UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ......... to ..........
Commission file number: 0-29126
JENNA LANE, INC.
(Exact name of registrant as specified in its charter)
Delaware 22-3351399
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1407 Broadway, Suite 2004 10018
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 704-0002
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock,
$.01 par value and Class A Common
Stock Purchase Warrants
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes...X.... No.....
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (ss.229.405 of this chapter) is not contained herein,
and will not be contained, to the best of the registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K. [ X ]
Aggregate market value of voting and non-voting common equity held by
non-affiliates as of June 23, 1998: $6,550,652.50 (includes all common equity,
whether or not registered under the Securities Act of 1933, as amended)
(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date: As of June 23, 1998
the number of shares of common stock outstanding was 4,414,707 shares.
DOCUMENTS INCORPORATED BY REFERENCE.
Portions of the Registrant's definitive proxy statement for the 1998
Annual Meeting, which will be filed within 120 days of March 31, 1998, are
incorporated by reference into Part III.
PART I
Item 1. Business.
Overview
The Company was formed in February 1995 and designs, manufactures and
markets high quality, cut and sewn, popularly priced "junior", "missy", and
large size basic sportswear, basic fashion sportswear, and fashion knit and
woven sportswear and other apparel for women and children. The Company was
founded by individuals with extensive experience in apparel manufacturing,
operations, sales and merchandising. Since its inception, the Company has
dedicated its time and resources primarily to the development of three sets of
product lines, basic sportswear, basic fashion sportswear and fashion
sportswear.
Sales of basic sportswear comprised approximately 35% of the Company's
revenues in the fiscal year ended March 31, 1998. In the production of basic
sportswear, the Company operates primarily as a domestic manufacturer which
substantially controls or owns all aspects of its production capability, known
within the industry as "vertical integration." The Company believes that this
vertical integration positions the Company among the few apparel manufacturers
in its market with the ability to control and manage the entire manufacturing
process from the conversion of yarn into fabric to the completion of finished
apparel. The Company believes it is able to realize significant cost savings
through its retention of responsibility for the manufacturing of its own fabric
(although not actually manufacturing itself). As a result, the Company believes
it can sell high quality merchandise to price sensitive discounters and mass
merchants at prices competitive to those of imported goods.
Management believes that vertical integration as a domestic manufacturer
of basic sportswear allows the Company to deliver good quality competitively
priced merchandise to customers significantly faster than the delivery time on
goods shipped from overseas. Because of the Company's ability to produce goods
more quickly than those of its competitors who import products, the Company's
retail customers can conserve capital by purchasing less initial inventory,
reduce markdowns by holding smaller quantities of non-moving merchandise, and
increase sales by rapidly restocking fast-selling items. Management believes
that the Company's ability to deliver good quality, competitively priced
merchandise in a short time frame has allowed it to obtain as customers many of
the nation's leading discount retail outlets, although no assurance can be given
that these relationships will continue or be expanded.
The second merchandise product line that the Company has focused upon is
the manufacturing of basic fashion products. Sales of basic fashion comprised
approximately 35% of the Company's revenues for the fiscal year ended March 31,
1998. In its sales of basic fashion, the Company is able to manufacture higher
quality goods at a moderate price point, by using its domestic vertically
integrated facilities in conjunction with imported processes more typical to the
fashion industry.
The third key merchandise product line which the Company has pursued,
which comprised approximately 30% of the Company's revenues in the fiscal year
ended March 31, 1998, is fashion sportswear. In producing its fashion
sportswear, the Company follows more traditional manufacturing processes
utilized in the apparel industry, namely the purchasing of fabric from
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outside vendors.
The fashion and basic fashion sportswear product lines generate a higher
gross profit margin than basic sportswear due to the differentiation of product
and reduced competition. In its fashion and basic fashion sportswear production,
the Company loses its competitive advantage of converting its own fabrics,
however, management believes that its long standing relationships with buyers
and management of its retail customers and its overall merchandising and design
skills allow the Company to successfully compete in the fashion and basic
fashion sportswear business, although no assurance of the continuation of such
success can be given.
The Company's sales efforts are organized based on the merchandise
category and/or customer, and are divided into "Missy"/Large Size, Young Large
Size, Imports, Mail Order, Mass Merchants, Smart Objects (Sweaters), United
States Polo Association ("USPA") and Children's. There can be no assurance
that these sales efforts will be successful or that the Company will not
determine to add additional categories or eliminate some or all of the
divisions denoted above.
Although management is pleased with its success to date in selling basic,
basic fashion and fashion sportswear, and believes the Company will continue to
benefit from substantial focus on those areas, a longer-term opportunity for
expansion will be the growth and development of sales of imports. Management's
long-term plan includes continuing to expand its importing activities which
represented approximately 36% of the Company's revenues for the fiscal year
ended March 31, 1998. Management also seeks to diversify its product offerings
with the additions of the Smart Objects, selling moderately priced sweaters,
USPA, a mid-market brand name and Children's sales groups. The Company continues
to pursue potential strategic acquisitions or license arrangements to further
broaden its product and customer base. There can be no assurance that this plan
will be successfully implemented or, if implemented, result in profits to the
Company.
The Company attempts to maximize its competitive advantage through its
market focus, product design, and merchandise. The Company targets the major
national, regional and specialty chains whose volume demands attract them to
manufacturers who can produce quality merchandise in high volumes at low cost
within specified delivery schedules.
The Company generally focuses on popularly priced clothing, a segment of
the apparel industry which management believes is experiencing faster growth
than the industry as a whole. The Company believes, although it has no
quantitative evidence thereof, that demographic trends have shifted consumer
spending habits and apparel expenses have become a smaller proportion of
personal expenditures for the "baby boom" population born between 1945 and 1964.
Management believes that these consumers are required to shift more of their
disposable income to the payment of mortgages, children's education and savings.
As consumers have less money to spend on clothing, management believes they are
shifting their apparel spending to discounters and off-price retailers. They are
also purchasing more basics that can be worn for more than one season and have
lower risk of becoming out of style in the year following purchase. At the same
time, the currently strong economy has increased the interest in basic fashion
products, which are higher priced but maintain some of the multi-season utility
of basic sportswear.
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A major focus of the Company's merchandising efforts involves the sale of
fashion, basic fashion and basic sportswear to large size women's departments.
Management believes that this market will grow due to the aging of the
population and the tendency of older people to be overweight, although there can
be no assurance of this.
The Company also will respond to what management believes to be the
growing trend among retailers for "quick response" whereby the retailer rapidly
determines consumer preferences and shifts inventory in response to these
preferences. Quick response involves shortening the production cycle, improving
productivity, reducing inventory and accelerating the feedback of consumer
preference to their manufacturer. Management believes that most major retailers
are working with their manufacturers to speed restocking time and create
efficient ways to reduce response time on orders. The anticipated growth in the
company's sales of imports, however, may reduce the Company's focus on "quick
response" based revenues.
In March 1997, the Company completed its initial public offering of
investment units comprising shares of Common Stock and Class A Common Stock
Purchase Warrants ("Warrants"). Each Warrant entitles the holder to purchase one
share of Common Stock at an exercise price of $6.36, subject to adjustment, at
any time until March 19, 2000. The net proceeds of the offering were
approximately $5,352,000. The Common Stock and Warrants are listed on the Nasdaq
National Market System ("Nasdaq") under the symbols JLNY and JLNYW,
respectively. See "Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters."
Product Line
The Company specializes in the design, manufacture and marketing of high
quality cut and sewn knit women's and children's wear. The Company's products
are sold at popular and moderate price points, typically ranging from $9 to $40
at retail. A large portion of the Company's sales are from merchandise sold
under the label of the retailer (known as "private label"). The remainder are
sold under the Company's own labels, which currently include Smart Objects (TM),
United States Polo Association (R), Stressed Out (TM), Jenna Lane (TM), JLNY
(TM), Eric Charles (TM) and Jenna Lane Woman (TM). The Company's product line
consists of many different styles that are changed twice each year in response
to the two major selling seasons in the apparel industry - fall/back to school
and spring. Adjustments and changes are made continuously to the line in
response to customer information. Many of these styles are similar but
customized to meet the design requests of the retailer or to provide the
retailer with merchandising which its competitor is not selling.
As indicated above, the Company concentrates on three primary product
lines: basic, fashion basic and fashion sportswear. Basic apparel is
significantly less risky than basic fashion and fashion apparel, primarily
because of its longer product life cycle, but contains a lower gross profit
margin. Management attempts to blend the relative risk levels with the
profitability of these areas.
The Company believes it has established a strong presence in the large
size women's market through the establishment of two separate sales groups in
this category. The first is young large
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size, catering primarily to plus size young women and for young working women.
The second sales group serves the more traditional middle aged large size
customer.
In the large size women's market, the Company produces a variety of
pants, shorts, skirts, blouses, t-shirts, sweaters, coordinates, and dresses in
knitted fabrics consisting predominantly of lycra, acrylic, and poly cotton.
Bottoms and tops predominate this category, with bottoms generally producing
greater sales than tops.
The Company believes it is a dominant manufacturer in the category of
leggings and stirrup pants containing lycra in the popular price and the large
size women's category and is a major manufacturer of lycra bottoms in popular
price "missy" sizes. The Company believes that its success in marketing bottoms
will depend upon its ability to compete on the basis of price against imports.
Sales Groups
The Company is organized into eight sales groups, described in more
detail below. Each sales group is decentralized with regard to sales. Production
costs and operating costs associated with each sales group are not the
responsibility of the sales group manager and operating expenses are not
allocated by sales group. Management of the sales groups are generally
compensated based on a commission tied to net sales and profit margins, although
some are compensated in part based upon the overall profitability of the sales
group. The Company believes that this structure enables sales group management
to concentrate on sales and merchandising.
