Item 1. Financial Statements.
JACLYN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands)
December 31, June 30,
2007 2007
(Unaudited) (See below)
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ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,495 $ 1,349
Accounts receivable, net 18,606 17,787
Inventory 7,832 9,243
Prepaid expenses and other current assets 2,946 1,788
------------ -----------
TOTAL CURRENT ASSETS 30,879 30,167
------------ -----------
PROPERTY PLANT AND EQUIPMENT, NET 3,839 3,921
ASSETS HELD FOR SALE 357 357
GOODWILL 3,338 3,338
OTHER ASSETS 335 294
------------ -----------
TOTAL ASSETS $ 38,748 $ 38,077
============ ===========
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable - bank $ 2,905 $ 4,515
Accounts payable 7,061 4,411
Other current liabilities 5,546 6,717
------------ -----------
TOTAL CURRENT LIABILITIES 15,512 15,643
------------ -----------
MORTGAGE PAYABLE 2,294 2,387
OTHER LIABILITIES 571 448
DEFERRED INCOME TAXES 325 325
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COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock 3,369 3,369
Additional paid-in capital 9,518 9,518
Retained earnings 13,776 13,004
------------ -----------
26,663 25,891
Less: Common shares in treasury at cost 6,617 6,617
------------ -----------
TOTAL STOCKHOLDERS' EQUITY 20,046 19,274
------------ -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 38,748 $ 38,077
------------ -----------
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The June 30, 2007 Balance Sheet is derived from audited financial statements.
See notes to condensed consolidated financial statements.
2
JACLYN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
(In Thousands, Except Share and Per Share Amounts)
Three Months ended Six Months ended
December 31, December 31,
2007 2006 2007 2006
---- ---- ---- ----
Net sales $ 40,193 $ 47,584 $ 77,646 $ 88,208
Cost of goods sold 30,555 35,724 59,755 67,845
------------- ------------ ------------ ------------
Gross profit 9,638 11,860 17,891 20,363
------------- ------------ ------------ ------------
Shipping, selling and administrative expenses 8,426 8,649 16,038 16,039
Interest expense 214 369 360 716
------------- ------------ ------------ ------------
8,640 9,018 16,398 16,755
------------- ------------ ------------ ------------
Earnings before income taxes 998 2,842 1,493 3,608
Provision for income taxes 397 1,126 592 1,429
------------- ------------ ------------ ------------
Net earnings $ 601 $ 1,716 $ 901 $ 2,179
============= ============ ============ ============
Net earnings per common share - basic $ .24 $ .69 $ .36 $ .88
============= ============ ============ ============
Weighted average number of shares outstanding - basic 2,469,000 2,478,000 2,469,000 2,481,000
============= ============ ============ ============
Net earnings per common share - diluted $ .24 $ .68 $ .36 $ .86
============= ============ ============ ============
Weighted average number of shares outstanding - diluted 2,537,000 2,541,000 2,521,000 2,544,000
============= ============ ============ ============
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See notes to condensed consolidated unaudited financial statements.
3
JACLYN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In Thousands)
Six Months Ended
December 31,
2007 2006
---- ----
Cash Flows From Operating Activities:
Net Earnings $ 901 $ 2,179
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Gain on forfeited real estate contract (150) -
Depreciation and amortization 199 214
Changes in assets and liabilities:
Increase in accounts receivable, net (819) (694)
Decrease (increase) in inventory 1,411 (2,966)
(Increase) decrease in prepaid expense and other
assets (1,204) 169
Increase in accounts payable and other current
liabilities 1,648 3,986
--------- ---------
Net cash provided by operating activities 1,986 2,888
--------- ---------
Cash Flows From Investing Activities:
Purchase of property and equipment (112) (85)
Investment in leased building (31) (2,421)
--------- ---------
Net cash used in investing activities (143) (2,506)
--------- ---------
Cash Flows From Financing Activities:
Net decrease in loans payable - bank (1,610) (805)
Payment of long-term debt (87) (81)
Repurchase of common stock - (55)
Exercise of stock options - 10
--------- ---------
Net cash used in financing activities (1,697) (931)
--------- ---------
Net increase (decrease) in Cash and Cash Equivalents 146 (549)
Cash and Cash Equivalents, beginning of period 1,349 932
--------- ---------
Cash and Cash Equivalents, end of period $ 1,495 $ 383
--------- ---------
Supplemental Information:
Interest paid $ 348 $ 687
--------- ---------
Taxes paid $ 1,226 $ 642
--------- ---------
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See notes to condensed consolidated financial statements.
