JACLYN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands)
September 30, June 30,
2007 2007
(Unaudited) (See below)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 769 $ 1,349
Accounts receivable, net 25,286 17,787
Inventory 11,517 9,243
Prepaid expenses and other current assets 2,674 1,788
------------- -----------
TOTAL CURRENT ASSETS 40,246 30,167
------------- -----------
PROPERTY PLANT AND EQUIPMENT, NET 3,880 3,921
ASSETS HELD FOR SALE 357 357
GOODWILL 3,338 3,338
OTHER ASSETS 307 294
------------- -----------
TOTAL ASSETS $ 48,128 $ 38,077
============= ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable - bank $ 13,130 $ 4,515
Accounts payable 8,186 4,411
Other current liabilities 4,139 6,717
------------- -----------
TOTAL CURRENT LIABILITIES 25,455 15,643
------------- -----------
MORTGAGE PAYABLE 2,341 2,387
OTHER LIABILITIES 562 448
DEFERRED INCOME TAXES 325 325
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock 3,369 3,369
Additional paid-in capital 9,518 9,518
Retained earnings 13,175 13,004
------------- -----------
26,062 25,891
Less: Common shares in treasury at cost 6,617 6,617
------------- -----------
TOTAL STOCKHOLDERS' EQUITY 19,445 19,274
------------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 48,128 $ 38,077
------------- -----------
|
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 Amounts)
Three Months Ended
September 30,
2007 2006
------------- -----------
Net sales $ 37,453 $ 40,624
Cost of goods sold 29,200 32,121
------------- -----------
Gross profit 8,253 8,503
------------- -----------
Shipping, selling and administrative expenses 7,612 7,390
Interest expense 146 347
------------- -----------
7,758 7,737
------------- -----------
Earnings before provision for income taxes 495 766
Provision for income taxes 195 303
------------- -----------
Net earnings $ 300 $ 463
============= ===========
Net earnings per common share - basic $ .12 $ .19
============= ===========
Weighted average number of shares outstanding - basic 2,468,000 2,483,000
============= ===========
Net earnings per common share - diluted $ .12 $ .18
============= ===========
Weighted average number of shares outstanding - diluted 2,506,000 2,529,000
============= ===========
|
See notes to condensed consolidated financial statements.
3
JACLYN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In Thousands)
Three Months Ended
September 30,
2007 2006
------------- -----------
Cash Flows From Operating Activities:
Net Earnings $ 300 $ 463
Adjustments to reconcile net earnings to net cash used in
operating activities:
Depreciation and amortization 100 99
Changes in assets and liabilities:
Increase in accounts receivable, net (7,499) (1,314)
Increase in inventory (2,274) (2,751)
Increase in prepaid expenses and other assets (902) (244)
Increase (decrease) in accounts payable and other
current liabilities 1,194 (732)
------------- -----------
Net cash used in operating activities (9,081) (4,479)
------------- -----------
Cash Flows From Investing Activities:
Purchase of property and equipment (56) (55)
Investment in leased building (15) (2,400)
------------- -----------
Net cash used in investing activities (71) (2,455)
------------- -----------
Cash Flows From Financing Activities:
Net increase in notes payable - bank 8,615 6,820
Payment of long-term debt (43) (45)
------------- -----------
Net cash provided by financing activities 8,572 6,775
------------- -----------
Net decrease in Cash and Cash Equivalents (580) (159)
Cash and Cash Equivalents, beginning of period 1,349 932
------------- -----------
Cash and Cash Equivalents, end of period $ 769 $ 773
------------- -----------
Supplemental Information:
Interest paid $ 104 $ 266
------------- -----------
Taxes paid $ 1,058 $ 411
------------- -----------
|
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
September 30, 2007, the condensed consolidated statements of earnings, and the
condensed consolidated statements of cash flows for the three month periods
ended September 30, 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 on Form 10-K for the year ended June 30, 2007. The results of
operations for the period ended September 30, 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, in
connection with the relocation of 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. Further, the Company
placed a deposit with the Lessor in the amount of $200,000 in connection with
its 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.
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 unamortized capital of the equity owners of
the Lessor (minority interest), approximately
5
$500,000, are reflected in the September 30, 2007 and June 30, 2007 Condensed
Consolidated Balance Sheets. There was no significant impact to net earnings.
