usual risks associated with purchases from foreign countries, other available
foreign and domestic manufacturing sources provide us with alternative sources
and facilities.
Our international operations consist of small offices in Hong Kong,
Shanghai and Taiwan. Personnel in these offices coordinate and track certain
orders for products, invoice certain shipments, and conduct
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inspections of outside contractor factories in the Far East that manufacture
products for the Company. We are in the process of opening a office in southern
China and shifting certain services provided by our Taiwan office to that new
office. The new office will better serve one of our major customers and is
expected to be completed by the end of the second fiscal quarter of fiscal 2005.
The Company does not believe that these operations are material to its business.
Approximately 75% of the Company's consolidated net sales for fiscal
2004 were to general merchandise, chain, department stores and catalogue
retailers, with the balance consisting of sales to smaller specialty shops,
smaller retail stores and cosmetic firms. During the fiscal year ended June 30,
2004, three major customers of the Company contributed approximately 68% of
consolidated net sales as follows: Wal- Mart Stores, Inc., 41%; Kohl's, 14% and
Estee Lauder, 13%. During the fiscal year ended June 30, 2003, Wal-Mart Stores,
Inc., Estee Lauder, and Kohl's, accounted for 56% of our consolidated net sales
(36%, 12% and 8% of consolidated net sales, respectively). The loss of any one
of these customers would have a material adverse effect on the Company's results
of operations.
Purchases of apparel and handbag raw materials, primarily fabrics, trim
and other materials, and certain of the Company's finished products, are made
from a variety of sources. In most cases, the Company assists its suppliers and
contractors in the design and style of the materials it purchases. Our largest
expenditures for raw materials are for fabrics, which we purchase from several
suppliers, one of which provided about 15% of our raw material needs in fiscal
2004. While the Company has no long-term supply contracts, the raw materials it
uses are available from various sources and it anticipates no difficulty in the
future in obtaining the necessary raw materials for its operations. The Company
deals with a number of sources for its purchases of finished apparel, handbags
and related products, no one of which accounted for more than approximately 4%
of the Company's total cost of goods sold during fiscal 2004. The Company has no
long-term supply contracts with its sources of finished handbags and related
products or apparel items and is subject to the usual risks associated
therewith.
The Company offers Fall/Winter, Holiday and Spring/Summer product lines
and, in almost all instances, manufactures products to meet the specific
requirements of its customers. Our business is somewhat seasonal in nature.
However, shipments have also been influenced by a number of factors, including,
for example, mid-year acquisitions which added to net sales in the second half
of the Company's 2002 fiscal year, and general economic conditions. Accordingly,
we do not believe that quarterly net sales are necessarily indicative of future
trends. Nevertheless, we anticipate that during fiscal 2004 we again will have
significantly more sales volume in the first-half of the fiscal year than in the
second half of the fiscal year. Reference is made to Note M, "Unaudited
Quarterly Financial Data," of the Notes to Consolidated Financial Statements on
page F-26 of this Form 10-K for additional information about historical
quarterly results.
At September 15, 2004, the Company had unfilled orders of approximately
$65,600,000 compared to approximately $65,200,000 at September 15, 2003. While
the unfilled order total is almost the same as last year at this time, there is
an increase in open orders in our handbag business as well as in the Topsville,
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Inc. infants' and children's apparel business, offset by a decrease in backlog
relating to our the Women's Sleepwear business and our catalogue business. In
the ordinary course of business, the dollar amount of unfilled orders at a
particular point in time is affected by a number of factors, including
scheduling of the manufacture and shipping of goods (which, in turn, may be
dependent on the requirements of customers). Accordingly, a comparison of
backlog from period to period is not necessarily meaningful and may not be
indicative of future sales patterns or shipments.
The Company employed 190 persons as of June 30, 2004, of whom 123 were
on a salaried basis and the balance on an hourly basis. At June 30, 2004, 16 of
the Company's employees were members of the Four Joint Boards of New York, New
Jersey, Pennsylvania and New England, affiliated with the International Leather
Goods, Plastics and Novelty Workers Union, AFL-CIO. The Company considers its
relations with its employees to be satisfactory.
The Company competes with numerous domestic and foreign manufacturers
of apparel and handbags, very few of which are believed to account for as much
as 1% of industry sales. We believe our sales of apparel items and handbag
products are not significant in light of total apparel industry sales. Our
business is dependent, among other things, on our ability to anticipate and
respond to changing consumer preferences, to remain competitive in price, style
and quality, and to meet our customers' various production and delivery
requirements. While some of the Company's competitors may be larger or may have
greater resources than ours, we believe that our size and financial position
will allow us to continue to respond to changes in consumer demand and remain
competitive.
On January 10, 2002, the Company acquired 100% of the stock of
Topsville, Inc., a New York City- based manufacturer and distributor of private
label infants' and children's clothing. The aggregate purchase price for the
acquisition was $3,245,702 (excluding $407,433 of transaction expenses), of
which $1,745,702 was paid at the closing of the transaction and the remainder of
which was paid over a fifteen-month period from closing from working capital and
our bank line of credit.
Item 2. Properties.
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The Company owns a 140,000 square foot facility in West New York, New
Jersey, in which the executive offices and one of its warehouse facilities is
located. The Company currently leases approximately 70,000 square feet of this
West New York facility to outside parties. This rental income is used to offset
a portion of the operating cost of the building and, as such, is included in our
shipping, selling and administrative expenses. The Company also leases five
showroom and office facilities in New York City totaling approximately 32,000
square feet, as well as a facility in Medley, Florida for its Topsville
operations with approximately 35,000 square feet of warehouse, shipping and
office space. Reference is made to Note D, "Commitments and Contingencies," of
the Notes to Consolidated Financial Statements on page F-14 of this Form 10-K
for additional information about the Company's commitments under the terms of
non-cancelable leases.
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In addition, and as noted in "Item 1. Business" above, the Company's
international operations consist of three small, leased offices in Hong Kong,
Shanghai, and Taiwan, aggregating approximately 11,500 square feet.
Item 3. Legal Proceedings.
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(a) The Company is not a party to, nor is any of its property the
subject of, any material pending legal proceeding.
(b) No material pending legal proceeding was terminated during the
three-month period ended June 30, 2004.
Item 4. Submission of Matters to a Vote of Security Holders.
---------------------------------------------------
The Company did not submit any matters to a vote of its security
holders, through the solicitation of proxies or otherwise, during the
three-month period ended June 30, 2004.
Executive Officers of the Registrant
The executive officers of the Company are set forth below. All
executive officers are elected at the annual meeting or at interim meetings of
the Board of Directors and hold their offices, at the pleasure of the Board of
Directors, until the next annual meeting of the Board and the election and
qualification of their respective successors. No arrangement or understanding
exists between any executive officer and any other person pursuant to which he
or she was elected as an executive officer.
Name Age Position and Period Served
- ---- --- --------------------------
Abe Ginsburg................... 87 Chairman of the Executive Committee
since November 29, 1988
Allan Ginsburg................. 62 Chairman of the Board since
November 29, 1988
Robert Chestnov................ 56 President and Chief Executive Officer
since November 29, 1988
Howard Ginsburg................ 62 Vice Chairman of the Board since
November 29, 1988 and President
of the Company's Shane Handbag
Division for more than the past
five years
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Name Age Position and Period Served
- ---- --- --------------------------
Anthony Christon............... 59 Chief Financial Officer for more than
the past five years
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PART II
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Item 5. Market for the Registrant's Common Equity
and Related Stockholder Matters.
-------------------------------
The Company's Common Stock, $1.00 par value per share, is traded on the
American Stock Exchange (Symbol: "JLN"). The following table sets forth the high
and low closing sales prices for the Company's Common Stock, as reported by the
American Stock Exchange, for each quarterly period during the Company's fiscal
years ended June 30, 2004 and June 30, 2003.
Fiscal Year Ended June 30, 2004 High Low
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First Quarter $ 4.30 $ 2.50
Second Quarter 5.15 4.15
Third Quarter 5.02 4.60
Fourth Quarter 5.40 4.70
Fiscal Year Ended June 30, 2003 High Low
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First Quarter $ 2.30 $ 1.53
Second Quarter 3.75 1.80
Third Quarter 3.38 2.20
Fourth Quarter 2.90 2.31
The Company did not pay cash dividends during fiscal 2004 or 2003 and
does not anticipate the payment of cash dividends in the foreseeable future.
At June 30, 2004, there were approximately 525 holders of record of the
Company's Common Stock.
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ISSUER PURCHASES OF EQUITY SECURITIES
The following sets forth certain information with respect to purchases
by the Company of shares of Common Stock during the three months ended June 30,
2004:
- ----------------- ------------- ------------- ------------- -------------
Total Number
Of Shares Maximum Number of
Total Purchased as Part Shares that May
Number of Average Of Publicly Yet Be Purchased
Shares Price Paid Announced Plans Under the Plans
Period Purchased per Share Or Programs(1) or Programs
- ----------------- ------------- ------------- ------------- -------------
April 1, 2004-
April 30, 2004 4,403 $ 4.84 4,403 171,254
- ----------------- ------------- ------------- ------------- -------------
May 1, 2004-
May 31, 2004 40,000 $ 5.33 40,000 166,851
- ----------------- ------------- ------------- ------------- -------------
June 1, 2004-
June 30, 2004 833 $ 5.21 833 126,851
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Total 45,236 $ 5.28 45,236 126,018
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(1) On December 3, 2002, the Company publicly announced that the Board of
Directors authorized the repurchase by us of up to 350,000 shares of Common
Stock, and that purchases would be made from time to time in the open
market and/or through privately negotiated transactions, subject to general
market and other conditions. Reference is made to "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and to Note
L of the Notes to Consolidated Financial Statements on page F-25 of this
Form 10-K for additional information about repurchases of shares of Common
Stock.
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Item 6. Selected Financial Data.
-----------------------
We have derived the selected financial data presented below from our
audited consolidated financial statements for the Fiscal Years ended June 30,
2004, 2003, 2002, 2001, and 2000. The selected financial information presented
below should be read in conjunction with such consolidated financial statements
and notes thereto.
Years ended June 30, 2004 2003 2002 2001 2000
- -------------------- ------------- ------------- ------------- ------------- -------------
Net Sales $ 123,850,000 $ 108,960,000 $ 81,031,000 $ 79,570,000 $ 72,078,000
Cost of Goods Sold - see Note 1 92,658,000 83,506,000 62,083,000 61,575,000 54,183,000
------------- ------------- ------------- ------------- -------------
Gross Profit 31,192,000 25,454,000 18,948,000 17,995,000 17,895,000
------------- ------------- ------------- ------------- -------------
Shipping, selling and administrative expenses -
see Note 1 and Note 2 27,979,000 23,620,000 19,812,000 17,714,000 17,525,000
Interest expense 574,000 546,000 293,000 234,000 100,000
Interest income (3,000) (5,000) (3,000) (109,000) (136,000)
Provision (benefit) for income taxes 1,184,000 610,000 (415,000) 56,000 146,000
------------- ------------- ------------- ------------- -------------
NET EARNINGS (LOSS)- see Note 1 $ 1,458,000 $ 683,000 $ (739,000) $ 100,000 $ 260,000
------------- ------------- ------------- ------------- -------------
Weighted average shares - Basic 2,531,000 2,521,000 2,561,000 2,644,000 2,710,000
Net earnings (loss) per common share -
Basic $ .58 $ .27 $ (.29) $ .04 $ .10
------------- ------------- ------------- ------------- -------------
Weighted average shares - Diluted 2,687,000 2,547,000 2,561,000 2,644,000 2,710,000
Net earnings (loss) per common share -
Diluted $ .54 $ .27 $ (.29) $ .04 $ .10
------------- ------------- ------------- ------------- -------------
TOTAL ASSETS $ 34,489,000 $ 33,005,000 $ 35,418,000 $ 25,031,000 $ 26,476,000
------------- ------------- ------------- ------------- -------------
Long-term liabilities $ 2,880,000 $ 3,023,000 $ 61,000 $ 100,000 --
------------- ------------- ------------- ------------- -------------
Stockholders' equity $ 17,276,000 $ 16,220,000 $ 15,824,000 $ 16,563,000 $ 16,857,000
------------- ------------- ------------- ------------- -------------
Note 1: Fiscal 2002 includes a pre-tax charge relating to the Topsville, Inc.
acquisition, totaling $1,289,000 ($825,000 after tax), of which $389,000
is included in Cost of Goods Sold for an adjustment to inventory based
upon the assessed fair value, and $900,000 included in Shipping, Sellin
and Administrative Expenses, for the amortization of open order backlog.
Note 2: Fiscal 2001 and 2000 includes goodwill amortization of $112,000 and
$95,000, respectively.
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Item 7. 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 mostly made to order, and we market and sell our products to a
range of retailers, including, general merchandise stores, retail chain stores,
department stores, cosmetic companies, major mail order catalogs and other
specialty retailers.