4
JACLYN, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED
UNAUDITED FINANCIAL STATEMENTS
1. Basis of Presentation:
The accompanying unaudited condensed consolidated balance sheet as of
December 31, 2007, the condensed consolidated statements of earnings and cash
flows for the three and six-month periods ended December 31, 2007 and 2006,
respectively, have been prepared in accordance with accounting principles
generally accepted in the United States of America for interim financial
information. Accordingly, they do not include all of the information and
footnotes required by accounting principles generally accepted in the United
States of America for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. These condensed
consolidated financial statements should be read in conjunction with the audited
financial statements and notes thereto included in the Company's 2007 Annual
Report to Stockholders for the year ended June 30, 2007. The results of
operations for the period ended December 31, 2007 are not necessarily indicative
of operating results for the full fiscal year.
Consolidation of Variable Interest Entity - On August 22, 2006, the
Company entered into a lease agreement for a new corporate office building, and
relocated the Company's executive offices from West New York, New Jersey to
Maywood, New Jersey during fiscal 2007. The lease has a 10-year term, and grants
to the Company an option to purchase the building at any time during the term of
the lease at a purchase price not to exceed $3,075,000, plus increases based on
a multiple of the consumer price index.
The lessor, 195 Spring Valley Associates, LLC, (the "Lessor"), purchased
the corporate office building at a closing which also took place in August 2006.
The Company provided the Lessor with $2,200,000 in mortgage financing, secured
by a first priority mortgage in favor of the Company on the land, office
building, and other customary rights of the mortgagor. The Company placed a
deposit with the Lessor in the amount of $200,000 in connection with the option
to purchase the property.
For accounting purposes, the Company determined that the Lessor is a
variable interest entity and the Company is its primary beneficiary as defined
by FASB Interpretation No. 46(R), "Consolidation of Variable Interest Entities"
("FIN 46(R)"). Accordingly, the financial statements of the Lessor have been
consolidated with those of the Company.
The effect of the Company's consolidation of the Lessor is that the lease
transaction is treated as a financing, and the lease obligation, mortgage notes
and deposits have been eliminated in consolidation. The cost of the building,
approximately $2,900,000, and the $500,000 unamortized capital of the equity
owners of the Lessor (minority interest), of which the unamortized balance of
approximately $417,000 is reflected in the December 31, 2007 Condensed
Consolidated Balance Sheet. There was no significant impact to net earnings.
5
Recently Issued Accounting Standards:
In June 2006, the FASB issued FIN 48, "Accounting for Uncertainty in
Income Taxes - an interpretation of FASB Statement 109," which clarifies the
accounting for uncertainty in income taxes recognized in an enterprise's
financial statements in accordance with SFAS 109, "Accounting for Income Taxes."
FIN 48 prescribes a recognition threshold and measurement attribute for the
financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. FIN 48 was effective for the fiscal year
beginning July 1, 2007. The Company determined that the impact of adopting FIN
48 on the Company's consolidated financial statements was approximately
$129,000.
In September 2006, the FASB issued SFAS 157, "Fair Value Measurements."
SFAS 157 defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles and expands disclosures about fair
value measurements. This statement is effective for the fiscal year beginning on
July 1, 2007. The Company does not expect the adoption of SFAS 157 to have a
material impact on the Company's consolidated financial statements.
In February 2007, the FASB issued SFAS 159, "The Fair Value Option for
Financial Assets and Financial Liabilities -- Including an amendment of FASB
Statement No. 115." SFAS 159 permits entities to choose to measure many
financial instruments and certain other items at fair value. This statement is
effective for the Company's fiscal year beginning July 1, 2008. The Company is
currently evaluating the impact of SFAS 159 on the Company's consolidated
financial statements.
2. Stock-Based Compensation:
The Company recognizes stock-based compensation in accordance with
Statement of Financial Accounting Standards No. 123(R), "Share-Based Payment, a
revision of SFAS No. 123, Accounting for Stock-Based Compensation", as
interpreted by SEC Staff Accounting Bulletin No. 107. Stock options granted by
the Company generally vest upon grant.
The Company maintains two stockholder-approved Stock Option Plans for key
employees and consultants of the Company. The Company terminated, effective
November 29, 2005, its 1996 Non-Employee Director Stock Option Plan (the "1996
Plan"). While no further options are being granted under the 1996 Plan, it
remains in effect for options outstanding.
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 September 30,
2007 the 1990 Plan also remains in effect for options outstanding.
The Company's 2000 Stock Option Plan, as amended (the "2000 Plan"),
initially provided for the grant of options to purchase up to 300,000 shares of
common stock. It 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, to a total of 550,000 shares. The 2000 Plan permitted the grant of
incentive and non-statutory stock options to key executives, consultants,
directors and other key employees.
6
Stock options could not be granted at less than the fair market value at
the date of 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. Stock options generally vested immediately and generally
are granted for a ten-year term.