The Company sells a majority of its products directly through its own
showroom at 1407 Broadway in Manhattan, New York. Most mail order sales,
however, are handled by its mail order showroom at 1384 Broadway in Manhattan,
New York. All sales of USPA products are made through a shared-rent arrangement
in a showroom at 1384 Broadway in Manhattan, separate from the mail order
showroom. In addition to its Co-Chief Executive Officers, Messrs. Mitchell
Dobies and Charles Sobel, the Company currently employs eight individuals in
sales. Although no written contracts exist with these additional salespeople
(other than Messrs. Dobies, Sobel, Eric Holtz, Martin Richter and Lori Katz, see
"Executive Compensation"), they generally receive a monthly draw against
commission, with the commission being determined by the gross profit margin on
an order by order basis. The Company pays for "co-op" advertising as may be
required in its agreements with customers and plans to use some advertising and
marketing efforts on behalf of USPA sales group.
"Missy"/Large Size. This sales group is responsible for selling
merchandise to customers servicing the more traditional "missy" and large size
markets. Merchandising in this sales group consists primarily of bottoms, tops
and coordinates. As mentioned previously, bottoms containing lycra are a strong
product in this category.
Young Large Size. This sales group's efforts are directed at customers
who service the under 25 large size market. The product is most commonly Junior
inspired fabrications and silhouettes manufactured to large size specifications.
The Company designs and manufactures a broad array of bottoms, tops, and dresses
for these customers. The Company's products are
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priced at retail generally from $16.99 - $39.99.
Imports. As mentioned above, a longer-term opportunity for expansion will
be the growth and development of the import sales group. Part of management's
long-term plan is to continue to expand its importing activities. Eric Holtz,
who has extensive experience in the design, sourcing and selling of imported
woven products, serves as Director of the import sales group.
Price points for both denim and woven products in this sales group are
slightly higher than those which are domestically produced, with similar gross
margins to domestic products. Management believes that reduced trade
restrictions, increased competition in the domestic market and other factors
have enhanced the Company's ability to substantially increase its activities in
the import area. The Company plans for all of its sales groups, as much as
possible, to benefit through the use of importing. It is the Company's goal to
make the use of imports the dominant focus of the Company's production efforts.
Mail Order. This sales group is responsible for selling merchandise to
companies who sell through direct mail catalogs. The product line includes
wovens and knits in both basic and fashion sportswear, and tends to concentrate
on somewhat higher price points than the Company's other products.
Mass Merchants. Management believes that, although no assurance can be
given, this sales group represents a very strong opportunity for significant
sales growth, primarily due to the management's reputation and its relationships
with key customers. The mass merchant area, however, is characterized by small
gross profit margins, and the Company intends to carefully control this sales
growth and attempt to limit it to the most profitable niches of that business.
In addition, the Company carefully manages its relationships with retailers, and
endeavors to avoid committing a large percentage of its business to any one
retailer.
Due to the customers' specific needs in the areas of color, price,
styling and delivery, and in order to maximize the image of the Company as a
whole, the mass merchant is best serviced as a separate sales group.
Smart Objects. In February 1998, the Company established the Smart
Objects sales group to manufacture and sell moderately priced women's sweaters
to department stores and better specialty chains. This is the Company's first
effort targeted at these retailers, and management hopes to expand sales in the
other sales groups as a result of its marketing efforts to these customers. The
Company markets the sweaters under the Smart Objects label. This sales group
represented a small portion of the Company's fourth quarter sales.
United States Polo Association. In February 1998, a wholly-owned
subsidiary of the Company (referred to in this paragraph as the "Company"),
entered into a license agreement with the master licensee of the United States
Polo Association. The license covers women's apparel of various types. The
license includes the use of the name United States Polo Association and its
logos. The license agreement continues until July 31, 2001 but the Company has
an option to extend the license for three additional years thereafter. Under the
license agreement, the Company pays a royalty of 5% of net sales generated but
pays a guaranteed minimum royalty of $150,000 in the first year, $200,000 in the
second year, and $250,000 in the third year and in any
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year thereafter. The Company also is obligated to achieve minimum annual net
sales of $3.0 million in the first year, $4.0 million in the second year
and $5.0 million in the third year and in any year thereafter. This sales
group expects to begin shipping its products in September 1998.
Children's. In May 1998, after the end of the fiscal year to which this
annual report relates, the Company established its children's sales group. On
June 19, 1998, a wholly-owned subsidiary of the Company purchased substantially
all of the assets of T.L.C. for Girls, Inc. ("TLC"), and a debtor-in-possession
under Chapter 11 of the United States Bankruptcy Code, a manufacturer of
children's wear, for an aggregate purchase price of $350,000. The Company also
had loaned TLC approximately $200,000 which has been capitalized as part of the
purchase price. In addition, for several months prior to the acquisition, the
Company served as TLC's exclusive supplier of goods, assisting TLC in producing
an order file approximating $4 million. The children's clothing shall continue
to be manufactured under the "TLC" label.
Design Development
New designs are created by an in-house staff which as of the date of this
Annual Report consists of seven designers. Management believes there are many
synergies in the design functions and that designs created for one sales group
are frequently modified for use by other sales groups. The Company endeavors to
combine creativity, knowledge of the marketplace and input from its retail
customers to develop designs that incorporate established fashion trends and
basic apparel.
In order to facilitate its design activities and production, the Company
uses a CAD/CAM (computer aided design/computer aided manufacturing) system which
was purchased with the proceeds from its initial public offering. This system
speeds the product development cycle during the design phases as well as initial
pattern making and the creation of samples. In addition, customer presentations
and maintenance of historical data were significantly improved with the addition
of the new system.
Manufacturing
In general, in basic sportswear merchandising, the Company maintains
responsibility for the entire manufacturing process from conversion of yarn to
shipment of finished goods, although it contracts out most of this work. The
Company has established ties with approximately fifteen "captive" contractors,
for whom the Company represents substantially all their business, to provide all
of its cutting and sewing needs, although no assurance can be made that these
relationships will continue at all or in a form and structure satisfactory to
the Company. These "captive" relationships allow the Company to exercise
substantial control over the contractor's production schedules and quality of
the production process without being required to manage its own large labor
force or undertake the financial obligations for capital acquisitions and
equipment.
The manufacturing process begins with the purchase of yarn. Poly cotton,
acrylic and lycra are the three major yarns which are purchased by the Company.
The Company generally purchases this yarn on a "spot" (or immediate) basis.
During times of price fluctuations, the Company attempts to protect against
these fluctuations by purchasing longer-term contracts, if
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possible.
The Company causes the yarn to be delivered to the contracted knitter,
which then knits fabric in accordance with Company specifications. This process
of conversion of knit to fabric generally takes approximately one week. The
majority of fabric produced are greige fabrics, which are fabrics in their
natural color. The Company maintains an inventory of greige fabric, permitting
it to respond quickly to orders or unforeseen shortages. By maintaining its
inventory primarily in greige goods rather than dyed goods, the fashion risk
inherent in fabric color is reduced.
The Company then sends the fabric to dyers and finishers primarily in the
Northeast United States, in particular New York, New Jersey and Pennsylvania.
After the fabric is completed, it is then shipped to another contractor, which
will then cut and sew garments according to Company specifications.
As indicated above, the Company has established a relationship with
approximately fifteen "captive" outside contractors to provide a majority of its
domestic cut and sewing needs. Although production is done outside the Company,
these contractors rely on the Company for substantially all of their revenue. As
the Company sales volume continues to expand, additional "captive" contractors
will be added to support the increases in sales volume. As practically the only
customer of these contractors, as mentioned above, the Company has control over
the contractors' production scheduling and movement of merchandise. Quality is
controlled in tandem by Company employees and by an in-house quality staff
provided by the contractor. The Company currently has no contractual arrangement
with these contractors, nor are any expected. The Company loaned an aggregate of
$246,000 to certain contractors during the fiscal year ended March 31, 1998, of
which $88,157 has been repaid with interest. Each of these loans is secured by
certain assets of the borrower.
After completion of cutting and sewing, the completed goods are sent to
the Company's warehouse in New Jersey for distribution and shipping or will be
shipped directly to the customer from the contractor.
Management believes that the industry standard in basic sportswear
merchandising to produce a finished product from the time the fabric is ordered
is six to eight weeks. By employing the processes described above, the Company
generally has been able to complete the entire manufacturing process from
delivery of yarn to completion of finished goods in approximately four weeks,
although no assurance can be given that such performance will continue, and many
factors outside the Company's control can affect this response time.
In the manufacture of basic fashion and fashion sportswear, the Company
and its captive contractors noted above are involved in the cutting and sewing
process, but the Company does not purchase the yarn or knit, dye or finish it.
This work is completed prior to the Company's contractor's commencement of
involvement in the process.
Shipping
The Company ships a small portion of its merchandise directly from the
contractor to
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customers. In addition, in June 1996, the Company leased 48,519
square feet of warehouse and office space in Cranbury, New Jersey. Most of the
Company's merchandise is shipped from this warehouse. Management has determined
that some long-term cost savings are generated by operating its own warehouse
rather than utilizing a public warehouse.
Quality Control
A vital concern to management is product quality and quality control.
Strict quality control standards are required in order to maintain and build
relationships with key customers and minimize product returns. Adherence to
these strict standards is even more important to national mass merchants such as
KMart (a current customer of the Company). The Company carefully monitors the
output of its contractors to insure they produce the highest quality
merchandise. All contractors are visited by employees of the Company's quality
control team, which includes its senior executives, and are supplemented by
contractor paid in-house teams.
Inventory
The Company believes that it turns its inventory more often than its
competitors. In the fiscal year ended March 31, 1998, it did so seven times,
compared to nine times for the 1997 fiscal year, although no assurance can be
given that such result will continue. As the Company grows and matures and
further increases its importing activities, the turn rate will decrease
significantly. The Company endeavors to offset this negative aspect of importing
by continually increasing the percent of merchandise that is sold prior to its
manufacturing. Currently a majority of the merchandise is pre-sold. There can be
no assurance of the Company's ability to pre-sell its merchandise.