Our business is subject to seasonal variations. Historically, we have
realized a significant portion of net sales 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. 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 general 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
accounting policies, many of which require the Company to make estimates and
assumptions about future events and their impact on amounts reported in the
consolidated financial statements and related notes. Since future events and
their impact cannot be determined with certainty, the actual results will
inevitably differ from its estimates. Such differences could be material to the
consolidated financial statements.
The Company believes that application of accounting policies, and the
estimates inherently required by the policies, are reasonable. These accounting
policies and estimates are periodically reevaluated, and adjustments are made
when facts and circumstances dictate a change. Historically, the Company has
found the application of accounting policies to be appropriate, and actual
results have not differed materially from those determined using necessary
estimates.
The Company's accounting policies are more fully described in Note A to
the consolidated financial statements. The Company 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
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first-in, first-out basis, or market. The Company writes down its inventory for
estimated obsolescence or unmarketable inventory based upon assumptions about
future demand and market conditions. If actual market conditions are less
favorable than those projected by management, additional inventory write-downs
may be required.
Allowance for doubtful accounts. The Company maintains allowances for
doubtful accounts for estimated losses resulting from the inability of its
customers to make required payments and also maintains accounts receivable
insurance on certain of its customers. If the financial condition of its
customers were to deteriorate, resulting in an impairment of their ability to
make payments, additional allowances may be required.
Market development accruals. The Company estimates reductions to
revenue for customer programs and incentive offerings including special pricing
agreements, price protection, promotions and other volume-based incentives. If
market conditions were to decline, the Company may take actions to increase
customer incentive offerings possibly resulting in an incremental reduction of
revenue at the time the incentive is offered.
Finite Long-lived assets. In the evaluation of the fair value and
future benefits of finite-lived assets, we perform an analysis of the
anticipated undiscounted future net cash flows of the related finite long-lived
assets. If the carrying value of the related asset exceeds the undiscounted cash
flows, the carrying value is reduced to its fair value. Various factors
including future sales growth and profit margins are included in this analysis.
To the extent these future projections change, the conclusion regarding
impairment may differ from the current estimates.
Goodwill. We evaluate goodwill annually or whenever events and changes
in circumstances suggest that the carrying amount may not be recoverable from
its estimated future cash flows. In making this assessment, management relies on
a number of factors including operating results, business plans, economic
projections, anticipated future cash flows and marketplace data. A change in
these underlying assumptions may cause a change in the results of the tests and,
as such, could cause fair value to be less than the carrying value. In such
event, we would then be required to record a charge which would impact earnings.
Deferred taxes. Should the Company determine that it becomes more
likely than not that it would not be able to realize all or part of its net
deferred tax asset in the future, an adjustment to the deferred tax asset would
be charged to income in the period such determination was made.
Liquidity and Capital Resources
The net increase in cash and cash equivalents for the fiscal year ended
June 30, 2004 of $560,000 was the result of funds provided by operating
activities totaling $1,140,000, offset by funds used in investing activities of
$290,000 and by funds used in financing activities totaling $290,000. Net cash
provided by operating activities resulted primarily from net earnings of
$1,458,000, a decrease in inventory levels totaling $1,788,000, reflecting
higher fourth quarter sales in fiscal 2004 compared to the prior comparable
period, and
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an increase in accounts payable and other current liabilities of $534,000.
Offsetting these positive cash flow factors was an increase in accounts
receivable totaling $3,128,000. Cash used in investing activities totaling
$290,000 was for purchases of property and equipment. Funds used in financing
activities were, for the most part, related to the repurchase of the Company's
common stock under the Company's stock repurchase program and from the exercise
of stock options offset by an increase in bank borrowing.
On October 23, 2003, the Company amended its bank credit facility. The
amended facility, which expires 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 requiring that the Company maintain a minimum tangible net worth of
$12,000,000 through June 30, 2004. The Company is in compliance with this
financial covenant as of June 30, 2004. Borrowing on the short-term line of
credit, as of June 30, 2004, was $4,220,000, and the Company had $7,597,000 of
additional availability (based on the borrowing formula) under the credit
facility at that date. At June 30, 2004, the Company was contingently obligated
on open letters of credit with an aggregate face amount of approximately
$16,256,000. 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 June 30, 2004 was 4.25%.
On August 14, 2002, the Company consummated a mortgage loan with a bank
lender in the amount of $3,250,000. The financing is secured by a mortgage of
the Company's West New York, New Jersey headquarters and warehouse facility (see
the information under the caption "Item 2. Properties"). The loan bears interest
at a fixed rate of 7% per annum. The financing has a fifteen-year term, but is
callable by the bank lender at any time after September 1, 2007 and may be
prepaid by the Company, along with a prepayment fee, from time to time during
the term of the financing.
The Company believes that funds provided by operations, existing
working capital, and the Company's bank line of credit will be sufficient to
meet foreseeable working capital needs. Reference is made to Note E, "Credit
Facilities," of the Notes to Consolidated Financial Statements on page F-15 of
this Form 10-K for additional information about the Company's credit lines.
There were no material commitments for capital expenditures at June 30,
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 cash flow from
operating activities
-12-
and/or from its bank credit facility. As of June 30, 2004, the Company purchased
233,982 shares of its Common Stock at a cost of approximately $860,000.
As of June 30, 2004, 2003 and 2002, working capital was $13,615,000,
$12,755,000, $9,747,000, respectively. The ratios of current assets to current
liabilities on those same dates were 2.0 to 1, 1.9 to 1, and 1.5 to 1,
respectively. The Company's cash and cash equivalents totaled $626,000, $66,000,
and $95,000, at June 30, 2004, 2003 and 2002, respectively.
Contractual Obligations and Commercial Commitments
To facilitate an understanding of our contractual obligations and commercial
commitments, the following data is provided:
Payments Due by Period
----------------------
Within After
Contractual Obligations Total 1 Year 2-3 Years 4-5 Years 5 Years
- ----------------------- ------------ ------------ ------------ ------------ ------------
Notes Payable $ 4,220,000 $ 4,220,000 $ -- $ -- $ --
Mortgage Payable 3,023,000 143,000 318,000 360,000 2,202,000
Royalties 589,500 202,000 387,500 -- --
Operating Leases 3,520,000 852,000 1,523,000 1,145,000 --
------------ ------------ ------------ ------------ ------------
Total Contractual Obligations $ 11,352,500 $ 5,417,000 $ 2,228,500 $ 1,505,000 $ 2,202,000
------------ ------------ ------------ ------------ ------------
Amount of Commitment Expiration Per Period
------------------------------------------
Total
Other Commercial Amounts Within After
Commitments Committed 1 Year 2-3 Years 4-5 Years 5 Years
- ----------- ------------ ------------ ------------ ------------ ------------
Letters of Credit $ 16,256,000 $ 16,256,000 $ -- $ -- $ --
------------ ------------ ------------ ------------ ------------
-13-
Total Commercial
Commitments $ 16,256,000 $ 16,256,000 $ -- $ -- $ --
------------ ------------ ------------ ------------ ------------
The Company enters into arrangements with vendors to purchase
merchandise up to three months in advance of expected delivery. These purchase
orders do not contain any significant termination payments or other penalties if
cancelled.
Our rent expense under operating leases provides for escalation clauses
and other lease concessions as applicable in each lease. The minimum lease
payments are recognized on a straight-line basis over the term of each
individual underlying lease.
The Company expects to contribute $752,000 to its defined benefit
pension plan during the fiscal year ended June 30, 2005.
Off-Balance Sheet Arrangements
The Company has not created, and is not a party to, any special-purpose
or off-balance sheet entities for the purpose of raising capital, incurring debt
or operating the Company's business. The Company does not have any arrangements
or relationships with entities that are not consolidated into the financial
statements that are reasonably likely to materially affect the Company's
liquidity or the availability of capital resources.
Results of Operations
2004 Compared to 2003
Net sales for fiscal 2004 totaled $123,850,000, an increase of
$14,890,000, or 13.7%, compared to the prior fiscal year. Sales by category were
as follows:
Net sales for the Apparel category in fiscal 2004 were $95,090,000, an
increase of $12,475,000, or 15.1%, compared to fiscal 2003. The sales increase
for this category was primarily due to an $18,700,000 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 of both private label and
licensed product. This significant increase was offset, in part, by an almost
$4,900,000 decrease in the catalog business reflecting continued lower demand
for mail-order apparel. The remainder of the offset is attributable to lower
children's apparel sales reflecting a lower level of reorders from one of our
customers.
Net sales for the Handbags category were $28,760,000 for the year ended
June 30, 2004, an increase of $2,415,000, or about 9%, above the same period in
the prior year. The increase was due to a $2,983,000 increase in the premium
business reflecting increased orders by one of our significant customers, offset
by a $568,000 decrease in our handbag business, where licensed products were in
less demand.
Overall gross margins were 25.2% in 2004 compared to 23.4% in the prior
fiscal year.
Gross margins by category were as follows:
-14-
Gross margin for the Apparel category in 2004 improved to 26.6% from
23.9% in the prior fiscal year. The 2.7 percentage point increase was primarily
attributable to higher margins contributed by the children's apparel business
due to a favorable 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, as well as an increase in the level of shipments to discounters during
this period.
Gross margin for the Handbags category decreased to 20.4% in 2004
compared to 21.8% in the similar prior year. 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 in order to maintain sales. The overall decrease was not
completely offset by slightly higher gross profit margins in the premium
business.
Shipping, selling and administrative expenses increased by $4,359,000
in fiscal 2004 to $27,979,000 (22.6% of net sales). The prior fiscal year
totaled $23,620,000 (21.7% of net sales). The increase was mainly due to
volume/mix related expenses in fiscal 2004 compared to the prior fiscal year. A
significant part of the increase related to higher selling commissions as a
result of changes in sales mix (an increase of $1,370,000), product development
(an increase of $991,000), higher royalty expense (an increase of $904,000)
relating to additional licensed product sales, an increase related to a charge
for a union pension withdrawal liability (an increase of $500,000), and higher
business and employee health care insurance premiums totaling approximately
$65,000. Reference is made to Note J, "Employees' Benefit Plans," of the Notes
to Consolidated Financial Statements on page F-20 of this Form 10-K for
additional information about the increase in the reserve for the union pension
withdrawal liability.
Interest expense was $574,000, an increase of $28,000 from the last
fiscal year, reflecting an increased level of bank borrowing necessary to
finance the increased volume of business in the current fiscal year compared to
fiscal 2003. The slight increase was offset somewhat by an approximately
one-half percent lower average interest rate in fiscal 2004 compared with the
prior year.
Net earnings of $1,458,000 for the fiscal year ended June 30, 2004
compared to net earnings of $683,000 in the prior year. This year's higher net
earnings were primarily due to higher sales and gross margins, not completely
offset by higher shipping, selling and administrative expenses, and higher
interest expense, as discussed above.
2003 Compared to 2002
Net sales for fiscal 2003 totaled $108,960,000, an increase of
$27,929,000, or 34.5%, compared to the prior fiscal year. Sales by category were
as follows:
-15-
Net sales for the Apparel category in fiscal 2003 were $82,615,000, or
$33,612,000 higher than the prior fiscal year. This 68.6% increase was primarily
due to the inclusion of a full year of net sales of Topsville in the current
year, compared with only six months of sales in the prior year. In addition,
higher levels of shipping to existing and new customers of the women's sleepwear
business, mostly during the first half of the Company's fiscal year, accounted
for the remainder of the increase in this category.
Net sales for the Handbags category in fiscal 2003 were $26,345,000, or
about 18% lower than the prior fiscal year's total of $32,028,000. The sales
decrease mostly reflected the non-renewal of the Anne Klein license and lower
sales for the premium bag business, offset somewhat by higher sales in the
children's handbag division.
Gross margins were 23.4% in both fiscal 2003 and 2002. However, the
period ended June 30, 2002 includes a $389,000 expense related to the portion of
purchase costs allocated to inventory for the acquisition of Topsville in
January 2002, which had the effect of decreasing last year's gross margins by
one- half of one percent.
Gross margins by category were as follows:
Gross margin for the Apparel category in 2003 increased to 23.9% in
2003 from 21.9% in 2002. The 2.0% increase was primarily attributable to better
2003 full-year margins in the children's apparel business, acquired in January
2002.
Gross margin for the Handbags category in 2003 decreased to 21.8% in
2003 from 26.9% in 2002. This decrease was mainly due to the non-renewal of the
Anne Klein licensing business and lower competitive margins in our premium
business, offset to some extent by better children's handbag margins.
Shipping, selling and administrative expenses increased by $3,808,000
in fiscal 2003 (including a prior- year $900,000 charge related to the Topsville
acquisition) mainly due to volume related expenses in fiscal 2003 compared to
the prior fiscal year. However, as a percentage of net sales, shipping, selling
and administrative expenses declined to 21.7% from 24.5% in fiscal 2002, due to
the relatively lower level of fixed expenses in fiscal 2003 compared to higher
net sales.
Interest expense was $546,000, an increase of $253,000 from the last
fiscal year, primarily the result of interest expense associated with the
$3,250,000 mortgage financing consummated in August 2002, and also from a
greater level of borrowing needed to finance the increased volume of business in
the current fiscal year compared to fiscal 2002.