During the first quarter of fiscal 2008, the Board of Directors approved a
new stock-based plan, the Jaclyn, Inc. 2007 Stock Incentive Plan, which became
effective upon approval by stockholders of the Company at the 2007 Annual
Meeting of Stockholders of the Company. The 2007 Stock Incentive Plan allows the
Company to make grants of stock options, stock appreciation rights (SARs),
restricted stock, restricted stock units, and stock awards to employees, as well
as stock options, SARs, restricted stock, and restricted stock units to our
non-employee directors. The total number of shares of common stock that may be
issued pursuant to awards granted under the 2007 Stock Incentive Plan is
185,000. Effective with approval of the 2007 Stock Incentive Plan by the
Company's stockholders, the Company will make no further grants of options under
the 2000 Plan, although outstanding options will not be affected and will remain
outstanding in accordance with their respective terms.
The Company did not grant any stock options during the six months of
fiscal 2008 or fiscal 2007. As of December 31, 2007, there were 95,500 stock
options outstanding. Options to purchase 2,000 shares of common stock expired
during the second quarter of fiscal 2008.
3. Earnings Per Share:
The Company's calculation of Basic and Diluted Net Earnings Per Common
Share follows (in thousands, except share amounts):
7
Three Months Ended Six Months Ended
December 31, December 31,
2007 2006 2007 2006
---- ---- ---- ----
Basic Net Earnings Per Common Share:
Net Earnings $ 601 $ 1,716 $ 901 $ 2,179
-------------------------------------------------------
Basic Weighted Average Shares Outstanding 2,469,000 2,478,000 2,469,000 2,481,000
-------------------------------------------------------
Basic Net Earnings Per Common Share $ .24 $ .69 $ .36 $ .88
-------------------------------------------------------
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Three Months Ended Six Months Ended
December 31, December 31,
2007 2006 2007 2006
---- ---- ---- ----
Diluted Net Earnings Per Common Share:
Net Earnings $ 601 $ 1,716 $ 901 $ 2,179
-------------------------------------------------------
Basic Weighted Average Shares Outstanding 2,469,000 2,478,000 2,469,000 2,481,000
Add: Dilutive Options 68,000 63,000 52,000 63,000
-------------------------------------------------------
Diluted Weighted Average Shares Outstanding 2,537,000 2,541,000 2,521,000 2,544,000
-------------------------------------------------------
Diluted Net Earnings Per Common Share $ .24 $ .68 $ .36 $ .86
-------------------------------------------------------
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Options to purchase 46,000 shares of the Company's common stock at
December 31, 2007 were outstanding, 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. There were no
options to purchase shares of the Company's common stock as of December 31, 2006
that were anti-dilutive. At December 31, 2007, there were 95,500 remaining
options which can be exercised.
4. Inventories:
Inventories consist of the following components (in thousands):
December 31, 2007 June 30, 2007
----------------- -------------
Raw materials $ 30 $ 42
Finished Goods 7,802 9,201
----------------- -------------
$ 7,832 $ 9,243
----------------- -------------
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8
5. Repurchase of Common Stock:
The Company previously announced that the Board of Directors authorized
the repurchase by the Company of up to 350,000 shares of the Company's Common
Stock. On September 27, 2006 the Board of Directors authorized an increase in
the Company's Common Stock repurchase program of an additional 125,000 shares.
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 generally finances these repurchases from its own funds from operations
and/or from its bank credit facility. For the three and six-month periods ended
December 31, 2007, the Company did not purchase any shares of its common stock
in connection with this repurchase program. As of December 31, 2007, the Company
has purchased a total of 343,726 shares of its Common Stock at a cost of
approximately $1,966,000 in connection with the repurchase program.
6. Financing Agreements:
The Company is a party to a bank credit facility, as amended, which
expires on December 1, 2008 and provides for short-term loans and the issuance
of letters of credit in an aggregate amount not to exceed $50,000,000. Based on
a borrowing formula, the Company may borrow up to $30,000,000 in short-term
loans and up to $50,000,000 including letters of credit. The borrowing formula
allows for an additional amount of borrowing during the Company's peak borrowing
season from June to October. Substantially all of the Company's assets are
pledged to the bank as collateral (except for the West New York, New Jersey
facility, which has been separately mortgaged as noted below). The line of
credit requires that the Company maintain a minimum tangible net worth, as
defined, and imposes certain debt to equity ratio requirements. The Company was
in compliance with all applicable financial covenants as of December 31, 2007.
As of December 31, 2007, borrowing on the short-term line of credit was
$2,905,000, and at that date the Company had $12,250,000 of additional
availability (based on the borrowing formula) under the credit facility. At
December 31, 2007 the Company was contingently obligated on open letters of
credit with an aggregate face amount of approximately $16,394,000. Borrowing
during the quarter was at the bank's prime rate or below, at the option of the
Company. The bank's prime rate at December 31, 2007 was 7.25%.