Ordering and Distribution
The Company has computerized its order entry and has fully integrated
order entry, shipping, accounts payable and accounts receivable through use of
computer software. Senior management reviews all orders with respect to price,
merchandise delivery dates and suitability for the customer. For the foreseeable
future, the Company has determined that virtually no merchandise will be
produced for stock domestically and all domestic manufacturing will take place
in response to customer orders. As mentioned above, a portion of the Company's
imported goods are produced prior to receipt of a customer order, primarily
resulting from the longer lead times required for manufacturing and delivery as
compared with domestically produced goods. Customers are invoiced at the time of
shipment. Generally most customers have made payment within approximately 60 -
75 days, although no assurance can be given that this trend will continue.
Operations
The Company maintains corporate offices at its warehouse facility in
Cranbury, New Jersey as well as at 1407 Broadway in Manhattan, where it also
maintains its showroom and principal executive offices. The Company's design
room is located at 264 West 40th Street in Manhattan, and its mail order
showroom is located at 1384 Broadway. The Company also sells USPA
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products from a shared lease arrangement at 1384 Broadway, separate from the
mail order showroom. See "Item 2-Description of Properties."
Customer Base
The Company attempts to conduct business only with those customers it
believes to be the most attractive in the market. These include current national
mass merchant customers such as KMart; regional discounters such as Ames,
Shopko, Hills, and Pamida, national specialty chains such as Cato Stores, Deb
Shops, Petrie, Ashley Stewart, Wet Seal, Miller's Outpost, and Charming Shoppes,
department stores such as Federated Stores, and Steinmart, and other customers
including the Army/Air Force Exchange, Brylane and Lerner's. Management has
extensive long standing personal relationships with most of these accounts,
although no assurance can be given that any of these will remain customers of
the Company. During the fiscal year ended March 31, 1998, Charming Shoppes
represented 18% of the Company's sales.
Competition
The apparel business is intensely competitive and consists of numerous
manufacturers, importers and distributors, none of which accounts for a
significant percentage of total industry sales, but many of which are
significantly larger and have substantially greater resources than the Company.
The Company competes with distributors that import apparel from abroad, domestic
companies with established foreign manufacturing relationships and companies
which produce apparel domestically.
The Company believes its ability to succeed depends in substantial part
on its ability to anticipate, gauge and respond to changing consumer demands and
fashion trends in a timely manner, as well as to operate within significant
production and delivery constraints. The Company has attempted and will continue
to attempt to minimize the risk of changing fashion trends and product
acceptance by producing a wide selection of apparel during a particular selling
season and by closely monitoring retail sales of its products. However, if the
Company misjudges the market for a number of products or product groups, it may
be faced with a significant amount of unsold finished goods inventory which
could have a material adverse effect on the Company's operations.
Backlog; Seasonality
As of June 1, 1998, the Company had unfilled orders of approximately
$16.1 million, compared to approximately $8.5 million of such orders at the
comparable date in 1997. These amounts include both confirmed orders and
unconfirmed orders, which the Company believes, based on industry practice and
its past experience, will be confirmed, and are therefore considered to be firm.
Shipment of Spring orders normally commences in the early part of January with
the major portion of Spring merchandise shipped in March and April. Shipment of
Back-to-School/Fall orders normally commences in late June with the major
portion of Fall merchandise shipped in August, September and October. The amount
of unfilled orders at a particular time is affected by a number of factors,
including the scheduling of the manufacture and shipping of the product which,
in some instances, depends on the desires of the customer. Accordingly, a
comparison of unfilled orders from period to period is not necessarily
meaningful
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and may not be indicative of eventual actual shipments.
The Company's business is somewhat seasonal, but management believes that
it is less so than many other sportswear companies, primarily because of the
Company's partial focus on basic sportswear, which is less seasonal than fashion
apparel. In addition, the Company believes its product mix is diverse and varied
enough so that some of its products are popular at any time of year. The Company
does, however, generally experience its strongest sales during its fourth
quarter, from January 1 to March 31. The Company does not believe this variation
has had a material adverse impact on its cash flow or operations, although there
can be no assurance that this will not be the case in the future.
Factoring of Accounts Receivable
Generally, the Company's accounts receivable are paid within 60-75 days
from invoice, which management believes is within industry standards. The
Company has a Factoring Agreement with Republic Factors Corp. ("Republic"),
pursuant to which the Company receives advances against factored accounts
receivable with interest at 1.0% over prime rate (this has been reduced to 1.0%
under prime rate as of June 1, 1998). Advances, which are at the discretion of
Republic, generally are equal to 80% of eligible receivables. Republic also has
provided the Company with financing for import letters of credit. Republic Bank
participates in this financing arrangement. The Company has generally utilized
the factoring arrangement to the maximum extent permitted by Republic. As the
Company completes further acquisitions and licensing arrangements, its
dependence on its arrangement with Republic will likely increase to assist the
Company's cash flow. The obligations of the Company to Republic are secured by a
lien on certain of the Company's assets, consisting primarily of accounts
receivable (and merchandise relating thereto), inventory, equipment and
intangible assets of the Company. As a result, there can be no assurance that
there will be assets available for distribution to stockholders or creditors
other than Republic in the event of a liquidation of the Company.
In November 1997 the Company entered into a factoring agreement with
Milberg Factors, Inc. ("Milberg"). Pursuant to this agreement the Company pays a
charge of 0.85% of the gross amount of receivables which are assigned to
Milberg. The minimum charge payable by the Company in each year of the contract
is $85,000. The contract continues for one year and is renewable at the
Company's and Milberg's option on a year to year basis thereafter. The
obligations of the Company to Milberg are secured by a lien on certain of the
Company's assets, subject to the lien in favor of Republic with respect to
amounts owed to Republic.
Employees
At March 31, 1998, the Company employed 88 full time individuals, of
which nine occupy executive or managerial positions, approximately 53 hold
design, production, quality control or distribution positions and the balance
occupy sales, clerical and office positions. Approximately eight of the
Company's warehouse packers are covered by a collective bargaining agreement
with the United Production Workers Union Local 17-18 which is effective from
June 15, 1996 through and including June 14, 1999. The Company considers its
relations with its employees to be good and has not experienced any interruption
of operations due to labor disputes.
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Item 2. Description of Properties.
The Company occupies four facilities in Manhattan and one in New Jersey.
The four Manhattan facilities, located at 1407 Broadway (its principal executive
offices), 264 West 40th Street, and two separate sites at 1384 Broadway, and
which encompass approximately 14,000 square feet in total, house the Company's
showroom and sales, merchandising, mail order and design staffs.
The Company's principal executive offices are located at 1407 Broadway,
Suite 2004, in Manhattan. This office is the subject of a lease requiring a
current annual base rental of $194,600 and continues until December 31, 2003.
The Company moved into this suite from smaller quarters in the same building in
December 1997.
The Company's mail order showroom, located at 1384 Broadway in Manhattan,
is the subject of a lease requiring a current annual base rental of
approximately $50,000 and continues until November 30, 2000.
The Company's USPA showroom is located at 1384 Broadway in Manhattan, and
is the subject of an oral month-to-month space sharing arrangement at a monthly
cost of $4,352.
The Company's design room is located at 264 West 40th Street in
Manhattan. This space is the subject of a lease requiring a current annual base
rental of $60,000 and continues until April 30, 2003.
The Company's warehouse and certain executive offices are located in
Cranbury, New Jersey (the "Warehouse"). The Warehouse is the subject of a lease
requiring a current annual base rental of approximately $206,000 and continues
until May 2001, with an option for the Company to renew for an additional two
years.
The Company believes that its existing facilities are adequate to meet
its current and currently foreseeable requirements, although there can be no
assurance thereof.
Item 3. Legal Proceedings
There are no material pending legal proceedings to which the Company is a
party or to which any of its property is subject. The Company is subject to
normal litigations in the ordinary course of business.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
12
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Market for Common Stock: In March 1997, the Company completed its initial
public offering of investment units comprising shares of Common Stock and
Warrants. Each Warrant entitles the holder to purchase one share of Common Stock
at an exercise price of $6.36, subject to adjustment, at any time until March
19, 2000. The Common Stock and Warrants are listed on Nasdaq under the symbols
JLNY and JLNYW, respectively.
Common Stock,
$0.01 par value
Closing Bid Closing Ask
----------- -----------
Period High Low High Low
Fiscal Year 1998 ---- --- ---- ---
First Quarter
(April 1997 through June) 9.4309 7.7265 9.7718 7.7833
Second Quarter
(July through September) 9.7718 8.7491 9.9422 8.8059
Third Quarter
(October through December) 12.3851 9.6581 12.6124 9.8855
Fourth Quarter
(January through March) 11.2489 8.6875 11.3057 8.7500
Fiscal Year 1997
March 20 through March 31* 9.9990 9.0900 10.2263 9.7718
Warrants
Closing Bid Closing Ask
----------- -----------
Period High Low High Low
Fiscal Year 1998 ---- --- ---- ---
First Quarter
(April 1997 through June) 4.5450 3.6360 4.9995 3.9769
Second Quarter
(July through September) 4.4314 3.9769 4.9995 4.2041
Third Quarter
(October through December) 6.1358 4.4314 6.3630 4.9995
Fourth Quarter
(January through March) 5.6813 2.7500 6.1358 2.9375
Fiscal Year 1997
March 20 through March 31* 4.0905 3.7496 4.5450 4.2041
(*) The Company's registration statement for its initial public offering
was declared effective March 19, 1997.