-16-
Net earnings of $683,000 for the fiscal year ended June 30, 2003
compared to a net loss of $739,000 in the prior year (including an after-tax
charge of $825,000 relating to the fair-value adjustment in connection with the
Topsville acquisition). This year's higher net earnings were primarily due to
higher gross margin dollars offset by higher interest costs, a relatively lower
percentage of shipping, selling and administrative expenses, as discussed above,
and a higher effective tax rate, primarily the result of expired foreign tax
credits.
Recent Accounting Pronouncements
In June 2004, the Financial Accounting Standards Board (FASB) issued an
interpretation of SFAS No. 143, "Accounting for Asset Retirement Obligations."
This interpretation clarifies the scope and timing of liability recognition for
conditional asset retirement obligations under SFAS No. 143, and is effective no
later than the end of our 2005 fiscal year. We have determined that this
interpretation, and the adoption of SFAS No. 143, will not have a material
impact on our consolidated financial statements or cash flows.
In December 2003, the SEC issued Staff Accounting Bulletin ("SAB") No.
104, "Revenue Recognition" ("SAB No. 104"), which codifies, revises and rescinds
certain sections of SAB No. 101, "Revenue Recognition", in order to make this
interpretive guidance consistent with current authoritative accounting guidance
and SEC rules and regulations. The changes noted in SAB No. 104 did not have a
material effect on our consolidated results of operations, consolidated
financial position or consolidated cash flows.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation
of Variable Interest Entities" ("FIN No. 46"), which addresses consolidation by
business enterprises of variable interest entities ("VIEs"). FIN No. 46 is
applicable immediately for VIEs created after January 31, 2003 and are effective
for reporting periods ending after December 15, 2003, for VIEs created prior to
February 1, 2003. In December 2003, the FASB published a revision to FIN 46
("FIN 46R") to clarify some of the provisions of the interpretation and to defer
the effective date of implementation for certain entities. Under the guidance of
FIN 46R, public companies that have interests in VIE's that are commonly
referred to as special purpose entities are required to apply the provisions of
FIN 46R for periods ending after December 15, 2003. A public company that does
not have any interests in special purpose entities but does have a variable
interest in a VIE created before February 1, 2003, must apply the provisions of
FIN 46 by the end of the first interim or annual reporting period ending after
March 14, 2004. The Company adopted FIN 46 and FIN 46R during the year ended
June 30, 2004. The adoption of FIN 46 had no impact on the financial condition
or results of operations of the Company since the Company does not have
investments in VIE's.
On April 30, 2003, the SFAS issued SFAS 149, amendment of Statement 133
on Derivative Instruments and Hedging Activities. SFAS 149 is intended to result
in more consistent reporting of contracts as either free-standing derivative
instruments subject to SFAS 133 in its entirety, or as hybrid instruments with
debt host contracts and embedded derivative features. In addition, SFAS 149
clarifies the definition of a
-17-
derivative by providing guidance on the meaning of initial net investments
related to derivatives. There was no impact on the Consolidated financial
statements from the adoption of SFAS 149.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity." This
standard requires an issuer to classify certain financial instruments as
liabilities. It also changes the classification of certain common financial
instruments from either equity or presentation to liabilities and requires an
issuer of those financial statements to recognize changes in fair value or
redemption amount, as applicable, in earnings. SFAS 150 is effective for
financial instruments entered into or modified after May 31, 2003, and with one
exception, is effective at the beginning of the first interim period beginning
after June 15, 2003. The adoption of SFAS 150 at this time has had no impact on
the Company's results of operations, financial position or cash flows.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
----------------------------------------------------------
The Company, in the normal course of doing business, is exposed to
interest rate change market risk. Since our borrowing patterns are cyclical, the
Company is not dependent on borrowing throughout the year. Nevertheless, a
sudden increase in interest rates (which under our bank line of credit is at the
prime rate or at LIBOR plus 250 basis points) may, especially during peak
borrowing, potentially have a significant negative impact on the Company's
results of operations. The Company estimates that a 100 basis point fluctuation
in applicable market interest rates would increase or decrease interest expense
by approximately $80,000, based on fiscal 2004 borrowing levels.
We have not used, and currently do not anticipate using, any derivative
financial instruments. In addition, we have not been materially impacted by
fluctuations in foreign currency exchange rates as substantially all of our
business is transacted in, and is expected to continue to be transacted in U.S.
dollar- based currencies.
Item 8. Financial Statements and Supplementary Data.
-------------------------------------------
Financial Statements
--------------------
The report dated September 28, 2004 of Deloitte & Touche LLP,
independent registered public accounting firm, the consolidated balance sheets
of Jaclyn, Inc. and subsidiaries as of June 30, 2004 and 2003 and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three fiscal years in the period ended June 30, 2004, and Notes to
Consolidated Financial Statements appear on pages F-2 through F-26 of this Form
10-K.
Supplementary Data
------------------
-18-
Selected unaudited quarterly financial data for the fiscal years ended
June 30, 2004 and June 30, 2003 is set forth at Note M, "Unaudited Quarterly
Financial Data" on page F-26 of this Form 10-K.
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.
------------------------
Not Applicable.
Item 9A. Controls and Procedures.
-----------------------
At the end of the period covered by this report, the Company carried
out an evaluation, with the participation of the Company's Chief Executive
Officer and Chief Financial Officer, of the effectiveness 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 year ended
June 30, 2004 that has materially affected, or is reasonably likely to
materially affect, the Company's internal control over financial reporting.
Item 9B. Other Information.
-----------------
Not Applicable.
PART III
--------
Item 10. Directors and Executive Officers of the Company.
-----------------------------------------------
The information required by this item (other than certain information
as to the executive officers of the Company, which information is set forth
after Part I of this Form 10-K under the caption "Executive Officers of the
Registrant") is incorporated herein by reference to the Company's definitive
Proxy Statement relating to the Company's 2004 Annual Meeting of Stockholders to
be filed pursuant to Regulation 14A under the Securities Exchange Act of 1934,
as amended.
Item 11. Executive Compensation.
----------------------
-19-
The information required by this item is incorporated herein by
reference to the Company's definitive Proxy Statement relating to the Company's
2004 Annual Meeting of Stockholders to be filed pursuant to Regulation 14A under
the Securities Exchange Act of 1934, as amended.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
--------------------------------------------------------------
The information required by this item is incorporated herein by
reference to the Company's definitive Proxy Statement relating to the Company's
2004 Annual Meeting of Stockholders to be filed pursuant to Regulation 14A under
the Securities Exchange Act of 1934, as amended.
Item 13. Certain Relationships and Related Transactions.
----------------------------------------------
The information required by this item is incorporated herein by
reference to the Company's definitive Proxy Statement relating to the Company's
2004 Annual Meeting of Stockholders to be filed pursuant to Regulation 14A under
the Securities Exchange Act of 1934, as amended.
Item 14. Principal Accounting Fees and Services.
--------------------------------------
The information required by this item is incorporated herein by
reference to the Company's definitive Proxy Statement relating to the Company's
2004 Annual Meeting of Stockholders to be filed pursuant to Regulation 14A under
the Securities Exchange Act of 1934, as amended.
PART IV
-------
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
---------------------------------------------------------------
(a) The following financial statements, financial statement
schedule and exhibits are filed as part of this report:
(1) Financial Statements:
--------------------
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets -- June 30, 2004 and 2003
-20-
Consolidated Statements of Operations-- for the years ended
June 30, 2004, 2003 and 2002
Consolidated Statements of Stockholders' Equity -- for the
years ended June 30, 2004, 2003 and 2002
Consolidated Statements of Cash Flows -- for the years ended
June 30, 2004, 2003 and 2002
Notes to Consolidated Financial Statements
(2) Financial Statement Schedule:
----------------------------
Schedule II - Valuation and Qualifying Accounts
All other schedules are omitted because they are either inapplicable,
not required, or because the required information is included in the
consolidated financial statements or notes thereto.
(3) Exhibits:
--------
Exhibit No. Description
----------- -----------
3(a) Certificate of Incorporation of the Registrant
(incorporated herein by reference to Exhibit
3(a) to the Registrant's Annual Report on Form
10-K, File No. 1-5863, for the fiscal year ended
June 30, 1994).
3(b) By-Laws of the Registrant (incorporated herein
by reference to Exhibit 3(b) to the Registrant's
Annual Report on Form 10-K, File No. 1-5863, for
the fiscal year ended June 30, 1991).
4(a) Promissory Note of the Registrant dated August
14, 2002 payable to the order of Hudson United
Bank ("HUB") in the principal amount of
$3,250,000 (incorporated herein by reference to
Exhibit 4(a) to the Registrant's Annual Report
on Form 10-K, File No. 1-5863, for the fiscal
year ended June 30, 2002).
4(b) Mortgage, Security Agreement and Financing
Statement dated August 14, 2002 between the
Registrant and HUB (incorporated herein by
reference to Exhibit 4(b) to the Registrant's
Annual Report on Form 10-K, File No. 1-5863, for
the fiscal year ended June 30, 2002).
-21-
4(c) Revolving Loan Agreement dated December 23, 200
between the Registrant and HUB (incorporated
herein by reference to Exhibit 4(c) to the
Registrant's Annual Report on Form 10-K, File
No. 1-5863, for the fiscal year ended June 30,
2003).
10(a) 1984 Employee Stock Option Plan of the
Registrant (incorporated herein by reference to
Exhibit 10(f) to the Registrant's Annual Report
on Form 10-K, File No. 1-5863, for the fiscal
year ended June 30, 1989).*
10(b) 1990 Stock Option Plan of the Registrant, as
amended (incorporated herein by reference to
Exhibit 10(g) to the Registrant's Annual Report
on Form 10-K, File No. 1-5863, for the fiscal
year ended June 30, 1991).*
10(c) Second Amended and Restated Stockholders'
Agreement dated May 12, 2003 among the
Registrant and the persons listed on Schedule A
thereto (incorporated herein by reference to
Exhibit U to Amendment No. 9 to the Schedule 13D
dated May 15, 2003 of Allan Ginsburg, Robert
Chestnov, Abe Ginsburg and Howard Ginsburg.).
10(d) Key Executive Disability Plan of the Registrant
(incorporated herein by reference to Exhibit
10(m) to the Registrant's Annual Report on Form
10-K, File No. 1-5863, for the fiscal year ended
June 30, 1988).*
10(e) Non-Qualified Stock Option Contract dated
December 2, 1998 between the Registrant and
Martin Brody (incorporated herein by reference
to Exhibit 10(I) to the Registrant's Annual
Report on Form 10-K, File No. 1-5863, for the
fiscal year ended June 30, 1999).
10(f) Non-Qualified Stock Option Contract dated
December 2, 1998 between the Registrant and
Richard Chestnov (incorporated herein by
reference to Exhibit 10(j) to the Registrant's
Annual Report on Form 10-K, File No. 1-5863, for
the fiscal year ended June 30, 1999).
10(g) Non-Qualified Stock Option Contract dated
December 2, 1998 between the Registrant and
Albert Safer (incorporated herein by reference
to Exhibit 10(j) to the Registrant's Annual
Report on Form 10-K, File No. 1-5863, for the
fiscal year ended June 30, 1999).
10(h) 1996 Non-Employee Director Stock Optio Plan
(incorporated by reference to Exhibit 10(o) to
the Registrant's Annual Report on Form 10-K,
File No. 1-5863, for
-22-
the fiscal year ended June 30, 1998).*
10(i) Non-Qualified Stock Option Contract dated
December 3, 1996 between the Registrant and
Martin Brody (incorporated by reference to
Exhibit 10(p) to the Registrant's Annual Report
on Form 10-K, File No. 1-5863, for the fiscal
year ended June 30, 1997).
10(j) Non-Qualified Stock Option Contract dated
December 3, 1996 between the Registrant and
Richard Chestnov (incorporated by reference to
Exhibit 10(q) to the Registrant's Annual Report
on Form 10-K, File No. 1-5863, for the fiscal
year ended June 30, 1997).
10(k) Non-Qualified Stock Option Contract dated August
19, 1997 between the Registrant and Al Safer
(incorporated by reference to Exhibit 10(r) to
the Registrant's Annual Report on Form 10-K,
File No. 1-5863, for the fiscal year ended June
30, 1997).
10(l) Non-Qualified Stock Option Contract dated
December 3, 1997 between the Registrant and
Martin Brody (incorporated by reference to
Exhibit 10(s) to the Registrant's Annual Report
on Form 10-K, File No. 1-5863, for the fiscal
year ended June 30, 1998).
10(m) Non-Qualified Stock Option Contract dated
December 3, 1997 between the Registrant and
Richard Chestnov (incorporated by reference to
Exhibit 10(t) to the Registrant's Annual Report
on Form 10-K, File No. 1-5863, for the fiscal
year ended June 30, 1998).
10(n) Non-Qualified Stock Option Contract dated
December 3, 1997 between the Registrant and
Albert Safer (incorporated by reference to
Exhibit 10(u) to the Registrant's Annual Report
on Form 10-K, File No. 1-5863, for the fiscal
year ended June 30, 1998).