In August 2002, the Company consummated a mortgage loan with a bank lender
in the amount of $3,250,000. The financing is secured by a mortgage of the
Company's West New York, New Jersey headquarters and warehouse facility. The
loan bears interest at a fixed rate of 7% per annum. The financing has a
fifteen-year term, but is callable by the bank lender at any time after January
2, 2009 and may be prepaid by the Company, along with a prepayment fee, from
time to time during the term of the financing. The balance of the mortgage as of
December 31, 2007 is approximately $2,476,000, of which the current portion of
approximately $182,000 is included in other current liabilities as of December
31, 2007.
7. Contractual Obligations and Commercial Commitments:
The Company leases office facilities under non-cancelable operating leases
that expire in various years through the year ended June 30, 2016.
9
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
-------- ----------
2008 $ 757,000
2009 1,219,000
2010 662,000
2011 514,000
2012 522,000
Thereafter 1,225,000
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The Company is obligated, in certain instances, to pay minimum royalties
over the term of the licensing agreements that expire in various years through
2008. Aggregate minimum royalty commitments by fiscal year are as follows:
Year Ended Minimum
June 30, Royalty Commitments
-------- -------------------
2008 $183,000
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From time to time, the Company and its subsidiaries may become a party to
legal proceedings, which arise in the normal course of business. At December 31,
2007, there were no material pending legal proceedings to which the Company was
a party.
The Company has not provided any financial guarantees as of December 31,
2007.
8. Retirement Plan:
The Company's pension plan was terminated effective January 31, 2006 and a
final distribution to its participants was made prior to the end of fiscal 2007.
Pension expense was $44,500 and $89,000 for the three and six-month
periods ended December 31, 2006, respectively.
10
9. Income Taxes:
Effective July 1, 2007, the Company adopted FASB Interpretation No. 48
(FIN No. 48), Accounting for Uncertainty in Income Taxes, which clarifies the
accounting and disclosure for uncertainty in income taxes. As a result of the
adoption, the Company recorded a decrease to beginning retained earnings of
approximately $129,000 and increased net liabilities for uncertain tax positions
and related interest and penalties by a corresponding amount. Net uncertain tax
positions of $129,000 as of the adoption date would favorably impact the
effective tax rate if these net liabilities were reversed.
The Company files income tax returns in the U.S. federal jurisdiction and
in various states and a foreign location. The U.S. federal filings and state
purposes for the fiscal years ended 2004 through 2007 and foreign filing (Hong
Kong) for fiscal years ended 2001 through 2007 remain open for examination by
the taxing authorities. The Company believes that its tax positions comply with
applicable tax laws and that it has adequately provided for these matters. The
Company does not believe it is reasonably possible that its unrecognized tax
benefits will significantly change within the next twelve months.
The Company recognizes interest and, if applicable, penalties, which could
be assessed, related to uncertain tax positions in income tax expense. As of the
adoption date, the total amount of accrued interest and penalties was $14,000.
The Company recorded approximately $33,000 in interest and penalties for the
first half of fiscal 2008.
10. Proposed Stock Splits:
On December 5, 2007, the Company announced that a special committee of
independent directors recommended to the Board of Directors, and the Board of
Directors approved, amendments to the Company's certificate of incorporation
which would result in a 1-for-250 reverse stock split of the Company's common
stock, to be immediately followed by a 250-for-1 forward stock split (the "Stock
Split Proposals"). Each of the Stock Split Proposals is subject to the approval
of the Company's stockholders. The Company has filed with the Securities and
Exchange Commission a preliminary Schedule 13E-3 Transaction Statement with
respect to the Stock Split Proposals and a preliminary proxy statement with
regard to a proposed stockholder vote on each of the Stock Split Proposals. The
Stock Split Proposals are intended to reduce the number of stockholders of
record to fewer than 300. If that is the case, the Company presently plans to
cease the registration of its common stock under federal securities laws and to
withdraw its shares of common stock from listing on the American Stock Exchange.
The Company announced that it was taking these steps to avoid the substantial
and increasing cost and expense of being an SEC reporting company and of
regulatory compliance under the Sarbanes-Oxley Act of 2002. The special
committee and the Board of Directors have retained the right to change the ratio
of the Stock Split Proposals, or to abandon the Stock Split Proposals, if either
the special committee or the Board of Directors believes that the Stock Split
Proposals are no longer in the best interests of stockholders.
11
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Overview
The Company and its subsidiaries are engaged in the design, manufacture,
distribution and sale of women's and children's apparel, and fabric handbags,
sport bags, backpacks, cosmetic bags, and related products. Our apparel lines
include women's loungewear, sleepwear, dresses and sportswear, and lingerie, as
well as infants' and children's clothing. Our products are, for the most part,
made to order, and are marketed and sold to a range of retailers; primarily
national mass merchandisers.
