Liquidity and Capital Resources
The
Company’s cash and cash equivalents decreased $933,000 during the nine-month
period ended March 31, 2008 to $416,000 from $1,349,000 at June 30, 2007.
Net
cash used in operating activities totaled $1,334,000, primarily from a decrease
in accounts payable and other current liabilities of $2,686,000 (due primarily
to the payment of commissions), which was partially offset by a decrease in
inventory totaling $621,000, a decrease in accounts receivable of $472,000 and
cash flow from net earnings of $444,000.
Funds
provided by financing activities of $669,000 were mostly the result of a net
increase totaling $800,000 in borrowing under the Company’s bank line of
credit, offset in part by the payment of long-term debt totaling $131,000.
Net
cash used in investing activities of $268,000 primarily reflects the purchase
of property and equipment purchases totaling $221,000.
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 March 31, 2008. As
of March 31, 2008, borrowing on the short-term line of credit was $5,315,000, and
at that date the Company had $10,733,000 of additional availability (based on
the borrowing formula) under the credit facility. At March 31, 2008 the Company
was contingently obligated on open letters of credit with an aggregate face
amount of approximately $13,637,000. 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 March 31, 2008 was 5.25%.
On
December 5, 2007, the Company announced that a special committee of independent
directors recommended to the Company’s 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 was approved by
stockholders of the Company at a special meeting of stockholders held on May 7,
2008. As a result of the reverse stock split, generally, holders of fewer than
250 shares of common stock will not be issued fractional shares but, instead,
will be paid $10.21 for the shares of common stock held by them immediately
prior to the effective time of the reverse stock split. The Company expects
that payments to these stockholders will be paid from cash on hand and from
funds under the bank credit facility. As long as no default or event of default
under the bank credit facility exists, the Company may repurchase, and may use
the proceeds of loans under the bank credit facility to repurchase, shares of
common stock in an aggregate amount not to exceed $3,000,000. In the event that
the total cost of repurchases of shares of common stock in the deregistration
transaction exceeds $3,000,000, the Company has been advised by its bank lender
that it intends to work with us to enter into a mutually agreeable amendment to
the bank credit facility so that the Company may complete the deregistration
transaction. The Company anticipates that any borrowings under the bank credit
facility to repurchase shares in the deregistration transaction will be repaid
in the ordinary course of business.
13
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, 2008. The financing
has a fifteen-year term, but is callable by the bank lender at any time after
July 1, 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 March 31, 2008 is approximately $2,432,000, of which the current portion
of approximately $186,000 is included in other current liabilities as of March
31, 2008.
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 at which time
the Company recognized the $150,000 payment in earnings.
The
Company continues 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 March 31, 2008.
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
nine-month periods ended March 31, 2008, the Company did not purchase any
shares of its Common Stock under this repurchase program. As of March 31, 2008,
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.
14
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.
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.
Contractual Obligations
Our future
contractual obligations have not changed significantly from the amounts
reported in our Annual Report on form 10-K for the year ended June 30, 2007.
Results of Operations
Net
sales were $31,187,000 and $108,833,000 during the three and nine-month periods
ended March 31, 2008, compared to $34,705,000 and $122,913,000 in the same
three and nine-month periods during fiscal 2007. For the three and nine-month
periods ended March 31, 2008, net sales in the Apparel category were lower by
16.1% and 14.5%, respectively, while the Handbag category net sales were higher
by 5.1% and lower by 5.2%, respectively, in each case compared to last year’s
three and nine-month period net sales.
15
Sales by
category were as follows:
Net
sales for the Apparel category were $20,914,000 for the three-month period
ended March 31, 2008, or $4,017,000 lower than the prior fiscal comparable
three-month period. This 16.1% decrease was primarily due to a 31.7% decrease
in our children’s apparel division due to the loss of a major program from a
significant customer and from the timing of certain shipments that we expect to
occur in the fourth quarter of fiscal 2008. This decrease in Apparel category
sales was not fully offset by a $2,111,000 (37.7%) increase in net sales in the
women’s sleepwear division as a result of new spring business with one of its
significant customers.
For
the nine-month period ended March 31, 2008, net sales for the Apparel category
were $70,572,000, or 14.5% lower than the prior fiscal year’s same period due
to a decrease in our children’s apparel division not fully offset the increase
in business in our women’s sleepwear division described above.
Net
sales totaling $10,273,000 for the Handbags category in the third quarter of
fiscal 2008 represented a 5.1% increase compared to $9,774,000 in net sales for
the same quarter in fiscal 2007. The third quarter net sales increase primarily
reflected higher sales in the premium incentive business (up 11.2%) due to the
timing of shipments to one of our significant customers. Not fully offsetting
this increase was a 10.6% net sales decrease in the handbag business for the
third quarter versus last year’s comparable quarter due to a reduction of
business with a significant customer.