10(o) Letter Agreement dated as of December 29, 1997
between the Registrant and Robert Chestnov
(incorporated herein by reference to Exhibit 2.1
to the Registrant's Current Report on Form 8-K,
file No. 1-5863, for the fiscal year ended June
30, 1998).*
10(p) Purchase and Sale Agreement dated January 11,
1999 between Banner Industries of New York, Inc.
and Jaclyn, Inc.(incorporated herein by
reference to Exhibit 2.1 to the Registrant's
Current Report on Form 8-K, file No. 1-5863,
dated January 26, 1999).
-23-
10(q) Non-Qualified Stock Option Contract dated
November 30, 1999, between the Registrant and
Richard Chestnov (incorporated herein by
reference to Exhibit 10(x) to the Registrant's
Annual Report on Form 10-K, File No. 1-5863, for
the fiscal year ended June 30, 2000).
10(r) Non-Qualified Stock Option Contract dated
November 30, 1999, between the Registrant and
Albert Safer (incorporated herein by reference
to Exhibit 10(y) to the Registrant's Annual
Report on Form 10-K, File No. 1-5863, for the
fiscal year ended June 30, 2000).
10(s) Non-Qualified Stock Option Contract dated
November 30, 1999, between the Registrant and
Martin Brody (incorporated herein by reference
to Exhibit 10(z) to the Registrant's Annual
Report on Form 10-K, File No. 1-5863, for the
fiscal year ended June 30, 2000).
10(t) Non-Qualified Stock Option Contract dated June
12, 2000, between the Registrant and Norman
Axelrod (incorporated herein by reference to
Exhibit 10(aa) to the Registrant's Annual Report
on Form 10-K, File No. 1-5863, for the fiscal
year ended June 30, 2000).
10(u) Non-Qualified Stock Option Contract dated
December 2, 1998 between the Registrant and
Richard Chestnov (incorporated herein by
reference to Exhibit 10(j) to the Registrant's
Annual Report on Form 10-K, File No. 1-5863, for
the fiscal year ended June 30, 1999).
10(v) Non-Qualified Stock Option Contract dated
December 2, 1998 between the Registrant and
Albert Safer (incorporated herein by reference
to Exhibit 10(k) to the Registrant's Annual
Report on Form 10-K, File No. 1-5863, for the
fiscal year ended June 30, 1999).
10(w) Non-Qualified Stock Option Contract dated
December 2, 1998 between the Registrant and
Martin Brody (incorporated herein by reference
to Exhibit 10(I) to the Registrant's Annual
Report on Form 10-K, File No. 1-5863, for the
fiscal year ended June 30, 1999).
10(x) Non-Qualified Stock Option Contract dated
November 30, 2001, between the Registrant and
Richard Chestnov (incorporated herein by
reference to Exhibit 10(I) to the Registrant's
Annual Report on Form 10-K, File No. 1-5863, for
the fiscal year ended June 30, 1999).
-24-
10(y) Non-Qualified Stock Option Contract dated
November 30, 2001, between the Registrant and
Albert Safer (incorporated herein by reference
to Exhibit 10(cc) to the Registrant's Annual
Report on Form 10-K, File No. 1-5863, for the
fiscal year ended June 30, 1999).
10(z) Non-Qualified Stock Option Contract dated
November 30, 2001, between the Registrant and
Martin Brody (incorporated herein by reference
to Exhibit 10(dd) to the Registrant's Annual
Report on Form 10-K, File No. 1-5863, for the
fiscal year ended June 30, 1999).
10(aa) Non-Qualified Stock Option Contract dated
November 30, 2001, between the Registrant and
Norman Axelrod (incorporated herein by reference
to Exhibit 10(ee) to the Registrant's Annual
Report on Form 10-K, File No. 1-5863, for the
fiscal year ended June 30, 1999).
10(bb) Purchase and Sale Agreement dated January 10,
2002 between Mark Nitzberg and the Registrant
(incorporated herein by reference to Exhibit 2.1
to the Registrant's Current Report on Form 8-K,
File No. 1-5863, dated January 24, 2002).
10(cc) Consulting Agreement dated January 10, 2002
between Natoosh, LLC, Mark Nitzberg and the
Registrant (incorporated herein by reference to
Exhibit 2.2 to the Registrant's Current Report
on Form 8-K, File No. 1-5863, dated January 24,
2002).
10(dd) Amendment to Consulting Agreement dated December
15, 2003, between Natoosh, LLC, Mark Nitzberg
and the Registrant.
10(ee) Payment and Indemnification Agreement dated
January 10, 2002 by and among Capital Factors,
Inc., Topsville, Inc. Mark Nitzberg and the
Registrant (incorporated herein by reference to
Exhibit 2.3 to the Registrant's Current Report
on For 8-K, File No. 1-5863, dated January 24,
2002).
10(ff) Non-Qualified Stock Option Contract dated
December 3, 2002 between the Registrant and
Richard Chestnov (incorporated herein by
reference to Exhibit 10(ff) to the Registrant's
Annual Report on Form 10-K, File No. 1-5863, for
the fiscal year ended June 30, 2003).
10(gg) Non-Qualified Stock Option Contract dated
December 3, 2002 between the Registrant and
Albert Safer (incorporated herein by reference
to Exhibit 10(gg) to the Registrant's Annual
Report on Form 10-K, File No. 1-5863, for the
fiscal year ended June 30, 2003). .
-25-
10(hh) Non-Qualified Stock Option Contract dated
December 3, 2002 between the Registrant and
Martin Brody (incorporated herein by reference
to Exhibit 10(hh) to the Registrant's Annual
Report on Form 10-K, File No. 1-5863, for the
fiscal year ended June 30, 2003).
10(ii) Non-Qualified Stock Option Contract dated
December 3, 2002 between the Registrant and
Norman Axelrod (incorporated herein by reference
to Exhibit 10(ii) to the Registrant's Annual
Report on Form 10-K, File No. 1-5863, for the
fiscal year ended June 30, 2003).
10(jj) Non-Qualified Stock Option Contract dated March
19, 2003, between the Registrant and Harold
Schechter (incorporated herein by reference to
Exhibit 10(jj) to the Registrant's Annual Report
on Form 10-K, File No. 1-5863, for the fiscal
year ended June 30, 2003).
10(kk) Consent and Joinder Agreement dated August 10,
2004 among the Registrant, Mark Nitzberg and the
persons listed on Schedule A thereto
(incorporated herein by reference to Exhibit U
to Amendment No. 12 to the Schedule 13D dated
August 16, 2004 of Allan Ginsburg, Robert
Chestnov, Abe Ginsburg and Howard Ginsburg.).
10(ll) Non-Qualified Stock Option Contract dated
November 14, 2003 between the Registrant and
Richard Chestnov.
10(mm) Non-Qualified Stock Option Contract dated
November 14, 2003 between the Registrant and
Albert Safer.
10(nn) Non-Qualified Stock Option Contract dated
November 14, 2003 between the Registrant and
Martin Brody.
10(oo) Non-Qualified Stock Option Contract dated
November 14, 2003 between the Registrant and
Norman Axelrod.
10(pp) Non-Qualified Stock Option Contract dated
November 14, 2003 between the Registrant and
Harold Schechter.
14 Code of Ethics for Finance Professionals of the
Registrant.
-26-
21 Subsidiaries of the Registrant.
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.
99(a) Code of Business Conduct and Ethics of the
Registrant.
--------------------
* Management contract or compensatory plan or arrangement
(b) Reports on Form 8-K.
-------------------
The Company filed a Form 8-K dated May 14, 2004 furnishing
under Item 12, Results of Operations and Financial Condition,
a press release announcing its financial results for the
fiscal quarter ended March 31, 2004.
(c) Exhibits.
--------
Exhibits are listed in response to Item 15(a)(3).
(d) Financial Statement Schedule.
-----------------------------
Financial Statement Schedules are listed in response to Item
15(a)(2).
-27-
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) 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.
By: /s/ ALLAN GINSBURG
-------------------------------------
September 28, 2004 ALLAN GINSBURG, Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
/s/ ALLAN GINSBURG Chairman of the Board September 28, 2004
- --------------------------- and Director
ALLAN GINSBURG
/s/ ROBERT CHESTNOV President, Principal September 28, 2004
- --------------------------- Executive Officer and
ROBERT CHESTNOV Director
/s/ ANTHONY CHRISTON Chief Financial Officer, September 28, 2004
- --------------------------- Principal Financial and
ANTHONY CHRISTON Accounting Officer
/s/ ABE GINSBURG Director September 28, 2004
- ---------------------------
ABE GINSBURG
/s/ HOWARD GINSBURG Director September 28, 2004
- ---------------------------
HOWARD GINSBURG
/s/ NORMAN AXELROD Director September 28, 2004
- ---------------------------
NORMAN AXELROD
/s/ MARTIN BRODY Director September 28, 2004
- ---------------------------
MARTIN BRODY
-28-
/s/ RICHARD CHESTNOV Director September 28, 2004
- ---------------------------
RICHARD CHESTNOV
/s/ AL SAFER Director September 28, 2004
- ---------------------------
AL SAFER
/s/ HAROLD SCHECHTER Director September 28, 2004
- ---------------------------
HAROLD SCHECHTER
-29-
JACLYN, INC. AND SUBSIDIARIES
TABLE OF CONTENTS PAGE
- ----------------- ----
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM F-1
FINANCIAL STATEMENTS:
CONSOLIDATED BALANCE SHEETS - AS OF JUNE 30, 2004 AND
2003 F-2
CONSOLIDATED STATEMENTS OF OPERATIONS - FOR THE YEARS
ENDED JUNE 30, 2004, 2003 AND 2002 F-3
CONSOLIDATED STATEMENTS OF CASH FLOWS - FOR THE YEARS
ENDED JUNE 30, 2004, 2003 AND 2002 F-4 TO F-5
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY - FOR
THE YEARS ENDED JUNE 30, 2004, 2003 AND 2002 F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-7 TO F-26
FINANCIAL STATEMENT SCHEDULE:
VALUATION AND QUALIFYING ACCOUNTS F-27
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Jaclyn, Inc.
West New York, New Jersey
We have audited the accompanying consolidated balance sheets of Jaclyn,
Inc. and subsidiaries as of June 30, 2004 and 2003, and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
three fiscal years in the period ended June 30, 2004. Our audits also included
the consolidated financial statement schedule listed in the Index at Item
15(a)(2). These financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and financial statement schedule based on
our audits.