Our business is subject to substantial seasonal variations. In that
regard, our net sales and net earnings generally have been higher during the
period from June to November (which includes our first fiscal quarter and a
portion of our second and fourth fiscal quarters) coinciding with sales to our
customers for back-to-school and holiday shopping, while net sales and net
earnings for the other months of our fiscal year are typically lower due, in
part, to the traditional slowdown by our customers immediately following the
winter holiday season. Accordingly, any significant decrease in back-to-school
and winter holiday shopping could have a material adverse effect on our
financial condition and results of operations. The Company believes this
seasonality is consistent with the general pattern associated with sales to the
retail industry. The Company's quarterly results of operations may also
fluctuate significantly as a result of a number of other factors, including the
timing of shipments to customers and economic conditions. Accordingly,
comparisons between quarters may not necessarily be meaningful, and the results
for any one quarter are not necessarily indicative of future quarterly results
or of full-year performance.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires the appropriate
application of certain accounting policies, many of which require us to make
estimates and assumptions about future events and their impact on amounts
reported in our financial statements and related notes. We believe the
application of our accounting policies, and the estimates inherently required
therein, are reasonable. These accounting policies and estimates are
periodically evaluated for continued reasonableness, and adjustments are made
when facts and circumstances dictate a change. However, since future events and
their impact cannot be determined with certainty, actual results may differ from
our estimates, and such differences could be material to the consolidated
financial statements. Historically, we have found our application of accounting
policies to be appropriate, and actual results have not differed materially from
those determined using necessary estimates. A summary of our significant
accounting policies and a description of accounting policies that we believe are
most critical may be found in our Management's Discussion and Analysis of
Financial Condition and Results of Operations included in our Annual Report on
Form 10-K for the year ended June 30, 2007, which we filed with the Securities
and Exchange Commission on September 27, 2007.
12
Liquidity and Capital Resources
The Company's cash and cash equivalents increased $146,000 during the
six-month period ended December 31, 2007 to $1,495,000 from $1,349,000 at June
30, 2007.
Net cash provided by operating activities totaled $1,986,000, primarily
from an increase in accounts payable and other current liabilities of $1,648,000
due to a greater proportion of unpaid inventory-in-transit as of December 31,
2007 compared to June 30, 2007, a decrease in inventory totaling $1,411,000 in
anticipation of lower third quarter shipping requirements, and net earnings
totaling $901,000, offset by an increase in prepaid expenses and other assets
totaling $1,204,000 and an increase in accounts receivable totaling $819,000,
due to a greater amount of sales during the latter part of the second fiscal
quarter of 2008 compared to the comparable fourth quarter of fiscal 2007.
Funds used in financing activities of $1,697,000 were mostly the result of
a net decrease totaling $1,610,000 in borrowing under the Company's bank line of
credit and the payment of long-term debt totaling $87,000.
Net cash used in investing activities of $143,000 primarily reflects the
purchase of property and equipment purchases totaling $112,000.
The Company is a party to a bank credit facility which expires on December
1, 2008, and provides for short-term loans and the issuance of letters of credit
in an aggregate amount not to exceed $50,000,000. Based on a borrowing formula,
the Company may borrow up to $30,000,000 in short-term loans and up to
$50,000,000 including letters of credit. The borrowing formula allows for an
additional amount of borrowing during the Company's peak borrowing season from
June to October. Substantially all of the Company's assets are pledged to the
bank as collateral (except for the West New York, New Jersey facility, which has
been separately mortgaged as noted below). The line of credit requires that the
Company maintain a minimum tangible net worth, as defined, and imposes certain
debt to equity ratio requirements. The Company was in compliance with all
applicable financial covenants as of December 31, 2007. As of December 31, 2007,
borrowing on the short-term line of credit was $2,905,000, and at that date the
Company had $12,250,000 of additional availability (based on the borrowing
formula) under the credit facility. At December 31, 2007 the Company was
contingently obligated on open letters of credit with an aggregate face amount
of approximately $16,394,000. Borrowing during the quarter was at the bank's
prime rate or below, at the option of the Company. The bank's prime rate at
December 31, 2007 was 7.25%.
In August 2002, the Company consummated a mortgage loan with a bank lender
in the amount of $3,250,000. The financing is secured by a mortgage of the
Company's West New York, New Jersey headquarters and warehouse facility. The
loan bears interest at a fixed rate of 7% per annum through August 31, 2007. The
financing has a fifteen-year term, but is callable by the bank lender at any
time after January 2, 2009 and may be prepaid by the Company, along with a
prepayment fee, from time to time during the term of the financing. The balance
of the mortgage as of December 31, 2007 is approximately $2,476,000, of which
the current portion of approximately $182,000 is included in other current
liabilities as of December 31, 2007.