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 is effective for the fiscal year
beginning July 1, 2007. The Company has determined that the impact of FIN 48 on
the Company's consolidated financial statements is 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, and has 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
6
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. At September 30, 2007, 185,000 shares were
available for future grants under the 2000 Plan, under which incentive and
non-statutory stock options may be granted to key executives, consultants,
directors and other key employees. Stock options may 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 vest
immediately and generally are granted for a ten-year term.
During the quarter, the Board of Directors approved a new stock-based
plan, the Jaclyn, Inc. 2007 Stock Incentive Plan, subject to approval at the
2007 Annual Meeting of Stockholders of the Company, at which time it will become
effective. If approved by stockholders, the 2007 Plan will allow 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. If stockholders approve the 2007 Plan, 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 first quarter of
fiscal 2008 or fiscal 2007. There were no forfeitures of stock options during
the first 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):
Three Months Ended
September 30,
-------------------------
2007 2006
----------- -----------
Basic Net Earnings Per Common Share:
Net Earnings $ 300 $ 463
----------- -----------
Basic Weighted Average Shares Outstanding 2,468,000 2,483,000
----------- -----------
Basic Net Earnings Per Common Share $ .12 $ .19
----------- -----------
|
7
Three Months Ended
September 30,
-------------------------
2007 2006
----------- -----------
Diluted Net Earnings Per Common Share:
Net Earnings $ 300 $ 463
----------- -----------
Basic Weighted Average Shares Outstanding 2,468,000 2,483,000
Add: Dilutive Options 38,000 46,000
----------- -----------
Diluted Weighted Average Shares Outstanding 2,506,000 2,529,000
----------- -----------
Diluted Net Earnings Per Common Share $ .12 $ .18
----------- -----------
|
Options to purchase 57,500 shares of the Company's common stock were
outstanding as of September 30, 2006, but were not included in the computation
of diluted earnings per share for the quarter then ended because these options
were anti-dilutive. There were no options to purchase shares of the Company's
common stock at September 30, 2007 that were antidilutive.
4. Inventories:
Inventories consist of the following components (in thousands):
September 30, 2007 June 30, 2007
------------------ -------------
Raw materials $ 14 $ 42
Finished Goods 11,503 9,201
------------------ -------------
$ 11,517 $ 9,243
------------------ -------------
|
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-month period ended September
30, 2007, the Company did not purchase any shares of its common stock in
connection with this repurchase program. As of September 30, 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:
In September 2006, the Company amended its existing bank credit facility.
The amended facility, which expires December 1, 2008, 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
8
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 September 30, 2007. As of September 30, 2007, borrowing on the
short-term line of credit was $13,130,000, and at that date the Company had
$22,315,000 of additional availability (based on the borrowing formula) under
the credit facility. At September 30, 2007 the Company was contingently
obligated on open letters of credit with an aggregate face amount of
approximately $13,233,000. Borrowing during the quarter ended September 30, 2007
was at the bank's prime rate or below, at the option of the Company. The bank's
prime rate at September 30, 2007 was 7.75%.
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
September 30, 2007 is approximately $2,520,000, of which the current portion of
approximately $179,000 is included in other current liabilities as of September
30, 2007.
In June 2007, the Company entered into an agreement for the sale of the
Company's former executive office and warehouse facility, as well as two
adjacent lots, located in West New York, New Jersey. The proposed purchase price
is $8,000,000, the substantial portion of which is payable at closing. The
closing of the sale is scheduled for February 15, 2008, although the proposed
purchaser has the right to extend the closing date for one additional 4-month
period upon payment of an extension fee. The closing is 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, including the
receipt of acquisition and construction loan commitments. However, since the
proposed transaction is subject to a number of conditions and contingencies,
including the receipt of required governmental approvals, there is no assurance
that a sale of the property will be concluded.
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, 2014.
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 $ 1,096,000
2009 1,166,000
2010 578,000
2011 427,000
2012 407,000
Thereafter 1,435,000
|
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 that expire in various years
through 2008. Aggregate minimum commitments by fiscal year are as follows:
Year Ended Minimum
June 30, Commitments
-------- -----------
2008 $ 183,000
|
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 September
30, 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 September 30,
2007.