We conducted our audits in accordance with standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly,
in all material respects, the financial position of Jaclyn, Inc. and
subsidiaries as of June 30, 2004 and 2003, and the results of their operations
and their cash flows for each of the three fiscal years in the period ended June
30, 2004, in conformity with accounting principles generally accepted in the
United States of America. Also, in our opinion, such financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
Deloitte & Touche LLP
September 28, 2004
New York, New York
F-1
JACLYN, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2004 AND 2003
================================================================================
ASSETS 2004 2003
------------ ------------
CURRENT ASSETS:
CASH AND CASH EQUIVALENTS $ 626,000 $ 66,000
ACCOUNTS RECEIVABLE, LESS SALES RETURNS, SALES DISCOUNTS, SALES
ALLOWANCES & ALLOWANCE FOR DOUBTFUL ACCOUNTS: - 2004: $2,561,000;
2003: $2,692,000 17,894,000 14,778,000
INVENTORIES 7,877,000 9,665,000
PREPAID EXPENSES AND OTHER CURRENT ASSETS 629,000 696,000
DEFERRED INCOME TAXES 907,000 1,079,000
------------ ------------
TOTAL CURRENT ASSETS 27,933,000 26,284,000
PROPERTY, PLANT AND EQUIPMENT - NET 1,069,000 1,147,000
GOODWILL 3,338,000 3,338,000
OTHER ASSETS 1,645,000 1,342,000
DEFERRED INCOME TAXES 504,000 894,000
------------ ------------
$ 34,489,000 $ 33,005,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
NOTES PAYABLE - BANK $ 4,220,000 $ 3,975,000
ACCOUNTS PAYABLE 6,373,000 7,305,000
COMMISSIONS PAYABLE 666,000 369,000
ACCRUED PAYROLL AND RELATED EXPENSES 1,490,000 840,000
OTHER CURRENT LIABILITIES 1,426,000 907,000
MORTGAGE PAYABLE - CURRENT PORTION 143,000 133,000
------------ ------------
TOTAL CURRENT LIABILITIES 14,318,000 13,529,000
------------ ------------
MORTGAGE PAYABLE 2,880,000 3,023,000
------------ ------------
DEFERRED INCOME TAXES 15,000 233,000
------------ ------------
COMMITMENTS AND CONTINGENCIES - NOTE D
STOCKHOLDERS' EQUITY:
PREFERRED STOCK, PAR VALUE $1: AUTHORIZED, 1,000,000 SHARES; ISSUED AND
OUTSTANDING, NONE
COMMON STOCK, PAR VALUE $1: AUTHORIZED, 5,000,000 SHARES;
ISSUED 2004 AND 2003: 3,368,733 SHARES; OUTSTANDING 2004
2,475,879 AND 2003 2,461,680 SHARES 3,369,000 3,369,000
ADDITIONAL PAID-IN CAPITAL 10,390,000 12,117,000
RETAINED EARNINGS 9,716,000 8,258,000
------------ ------------
23,475,000 23,744,000
LESS: TREASURY STOCK AT COST (2004: 892,854 AND 2003: 907,053 SHARES) 6,199,000 7,524,000
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 17,276,000 16,220,000
------------ ------------
$ 34,489,000 $ 33,005,000
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-2
JACLYN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 30, 2004, 2003 AND 2002
================================================================================
2004 2003 2002
------------- ------------- -------------
Net sales $ 123,850,000 $ 108,960,000 $ 81,031,000
Cost of goods sold 92,658,000 83,506,000 62,083,000
------------- ------------- -------------
Gross profit 31,192,000 25,454,000 18,948,000
------------- ------------- -------------
Shipping, selling and administrative expenses 27,979,000 23,620,000 19,812,000
Interest expense 574,000 546,000 293,000
Interest income (3,000) (5,000) (3,000)
------------- ------------- -------------
EARNINGS (LOSS) BEFORE INCOME TAXES 2,642,000 1,293,000 (1,154,000)
PROVISION (BENEFIT) FOR INCOME TAXES 1,184,000 610,000 (415,000)
------------- ------------- -------------
NET EARNINGS (LOSS) $ 1,458,000 $ 683,000 $ (739,000)
============= ============= =============
NET EARNINGS (LOSS) PER COMMON SHARE - BASIC $ .58 $ .27 $ (.29)
============= ============= =============
Weighted average number of shares
outstanding - basic 2,531,000 2,521,000 2,561,000
============= ============= =============
NET EARNINGS (LOSS) PER COMMON SHARE - DILUTED $ .54 $ .27 $ (.29)
============= ============= =============
Weighted average number of shares
outstanding - diluted 2,687,000 2,547,000 2,561,000
============= ============= =============
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
JACLYN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 2004, 2003 AND 2002 - (Continued)
================================================================================
2004 2003 2002
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) $ 1,458,000 $ 683,000 $ (739,000)
Adjustments to reconcile net earnings (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 378,000 364,000 341,000
Deferred income taxes 344,000 398,000 (463,000)
Provision for doubtful accounts 12,000 5,000 123,000
Fair Value Adjustment - Topsville acquisition -- -- 1,289,000
Changes in assets and liabilities:
(Increase) in accounts receivable (3,128,000) (116,000) (5,837,000)
Decrease (increase) in inventories 1,788,000 1,730,000 (230,000)
Decrease (increase) in prepaid expenses and
other current assets 67,000 (242,000) (833,000)
(Increase) decrease in other assets (313,000) 163,000 (73,000)
Increase in accounts payable and
other current liabilities 534,000 745,000 2,853,000
------------ ------------ ------------
Net cash provided by (used in) operating activities 1,140,000 3,730,000 (3,569,000)
------------ ------------ ------------
F-4
JACLYN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 2004, 2003 AND 2002 - (Continued)
================================================================================
2004 2003 2002
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (290,000) (300,000) (89,000)
Acquisition cost -- -- (2,153,000)
------------ ------------ ------------
Net cash used in investing activities (290,000) (300,000) (2,242,000)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in notes payable - bank, net 245,000 (5,120,000) 6,540,000
Proceeds from mortgage loan -- 3,023,000 --
Payment of long-term debt (133,000) (61,000) --
Payment of acquisition notes -- (1,100,000) (700,000)
Exercise of stock options 174,000 -- --
Repurchase of common stock (576,000) (287,000) --
------------ ------------ ------------
Net cash (used in) provided by financing activities (290,000) (3,545,000) 5,840,000
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 560,000 (29,000) 29,000
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR 66,000 95,000 66,000
------------ ------------ ------------
CASH AND CASH EQUIVALENTS,
END OF YEAR $ 626,000 $ 66,000 $ 95,000
============ ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 575,000 $ 564,000 $ 276,000
------------ ------------ ------------
Income taxes $ 864,000 $ 148,000 $ 322,000
------------ ------------ ------------
NON-CASH ITEMS:
Non-cash financing - repurchase of common stock
and exercise of stock options $ 569,000 $ -- $ --
------------ ------------ ------------
Non-cash financing - note on acquisition $ -- $ -- $ 1,500,000
------------ ------------ ------------
The accompanying notes are an integral part of these consolidated financial
statements. (Concluded)
F-5
JACLYN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JUNE 30, 2004, 2003, AND 2002
================================================================================
COMMON STOCK TREASURY STOCK
--------------------------- Additional ----------------------------
Paid-in Retained
Shares Amount Capital Earnings Shares Amount
------------ ------------ ------------ ------------ ------------ ------------
BALANCE, JULY 1, 2001 3,368,733 $ 3,369,000 $ 12,117,000 $ 8,314,000 807,342 $ 7,237,000
Net loss -- -- -- (739,000) -- --
------------ ------------ ------------ ------------ ------------ ------------
BALANCE, JUNE 30, 2002 3,368,733 3,369,000 12,117,000 7,575,000 807,342 7,237,000
Net earnings -- -- -- 683,000 -- --
Repurchase of Common Stock -- -- -- -- 99,711 287,000
------------ ------------ ------------ ------------ ------------ ------------
BALANCE, JUNE 30, 2003 3,368,733 3,369,000 12,117,000 8,258,000 907,053 7,524,000
Net earnings -- -- -- 1,458,000
Repurchase of Common Stock -- -- -- -- 289,301 1,145,000
Exercise of Stock Options -- -- (1,727,000) -- (303,500) (2,470,000)
------------ ------------ ------------ ------------ ------------ ------------
BALANCE, JUNE 30, 2004 3,368,733 $ 3,369,000 $ 10,390,000 $ 9,716,000 892,854 $ 6,199,000
============ ============ ============ ============ ============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
JACLYN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE A - SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
Jaclyn, Inc. and its subsidiaries (the "Company") are engaged in the design,
manufacture, marketing and sale of apparel, handbags, accessories and related
products. The Company sells its products to retailers, including department and
specialty stores, national chains, major discounters and mass volume and
cataloge retailers, throughout the United States.
The consolidated financial statements include the accounts of the Company and
all of its wholly-owned subsidiaries. All significant intercompany transactions
and balances have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, and disclosure of contingent liabilities at the date of the
financial statements, and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
The most significant estimates made by management include those made in the
areas of inventory, receivables, deferred taxes, contingencies and the
assessment of the recoverability of goodwill, pensions, and sales returns and
allowances.
Management periodically evaluates estimates used in the preparation of the
consolidated financial statements for continued reasonableness. Appropriate
adjustments, if any, to the estimates used are made prospectively based on such
periodic evaluations.
Cost of Goods Sold
Cost of goods sold includes the following: purchasing and receiving costs,
factory inspections, customs duty, freight-in (including ocean and air freight),
marine insurance, brokerage, in-bound trucking and other freight, internal
transfer costs and other costs of our distribution network.
Shipping, Selling, and Administrative Expenses
F-7
Shipping, selling, and administrative expenses include the following: public
warehousing, carton and shipping expenses, warehouse supervision, salesmen's
salaries and commissions, showroom costs, salesperson's travel and entertainment
and other miscellaneous costs relating to the selling of products, design and
sample making, accounting and computer costs, management and general supervisory
costs and related overhead. Charges recorded in the consolidated statement of
operations for shipping and handling costs amounted to $2,804,000, $2,836,000,
and $2,133,000 for the years ended June 30, 2004, 2003 and 2002, respectively.
The Company currently leases approximately 70,000 square feet of its West New
York, New Jersey facility to outside parties. This rental income, amounting to
approximately $238,000, $196,000 and $252,000 in fiscal 2004, 2003 and 2002,
respectively, is used to offset a portion of the operating cost of the building
and, as such, is included in our shipping, selling and administrative expenses.
Cash and Cash Equivalents
Cash in excess of daily requirements is invested in certificates of deposits and
money market funds with original maturities of three months or less. Such
investments are presented as cash equivalents.
Fair Value of Financial Instruments
The carrying amount of cash, accounts receivable, accounts and notes payable and
accrued expenses are assumed to approximate fair value due to their short
maturities. The carrying value of the bank loan, which bears interest at a
variable rate, approximates fair value. The carrying value of the mortgage loan
approximates fair value based upon the relatively small change in interest rates
since inception of the mortgage.
Inventories
Inventory is carried at the lower of cost on a first-in, first-out basis, or
market. Management writes down inventory for estimated obsolescence or
unmarketable inventory based upon assumptions about future demand and market
conditions.
Allowances for Doubtful Accounts/Sales Discounts
The Company maintains allowances for doubtful accounts for estimated losses
resulting from the inability of its customers to make required payments and also
maintains accounts receivable insurance on certain of its customers.
F-8
The Company estimates reductions to revenue for customer programs and incentive
offerings including special pricing agreements, price protection, promotions and
other volume-based incentives, based on terms of the agreement and/or historical
experience.
License Agreements
The Company enters into license agreements from time to time that allows us to
use certain trademarks and trade names on certain of its products. These
agreements require the Company to pay royalties, generally based on the sales of
such products, and may require guaranteed minimum royalties, a portion of which
may be paid in advance. The Company's accounting policy is to match royalty
expense with revenue by recording royalties at the time of sale at the greater
of the contractual rate or an effective rate calculated based on the guaranteed
minimum royalty and the Company's estimate of sales during the contract period.
If a portion of the guaranteed minimum royalty is determined not to be
recoverable, the unrecoverable portion is charged to expense at that time.
Guaranteed minimum royalties paid in advance are recorded in the consolidated
balance sheets as other assets. As of June 30, 2004 and 2003 there were no
advances.
Royalty amounts expensed for each of the three fiscal years ended June 30, 2004,
2003, and 2002 were $ 1,119,000, $215,000, and $ 557,000, respectively.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. The Company provides for
depreciation and amortization on the straight-line method over the following
estimated useful lives:
Buildings 25 to 40 years
Machinery and equipment 5 years
Furniture and fixtures 5 years
Leasehold improvements Lesser of estimated useful life of the
asset or life of the lease
Automobiles and trucks 3 to 5 years
Trademarks
Trademarks, included in other assets, are being amortized on a straight-line
basis over periods not exceeding 10 years.
Other intangibles totaling $174,000, included in "Other Assets", consist of
amounts allocated to trade names, patents and backlog relating to the
acquisition of Topsville, Inc. (Note I). The
F-9
Company incurred $10,000 and $89,000 of amortization expense in 2004 and 2003,
respectively. Additional annual amortization expense of $10,000 will be incurred
through 2011.
Impairment of Finite-Lived Assets
The Company evaluates finite-lived assets in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 144, "Accounting for the Impairment
or Disposal of Long-lived Assets." Finite-lived assets are evaluated for
recoverability in accordance with SFAS No. 144 whenever events or changes in
circumstances indicate that an asset may have been impaired. In evaluating an
asset for recoverability, the Company estimates the future cash flows expected
to result from the use of the asset and eventual disposition. If the sum of the
expected future cash flows (undiscounted and without interest charges) is less
than the carrying amount of the asset, an impairment loss, equal to the excess
of the carrying amount over the fair market value of the asset, is recognized.
Management believes at this time that carrying values are not impaired and
useful lives continue to be appropriate.
Goodwill
The Company accounts for goodwill under SFAS No. 142, "Goodwill and Other
Intangible Assets." Under SFAS No. 142, goodwill is not amortized, but is
reviewed for impairment annually or more frequently if certain indicators arise.
Management believes at this time, based on the valuation process undertaken,
that the carrying value continues to be appropriate.
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. 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." See Note F to the Company's Consolidated Financial Statements. If
compensation cost for the Company's stock option plans had been determined in
accordance with the fair value method prescribed by SFAS No. 148, the Company's
net earnings (loss) would have been:
Fiscal Year Ended June 30,
----------------- ---------------------------------------------
2004 2003 2002
------------- ------------- -------------
Net earnings (loss)
As reported $ 1,458,000 $ 683,000 $ (739,000)
Deduct: Total stock based employee compensation
expense determined under fair value based
F-10
method, net of taxes 26,000 183,000 --
------------- ------------- -------------
Pro forma Net Earnings (Loss) $ 1,432,000 $ 500,000 $ (739,000)
------------- ------------- -------------
Basic net earnings (loss) per share:
- -----------------------------------
As reported $ .58 $ .27 $ (.29)
Pro forma $ .57 $ .20 $ (.29)
------------- ------------- -------------
Diluted net earnings (loss) per share:
- -------------------------------------
As reported $ .54 $ .27 $ (.29)
Pro forma $ .53 $ .20 $ (.29)
------------- ------------- -------------
The fair value of each option grant is estimated on the date of each grant using
the Black-Scholes option pricing model. Since options are granted at fair value,
no compensation expense has been recorded. The following weighted average
assumptions were used for grants in 2004 and 2003: risk-free interest rate of
3.25% and 4.75%, expected life of 10 years; expected volatility of 161% and 43%;
dividend yield of 0%. The fair values generated by the Black-Scholes model may
not be indicative of the future benefit, if any, that may be received by the
option holder.