13
In June 2007, the Company announced it had entered into a purchase and
sale agreement to sell its former executive offices and warehouse facility, as
well as two adjacent lots, located in West New York, New Jersey. The proposed
purchaser had the right under the purchase and sale agreement to extend the
originally scheduled closing date (October 15, 2007) for two separate four-month
periods and, upon the payment of $150,000, the proposed purchaser extended the
closing date for the first extension period.
The closing under the purchase and sale agreement was contingent on the
proposed purchaser's receipt of governmental approvals required for the
construction of residential, multi-family housing consisting of 150 residential
units, as well as a number of other contingencies and conditions. On December
12, 2007, the Company received a notice indicating that the proposed purchaser
would not obtain all governmental approvals by the December 15, 2007 deadline
required under the purchase and sale agreement and, accordingly, was exercising
the proposed purchaser's right to terminate the purchase and sale agreement.
In light of the termination of the purchase, the Company now intends to
evaluate all of its alternatives with regard to its West New York former
headquarters, including the general marketing of the property.
The Company believes that funds provided by operations, existing working
capital, and the Company's bank line of credit and mortgage financing will be
sufficient to meet anticipated working capital needs for the next twelve months.
There were no material commitments for capital expenditures at December
31, 2007.
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. On September 27, 2006 the Board of Directors authorized an increase in
the Company's Common Stock repurchase program of an additional 125,000 shares.
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 generally finances these repurchases from its own funds from operations
and/or from its bank credit facility. For the three and six-month periods ended
December 31, 2007, the Company did not purchase any shares of its Common Stock
under this repurchase program. As of December 31, 2007, the Company purchased a
total of 343,726 shares of its Common Stock at a cost of approximately
$1,966,000 in connection with the repurchase program.
Contractual Obligations and Commercial Commitments
To facilitate an understanding of our contractual obligations and
commercial commitments, the following data is provided as of December 31, 2007:
14
* * * * Payments Due by Period * * * *
Less than More than
Contractual Obligations Total 1 Year 1-3 Years 3-5 Years 5 Years
----------------------- ----- ------ --------- --------- -------
Notes Payable $ 2,905,000 $ 2,905,000 $ - $ - $ -
2,476,000 90,000 392,000 452,000 1,542,000(1)
Mortgage Payable
183,000 183,000 - - -
Royalties
Operating Leases 4,899,000 757,000 1,881,000 1,036,000 1,225,000
-------------------------------------------------------------------
Total Contractual
Obligations $10,463,000 $ 3,935,000 $ 2,273,000 $ 1,488,000 $ 2,767,000
-------------------------------------------------------------------
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(1)The Mortgage is callable on January 2, 2009, but is presented through
maturity.
(2)Effective at the beginning of the first quarter of 2007, we adopted FIN
No. 48 as described in Note 9 to the Notes to Unaudited Condensed
Consolidated Financial Statements. Our total liabilities for unrecognized
tax benefits were approximately $160,000 at December 31, 2007. We cannot
make a reasonable estimate of the period or amount, if any, of related
future payments. Therefore these liabilities were not included in the
above table.
Total Less than More than
Other Commercial Commitments Commitments 1 Year 1-3 Years 3-5 Years 5 Years
Letters of Credit $16,394,000 $16,394,000 - - -
----------- -----------
Total Commercial Commitments $16,394,000 $16,394,000 - - -
----------- -----------
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Off-Balance Sheet Arrangements
Except as described below, 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.
15
On August 22, 2006, the Company entered into a lease agreement for a new
corporate office building, and relocated the Company's executive offices from
West New York, NJ to Maywood, New Jersey during fiscal 2007. The lease has a
10-year term, and grants to the Company an option to purchase the building at
any time during the term of the lease at a purchase price not to exceed
$3,075,000, plus increases based on a multiple of the consumer price index. The
lessor, 195 Spring Valley Associates, LLC, (the "Lessor"), purchased the
corporate office building at a closing, which also took place in August 2006.
The Company provided the Lessor with $2,200,000 in mortgage financing, secured
by a first priority mortgage in favor of the Company on the land, office
building, and other customary rights of the mortgagor. The Company placed a
deposit with the Lessor in the amount of $200,000 in connection with the option
to purchase the property. For accounting purposes, the Company determined that
the Lessor is a variable interest entity and the Company is its primary
beneficiary as defined by FASB Interpretation No. 46(R), "Consolidation of
Variable Interest Entities" ("FIN 46(R)"). Accordingly, the financial statements
of the Lessor were consolidated with those of the Company.