As a condition to listing the Company's securities on Nasdaq, the
Company is required to ensure that (i) independent directors represent a
majority of the members of the Board of
13
Directors, and for one such independent director to serve as Chairman
and (ii) Messrs. Dobies and Sobel agree not to sell or otherwise dispose
of any securities of the Company beneficially owned by them (other
than certain shares sold by them in the Company's initial public
offering) for a period of two years from the effective date of the initial
public offering. There can be no assurance that Nasdaq will not request further
restrictions in the future, or that any other securities exchange on which the
Company desires to list its securities will not request similar or more onerous
restrictions.
Holders: As of June 23, 1998, there were approximately 14 holders of
the Common Stock (including CEDE & Co. on behalf of numerous other
beneficial owners) and 15 holders of the Warrants.
Dividends: The Company has not paid any cash dividends on its Common
Stock since inception and does not expect to declare or pay any cash dividends
in the foreseeable future. The Company presently anticipates that all earnings
will be retained to finance the continued growth and development of the
Company's business. Any future determination as to the payment of cash dividends
will depend upon the Company's financial condition, results of operations and
other factors deemed relevant by the Board of Directors.
On February 17, 1998 the Company declared a stock dividend (the "Stock
Dividend") which was paid on March 13, 1998. The market value of the dividend
was greater than the Company's earned surplus and aggregate retained earnings
but the Board of Directors of the Company desired to reward its stockholders,
who had invested in the Company and supported it.
14
Item 6. Selected Financial Data
Year Ended March 31,
-------------------------------------
1998 1997 1996
---- ---- ----
Statement of Operations Data:
Net sales $42,561,796 $35,372,386 $25,832,323
Operating income 919,322 450,395 975,566
Net income 517,157 136,260 501,429
Net income per share:
Basic 0.11 0.03 0.19
Diluted 0.09 0.03 0.16
Weighted average common
shares outstanding
Basic 4,719,322 2,305,749 2,111,248
Diluted 5,531,859 2,333,234 3,115,355
March 31,
-------------------------------------
1998 1997 1996
---- ---- ----
Balance Sheet Data:
Working capital $ 7,326,297 $ 7,191,854 $ 2,362,245
Total assets 11,537,169 10,034,842 5,209,550
Long-term debt 3,653 16,797 425,143
Preferred stock -- -- 828,030
Shareholders' equity 8,072,553 7,461,770 1,238,143
15
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operation
The following is a discussion of the financial condition and results
of operations of the Company for the three years ended March 31, 1998.
Highlights
The Company was incorporated in Delaware in February 1995 and designs,
manufactures and markets high quality, popular priced apparel for women and
children. Management's primary goal was to be recognized as a key resource to
its target customers. Market penetration was achieved through aggressive
pricing, established relationships within the industry and experience in
predicting fashion trends. In response to customer buying patterns, the Company,
which began production and shipping in April 1995, significantly increased the
amount of woven sportswear being produced and sold. Sales volume expanded
rapidly throughout the Company's first full fiscal year which ended March 31,
1996 and continued to accelerate through the fiscal year ending March 31, 1997
and the current fiscal year.
The Company expanded its import sales group in fiscal 1998. In doing
so, this sales group accounted for approximately 36% of sales compared to 21%
in fiscal 1997.
Effective January 1, 1998, the Company commenced operations of a new
division - Smart Objects. This division will consist primarily of junior and
large size moderately priced domestic knit sweaters. Full scale operations are
expected by Fall 1998.
In February 1998, the Company signed a license agreement for Misses,
Petite, Junior and Plus size sportswear to utilize the US Polo Association
brand. Jenna Lane Polo Association, Ltd., a recently formed wholly-owned
subsidiary of the Company, will implement the license. The license agreement
provides for a term of 3 years, renewable for 3 additional years, and requires
royalties of 5% of net sales to be paid to Quade, Inc., the master licensee for
the US Polo Association trademarks. Minimum royalties of $150,000, $200,000 and
$250,000 are payable in the first, second and third years of the agreement,
respectively. The agreement may be terminated by Quade upon certain events
defined in the agreement.
In May 1998, the Company established its children's sales group. On
June 19, 1998, a wholly-owned subsidiary of the Company purchased substantially
all of the assets of T.L.C. for Girls, Inc. ("TLC"), and a debtor-in-possession
under Chapter 11 of the United States Bankruptcy Code, a manufacturer of
children's wear, for an aggregate purchase price of $350,000. The Company also
had loaned TLC approximately $200,000 which has been capitalized as part of the
purchase price. In addition, for several months prior to the acquisition, the
Company served as TLC's exclusive supplier of goods, assisting TLC in producing
an order file approximating $4 million. The children's clothing shall continue
to be manufactured under the "TLC" label.
16
Results of Operations
The following table sets forth, for the year indicated, the Company's
statements of operations data as a percentage of net sales.
Year Ended
March 31,
-------------------------------------
1998 1997 1996
------ ------ ------
Net sales 100.0% 100.0% 100.0%
Cost of sales 81.1 82.2 81.8
----- ----- -----
Gross Profit 18.9 17.8 18.2
Operating Expenses 16.7 16.5 14.4
----- ----- -----
Income from operations 2.2 1.3 3.8
Other expenses - 0.7 0.2
----- ----- -----
Income before income taxes 2.2 0.6 3.6
Provision for income taxes 0.9 0.2 1.7
----- ----- -----
Net Income 1.3% 0.4% 1.9%
===== ===== =====
Year Ended March 31, 1998 Compared with Year Ended March 31, 1997
Net sales of $42.6 million in the year ended March 31, 1998 represented
an increase of $7.2 million, or 20.3% over net sales of $35.4 million in the
year ended March 31, 1997. The increase in net sales was primarily attributable
to continued expansion of the customer base and increased volume from several
existing customers.
The Company's gross profit increased $1.7 million, or 28.1%, to $8.0
million for the year ended March 31, 1998 from $6.3 million for the year ended
March 31, 1997. Gross profit margin increased to 18.9% in the year ended March
31, 1998 from 17.8% in the year ended March 31, 1997. The increase in gross
profit margin resulted primarily from higher import sales volume. Gross profit
from import sales is generally higher than gross profit from domestically
produced merchandise.
Operating expenses, including all transactions with the factor,
increased $1.3 million, or 22.4%, to $7.1 million in the year ended March 31,
1998 from $5.8 million in the year ended March 31, 1997. The increase was
primarily due to an increase of $728,000 in payroll and related costs, including
$407,000 in increased selling salaries, as well as $220,000 in selling-related
expenses which resulted from increased sales volume. Factoring costs decreased
$314,000 as a result of lower commission rates and reduced borrowing for working
capital needs, however, a $156,000 credit loss was incurred during the year
relating to Montgomery Ward's bankruptcy filing.
As a result of the above factors, income from operations increased 104%
from $450,000 in the year
17
ended March 31, 1997 to $919,000 in the year ended March 31, 1998.
Other expenses of $241,000 for the year ended March 31, 1997 consist of
interest expense on promissory notes issued in November 1995. These notes were
repaid in March 1997 from the proceeds of the Company's initial public offering.
Year Ended March 31, 1997 Compared with Year Ended March 31, 1996
Net sales of $35.3 million in the year ended March 31, 1997 represented
an increase of $9.5 million, or 36.8% over net sales of $25.8 million in the
year ended March 31, 1996. The increase in net sales was primarily attributable
to expansion of the customer base and increased volume from existing customers.
The expansion of the customer base includes approximately $8.3 million in net
sales to Charming Shoppes and Deb Shops which were not customers during the year
ended March 31, 1996. Increased volume to Brylane, Petrie and Bradlees, among
others, accounted for the balance of the sales increase.
The Company's gross profit increased $1.6 million, or 33.6% to $6.3
million for the year ended March 31, 1997 from $4.7 million for the year ended
March 31, 1996. Gross profit margin decreased to 17.8% in the year ended March
31, 1997 from 18.2% in the year ended March 31. 1996. The decrease in gross
profit margin resulted primarily in the fourth quarter of the year as allowances
to customers increased. This was attributable to certain production and shipping
problems resulting from a sudden sharp increase in sales during the fourth
quarter. The Company believes it has adequately addressed the problems resulting
from this sales increase.
Operating expenses, including all transactions with the factor,
increased $2.1 million, or 56.5% to $5.8 million in the year ended March 31,
1997 from $3.7 million in the year ended March 31, 1996. The increase was
primarily due to an increase of $989,000 in payroll and related costs, including
$430,000 in increased selling salaries and $194,000 in increased warehouse and
shipping salaries which are impacted by increased sales volume. The Company's
results also include increases of $157,000 attributable to additional fixed
costs (including rent, depreciation and insurance) relating to the expansion of
office and storage space. Factoring costs increased $535,000 relating to
commissions on higher sales volume, and additional borrowing for working capital
needs. The increased level of operating expenses incurred during the year ended
March 31, 1997 also reflected anticipated further expansion of the Company's
business, not all of which was achieved during the period.
As a result of the above factors, income from operations decreased
$525,000 to $451,000 in the year ended March 31, 1997 from $976,000 in the year
ended March 31, 1996.
Other expenses increased by $199,000 in the year ended March 31, 1997
from $42,000 in the year ended March 31, 1996 resulting primarily from interest
expense (including amortization of debt discount) and offering costs on
promissory notes issued in November 1995 and August 1996. These notes were
repaid from the proceeds of the Company's initial public offering.
For the fiscal year 1997, income tax expense as a percentage of pre-tax
income decreased from 46.3% to 34.8% compared to fiscal 1996. The decrease
results primarily from applying the normal statutory tax rates to the lower
income level.