Revenue Recognition
Revenue is recognized at the time merchandise is shipped or received by a third
party consolidator, normally the same day of the shipment. The Company offers
various sales discounts and incentives to its customers. These discounts and
incentives are recorded at the time of sales as a reduction of sales based on
historical experience and the terms of agreements, if any, between the Company
and its customers. Products are shipped directly to customers using third party
carriers. The customer takes title and assumes the risks and rewards of
ownership of the products when the merchandise leaves the Company's warehouse or
is received by a third party consolidator, as applicable.
Shipping and Handling Costs
Included in Shipping, Selling and Administrative Expenses are all shipping and
handling costs incurred by the Company. Included in revenues are all amounts
billed to a customer in a sale transaction related to shipping and handling.
Shipping and handling reimbursements included in revenue amounted to
approximately $7,000, $7,000 and $24,000 for the years ended June 30, 2004,
2003, and 2002, respectively.
Segment Reporting
The Company operates in a single operating segment - the manufacture of apparel,
women's handbag and related accessories. Revenues from customers are derived
from merchandise sales. The Company's merchandise sales mix by product category
for the last three years was as follows:
Year ended June 30,
------------------------------------
Product Category 2004 2003 2002
---------------- ---------- ---------- ----------
F-11
Apparel 77% 76% 60%
Handbags 23% 24% 40%
---------- ---------- ----------
100% 100% 100%
---------- ---------- ----------
During the years ended June 30, 2004, 2003 and 2002, sales revenues derived from
one customer were 41%, 36% and 19%, respectively. Sales to a second customer
were 14%, 12% and 11%, and to a third customer were 13%, 8% and 10%,
respectively. The loss of any one of these customers would have a material
adverse effect on the Company's operations.
At June 30, 2004 and 2003, accounts receivable due from one customer were 45%
and 66%, respectively, and accounts receivable due from a second customer at
June 30, 2004 was 25% (accounts receivable due from this customer at June 30,
2003 was 9%) of total accounts receivable. Should either customer not be
able to pay any substantial obligation to the Company, however, that failure
would have a material adverse effect on the Company's operating results. No
other customer comprised 10% or more of our total net accounts receivable as at
either of those dates.
The Company relies on suppliers to purchase a variety of raw materials. The
Company had one supplier who in the aggregate constituted 15% of the Company's
purchases for the year ended June 30, 2004.
Recently Issued Accounting Standards
In June 2004, the Financial Accounting Standards Board (SFAS) issued an
interpretation of SFAS No. 143, Accounting for Asset Retirement Obligations.
This interpretation clarifies the scope and timing of liability recognition for
conditional asset retirement obligations under FASB No. 143, and is effective no
later than the end of our 2005 fiscal year. We have determined that this
interpretation, and the adoption of SFAS No. 143, will not have a material
impact on our consolidated financial statements or cash flows.
In December 2003, the SEC issued Staff Accounting Bulletin ("SAB") No. 104,
"Revenue Recognition" ("SAB No. 104"), which codifies, revises and rescinds
certain sections of SAB No. 101, "Revenue Recognition", in order to make this
interpretive guidance consistent with current authoritative accounting and SEC
rules and regulations. The changes noted in SAB No. 104 did not have a material
effect on our consolidated results of operations, consolidated financial
position or consolidated cash flows.
F-12
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN No. 46"), which addresses consolidation by
business enterprises of variable interest entities ("VIEs"). FIN No.46 is
applicable immediately for VIEs created after January 31, 2003 and are effective
for reporting periods ending after December 15, 2003, for VIEs created prior to
February 1, 2003. In December 2003, the FASB published a revision to FIN 46
("FIN 46R") to clarify some of the provisions of the interpretation and to defer
the effective date of implementation for certain entities. Under the guidance of
FIN 46R, public companies that have interests in VIE's that are commonly
referred to as special purpose entities are required to apply the provisions of
FIN 46R for periods ending after December 15, 2003. A public company that does
not have any interests in special purpose entities but does have a variable
interest in a VIE created before February 1, 2003, must apply the provisions of
FIN 46R by the end of the first interim or annual reporting period ending after
March 14, 2004. The Company adopted FIN 46 and FIN 46R during the year ended
June 30, 2004. The adoption of FIN 46 had no impact on the financial condition
or results of operations of the Company since the Company does not have
investments in VIE's.
On April 30, 2003, the FASB issued SFAS 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities". SFAS 149 is intended to result
in more consistent reporting of contracts as either freestanding derivative
instruments subject to SFAS 133 in its entirety, or as hybrid instruments with
debt host contracts and embedded derivative features. In addition, SFAS 149
clarifies the definition of a derivative by providing guidance on the meaning of
initial net investments related to derivatives. There was no impact on the
consolidated financial statements from the adoption of SFAS 149.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity." This standard
requires an issuer to classify certain financial instruments as liabilities. It
also changes the classification of certain common financial instruments from
either equity or presentation to liabilities and requires an issuer of those
financial statements to recognize changes in fair value or redemption amount, as
applicable, in earnings. SFAS 150 is effective for financial instruments entered
into or modified after May 31, 2003, and with one exception, is effective at the
beginning of the first interim period beginning after June 15, 2003. The
adoption of SFAS 150 at this time has had no impact on the Company's results of
operations, financial position or cash flows.
Reclassifications
Certain items in prior years have been reclassified for comparative purposes.
NOTE B - INVENTORIES
Inventories consist of the following:
F-13
June 30,
-------------------------
2004 2003
---------- ----------
Raw material $2,932,000 $3,874,000
Work in process 450,000 1,506,000
Finished goods 4,495,000 4,285,000
---------- ----------
$7,877,000 $9,665,000
========== ==========
NOTE C - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is summarized as follows:
June 30,
-------------------------
2004 2003
---------- ----------
Land $ 162,000 $ 162,000
Buildings 1,181,000 1,181,000
Machinery and equipment 1,225,000 1,183,000
Furniture and fixtures 347,000 317,000
Leasehold improvements 1,197,000 1,127,000
Automobiles and trucks 89,000 94,000
---------- ----------
4,201,000 4,064,000
Less: accumulated depreciation
and amortization 3,132,000 2,917,000
---------- ----------
$1,069,000 $1,147,000
========== ==========
Depreciation and amortization expense of $368,000, $364,000 and $341,000 was
recorded during the years ended June 30, 2004, 2003 and 2002, respectively
NOTE D - COMMITMENTS AND CONTINGENCIES
The Company leases office facilities under non-cancelable leases, with
escalation clauses, that expire in various years through the year ended June 30,
2009.
Future minimum payments under non-cancelable operating leases with initial or
remaining terms of one year or more are as follows:
Year Ended Office and Showroom
June 30, Facilities
-------- ----------
2005 $ 852,000
2006 794,000
2007 729,000
2008 532,000
F-14
2009 613,000
Rental expense, including real estate taxes, for all operating leases, totaled
$1,145,000, $969,000, and $669,000 for the years ended June 30, 2004, 2003 and
2002, respectively. The Company currently leases approximately 70,000 square
feet of its West New York, New Jersey facility to outside parties. Rental income
in fiscal 2004, 2003 and 2002 was $238,000, $196,000 and $252,000, respectively.
The Company has entered into licensing arrangements with several companies. The
Company is obligated, in certain instances, to pay minimum royalties over the
term of the licensing agreements which expire in various years through 2007.
Aggregate minimum commitments by fiscal year are as follows:
Year
Ended Minimum
June 30, Commitments
-------- -----------
2005 $ 202,000
2006 250,000
2007 137,500
From time to time, the Company and its subsidiaries may be subject to claims and
may become a party to legal proceeding which arise in the normal course of
business. At June 30, 2004, there were no material, pending legal proceedings or
material claims to which the Company was a party. In the opinion of management,
disposition of all claims and legal proceedings is not expected to materially
affect the Company's financial position, cash flows or results of operations.
The Company has not provided any financial guarantees as of June 30, 2004 and
2003.
NOTE E - CREDIT FACILITIES
On October 23, 2003, the Company amended its bank credit facility. The amended
facility, which expires 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
F-15
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 requiring
that the Company maintain a minimum tangible net worth of $12,000,000 through
June 30, 2004. The Company was in compliance with this financial covenant at
June 30, 2004. As of June 30, 2004, borrowing on the short-term line of credit
was $4,220,000, and the Company had $7,597,000 of additional availability (based
on the borrowing formula) under its credit facility. At June 30, 2004, the
Company was contingently obligated on open letters of credit with an aggregrate
face amount of approximately $16,256,000. 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 June 30, 2004 was 4.25%.
During fiscal 2004, the average amount outstanding under the short-term line was
$8,221,000 with a weighted average interest rate of 3.89%. During 2003, the
average amount outstanding under the short-term line was $7,657,000 with a
weighted average interest rate of 4.16%. The maximum amount outstanding during
fiscal 2004 and fiscal 2003 was $22,000,000 and $18,000,000, respectively.
On August 14, 2002, the Company consummated a 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 $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.
NOTE F - STOCK OPTIONS
The Company maintains two stockholder-approved Stock Option Plans for key
employees and consultants of the Company and one non-employee director plan.
The Company's 2000 Stock Option Plan, as amended ( the "2000 Plan"), originally
provided for the grant of options to purchase up to 300,000 shares of Common
Stock, and was amended during fiscal 2004 to increase the number of shares of
Common Stock for which options may be granted by an additional 250,000 shares.
The 1990 Stock Option Plan of the Company, as amended (the "1990 Plan"),
provided for the grant of an aggregate of 500,000 shares of Common Stock.
Options may no longer be granted under the 1990 Plan, although at June 30, 2004
options to purchase 87,500 shares of Common Stock remained outstanding.
Stockholders of the Company had also approved a 1984 Stock Option Plan of the
Company (as amended, the "1984 Plan"), which originally provided for the grant
of up to 125,000 shares of Common Stock. Options may no longer be granted under
the 1984 Plan and, at June 30, 2004, the last remaining options granted under
the 1984 Plan expired. The Company also has in effect the 1996 Non-Employee
Director Stock Option Plan (the "1996 Plan", and together with the 1990 Plan and
the 2000 Plan, the "Plans"), under
F-16
which options to purchase up to 100,000 shares of Common Stock may be issued to
non-employee directors of the Company.
Under the Plans, the Board of Directors determines the per share option price
which, in the case of incentive stock options granted and to be granted under
the 1990 Plan, may not be less than the fair market value of the shares of
Common Stock subject to the option on the date of the grant, or 110% of the fair
market value for individuals who own or are deemed to own more than 10% of the
combined voting power of all classes of stock of the Company. Options, which may
be granted to October 2010, under the 2000 Plan and November 2006, under the
1996 Plan, are exercisable as determined by the Board of Directors at the time
of grant.
Stock option transactions are summarized below:
2004 2003 2002
---------------------------- ---------------------------- ----------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------------ ------------ ------------ ------------ ------------ ------------
Outstanding - beginning of year 720,161 $ 2.95 412,161 $ 3.53 422,161 $ 3.99
Granted 10,000 1.95 322,000 1.75 -- --
Exercised (303,500) 2.45 -- -- -- --
Expired (39,161) 9.54 -- -- -- --
Forfeited (10,000) 2.21 (14,000) 2.86 (10,000) 4.06
------------ ------------ ------------ ------------ ------------ ------------
Outstanding and exercisable -
end of year 377,500 $ 2.26 720,161 $ 2.95 412,161 $ 3.53
------------ ------------ ------------ ------------ ------------ ------------
Weighted-average fair value of
options granted during the year $ 4.81 $ 1.08 $ --
------------------------------------------------------------------------------------------
During the fiscal year ended June 30, 2004, certain officers of the Company
exercised options to purchase 290,500 shares of the Company's Common Stock.
As permitted by the applicable stock option plan and contracts governing
the options, the officers tendered to the Company and the Company purchased
in partial payment of the exercise price for 210,500 of these options, 164,141
mature shares of Common Stock, with a market value of $569,000. During the
same period, the Company repurchased 4,725 shares from employees who received
distributions from the Company's ESOP at a price of $19,000.
F-17
The following table summarizes information about stock options outstanding at
June 30, 2004:
Options Outstanding and Exercisable
------------------------------------------------------------------
Weighted
Average Weighted
Number Remaining Average
Range of Outstanding at Contractual Exercise
Exercise Prices June 30, 2004 Life (Yrs) Price
--------------- ------------- ------------ ------------
$1.65 to $2.10 179,000 7.03 $1.66
$2.21 to $2.88 142,000 5.73 $2.49
$3.15 to $3.75 22,000 7.68 $3.31
$4.06 to $4.13 22,500 2.00 $4.06
$4.38 to $5.13 12,000 3.14 $4.72
-------------
Totals 377,500
-------------
NOTE G - PREFERRED STOCK
The Board of Directors of the Company has authority (without action by the
stockholders) to issue the authorized and unissued preferred stock in one or
more series and, within certain limitations, to determine the voting rights,
preference as to dividends and in liquidation, conversion and other rights of
each such series. No shares of preferred stock have been issued.