Results Of Operations
Net sales were $40,193,000 and $77,646,000 during the three and six-month
periods ended December 31, 2007, compared to $47,584,000 and $88,208,000 in the
comparable three and six-month periods during fiscal 2007. For the three-month
period ended December 31, 2007, the Handbag category net sales were slightly
higher (2.4%) while the six-month period was 8.5% lower. Net sales in the
Apparel category dropped 22.8 % and 13.8 %, respectively, compared to last
year's three and six-month period net sales.
Sales by category were as follows:
Net sales for the Apparel category were $26,125,000 for the three-month
period ended December 31, 2007, or $7,723,000 lower than the comparable
three-month period during fiscal 2007. This 22.8% decrease was primarily due to
a 38.5% decrease in our children's apparel division due to the loss of a major
fall program from one of its significant customers, slightly offset by a 4.5%
increase in net sales in the women's sleepwear division.
For the six-month period ended December 31, 2007, net sales for the
Apparel category were $49,658,000, or 13.8 % lower than the prior fiscal year's
same period mostly due to decreases in our children's apparel business and, to a
lesser extent, lower net sales for our women's sleepwear business.
Net sales totaling $14,068,000 for the Handbags category in the second
quarter of fiscal 2008 represented a 2.4% increase compared to $13,736,000 in
net sales for the same quarter in fiscal 2007. The increase in net sales in the
second quarter primarily reflected higher sales in the premium incentive
business (an increase of 21.2%) due to shipments to a significant customer that
occurred in the current year's second quarter instead of the first quarter.
16
This increase was not fully offset by lower handbag business during the
quarter resulting from fewer orders from a considerable customer.
For the six-month period ended December 31, 2007, net sales for the
Handbags category were $27,988,000, a decline of $2,599,000, or 8.5% compared to
the prior comparable six-month period, all attributable to lower handbag
business in the first half of this fiscal period, for the same reason as above.
Gross margins were 24.0% and 23.0% in the three-month and six-month
periods ended December 31, 2007, compared to 24.9% and 23.1% in the comparable
periods ended December 31, 2006. Gross margins by category were as follows:
Gross margin for the Apparel category decreased to 24.7% in the
three-month period ended December 31, 2007 from 27.4% in the second quarter of
fiscal 2007. The 2.7 percentage point decrease was primarily the result of lower
margins in the children's apparel division attributable to customer incentives
given to one of the division's significant customers for slow moving
merchandise, lower women's sleepwear division margins due mostly to increases in
product costs. For the six-month period ended December 31, 2007, gross margins
for the Apparel category declined 2.3 percentage points to 24.6% from the prior
comparable period primarily for the same reasons.
Gross margin for the Handbags category in the second quarter of fiscal
2008 improved to 22.6 % from 18.7% in the second quarter of fiscal 2007. The
improvement was attributable to higher margins in our premium incentive business
as a result of a settlement from one of the Company's foreign suppliers relating
to quality issues and due to favorable product mix. For the six-month period
ended December 31, 2007, gross margins for the Handbags category increased to
20.3% (from 15.9% in the prior year's comparable period) attributable to a 5.2
percentage point increase in the premium incentive business margins due
primarily to product mix, as well as slightly higher handbag business gross
margins.
As a percentage of net sales, shipping, selling and administrative
expenses increased to 21.0% for the three-month period ended December 31, 2007
from 18.2% for the three-month period ended December 31, 2006. However,
shipping, selling and administrative expenses decreased by $223,000 in the
second quarter of fiscal 2008 compared to the prior year comparable period,
mainly due to lower sales commission costs totaling $308,000 relating to
decreased sales volume in this year's second fiscal quarter, income from a
forfeited option premium relating to the terminated sale of our former West New
York headquarters facility totaling $150,000, and lower royalty expense totaling
$99,000 related mostly to certain minimum royalty commitments which were not met
last year and had to be expensed in last year's second fiscal quarter.
Offsetting these reduced expenses were higher selling costs totaling $143,000,
as well as higher product development costs of $93,000 for both the children's
apparel and premium business relating to potential additional future business, a
$106,000 increase in general and administrative expense principally due to
higher compensation costs, as well as higher shipping and warehousing expense
totaling $82,000 relating mostly to the mix of sales contributing to higher
outside warehouse expense.
17
Shipping, selling and administrative expenses for the six-month period
ended December 31, 2007 also increased as a percentage of net sales (20.7% of
net sales compared with 18.2% of net sales in the same period in fiscal 2007).