18
Liquidity and Capital Resources
Since its formation, the Company has financed its operations and met
its capital requirements primarily through funds raised from its founders, three
private placement offerings, as well as borrowings under its factoring
arrangements, vendor financing and, to a lesser extent, equipment financing. In
March 1997, the Company completed an initial public offering of investment units
resulting in proceeds, net of underwriting discounts and offering costs, of
$5,352,000. These financing activities provided net cash of $1.3 million in
fiscal 1996, $4.6 million in fiscal 1997 and $15,000 in fiscal 1998.
Operating activities used net cash of $1.7 million in fiscal 1996, $3.9
million in fiscal 1997 and $24,000 in fiscal 1998. The principal uses of
operating cash are to purchase fabric and manufacture its products, purchase
import finished goods and financing accounts receivable. Inventory levels
increased as result of the corresponding increased production to support the
growth in sales, continued expansion of import product categories and the timing
of Spring '98 shipments to customers.
The Company's capital expenditures totaled $122,000, $175,000 and
$360,000 in fiscal 1996, 1997 1998, respectively. These capital expenditures
were for computer and office equipment, and improvements to leased premises. The
Company does not have any material commitments for capital expenditures at this
time.
The Company believes that existing cash, anticipated cash flows from
operations and availiability of advances under its factoring arrangement will be
sufficient to support the Company's operations for at least the next 12 months,
inclusive of the TLC acquisition. There can be no assurance, however, that the
Company's cash requirements during this period will not exceed its available
resources.
Year 2000 Computer Issues
What is commonly known as the "Year 2000 Issue" arises because many
computer hardware and software systems use only two digits to represent the
year. As a result, these systems and programs may not calculate dates beyond
1999, which may cause errors in information or system failures.
With respect to its internal systems, the Company is taking appropriate
steps to remediate the year 2000 issues and does not expect the costs of these
efforts to be material. However, the year 2000 readiness of the Company's
suppliers may vary. While the Company does not believe the year 2000 matters
discussed above will have a material impact on its business, financial condition
or results of operations, it is uncertain whether or to what extent the Company
may be affected by such matters.
Recently Issued Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting
Comprehensive Income", which establishes standards for reporting the components
of comprehensive income and SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information", which replaces existing
19
segment disclosure requirements and requires reporting certain financial
information regarding operating segments. It also establishes standards for
related disclosures about products and services, geographic areas, and
major customers. SFAS No. 130 and 131 are effective for financial
statements for fiscal years beginning after December 15, 1997. The
Company is not currently affected by SFAS No. 130 and is in the process
of evaluating the specific requirements of SFAS No. 131. These statements
will affect disclosure and presentation in the financial statements,
but will have no impact on the Company's consolidated financial position,
results of operations or cash flows.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Not Applicable.
Item 8. Financial Statements and Supplementary Data
See pages F-1 through F-14 annexed hereto. All other schedules are omitted
because they are not required, are not applicable, or the information is
included in the financial statements or notes thereto.
20
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.
Not Applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant.
The following sets forth certain information with respect to the
directors, executive officers and key employees of the Company.
Name Age Position(s)
- ---- --- -----------
Mitchell Dobies 40 President, Treasurer, Co-Chief Executive
Officer and Director
Charles Sobel 38 Co-Chief Executive Officer,
Executive Vice President and Director
Eric Holtz 32 Director of Import Sales Group
Kathleen A. Dressel 32 Secretary
Mitchell Herman 46 Chairman of the Board of Directors
Gerald L. Kanter 63 Director
Gerald Cohen 65 Director
Directors of the Company are elected annually at the annual meeting of
stockholders and serve until the next annual meeting and until their successors
are elected and qualify. Under the Company's By-laws, the number of directors
constituting the entire Board of Directors shall be fixed, from time to time, by
the directors then in office or by the stockholders. The directors may, however,
decrease or increase the number of directors by majority action without
soliciting stockholder approval. If the number of directors is not fixed, the
number shall be four.
Walsh Manning Securities, LLC, the underwriter of the Company's initial
public offering ("Underwriter"), has the right to nominate one member of the
Board of Directors for a period of two years from the closing of the offering.
The Underwriter has not exercised this option to date.
As a condition to listing the Company's securities on Nasdaq, the Company
was required to ensure that independent directors represent a majority of the
members of the Board of Directors, and for one such independent director to
serve as Chairman. Messrs. Herman, Cohen and Kanter, each an independent
director, represent a majority of the Board of Directors, and Mr.
21
Herman serves as Chairman of the Board of Directors. There can be no assurance
that Nasdaq will not request further restrictions in the future, or that any
other securities exchange on which the Company desires to list its securities
will not request similar or more onerous restrictions.
Mitchell Dobies. Mr. Dobies is President, Co-Chief Executive Officer,
Treasurer, and a director of the Company. Prior to founding Jenna Lane, Inc.,
Mr. Dobies had extensive experience in apparel manufacturing and operation with
both major organizations and entrepreneurial operations. From 1986 until 1995
Mr. Dobies was President and Chief Executive Officer of CR & ME, Ltd. ("CR &
ME"), a vertically integrated domestic manufacturer of cut and sewn knit
sportswear. From 1984 to 1986 he was Director of Operations of the Mens Division
of Izod LaCoste, a division of General Mills. From 1982 to 1984 he was a
shareholder and general manager of Necessary Objects, a moderate priced domestic
manufacturer of women's apparel, of which he was the founder. From 1979 to 1981
he was a buyer for a retail chain specializing in junior apparel. See also,
"Certain Legal Issues Concerning Management," below.
Charles Sobel. Charles Sobel is Co-Chief Executive Officer, Executive
Vice President and a director of the Company, and is in charge of all aspects of
sales and merchandising. Mr. Sobel, a founder of the Company, has more than 13
years of experience in selling women's apparel and maintains an extensive
network of relationships with the senior management of most retail chains. From
January, 1994 until February, 1995 Mr. Sobel was Executive Vice President of CR
& ME. From September, 1992 until joining CR & ME he was the Vice President and
Sales Manager for the Women's Wear Division of Gitano Corporation. From 1982 to
1992 he was a Principal and Sales Manager of Style Up of California, a
manufacturer of women's apparel and a division of Breton Industries.
Eric Holtz. Mr. Holtz, Director of the Import Sales Group, has been
with the Company since January 1996. From December 1994 to January 1996, he
was President of the Denim Division of Miss Juli Apparel. From 1992 through
December 1994, Mr. Holtz was a sales representative for Pellini/True Blue.
Kathleen A. Dressel. Ms. Dressel, Secretary of the Company, has been
Operations Manager of the Company since its inception in March 1995. From
September 1994 through March 1995, she was an Executive Assistant at CR & ME.
From April 1986 through September 1994 she was an Administrative Assistant to
the Senior Vice President of Merchandising of Jamesway Corporation, a regional
discount department store.
Mitchell Herman. Mr. Herman became a director in March 1997 and was
elected Chairman of the Board in December 1997. Since 1995, he has been
Sales Manager of By Design, an apparel manufacturer. From 1990-1995, he was
Sales Manager of E.S. Sutton, a manufacturer of knitwear. He also has
previously been associated with Bradlees Department Stores, Jefferson Ward
Stores and J.W. Mays.
Gerald L. Kanter. Mr. Kanter became a director in December of 1997.
Since 1997, he has been a private retail consultant. From 1996-1997, he was
the National Managing Director of Retail Turnarounds for KPMG Peat Marwick.
From 1993-1995, he was the President and CEO for Retail Holdings Group, Inc.
From 1990-1992, he was an Executive Vice President for Ames
22
Department Stores.
Gerald Cohen. Mr. Cohen became a director in March 1997. He is a
certified public accountant and attorney who for the past five years has
acted primarily as a financial consultant advising businesses in business
combinations and formations and general advisory work. He has previously
served on the boards of directors of more than 12 public companies and
several private companies. Mr. Cohen formerly served as personal accountant to
Charles Sobel.
Certain Legal Issues Concerning Management
In 1991, Mr. Dobies was convicted by a state court in Essex County, New
Jersey, of theft in the third degree (a low-grade felony) of certain materials
from a contractor of CR & ME, his former employer. Mr. Dobies agreed to a plea
bargain, after which he received probation and community service. Mr. Dobies
maintains that the only items he removed from the supplier's location were those
owned by CR & ME, but did not believe it was in his or CR & ME's best interest
to pursue a trial in the matter.
As a condition to listing the Company's securities on Nasdaq, the Company
is required to ensure that (i) independent directors represent a majority of the
members of the Board of Directors, and for one such independent director to
serve as Chairman and (ii) Messrs. Dobies and Sobel agree not to sell or
otherwise dispose of any securities of the Company beneficially owned by them
(other than certain shares sold by them in the Company's initial public
offering) for a period of two years from the effective date of the initial
public offering. There can be no assurance that Nasdaq will not request further
restrictions in the future, or that any other securities exchange on which the
Company desires to list its securities will not request similar or more onerous
restrictions.
Directors' Compensation
The Company currently pays $1,000 per meeting (plus travel and related
expenses) to members of the Board of Directors who are not employees of the
Company. On March 12, 1997, the Board of Directors granted 2,500 ten-year stock
options at an exercise price of $4.54, outside the Company's 1996 Incentive
Stock Option Plan (the "Option Plan"), to each of Messrs. Haft, Herman and
Cohen, which were effective on March 19, 1997. In appreciation of his services,
upon Mr. Haft's resignation as a director in December 1997, the vesting of his
2,500 options was accelerated. On April 28, 1998, Messrs. Kanter, Herman and
Cohen each received 2,500 ten-year stock options at an exercise price of $7.60,
outside the Option Plan.