F-18
NOTE H - INCOME TAXES
The components of the Company's tax provision (benefit)for the years
ended June 30, 2004, 2003 and 2002 are as follows:
June 30,
----------------------------------------
2004 2003 2002
---------- ---------- ----------
Current:
Federal $ 545,000 $ (11,000) $ --
State and Local 79,000 195,000 32,000
Foreign 216,000 26,000 16,000
---------- ---------- ----------
840,000 210,000 48,000
Deferred:
Federal and State 344,000 400,000 (463,000)
---------- ---------- ----------
Provision (benefit) $1,184,000 $ 610,000 $ (415,000)
========== ========== ==========
Reconciliation between the provision (benefit) for income taxes computed by
applying the federal statutory rate to income before income taxes and the actual
provision (benefit) for income taxes is as follows:
- ------------------------------------------------------ ---------- ---------- ----------
June 30, 2004 2003 2002
- ------------------------------------------------------ ---------- ---------- ----------
Provision (benefit) for income taxes at statutory rate 34.0% 34.0% (34.0)%
State and local income taxes net of federal tax benefit 3.5 5.7 (3.0)
Expired foreign tax credits 0.7 4.7 --
Valuation Allowance for expiring foreign tax credits 3.5 -- --
Other 3.1 2.9 1.0
---------- ---------- ----------
Effective tax rate percent 44.8% 47.3% 36.0%
========== ========== ==========
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Foreign tax credits are
expected to expire through June 30, 2007. The income tax effects of significant
items comprising the Company's net deferred tax assets and liabilities as of
June 30, 2004 and 2003 are as follows:
- ------------------------------------ --------------------------- --------------------------
June 30, 2004 2003
- ------------------------------------ --------------------------- --------------------------
Assets Liabilities Assets Liabilities
Depreciation
and amortization $ 146,000 $ -- $ -- $ 159,000
Leases -- 15,000 -- 74,000
Foreign taxes 358,000 -- 669,000 --
Valuation allowance (79,000) -- -- --
Inventory 312,000 -- 743,000 --
F-19
Bad debt, sales allowances and
other reserves 112,000 -- 111,000 --
Other 562,000 -- 449,000 --
----------- ----------- ----------- -----------
$ 1,411,000 $ 15,000 $ 1,972,000 $ 233,000
=========== =========== =========== ===========
NOTE I - ACQUISITIONS
In January 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 aggregate purchase price for the acquisition was
$3,246,000 (excluding transaction costs of $407,433), of which $1,746,000 was
paid at the closing of the transaction and the remainder of which was paid
during the fifteen-month period after closing. At June 30, 2003, the entire
obligation under the purchase agreement had been paid.
The Company recorded a pre-tax charge to earnings of $1,289,000 ($389,000 to
cost of goods sold for the write-up of inventory, and $900,000 to amortization
expense related to the order backlog, within selling and administrative
expenses) for the year ended June 30, 2002. These charges primarily represent a
fair value adjustment representing the write-up of the inventory purchased from
Topsville, Inc., and the purchase order backlog acquired from Topsville which
was amortized over the period that the related revenue was recorded by the
Company which was from the date of acquisition to June 30, 2002. The remaining
$79,000 of backlog allocated to open orders acquired with the acquisition was
charged to earnings during the first quarter of fiscal year 2003.
The changes in the carrying amount of goodwill during the years ended June 30,
2004 and 2003 are as follows:
2004 2003
----------- -----------
Balance as of beginning of year $ 3,338,000 $ 3,342,000
Goodwill adjusted during the period -- (4,000)
----------- -----------
$ 3,338,000 $ 3,338,000
----------- -----------
NOTE J - EMPLOYEES' BENEFIT PLANS
F-20
The Company has a trusteed, defined-benefit pension plan for certain of their
salaried and hourly personnel. The plan provides pension benefits that are based
on a fixed amount of compensation per year of service, career average pay or on
the employee's compensation during a specified number of years before
retirement. The Company's funding policy is to make annual contributions
required by the Employee Retirement Income Security Act of 1974.
Fiscal Year Ended June 30, 2004 2003
----------- -----------
CHANGE IN BENEFIT OBLIGATION:
Net benefit obligation at beginning of year $ 4,735,000 $ 4,442,000
Service cost 332,000 311,000
Interest cost 278,000 260,000
Actuarial loss 393,000 424,000
Gross benefits paid (148,000) (702,000)
----------- -----------
Net benefit obligation at end of year $ 5,590,000 $ 4,735,000
=========== ===========
CHANGE IN PLAN ASSETS:
Fair value of plan assets at beginning of year $ 4,574,000 $ 4,379,000
Employer contributions 693,000 573,000
Gross benefits paid (148,000) (702,000)
Actual return on plan assets 178,000 324,000
----------- -----------
Fair value of plan assets at end of year 5,297,000 4,574,000
=========== ===========
Funded status at end of year (293,000) (160,000)
Unrecognized net actuarial loss 1,802,000 1,399,000
Unrecognized transition amount (9,000) (48,000)
Unrecognized prior service cost 1,000 1,000
----------- -----------
Prepaid benefit costs $ 1,501,000 $ 1,192,000
=========== ===========
F-21
Pension expenses includes the following components:
Fiscal Year Ended June 30, 2004 2003 2002
---------- ---------- ----------
COMPONENTS OF NET PERIODIC BENEFIT COST:
Service cost $ 332,000 $ 311,000 $ 288,000
Interest cost 278,000 260,000 247,000
Expected return on assets (198,000) (259,000) (249,000)
Amortization of prior service cost 1,000 1,000 1,000
Amortization of transition assets (39,000) (39,000) (39,000)
Amortization of actuarial loss 10,000 85,000 54,000
---------- ---------- ----------
Net periodic cost $ 384,000 $ 359,000 $ 302,000
========== ========== ==========
The accumulated benefit obligation for the defined benefit pension plan was
$5,140,000 and $3,715,000 at June 30, 2004 and 2003.
Assumptions used to determine Benefit Obligation at June 30, 2004 and 2003 are
as follows:
2004 2003
---------- ----------
Discount rate 5.50% 5.75%
Expected long-term return on plan assets 6.00% 6.00%
Rate of compensation increase 3.75% 3.00%
Assumptions used in determining the net periodic cost:
June 30, 2004 2003 2002
---------- ---------- ----------
Discount rate 5.75% 5.75% 6.25%
Rate of increase in compensation levels 3.75% 3.00% 3.00%
Expected long-term rate of return on assets 6.00% 6.00% 6.50%
The expected long-term return on plan assets assumption represents the average
rate that the Company expects to earn over the long-term on assets (primarily
high-grade government bonds) in the Company's Pension Plan, including, if any,
interest income and capital appreciation. The assumption has been determined
based on expectations regarding future rates of return for the plan's investment
portfolio.
The Company has the responsibility to formulate the investment policy and
strategy for the Pension Plan's assets. The overall policy and strategy includes
maintaining the highest return, with the lowest assumed risk, while striving to
have the Plan fully-funded.
F-22
The Company has retained the professional services of a bond broker, which
selects for investment high-grade government bonds, consistent with the
Company's risk and investment strategy. This broker has investment discretion
over the assets placed under its management, provided it is within the Company's
risk and investment strategy.
The table below represents the Company's pension plan asset allocation at
June 30, 2004 and 2003 by asset category.
Asset Allocation
Asset Category 2004 2003
- -------------- ---------- ----------
Equity securities 0% 1%
Debt securities 68% 57%
Other, primarily cash and cash equivalents 32% 42%
------- -------
Total 100% 100%
======= =======
The Company expects to contribute $752,000 to its defined benefit pension plan
during the fiscal year ended June 30, 2005.
Anticipated payments during the next ten (10) fiscal years are as follows:
Fiscal Year Ending June 30, Expected Payment
--------------------------- ----------------
2005 $ 677,077
2006 165,241
2007 1,497,658
2008 511,091
2009 547,923
2010-2014 4,221,704
F-23
The Company maintains a non-contributory Employee Stock Ownership Plan (the
"ESOP") and Trust, for its employees who are not covered by a collective
bargaining agreement. Contributions to the ESOP are at the discretion of the
Company's Board of Directors. There was no ESOP expense for the years ended June
30, 2004, 2003 and 2002.
Vesting occurs after five years of service. However, if the ESOP is deemed
"top-heavy", vesting will occur at the rate of 20% per year after the completion
of the second year of service.
The Company has a 401(K) savings plan for the benefit of its Topsville, Inc.
employees, which existed prior to the Company's acquisition of Topsville. No
contributions by the Company were made during fiscal 2004.
The Company recently entered into an amendment to its collective bargaining
agreement with Local 62-32, UNITE, AFL-CIO, which covers all 16 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 be required to contribute to the union's 401-K plan and as such,
has not recorded any charge relating to this contingency in its consolidated
financial statements. During fiscal 2004, the Company decided to withdraw from
the pension plan. This decision obligates the Company for a portion of the
unfunded pension obligation. The final determination of the withdrawal liability
is impacted by the timing of the final settlement by the Company to withdraw
from the plan and the continued participation of other companies that contribute
to the pension plan. Based on the latest information provided to the Company by
the union, the estimated present value is approximately $500,000.
NOTE K - NET EARNINGS (LOSS) PER SHARE
The Company's calculation of Basic and Diluted Net Earnings (Loss) Per Share are
as follows:
Year Ended June 30,
---------------------------------------
2004 2003 2002
----------- ----------- -----------
Basic Net Earnings (Loss) Per Share:
Net Earnings (Loss) $ 1,458,000 $ 683,000 $ (739,000)
----------- ----------- -----------
Basic Weighted Average Shares Outstanding 2,531,000 2,521,000 2,561,000
----------- ----------- -----------
Basic Net Earnings (Loss) Per Common Share $ .58 $ .27 $ (.29)
----------- ----------- -----------
F-24
Diluted Net Earnings (Loss) Per Share:
Net Earnings (Loss) $ 1,458,000 $ 683,000 $ (739,000)
----------- ----------- -----------
Basic Weighted Average Shares Outstanding 2,531,000 2,521,000 2,561,000
Add: Dilutive Options 156,000 26,000 (a)
----------- ----------- -----------
Diluted Weighted Average Shares Outstanding 2,687,000 2,547,000 2,561,000
----------- ----------- -----------
Diluted Net Earnings (Loss) Per Common Share $ .54 $ .27 $ (.29)
----------- ----------- -----------
(a): Options are not considered part of the diluted weighted average share
calculation where there is a loss for the period, since they would be
anti-dilutive.
Options to purchase 256,000 common shares were outstanding as of June 30, 2003
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.
NOTE L - REPURCHASE OF SHARES FOR TREASURY
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 is financing these repurchases from its own funds from operations and/or
from its bank credit facility. As of June 30, 2004, the Company purchased
233,982 shares of its Common Stock at a cost of approximately $860,000.
F-25
NOTE M - UNAUDITED QUARTERLY FINANCIAL DATA
Summarized quarterly financial data amounts for the fiscal years ended June 30,
2004 and 2003 are as follows:
Three Months Ended
-----------------------------------------------------------
June 30, March 31, December 31, September 30,
2004 2004 2003 2003
------------ ------------ ------------ ------------
Net sales $ 28,796,000 $ 26,413,000 $ 38,745,000 $ 29,896,000
Gross profit 7,553,000 6,721,000 9,328,000 7,590,000
Net earnings (loss) 441,000 (240,000) 899,000 358,000
Net earnings (loss) per common share -
basic $ .18 $ (.09) $ .35 $ .14
Net (loss) earnings per common share -
diluted $ .17 $ (.09) $ .33 $ .13
Three Months Ended
-----------------------------------------------------------
June 30, March 31, December 31, September 30,
2003 2003 2002 2002
------------ ------------ ------------ ------------
Net sales $ 22,510,000 $ 20,816,000 $ 35,689,000 $ 29,945,000
Gross profit 5,259,000 5,400,000 8,313,000 6,482,000
Net (loss) earnings - see Note below (209,000) (213,000) 799,000 306,000
Net (loss) earnings per common share -
basic and diluted - see Note below $ (.06) $ (.09) $ .30 $ .12
In the fourth quarter of fiscal 2003, the Company recorded tax expense of
$61,000 relating to foreign tax credits that expired prior to the Company's
ability to realize such asset.