However, total shipping, selling and administrative dollars in each period were
almost identical at $16,038,000 for the six-month period ended December 31, 2007
versus $16,039,000 for the prior fiscal comparable period. Lower sales
commissions totaling $371,000 relating to the lower sales volume and a decrease
in royalty expense totaling $344,000 attributable to certain minimum royalty
commitments which were not met and had to be expensed in fiscal 2007's first
six-month period, were offset by higher product development costs of $345,000
relating to potential future business, a $275,000 increase in general and
administrative costs for higher compensation related expenses, and increased
shipping and warehouse costs totaling $63,000 related to the higher outside
warehousing expense in this year's first six month period ended December 31,
2007 compared to the same six months last year.
Interest expense of $214,000 in the second quarter of fiscal 2008 compares
to $369,000 in the prior year's comparable quarter. For the six-month period
ended December 31, 2007, interest expense totaled $360,000 versus $716,000. Both
decreases are primarily the result in the current fiscal quarter and six-month
period ended December 31, 2007 of a lower level of average borrowing due to the
timing of shipments to customers, in addition to improved cash collections from
a greater proportion of direct ship business which has shorter payment terms
compared to last year's same fiscal periods.
The decrease in earnings before income taxes of $1,844,000 and $2,115,000
for the three and six-month periods ended December 31, 2007, respectively,
compared to last fiscal year's second quarter and six-month comparable periods
was primarily due to lower net sales and lower gross profit dollars, not fully
offset by lower interest expense, as discussed above.
For the six-month period ended December 31, 2007, the Company's effective
tax rate of 39.7 % compared to 39.6 % in the first six-month period of the prior
year.
Net earnings decreased $1,115,000 and $1,278,000 for the three and
six-month periods ended December 31, 2007, respectively, compared to the prior
comparable periods.
Recently Issued Accounting Standards
In June 2006, the FASB issued FIN 48, "Accounting for Uncertainty in
Income Taxes - an interpretation of FASB Statement 109," which clarifies the
accounting for uncertainty in income taxes recognized in an enterprise's
financial statements in accordance with SFAS 109, "Accounting for Income Taxes."
FIN 48 prescribes a recognition threshold and measurement attribute for the
financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. FIN 48 was effective for the fiscal year
beginning July 1, 2007. The Company determined that the impact of adoopting FIN
48 on the Company's consolidated financial statements is approximately $129,000.
18
In September 2006, the FASB issued SFAS 157, "Fair Value Measurements."
SFAS 157 defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles and expands disclosures about fair
value measurements. This statement is effective for the fiscal year beginning on
July 1, 2007. The Company does not expect the adoption of SFAS 157 to have a
material impact on the Company's consolidated financial statements.
In February 2007, the FASB issued SFAS 159, "The Fair Value Option for
Financial Assets and Financial Liabilities -- Including an amendment of FASB
Statement No. 115." SFAS 159 permits entities to choose to measure many
financial instruments and certain other items at fair value. This statement is
effective for the Company's fiscal year beginning July 1, 2008. The Company is
currently evaluating the impact of SFAS 159 on the Company's consolidated
financial statements.
Seasonality
The Company's business is subject to substantial seasonal variations. In
that regard, our net sales and net earnings generally have been higher during
the period from June to November (which includes our first fiscal quarter and a
portion of our second and fourth fiscal quarters) coinciding with sales to our
customers for back-to-school and holiday shopping, while net sales and net
earnings for the other months of our fiscal year are typically lower due, in
part, to the traditional slowdown by our customers immediately following the
winter holiday season. Accordingly, any significant decrease in back-to-school
and winter holiday shopping could have a material adverse effect on our
financial condition and results of operations. The Company's quarterly results
of operations may also fluctuate significantly as a result of a variety of other
factors, including, among other things, the timing of shipments to customers and
economic conditions. The Company believes this is the general pattern associated
with its sales to the retail industry and expects this pattern will continue in
the future. Consequently, comparisons between quarters are not necessarily
meaningful and the results for any quarter are not necessarily indicative of
future results.
Forward-Looking Statements
In order to keep stockholders and investors informed of the future plans
of the Company, this Form 10-Q contains and, from time to time, other reports
and oral or written statements issued by the Company may contain,
forward-looking statements concerning, among other things, the Company's 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 in the statement. The Company's
forward-looking statements are subject to a number of known and unknown risks
and uncertainties that could cause 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, competition; potential changes in customer spending; acceptance of
product offerings and designs; the variability of consumer spending resulting
from changes in domestic economic activity; a highly promotional retail
environment; any significant variations between actual amounts and the amounts
estimated for those matters identified as critical accounting estimates as well
as other significant accounting estimates made in the preparation of the
Company's financial statements; and the impact of hostilities in the Middle East
and the possibility of hostilities in other geographic areas as well as other
geopolitical concerns.
19
Accordingly, actual results may differ materially from such
forward-looking statements. You are urged to consider all such factors. In light
of the uncertainty inherent in such 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.