Further, in June 1996, the Company paid Lawrence Kaplan, a former
director, compensation in the form of 62,857 shares of Common Stock designated
as "Performance Shares" as an inducement for him to continue to serve as a
director of the Company. With respect to the Performance Shares, (a) in June
1998, one-half of these shares ("One Half") were repurchased by the Company for
the par value thereof since the Company did not achieve net income before taxes
("Net Income") of at least $1.5 million during the period of April 1, 1997
through March 31, 1998 ("1998 Fiscal Year"), and (b) One Half shall be
repurchased by the Company for the par value thereof in the event that the
Company does not achieve Net Income of at least $2.5 million during the period
of April 1, 1998 through March 31, 1999 ("1999 Fiscal
23
Year"), provided that (x) only one-half of such One Half shall be
repurchased by the Company in the event that the Company achieves Net
Income for the 1999 Fiscal Year of at least $2.25 million but less
than $2.5 million. Net Income, for purposes of the foregoing calculations,
will exclude any tax deduction obtained by the Company solely on
account of the issuance of the Performance Shares and all similar Performance
Shares issued to directors and members of management of the Company. These
shares, unlike the Performance Shares owned by Messrs. Dobies and Sobel (see
"Item 11 - Executive Compensation," below), otherwise are not subject to vesting
or any other requirement that Mr. Kaplan remain as a director of the Company
for any specified period. In February 1997, Mr. Kaplan resigned as a director
of the Company.
Committees of the Board of Directors
The Board of Directors includes an Audit Committee consisting of Messrs.
Dobies, Kanter and Cohen. The Audit Committee reviews (i) the Company's audit
functions, (ii) with management, the finances, financial condition and interim
financial statements of the Company, (iii) with the Company's independent
auditors, the year end financial statements of the Company and (iv) the
implementation of any action recommended by the independent auditors.
Item 11. Executive Compensation.
The response to this item will be included in a definitive proxy
statement filed within 120 days after the end of the Company's fiscal year,
which proxy statement is incorporated herein by this reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The response to this item will be included in a definitive proxy
statement filed within 120 days after the end of the Company's fiscal year,
which proxy statement is incorporated herein by this reference.
Item 13. Certain Relationships and Related Transactions.
Eric Holtz entered into an Employment Agreement with the Company on May 21,
1997.
24
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) Exhibits
EXHIBIT
NUMBER DESCRIPTION
1.1 Form of Underwriting Agreement between the Company and the
Underwriter (incorporated by reference to registrant's
Registration Statement on Form S-1, registration number
333-11979)
1.2 Form of Warrant Agreement among the Company, the Underwriter and
American Stock Transfer Company, as warrant agent (incorporated
by reference to registrant's Registration Statement on Form S-1,
registration number 333-11979)
3.1 Certificate of Incorporation of Registrant (incorporated by
reference to registrant's Registration Statement on Form S-1,
registration number 333-11979)
3.3 By-laws of Registrant (incorporated by reference to registrant's
Registration Statement on Form S-1, registration number
333-11979)
4.1 Specimen common stock certificate (incorporated by reference
to registrant's Registration Statement on Form S-1,
registration number 333-11979)
4.2 Specimen preferred stock certificate (incorporated by
reference to registrant's Registration Statement on Form S-1,
registration number 333-11979)
4.3 Form of Underwriter's Warrant for the Purchase of Units
(incorporated by reference to registrant's Registration
Statement on Form S-1, registration number 333-11979)
4.4 Form of Warrant Agreement between the Company and American Stock
Transfer Company, as warrant agent (incorporated by reference to
registrant's Registration Statement on Form S-1, registration
number 333-11979)
10.1 Amended and Restated Employment Agreement, dated as of February
1, 1997, between the Registrant and Mitchell Dobies
(incorporated by reference to registrant's Registration
Statement on Form S-1, registration number 333-11979)
10.2 Amended and Restated Employment Agreement, dated as of February
1, 1997, between the Registrant and Charles Sobel
(incorporated by reference to registrant's Registration
Statement on Form S-1, registration number 333-11979)
10.3 Employment Agreement, dated May 21, 1997, between the
Registrant and Eric Holtz. (incorporated by reference to
registrant's annual report on Form 10-K for the fiscal year
ended March 31, 1997)
10.4 Letter Agreement between the Registrant and Lawrence Kaplan
(incorporated by reference to registrant's Registration
Statement on Form S-1, registration number 333-11979)
10.5 Termination and Performance Shares Repurchase Agreement,
dated February 8, 1996, by and between the Registrant and
Ernie Baumgarten (incorporated by reference to registrant's
Registration Statement on Form S-1, registration number
333-11979)
10.6 Factoring Agreement, dated March 17, 1995, between the
Registrant and Republic Factors Corp. ("Republic"), as amended
to date (incorporated by reference to registrant's Registration
Statement on Form S-1, registration number 333-11979)
25
10.7 Security Agreement, dated March 17, 1995, between the Registrant
and Republic (incorporated by reference to registrant's
Registration Statement on Form S-1, registration number
333-11979)
10.8 1996 Incentive Stock Option Plan of Jenna Lane, Inc.
(incorporated by reference to registrant's Registration
Statement on Form S-1, registration number 333-11979)
10.9 Collective Bargaining Agreement by and between United
Production Workers Union Local 17-18 and the Company, dated
June 15, 1996 (incorporated by reference to registrant's
Registration Statement on Form S-1, registration number
333-11979)
10.10 Form of Letter Agreement between the Company and the Underwriter
regarding consulting services (incorporated by reference to
registrant's Registration Statement on Form S-1, registration
number 333-11979)
10.11 Form of Registration Rights Agreement between the Company and
certain warrantholders (incorporated by reference to
registrant's Registration Statement on Form S-1, registration
number 333-11979)
10.12 Form of Selected Dealer Agreement for initial public offering
(incorporated by reference to registrant's Registration
Statement on Form S-1, registration number 333-11979)
10.13 Agreement for USPA license
10.14 Supply and Financing Agreement between the Company and T.L.C.
for Girls, Inc.
10.15 Purchase Agreement between Jenna Lane Kids, Inc. (now
known as T.L.C. for Kidz, Inc.) and T.L.C. for Girls, Inc.
21.1 Subsidiaries (incorporated by reference to registrant's
Registration Statement on Form S-1, registration number
333-11979)
27.1 Financial Data Schedule (submitted electronically only)
(b) Financial Statements and Supplementary Data - Reference is made to
the Index to Financial Statements under Item 8 in Part II hereof, where these
documents are listed.
(c) Reports on Form 8-K. The registrant has submitted no Reports on Form
8-K during the fourth fiscal quarter of its 1998 fiscal year.
26
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
JENNA LANE, INC.
Date: June 25 , 1998
By: /s/ Mitchell Dobies
Mitchell Dobies, President,
Co-Chief Executive Officer
By: /s/ Charles Sobel
Charles Sobel, Co-Chief
Executive Officer
By: /s/ Mitchell Dobies
Mitchell Dobies, Principal
Accounting Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
/s/ Mitchell Dobies Director and 6/25/98
Mitchell Dobies Principal Executive
Officer
/s/ Charles Sobel Director and 6/25/98
Charles Sobel Principal Executive
Officer
/s/ Mitchell Dobies Principal Accounting 6/25/98
Mitchell Dobies Officer
/s/ Gerald L. Kanter Chairman of the 6/25/98
Gerald L. Kanter Board of Directors
/s/ Mitchell Herman Director 6/25/98
Mitchell Herman
/s/ Gerald Cohen Director 6/25/98
Gerald Cohen
27
JENNA LANE, INC.
INDEX TO FINANCIAL STATEMENTS
Page
----
Independent Auditors' Report F-2
Consolidated Balance Sheets -- March 31, 1998 and 1997 F-3
Consolidated Statements of Operations --
Years Ended March 31, 1998, 1997 and 1996 F-4
Consolidated Statements of Shareholders' Equity --
Years Ended March 31, 1998, 1997 and 1996 F-5
Consolidated Statements of Cash Flows --
Years Ended March 31, 1998, 1997 and 1996 F-6
Notes to Financial Statements F-7 -- F-14
F-1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders
Jenna Lane, Inc.
We have audited the accompanying consolidated balance sheets of Jenna Lane, Inc.
and Subsidiary as of March 31, 1998 and 1997, and the related consolidated
statements of operations, shareholders' equity, and cash flows for each of the
three years in the period ended March 31, 1998. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Jenna Lane, Inc.
and Subsidiary as of March 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period
ended March 31, 1998, in conformity with generally accepted accounting
principles.
EDWARD ISAACS & COMPANY LLP
New York, New York
May 20, 1998, except Note 12 as to which
the date is June 19, 1998
F-2
JENNA LANE, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
March 31, March 31,
ASSETS 1998 1997
----------- -----------
Current Assets:
Cash $ 6,595 $ 548,319
Due from factors 4,440,310 4,954,462
Inventories 5,888,085 3,632,913
Prepaid income taxes -- 182,989
Prepaid expenses and other 379,270 353,446
Deferred income taxes 43,000 26,000
----------- -----------
Total Current Assets 10,757,260 9,698,129
Property and Equipment, net 501,617 242,804
Other Assets 278,292 93,909
----------- -----------
$11,537,169 $10,034,842
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 2,925,661 $ 2,204,555
Accrued liabilities 187,208 287,823
Income taxes payable 305,645 --
Current maturities of long-term debt 12,449 13,897
----------- -----------
Total Current Liabilities 3,430,963 2,506,275
----------- -----------
Long-Term Debt 3,653 16,797
----------- -----------
Deferred Income Taxes 30,000 50,000
----------- -----------
Shareholders' Equity
Common Stock, $.01 par value; 18,000,000 shares
authorized; issued and outstanding, 4,728,993
and 4,290,000 shares, respectively 47,290 42,900
Capital in excess of par value 7,980,635 7,063,733
Unearned compensation, performance shares -- (63,626)
Retained Earnings 44,628 418,763
----------- -----------
Total Shareholders' Equity 8,072,553 7,461,770
----------- -----------
$11,537,169 $10,034,842
=========== ===========
See notes to consolidated financial statements.