8. Retirement Plans:
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 for the fiscal quarter ended September 30, 2009 includes
the following components:
10
Fiscal Quarter Ended September 30, 2006
Components of Net Periodic Benefit Cost:
Service cost $ -
Interest cost 85,800
Expected return on assets (83,135)
Amortization of prior service cost -
Amortization of actuarial loss 41,835
---------
Net periodic cost $ 44,500
---------
|
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 $10,000.
The Company recorded approximately $3,000 in interest and penalties for the
first quarter of 2008.
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. We expect that trend to continue during fiscal 2008.
However, 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 that 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. 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.
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. 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 decreased $580,000 during the
three-month period ended September 30, 2007 to $769,000 from $1,349,000 at June
30, 2007.
Net cash used in operating activities totaled $9,081,000, primarily from
an increase in accounts receivable totaling $7,499,000 resulting from higher
levels of shipping in this year's first quarter compared to the last fiscal
quarter of 2007, and an increase in inventory levels totaling $2,274,000 to meet
anticipated second quarter shipping requirements, which were not fully offset by
a net increase of $1,194,000 in accounts payable and other current liabilities.
The net increase in accounts payable and other current liabilities consisted
mostly of inventory accruals, which were not fully offset by a decrease in
commissions and incentive payments due to the timing of such payments.
Funds provided by financing activities of $8,572,000 were the result of
$8,615,000 in borrowing under the Company's bank line of credit used to finance
our seasonal business activity, slightly offset by the payment of long-term debt
totaling $43,000.
Net cash used in investing activities totaling $71,000 was primarily for
property and equipment purchases totaling $56,000.
In September 2006, the Company amended its existing bank credit facility.
The amended facility, which expires December 1, 2008, 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 September 30, 2007. As of September 30, 2007, borrowing on the
short-term line of credit was $13,130,000, and at that date the Company had
$22,315,000 of additional availability (based on the borrowing formula) under
the credit facility. At September 30, 2007 the Company was contingently
obligated on open letters of credit with an aggregate face amount of
approximately $13,233,000. Borrowing during the quarter ended September 30, 2007
was at the bank's prime rate or below, at the option of the Company. The bank's
prime rate at September 30, 2007 was 7.75%.
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 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 September 30, 2007 is approximately $2,520,000.
13
In June 2007, the Company entered into an agreement for the sale of the
Company's former executive office and warehouse facility, as well as two
adjacent lots, located in West New York, New Jersey. The proposed purchase price
is $8,000,000, the substantial portion of which is payable at closing. The
closing of the sale is scheduled for February 15, 2008, although the proposed
purchaser has the right to extend the closing date for one additional 4-month
period upon payment of an extension fee. The closing is 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, including the
receipt of acquisition and construction loan commitments. However, since the
proposed transaction is subject to a number of conditions and contingencies,
including the receipt of required governmental approvals, there is no assurance
that a sale of the property will be concluded.
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 September
30, 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 intends to finance these repurchases from its own funds from operations
and/or from its bank credit facility. For the three-month period ended September
30, 2007, the Company did not purchase any shares of its common stock under this
repurchase program. As of September 30, 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.
Contractual Obligations and Commercial Commitments
To facilitate an understanding of our contractual obligations and
commercial commitments, the following data is provided as of September 30, 2007:
14
* * * * Payments Due by Period * * * *
Less than 1 More than
Contractual Obligations Total Year 1-3 Years 3-5 Years 5 Years
Notes Payable $ 13,130,000 $ 13,130,000 $ - $ - $ -
Mortgage Payable 2,520,000 179,000 323,000 366,000 1,652,000
Royalties 183,000 183,000 - - -
Operating Leases 5,109,000 1,096,000 1,744,000 834,000 1,435,000
----------------------------------------------------------------------
Total Contractual Obligations $ 20,942,000 $ 14,588,000 $ 2,067,000 $ 1,200,000 $ 3,087,000
----------------------------------------------------------------------
Total Less than 1-3 More than
Other Commercial Commitments Commitments 1 Year Years 3-5 Years 5 Years
Letters of Credit $ 13,233,000 $ 13,233,000 - - -
------------ ------------
Total Commercial Commitments $ 13,233,000 $ 13,233,000 - - -
------------ ------------
|
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.