For
the nine-month period ended March 31, 2008, net sales for the Handbags category
were $38,261,000, a reduction of $2,100,000, or 5.2%, compared to the prior
comparable nine-month period. A modest 2.5% net sales dollar increase for the
nine-month period for the premium incentive business was more than offset by a
32.7% decrease in the hangbag business for the same reasons noted above.
Gross
margins were 21.6% and 22.6% in the three-month and nine-month periods ended
March 31, 2008, compared to 25.5% and 23.8% in the comparable periods ended
March 31, 2007. Gross margins by category were as follows:
Gross
margin for the Apparel category decreased to 21.0% in the three-month period
ended March 31, 2008 from 27.1% in the third quarter of fiscal 2007. The 6.1
percentage point decrease was primarily the result of lower margins in the
women’s sleepwear and the children’s apparel divisions, in each case mostly
attributable higher product costs associated with the weakening U.S. dollar and
a relatively higher level of sales allowances given to customers. For the
nine-month period ended March 31, 2008, gross margins for the Apparel category
decreased to 23.5% (from 27.0%) in the prior comparable period for the same
reasons.
Gross
margin for the Handbags category in the third quarter of fiscal 2008 increased
to 22.6% from 21.4% in the third quarter of fiscal 2007. This increase was
mainly due to higher premium incentive business margins attributable to several
new programs offset, in part, by lower handbag margins due to product mix. For
the nine-month period ended March 31, 2008, gross margin for the Handbags
category increased to 20.9% from 17.2% in the prior comparable period,
attributable primarily to higher premium incentive business gross margins
resulting from product mix.
16
As
a percentage of net sales, shipping, selling and administrative expenses
increased to 23.3% for the three-month period ended March 31, 2008 from 21.9%
for the three-month period ended March 31, 2007. However, shipping, selling and
administrative expenses decreased by $339,000 in the third quarter of fiscal
2008 compared to the prior year comparable period, mainly due to lower sales
commission costs totaling $389,000 relating to decreased sales volume in this
year’s third fiscal quarter, higher product development costs of $119,000 for
both the children’s apparel and premium business relating to potential
additional future business, and a $261,000 increase in general and
administrative costs, principally due to higher compensation related costs. In
addition, the Company experienced higher shipping and warehousing expense
totaling $81,000 relating the greater use of outside warehouse facilities to
ship our product. Royalty expensed decreased approximately $49,000 as a result
of a product mix that included fewer licensed product sales in this fiscal
quarter compared to the same period last year.
Shipping,
selling and administrative expenses for the nine-month period ended March 31,
2008 increased as a percentage of net sales (21.4% of net sales compared with
19.2% of net sales in the same period in fiscal 2007), and were $23,294,000 for
the period, or $340,000 lower than the total of $23,634,000 for the comparable
nine-month period in the prior fiscal year. The dollar decrease was primarily
attributable to lower sales commissions totaling $760,000 relating to the lower
sales volume, higher product development costs of $463,000 to develop future
potential business, a $143,000 increase in general and administrative costs for
higher compensation related expenses, decreased royalty expense totaling
$393,000 due to certain minimum royalty commitments in the prior year
nine-month period which were not met and had to be expensed, and increased
shipping and warehouse costs totaling $144,000 related to the mix of goods
shipped necessitating the greater use of outside warehousing facilities for the
nine month period ended March 31, 2008 compared to the same nine months last
year.
Interest
expense of $99,000 in the third quarter of fiscal 2008 compares to $195,000 in
the prior comparable quarter. For the nine-month period ended March 31, 2008,
interest expense totaled $459,000 versus $911,000. Both decreases are primarily
the result of a lower level of average borrowing to finance lower sales volume,
as well as a lower average borrowing cost in the current periods.
As
a result of last fiscal year’s termination and final pension plan distribution
to the plan’s participants, the Company incurred a one-time pretax pension plan
settlement charge totaling approximately $3,089,000 ($1,970,000, after tax) for
the three and nine-month periods ended March 31, 2007.
The
decrease in loss before income taxes of $1,391,000 for the three-month period
ended March 31, 2008, and the decreased earnings before income taxes totaling
$724,000 for the nine-month period ended March 31, 2008 compared to the 2007
fiscal third quarter and nine-month comparable periods, reflects, in part, last
year’s $3,089,000 third quarter pretax charge for the pension plan settlement.