F-3
JENNA LANE, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended March 31,
-----------------------------------------
1998 1997 1996
----------- ----------- -----------
Net Sales $42,561,796 $35,372,386 $25,832,323
Cost of Sales 34,514,628 29,087,860 21,128,147
----------- ----------- -----------
Gross Profit 8,047,168 6,284,526 4,704,176
----------- ----------- -----------
Operating Expenses:
Selling, general and administrative 6,378,728 4,770,977 3,200,450
Factoring charges and interest 749,118 1,063,154 528,160
----------- ----------- -----------
Total Operating Expenses 7,127,846 5,834,131 3,728,610
----------- ----------- -----------
Operating Income 919,322 450,395 975,566
----------- ----------- -----------
Other Expenses:
Interest expense -- promissory notes -- 184,167 41,573
Amortization of deferred financing
costs -- 57,297 --
----------- ----------- -----------
Total Other Expenses -- 241,464 41,573
----------- ----------- -----------
Income Before Income Taxes 919,322 208,931 933,993
----------- ----------- -----------
Provision for Income Taxes 402,165 72,671 432,564
----------- ----------- -----------
Net Income $ 517,157 $ 136,260 $ 501,429
=========== =========== ===========
Net Income Per Share:
Basic $ 0.11 $ 0.03 $ 0.19
=========== =========== ===========
Diluted $ 0.09 $ 0.03 $ 0.16
=========== =========== ===========
See notes to consolidated financial statements.
F-4
JENNA LANE, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Common Stock Capital in Retained
-------------------- Excess of Unearned Earnings
Shares Amount Par Value Compensation (Deficit) Total
--------- ------- ---------- ------------- ---------- ----------
Balance at March 31, 1995 1,761,905 $17,619 $ 682,381 $(75,000) $ (43,926) $ 581,074
Issuance of common stock 285,714 2,857 122,143 -- -- 125,000
Amoritization of unearned compensation -- -- -- 31,000 -- 31,000
Repurchase of performance shares (68,571) (686) 326 -- -- (360)
Net income -- -- -- -- 501,429 501,429
--------- ------- ---------- -------- --------- ----------
Balance at March 31, 1996 1,979,048 19,790 804,850 (44,000) 457,503 1,238,143
Issuance of common stock and warrants 1,290,000 12,900 5,339,143 -- -- 5,352,043
Issuance of performance shares 125,714 1,257 75,963 (77,220) -- --
Conversion of preferred stock 952,381 9,524 818,506 -- -- 828,030
Repurchase of performance shares (57,143) (571) 271 -- -- (300)
Amoritization of unearned compensation -- -- -- 57,594 -- 57,594
Issuance of warrants -- -- 25,000 -- -- 25,000
Net income -- -- -- -- 136,260 136,260
Dividends paid on preferred stock -- -- -- -- (175,000) (175,000)
--------- ------- ---------- -------- --------- ----------
Balance at March 31, 1997 4,290,000 42,900 7,063,733 (63,626) 418,763 7,461,770
Amoritization of unearned compensation -- -- -- 63,626 -- 63,626
Common stock dividend 428,993 4,290 887,002 -- (891,292) --
Exercise of stock options 10,000 100 29,900 -- -- 30,000
Net income -- -- -- -- 517,157 517,157
--------- ------- ---------- -------- ---------- ----------
Balance at March 31, 1998 4,728,993 $47,290 $7,980,635 $ -- $ 44,628 $8,072,553
========= ======= ========== ======== ========== ==========
See notes to consolidated financial statements.
F-5
JENNA LANE, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended March 31,
-----------------------------------------
1998 1997 1996
----------- ----------- -----------
Operating Activities:
Net Income $ 517,157 $ 136,260 $ 501,429
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization 168,292 166,436 46,360
Deferred income taxes (37,000) 24,000 --
Amortization of debt discount -- 104,167 20,833
Changes in assets and liabilities:
Due from factors 514,152 (2,853,753) (2,100,709)
Inventories (2,255,172) (850,778) (2,680,058)
Prepaid expenses and other (40,840) (215,061) (114,239)
Income taxes 488,634 (339,989) 157,000
Other assets -- -- (9,098)
Accounts payable and accrued liabilities 620,491 (37,594) 2,514,270
----------- ----------- -----------
Net Cash Used In Operating Activities (24,286) (3,866,312) (1,664,212)
----------- ----------- -----------
Investing Activities:
Capital expenditures (361,514) (143,374) (115,329)
Security deposits and other (18,515) (54,488) --
Issuance of notes receivable (304,900) -- --
Repayment of notes receivable 152,083 -- --
----------- ----------- -----------
Net Cash Used in Investing Activities (532,846) (197,862) (115,329)
----------- ----------- -----------
Financing Activities:
Issuance of common stock, net of offering costs -- 5,352,043 --
Exercise of stock options 30,000 -- --
Issuance of preferred stock -- -- 900,000
Repayment of notes payable -- (1,000,000) --
Proceeds from issuance of units -- 500,000 500,000
Proceeds from shareholder / director loan -- -- 100,000
Repayment of shareholder / director loan -- -- (100,000)
Principal payments on equipment notes payable (14,592) (8,203) (766)
Repurchase of performance shares -- (300) (360)
Offering costs (preferred stock and units) -- (57,297) (139,470)
Dividends paid -- (175,000) --
----------- ----------- -----------
Net Cash Provided By Financing Activities 15,408 4,611,243 1,259,404
----------- ----------- -----------
Net (Decrease) Increase In Cash (541,724) 547,069 (520,137)
Cash at beginning 548,319 1,250 521,387
----------- ----------- -----------
Cash at end $ 6,595 $ 548,319 $ 1,250
=========== =========== ===========
Supplemental Disclosures of Cash Flow Information:
Interest paid $ 322,072 $ 595,592 $ 236,834
=========== =========== ===========
Income taxes paid $ 50,335 $ 391,018 $ 275,564
=========== =========== ===========
Noncash Transactions:
Issuance of performance shares $ -- $ 77,220 $ --
=========== =========== ===========
Equipment notes payable for the acquisition
of equipment $ -- $ 32,325 $ 7,338
=========== =========== ===========
Issuance of common stock for services in
connection with preferred stock offering $ -- $ -- $ 25,000
=========== =========== ===========
Conversion of Series A Convertible Preferred
Stock to Common Stock $ -- $ 828,030 $ --
=========== =========== ===========
See notes to consolidated financial statements.
F-6
JENNA LANE, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
1. The Company and its Significant Accounting Principles
Business:
The Company designs, manufactures (through contractors) and imports
women's and children's sportswear and other apparel for the domestic
retail market.
Principles of Consolidation:
The consolidated financial statements include the accounts of Jenna Lane,
Inc. and its wholly-owned subsidiary, Jenna Lane Polo Association Ltd.
(the Company). All significant intercompany accounts and transactions
have been eliminated.
Inventories:
Inventories are stated at the lower of cost (first-in, first-out) or
market.
Income Taxes:
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and amounts used for income tax purposes, primarily
depreciation, inventory costs capitalized and deferred compensation.
Property and Equipment:
Property and equipment are stated at cost. Furniture and equipment are
depreciated using the straight-line method over their estimated useful
lives of five years. Leasehold improvements are amortized over their
respective lives or the terms of the applicable leases, whichever is
shorter.
Stock-Based Compensation Plans:
Effective April 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation"
("SFAS No. 123"). SFAS No. 123 permits either the recognition of
compensation cost for the estimated fair value of employee stock-based
compensation arrangements on the date of grant, or the disclosure in
the notes to the financial statements of the pro forma effects on net
income and earnings per share, determined as if the fair value-based
method had been applied in measuring compensation cost. The Company has
adopted the disclosure option and continues to apply APB Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25") in accounting for
its plans. Accordingly, no compensation cost has been recognized for the
Company's stock incentive plan.
F-7
JENNA LANE, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
1. The Company and its Significant Accounting Principles (Continued)
Earnings Per Share:
The Company computes basic and diluted earnings per share in accordance
with Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS
128"), which the Company adopted as of December 31, 1997. Basic earnings
per share is computed based upon the weighted average number of
outstanding common shares. Diluted earnings per share include the weighted
average effect of dilutive options, warrants and convertible preferred
stock. In 1997, the convertible preferred shares were anti-dilutive.
In conjunction with the issuance of SFAS 128, the Company adopted
Securities and Exchange Commission Staff Accounting Bulleting No. 98
("SAB 98"). As a result, certain securities which had previously been
classified as and included in common shares outstanding, pursuant to SAB
83, are no longer required to be included as common shares outstanding.
Accordingly, the 1997 and 1996 earnings per share computations have been
restated.
Year Ended March 31,
-------------------------------------
1998 1997 1996
---- ---- ----
Basic Earnings Per Share Computation
Numerator:
Net income $ 517,157 $ 136,260 $ 501,429
Preferred dividends -- 75,000 100,000
---------- ---------- ----------
Net income applicable to
common shares $ 517,157 $ 61,260 $ 401,429
========== ========== ==========
Denominator:
Average common shares outstanding 4,719,322 2,305,749 2,111,248
========== ========== ==========
Basic Earnings Per Share $ 0.11 $ 0.03 $ 0.19
========== ========== ==========
Diluted Earnings Per Share Computation
Numerator:
Net income applicable to
common shares $ 517,157 $ 61,260 $ 501,429
========== ========== ==========
Denominator:
Average common shares outstanding 4,719,322 2,305,749 2,111,248
Dilutive effect of:
Options 185,125 27,485 --
Warrants 627,412 -- --
Convertible preferred stock -- -- 1,004,107
---------- ---------- ----------
Total average common shares
outstanding 5,531,859 2,333,234 3,115,355
========== ========== ==========
Diluted Earnings Per Share $ 0.09 $ 0.03 $ 0.16
========== ========== ==========
Stock Dividends:
On February 17, 1998, the Company declared a 10% stock dividend paid
March 13, 1998 to shareholders of record as of March 6, 1998. The stock
price on the date of declaration was $9.625. The fair value of the
dividend has been charged against retained earnings only to the extent of
retained earnings and current income as of the date of distribution.