15
Results of Operations
Net sales were $37,453,000 during the three-month period ended September
30, 2007, compared to $40,624,000 in the prior fiscal three-month comparable
period. Sales by category were as follows:
Net sales for the Apparel category were $23,533,000, or $240,000 lower
than the prior fiscal year. We experienced an 8.8% increase in our children's
apparel division due to the timing of shipping programs which were delayed by
one customer from the fourth quarter of fiscal 2007 until the first quarter of
fiscal 2008. However, this sales increase was offset, in part, by a 20.7%
reduction in net sales in the women's sleepwear division also the result of the
timing of shipments, but in this instance, from the first quarter to the second
quarter of fiscal 2008. In addition, last year's first quarter included net
sales of our former catalogue division, which we phased out during that quarter.
Net sales totaling $13,920,000 for the Handbags category in the first
quarter of fiscal 2008 represents a 17.4% decrease compared to $16,851,000 in
net sales for the same quarter of the prior fiscal year. Approximately $800,000
of the sales decrease, or 4.8% of the 17.4% overall decrease, relates to a
customer sales allowance for a product which was manufactured by a foreign,
third-party supplier and did not meet our quality standards. The remainder of
the sales decrease primarily reflected 15.0% lower sales in the premium
incentive business due to the timing of shipments to one of its significant
customers to the second quarter of fiscal 2008 from the first fiscal quarter. In
addition, net sales were 30.5% lower in the handbag business for the first
quarter versus last year's first quarter primarily due to fewer orders received
from a significant customer.
Gross margins were 22.0% in the first quarter of fiscal 2008 compared to
20.9% in the first quarter of 2007. Gross margins by category were as follows:
Gross margin for the Apparel category decreased to 24.4% in the first
three months of fiscal 2007 from 26.2% in the first quarter of fiscal 2007. The
1.8 percentage point decrease was primarily the result of lower margins in the
women's sleepwear division due to the mix of items sold in the current fiscal
quarter compared to last year's first fiscal quarter.
Gross margin for the Handbags category in the first quarter of fiscal 2008
improved to 18.1 % from 13.6% in the first quarter of fiscal 2007. This increase
was mainly due to improved premium incentive business margins attributable to
product mix. Higher margins in the handbag business were also the result of
product mix.
Shipping, selling and administrative expenses increased by $222,000 to
$7,612,000, or 18.2% of net sales, from $7,390,000, or 21.2% of net sales,
mainly due to higher product development costs of $252,000 for the women's
apparel, the children's apparel and the premium businesses relating to
developing potential additional future business. In addition, the Company
experienced an increase of approximately $183,000 in general and administrative
costs, mostly the result of higher outside professional and consulting fees, as
well as higher selling costs totaling $69,000 due primarily to higher selling
office rent expense in the first quarter of fiscal
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2008 compared to last year's first fiscal quarter. Offsetting these increases,
in part, were lower royalty expense of $245,000. Last year's corresponding
quarter included royalty expenses relating to net sales of licensed products, as
well as minimum royalty commitments which were not met and had to be expensed,
in each case which did not recur during the first quarter this year. Lower
commission expense totaling $62,000 and lower shipping and warehousing expense
totaling $19,000 were the result of lower sales volume in the first fiscal
quarter of 2008 compared to the same quarter last year.
Interest expense in the first quarter of fiscal 2008 decreased to
$146,000, or $201,000 below the last year's first quarter of $347,000, primarily
the result of a lower level of average borrowing. The lower level of borrowing
was due primarily 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 in the current fiscal quarter ended September
30, 2007 compared to last year's same fiscal quarter.
The decrease of $271,000 in earnings before income taxes for the three
month period ended September 30, 2007 to $495,000 from earnings before income
taxes of $766,000 in the prior fiscal comparable period was primarily due to
lower net sales and gross profit dollars, as well as higher shipping, selling
and administrative expenses, not fully offset by lower interest expense, as
discussed above. For the three-month period ended September 30, 2007, the
Company had an effective tax rate of 39.4 % compared to 39.6 % in the first
three-month period of the prior year. Net earnings decreased $163,000 to
$300,000 for the three-month period ended September 30, 2007 from $ 463,000 in
the prior comparable period.
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 is effective for the fiscal year
beginning July 1, 2007. The Company has determined that the impact of FIN 48 on
the Company's consolidated financial statements is 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.
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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.
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