F-26
JACLYN INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
================================================================================
Column Column Column Column Column
A B C D E
Additions
Balance at Charged Balance
beginning of to costs at end
Description period and expenses Deductions of period
------------ ------------ ------------ ------------
Fiscal Year ended June 30, 2004
Allowance for doubtful accounts $ 165,000 $ 12,000 $ -- $ 177,000
Allowance for sales discounts, returns and allowances 2,527,000 6,784,000 (6,926,000) 2,385,000
Fiscal Year ended June 30, 2003
Allowance for doubtful accounts 160,000 39,000 (34,000) 165,000
Allowance for sales discounts, returns and allowances 809,000 6,309,000 (4,591,000) 2,527,000
Fiscal Year ended June 30, 2002
Allowance for doubtful accounts 37,000 108,000 15,000 160,000
Allowance for sales discounts, returns and allowances 928,000 2,372,000 (2,491,000) 809,000
F-27
======================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------------------------------
EXHIBITS
to
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR
ENDED JUNE 30, 2004
------------------------------------------------------
JACLYN, INC.
======================================================
-30-
Exhibit No. Description
- ----------- -----------
3(a) Certificate of Incorporation of the Registrant (incorporated
herein by reference to Exhibit 3(a) to the Registrant's Annual
Report on Form 10-K, File No. 1-5863, for the fiscal year
ended June 30, 1994).
3(b) By-Laws of the Registrant (incorporated herein by reference to
Exhibit 3(b) to the Registrant's Annual Report on Form 10-K,
File No. 1-5863, for the fiscal year ended June 30, 1991).
4(a) Promissory Note of the Registrant dated August 14, 2002
payable to the order of Hudson United Bank ("HUB") in the
principal amount of $3,250,000 (incorporated herein by
reference to Exhibit 4(a) to the Registrant's Annual Report on
Form 10-K, File No. 1-5863, for the fiscal year ended June 30,
2002).
4(b) Mortgage, Security Agreement and Financing Statement dated
August 14, 2002 between the Registrant and HUB (incorporated
herein by reference to Exhibit 4(b) to the Registrant's Annual
Report on Form 10-K, File No. 1-5863, for the fiscal year
ended June 30, 2002).
4(c) Revolving Loan Agreement dated December 23, 200 between the
Registrant and HUB (incorporated herein by reference to
Exhibit 4(c) to the Registrant's Annual Report on Form 10-K,
File No. 1-5863, for the fiscal year ended June 30, 2003).
10(a) 1984 Employee Stock Option Plan of the Registrant
(incorporated herein by reference to Exhibit 10(f) to the
Registrant's Annual Report on Form 10-K, File No. 1-5863, for
the fiscal year ended June 30, 1989).*
10(b) 1990 Stock Option Plan of the Registrant, as amended
(incorporated herein by reference to Exhibit 10(g) to the
Registrant's Annual Report on Form 10-K, File No. 1-5863, for
the fiscal year ended June 30, 1991).*
10(c) Second Amended and Restated Stockholders' Agreement dated May
12, 2003 among the Registrant and the persons listed on
Schedule A thereto (incorporated herein by reference to
Exhibit U to Amendment No. 9 to the Schedule 13D dated May 15,
2003 of Allan Ginsburg, Robert Chestnov, Abe Ginsburg and
Howard Ginsburg.).
10(d) Key Executive Disability Plan of the Registrant (incorporated
herein by reference to Exhibit 10(m) to the Registrant's
Annual Report on Form 10-K, File No. 1-5863, for the fiscal
year ended June 30, 1988).*
-31-
10(e) Non-Qualified Stock Option Contract dated December 2, 1998
between the Registrant and Martin Brody (incorporated herein
by reference to Exhibit 10(I) to the Registrant's Annual
Report on Form 10-K, File No. 1-5863, for the fiscal year
ended June 30, 1999).
10(f) Non-Qualified Stock Option Contract dated December 2, 1998
between the Registrant and Richard Chestnov (incorporated
herein by reference to Exhibit 10(j) to the Registrant's
Annual Report on Form 10-K, File No. 1-5863, for the fiscal
year ended June 30, 1999).
10(g) Non-Qualified Stock Option Contract dated December 2, 1998
between the Registrant and Albert Safer (incorporated herein
by reference to Exhibit 10(j) to the Registrant's Annual
Report on Form 10-K, File No. 1-5863, for the fiscal year
ended June 30, 1999).
10(h) 1996 Non-Employee Director Stock Optio Plan (incorporated by
reference to Exhibit 10(o) to the Registrant's Annual Report
on Form 10-K, File No. 1-5863, for the fiscal year ended June
30, 1998).*
10(i) Non-Qualified Stock Option Contract dated December 3, 1996
between the Registrant and Martin Brody (incorporated by
reference to Exhibit 10(p) to the Registrant's Annual Report
on Form 10-K, File No. 1-5863, for the fiscal year ended June
30, 1997).
10(j) Non-Qualified Stock Option Contract dated December 3, 1996
between the Registrant and Richard Chestnov (incorporated by
reference to Exhibit 10(q) to the Registrant's Annual Report
on Form 10-K, File No. 1-5863, for the fiscal year ended June
30, 1997).
10(k) Non-Qualified Stock Option Contract dated August 19, 1997
between the Registrant and Al Safer (incorporated by reference
to Exhibit 10(r) to the Registrant's Annual Report on Form
10-K, File No. 1-5863, for the fiscal year ended June 30,
1997).
10(l) Non-Qualified Stock Option Contract dated December 3, 1997
between the Registrant and Martin Brody (incorporated by
reference to Exhibit 10(s) to the Registrant's Annual Report
on Form 10-K, File No. 1-5863, for the fiscal year ended June
30, 1998).
10(m) Non-Qualified Stock Option Contract dated December 3, 1997
between the Registrant and Richard Chestnov (incorporated by
reference to Exhibit 10(t) to the Registrant's Annual Report
on Form 10-K, File No. 1-5863, for the fiscal year ended June
30, 1998).
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10(n) Non-Qualified Stock Option Contract dated December 3, 1997
between the Registrant and Albert Safer (incorporated by
reference to Exhibit 10(u) to the Registrant's Annual Report
on Form 10-K, File No. 1-5863, for the fiscal year ended June
30, 1998).
10(o) Letter Agreement dated as of December 29, 1997 between the
Registrant and Robert Chestnov (incorporated herein by
reference to Exhibit 2.1 to the Registrant's Current Report on
Form 8-K, file No. 1-5863, for the fiscal year ended June 30,
1998).*
10(p) Purchase and Sale Agreement dated January 11, 1999 between
Banner Industries of New York, Inc. and Jaclyn,
Inc.(incorporated herein by reference to Exhibit 2.1 to the
Registrant's Current Report on Form 8-K, file No. 1-5863,
dated January 26, 1999).
10(q) Non-Qualified Stock Option Contract dated November 30, 1999,
between the Registrant and Richard Chestnov (incorporated
herein by reference to Exhibit 10(x) to the Registrant's
Annual Report on Form 10-K, File No. 1-5863, for the fiscal
year ended June 30, 2000).
10(r) Non-Qualified Stock Option Contract dated November 30, 1999,
between the Registrant and Albert Safer (incorporated herein
by reference to Exhibit 10(y) to the Registrant's Annual
Report on Form 10-K, File No. 1-5863, for the fiscal year
ended June 30, 2000).
10(s) Non-Qualified Stock Option Contract dated November 30, 1999,
between the Registrant and Martin Brody (incorporated herein
by reference to Exhibit 10(z) to the Registrant's Annual
Report on Form 10-K, File No. 1-5863, for the fiscal year
ended June 30, 2000).
10(t) Non-Qualified Stock Option Contract dated June 12, 2000,
between the Registrant and Norman Axelrod (incorporated herein
by reference to Exhibit 10(aa) to the Registrant's Annual
Report on Form 10-K, File No. 1-5863, for the fiscal year
ended June 30, 2000).
10(u) Non-Qualified Stock Option Contract dated December 2, 1998
between the Registrant and Richard Chestnov (incorporated
herein by reference to Exhibit 10(j) to the Registrant's
Annual Report on Form 10-K, File No. 1-5863, for the fiscal
year ended June 30, 1999).
10(v) Non-Qualified Stock Option Contract dated December 2, 1998
between the Registrant and Albert Safer (incorporated herein
by reference to Exhibit 10(k) to the Registrant's Annual
Report on Form 10-K, File No. 1-5863, for the fiscal year
ended June 30, 1999).
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10(w) Non-Qualified Stock Option Contract dated December 2, 1998
between the Registrant and Martin Brody (incorporated herein
by reference to Exhibit 10(I) to the Registrant's Annual
Report on Form 10-K, File No. 1-5863, for the fiscal year
ended June 30, 1999).
10(x) Non-Qualified Stock Option Contract dated November 30, 2001,
between the Registrant and Richard Chestnov (incorporated
herein by reference to Exhibit 10(I) to the Registrant's
Annual Report on Form 10-K, File No. 1-5863, for the fiscal
year ended June 30, 1999).
10(y) Non-Qualified Stock Option Contract dated November 30, 2001,
between the Registrant and Albert Safer (incorporated herein
by reference to Exhibit 10(cc) to the Registrant's Annual
Report on Form 10-K, File No. 1-5863, for the fiscal year
ended June 30, 1999).
10(z) Non-Qualified Stock Option Contract dated November 30, 2001,
between the Registrant and Martin Brody (incorporated herein
by reference to Exhibit 10(dd) to the Registrant's Annual
Report on Form 10-K, File No. 1-5863, for the fiscal year
ended June 30, 1999).
10(aa) Non-Qualified Stock Option Contract dated November 30, 2001,
between the Registrant and Norman Axelrod (incorporated herein
by reference to Exhibit 10(ee) to the Registrant's Annual
Report on Form 10-K, File No. 1-5863, for the fiscal year
ended June 30, 1999).
10(bb) Purchase and Sale Agreement dated January 10, 2002 between
Mark Nitzberg and the Registrant (incorporated herein by
reference to Exhibit 2.1 to the Registrant's Current Report on
Form 8-K, File No. 1-5863, dated January 24, 2002).
10(cc) Consulting Agreement dated January 10, 2002 between Natoosh,
LLC, Mark Nitzberg and the Registrant (incorporated herein by
reference to Exhibit 2.2 to the Registrant's Current Report on
Form 8-K, File No. 1-5863, dated January 24, 2002).
10(dd) Amendment to Consulting Agreement dated December 15, 2003,
between Natoosh, LLC, Mark Nitzberg and the Registrant.
10(ee) Payment and Indemnification Agreement dated January 10, 2002
by and among Capital Factors, Inc., Topsville, Inc. Mark
Nitzberg and the Registrant (incorporated herein by reference
to Exhibit 2.3 to the Registrant's Current Report on For 8-K,
File No. 1-5863, dated January 24, 2002).
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10(ff) Non-Qualified Stock Option Contract dated December 3, 2002
between the Registrant and Richard Chestnov (incorporated
herein by reference to Exhibit 10(ff) to the Registrant's
Annual Report on Form 10-K, File No. 1-5863, for the fiscal
year ended June 30, 2003).
10(gg) Non-Qualified Stock Option Contract dated December 3, 2002
between the Registrant and Albert Safer (incorporated herein
by reference to Exhibit 10(gg) to the Registrant's Annual
Report on Form 10-K, File No. 1-5863, for the fiscal year
ended June 30, 2003). .
10(hh) Non-Qualified Stock Option Contract dated December 3, 2002
between the Registrant and Martin Brody (incorporated herein
by reference to Exhibit 10(hh) to the Registrant's Annual
Report on Form 10-K, File No. 1-5863, for the fiscal year
ended June 30, 2003).
10(ii) Non-Qualified Stock Option Contract dated December 3, 2002
between the Registrant and Norman Axelrod (incorporated herein
by reference to Exhibit 10(ii) to the Registrant's Annual
Report on Form 10-K, File No. 1-5863, for the fiscal year
ended June 30, 2003).
10(jj) Non-Qualified Stock Option Contract dated March 19, 2003,
between the Registrant and Harold Schechter (incorporated
herein by reference to Exhibit 10(jj) to the Registrant's
Annual Report on Form 10-K, File No. 1-5863, for the fiscal
year ended June 30, 2003).
10(kk) Consent and Joinder Agreement dated August 10, 2004 among the
Registrant, Mark Nitzberg and the persons listed on Schedule A
thereto (incorporated herein by reference to Exhibit U to
Amendment No. 12 to the Schedule 13D dated August 16, 2004 of
Allan Ginsburg, Robert Chestnov, Abe Ginsburg and Howard
Ginsburg.).
10(ll) Non-Qualified Stock Option Contract dated November 14, 2003
between the Registrant and Richard Chestnov.
10(mm) Non-Qualified Stock Option Contract dated November 14, 2003
between the Registrant and Albert Safer.
10(nn) Non-Qualified Stock Option Contract dated November 14, 2003
between the Registrant and Martin Brody.
10(oo) Non-Qualified Stock Option Contract dated November 14, 2003
between the Registrant and Norman Axelrod.
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10(pp) Non-Qualified Stock Option Contract dated November 14, 2003
between the Registrant and Harold Schechter.
14 Code of Ethics for Finance Professionals of the Registrant.
21 Subsidiaries of the Registrant.
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.
99(a) Code of Business Conduct and Ethics of the Registrant.
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* Management contract or compensatory plan or arrangement
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