Without this charge, the loss before income taxes would have been greater by
$1,698,000 for the third quarter, and $3,813,000 for the nine-month comparable
periods. Lower shipping, selling and administrative expenses and lower interest
expense in the third quarter and nine-month periods compared to the same periods last year, did not offset lower
sales and gross profit in this year’s third quarter and nine-month fiscal
periods for the reasons discussed above.
17
For the
nine-month period ended March 31, 2008, the Company’s effective tax rate was
48.3% compared to 56.3% for the first nine-month periods of fiscal 2007. The
Company’s effective rate decreased significantly from last year’s effective tax
rate, which reflected the $3,089,000 pre-tax pension plan settlement charge
discussed above, resulting in the Company’s inability to utilize certain state
net operating loss carry-forwards and other tax benefits.
Net loss
decreased by $1,030,000 and net earnings
decreased $248,000 for the three and nine-month periods ended March 31, 2008,
respectively, from the prior comparable periods, primarily due to lower sales
and gross profit, not offset by lower shipping, selling and administrative
expenses and lower interest expense, for the reasons discussed above. Without
the pension settlement charge, earnings after taxes decreased $940,000 for the three month period and $2,218,000
for the nine-month period ended March 31, 2008 compared to the prior fiscal
year comparable periods.
Recently Issued
Accounting Standards
In June
2006, the Financial Accounting Standards Board (the “FASB”) issued FIN 48,
“Accounting for Uncertainty in Income Taxes – an interpretation of FASB
Statement 109” (“FIN 48”), 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 (see Note 9).
In
September 2006, the FASB issued SFAS 157, “Fair Value Measurements” (“SFAS
157”). SFAS 157 defines fair value, establishes a framework for measuring fair
value and enhances disclosures about fair value measures required under other
accounting pronouncements, but does not change existing guidance as to whether
or not an instrument is carried at fair value. In February 2008, the FASB
issued FASB Staff Position (FSP) Financial Accounting Standard (FAS) 157-1,
“Application of FASB Statement No. 157” to FASB Statement No. 13 and Its
Related Interpretive Accounting Pronouncements That Address Leasing
Transactions,” and FSP FAS 157-2, “Effective Date of FASB Statement No.157.”
FSP FAS 157-1 removes leasing from the scope of SFAS No. 157, “Fair Value
Measurements”. FSP FAS 157-2 delays the effective date of SFAS No. 157 from the
fiscal year beginning on July 1, 2008 to the fiscal year beginning on July 1,
2009 for all nonfinancial assets and nonfinancial liabilities, except those
that are recognized or disclosed at fair value in the financial statements on a
recurring basis (at least annually). The Company is currently evaluating the
impact of SFAS 157 on the Company’s consolidated financial statements.
18
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. 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.
19
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Item 3.
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Quantitative and Qualitative Disclosures About Market Risk.
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Not
applicable
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Item 4.
|
Controls and Procedures.
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Not applicable.
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Item 4T.
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Controls and Procedures.
|
At
the end of the period covered by this report, the Company carried out an
evaluation, with the participation of management of the Company, including the
Company's Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of the Company's disclosure controls
and procedures. Based on the Company's evaluation, the Company's Chief
Executive Officer and Chief Financial Officer concluded that the Company's
disclosure controls and procedures were effective. There was no change in the
Company's internal control over financial reporting during the quarter ended
March 31, 2008 that has materially affected, or is reasonably likely to
materially affect, the Company's internal control over financial reporting.
PART II.
OTHER INFORMATION
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Item 6.
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Exhibits.
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Exhibit No.
|
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Description
|
|
|
|
|
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|
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31(a)
|
|
Rule 13a-14(a) Certification of Robert Chestnov, President and Chief
Executive Officer of the Company.
|
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31(b)
|
|
Rule 13a-14(a) Certification of Anthony Christon, Principal Financial
Officer of the Company.
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32
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Certification Pursuant to 18 U.S.C. Section 1850, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
|
20
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
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JACLYN, INC.
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(Registrant)
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May 15, 2008
|
/s/ALLAN
GINSBURG
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|
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Allan
Ginsburg
|
|
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Chairman of
the Board
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May 15, 2008
|
/s/ ANTHONY
CHRISTON
|
|
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Anthony
Christon
|
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Vice
President
|
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Chief
Financial Officer
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21
EXHIBIT INDEX
|
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Exhibit No.
|
|
Description
|
|
|
|
|
|
|
|
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31(a)
|
|
Rule 13a-14(a) Certification of Robert Chestnov, President and Chief
Executive Officer of the Company.
|
|
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|
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31(b)
|
|
Rule 13a-14(a) Certification of Anthony Christon, Principal Financial
Officer of the Company.
|
|
|
|
|
|
32
|
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Certification Pursuant to 18 U.S.C. Section 1850, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
|
22
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