In July 1996, the Company declared a 1.9047619 for one stock split of the
Common Stock to be effected in the form of a stock dividend. All share and
per share data have been restated in these financial statements for all
periods presented to reflect the stock dividend and stock split.
F-8
JENNA LANE, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
1. The Company and its Significant Accounting Principles (Continued)
Advertising costs:
The Company expenses advertising costs as incurred which amounted to
approximately $68,000, $15,000 and $8,000 for the years ended March 31,
1998, 1997 and 1996, respectively.
Use of Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements
and accompanying notes. Although these estimates are based on management's
knowledge of current events and actions it may undertake in the future,
they may ultimately differ from actual results.
2. Due From Factors
The Company has agreements with two factors, whereby substantially all its
accounts receivable are sold to the factors on a pre-approved non-recourse
basis (except as to customer claims). Factoring commissions are charged
at rates ranging from .75% to.85%.
3. Inventories
Inventories consist of the following:
March 31,
--------------------------------
1998 1997
---------- ----------
Raw materials $2,308,517 $2,063,783
Work-in-process 368,954 435,937
Finished goods 3,210,614 1,133,193
---------- ----------
$5,888,085 $3,632,913
========== ==========
4. Property and Equipment
Property and equipment consist of:
March 31,
--------------------------------
1998 1997
---------- ----------
Furniture and equipment $ 543,387 $ 206,486
Leasehold improvements 120,862 99,755
---------- ----------
664,249 306,241
Less: Accumulated depreciation
and amortization 162,632 63,437
---------- ----------
$ 501,617 $ 242,804
========== ==========
F-9
JENNA LANE, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
5. Income Taxes
The provision for income taxes consists of the following:
March 31,
----------------------------------
1998 1997 1996
--------- -------- ---------
Current:
Federal $ 337,335 $ 22,970 $ 320,000
State 101,830 25,701 112,564
Deferred (37,000) 24,000 -
--------- -------- ---------
$ 402,165 $ 72,671 $ 432,564
========= ======== =========
Reconciliation of the statutory federal income tax rate to the Company's
effective tax rate is as follows:
March 31,
----------------------------------
1998 1997 1996
--------- -------- ---------
Statutory Federal income tax rate 34.0% 34.0% 34.0%
State income taxes, net of
Federal benefit 7.3 8.1 7.9
Other 2.5 (7.3) 4.4
--------- -------- ---------
Effective income tax rate 43.8% 34.8% 46.3%
========= ======== =========
Significant components of the Company's deferred tax assets and
liabilities as of March 31, 1998 and 1997 are summarized as follows:
March 31,
---------------------
1998 1997
-------- ---------
Current deferred tax asset-inventory $ 43,000 $ 26,000
======== =========
Noncurrent deferred tax liabilities:
Depreciation 30,000 29,000
Unearned compensation - 21,000
-------- ---------
Noncurrent deferred tax liabilities $ 30,000 $ 50,000
======== =========
6. Long-Term Debt
Long-term debt consists of equipment notes payable through December
1999. The fair value of the long-term debt approximates the carrying
value based on current rates for equipment obligations.
F-10
JENNA LANE, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
7. Shareholders' Equity
Initial Public Offering:
In March 1997, the Company completed an initial public offering of
690,000 units, at a public offering price of $10.125 per unit. Each unit
consisted of two shares of common stock and one warrant. Each warrant
entitles the holder to purchase one share of common stock at an exercise
price of $6.36, subject to adjustment, at any time until March 2000. The
net proceeds from the offering of approximately $5,352,000 were used to
repay debt, acquire equipment and for general corporate purposes.
Series A Convertible Preferred Stock:
The Series A Convertible Preferred Stock was converted in March 1997
into common shares effective with the completion of the Company's
initial public offering of common stock.
In April 1996, the Company declared and paid an annual dividend of $.20
per share ($100,000) to the shareholders of preferred stock. In June
1996, October 1996 and January 1997, the Company declared and paid a
quarterly dividend of $25,000 to the shareholders of preferred stock.
Issuance of Notes and Warrants:
In August, 1996, the Company completed a bridge financing by issuing
$500,000 (principal amount) 10% notes and 1,100,000 warrants. The Bridge
Notes were repaid in March 1997 from the proceeds of the Company's
initial public offering. The warrants to purchase 1,100,000 shares of
common stock at an exercise price of $6.36 per share, subject to
adjustment, are exercisable for a period of three years. The warrants
contain various redemption and other provisions.
Promissory notes issued in November 1995, pursuant to a private
placement offering, were repaid in March 1997 from the proceeds of the
Company's initial public offering.
Unearned Compensation - Performance Shares:
Performance shares represent common shares issued as compensation to
certain key executives and a director. The shares are subject to
repurchase by the Company at par value ($.01 per share) in the event the
Company does not achieve certain annual pre-tax earnings in fiscal 1998
and 1999 or upon termination of service. Unearned compensation was
recorded based on the fair value of the shares issued and has been
fully amortized through March 1998. Amortization of unearned
compensation was $64,000, $58,000 and $31,000 for the years ended March
31, 1998, 1997 and 1996, respectively.
At March 31, 1998, 628,572 performance shares were outstanding, of
which 314,286 shares were repurchased subsequent to year end.
F-11
JENNA LANE, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
8. Commitments and Contingencies
Leases:
The Company leases warehouse, office and showroom space and equipment
under leases extending to 2003. The leases provide for payment by the
Company of taxes and other expenses. Rent expense was approximately
$461,000, $358,000 and $172,000 for the years ended March 31, 1998, 1997
and 1996.
Minimum rental payments under noncancellable operating leases are as
follows:
Fiscal year ending March:
Year Amount
---- -----------
1999 $ 530,000
2000 515,000
2001 500,000
2002 290,000
2003 255,000
Thereafter 150,000
-----------
$ 2,240,000
===========
Employment Agreements:
The Company has executed employment agreements with several of its
executives which, among other things, provide for aggregate annual base
compensation of $700,000 for fiscal 1999 and $600,000 for fiscal 2000
and minimum bonuses plus profit participation, as defined.
Letters of Credit:
At March 31, 1998, the Company was contingently liable for open letters
of credit aggregating approximately $580,000.
Licensing Agreement:
In February 1998, the Company signed a 3 year license agreement (with a
3 year renewal option) to utilize the US Polo Association brand. The
agreement requires royalties of 5% of net sales with annual minimum
royalties of $150,000, $200,000 and $250,000.
9. Sales to Major Customers
For the years ended March 31, 1998 and 1997, one customer accounted for
approximately 18% of sales in both years.
F-12
JENNA LANE, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
10. Stock Incentive Plan
In August 1996, the Company adopted an Incentive Stock Option Plan for
employees (the Plan). The Plan permits the issuance of stock options to
selected employees (and consultants) of the Company. The Company
reserved 660,000 shares of common stock for grant. Options granted may
be either nonqualified or incentive stock options and will expire not
later than 10 years from the date of grant.
Had compensation cost been determined based on the fair value at the
grant date for awards granted in fiscal 1997, consistent with the
requirements of Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation," the Company's net income and
earnings per share would have been reduced by $80,600 and $0.01 per
share in fiscal 1998 and $14,500 and $0.01 per share in fiscal 1997.
The fair value of each stock option grant has been estimated on the date
of grant using the minimum value calculation for the options issued
prior to the Company going public, and the Black-Scholes option pricing
model for all other options with the following weighted-average
assumptions:
Risk-free interest rate 6.1%
Expected life 3.5 years
Expected volatility 23%
Expected dividend yield 0%
The following table summarizes stock option activity for the two years
ended March 31, 1998:
Number of Weighted
Shares Subject Average Exercise
Stock Option Activity To Options Price Per Share
--------------------- -------------- ----------------
Outstanding, April 1, 1996 - $ -
Granted 327,241 3.94
Exercised - -
---------
Outstanding, March 31, 1997 327,241 3.94
Granted - -
Exercised (10,000) 3.00
---------
Outstanding, March 31, 1998 317,241 3.98
=========
The following table summarizes information about stock options
outstanding and exercisable at March 31, 1998:
Options Outstanding Options Exercisable
-------------------------------------------------- ----------------------------
Weighted Weighted Weighted
Range of Average average average
exercise Remaining exercise exercise
price Number of Contractual price Number of price
per share Shares life (years) per share shares per share
------------ ---------- ----------- ------------ ----------- ----------
$2.73 - 4.55 317,241 8.42 $3.98 174,081 $ 3.51
============ ========== ====== ============ =========== ==========
F-13
JENNA LANE, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
10. Stock Incentive Plan (Continued)
At March 31, 1997, options were exercisable for 110,000 shares at a
weighted average exercise price of $2.73 per share.
Subsequent to March 31, 1998 the Company granted an additional 151,500
stock options, exercisable at $7.60 per share.
11. 401(K) Plan
Effective August 1996, the Company established a qualified Salary
Reduction Profit Sharing Plan ("The Plan") for eligible employees under
Section 401(k) of the Internal Revenue Code. The Plan provides for
voluntary employee contributions through salary reduction and voluntary
employer contributions at the discretion of the Company. There were no
Company contributions for the years ended March 31, 1998 and 1997.
12. Subsequent Event
Acquisition
On June 19, 1998, the Company acquired substantially all the assets of
T.L.C. for Girls, Inc., a manufacturer of children's wear for a total
consideration of approximately $550,000.
F-14
EXHIBIT
NUMBER DESCRIPTION
1.1 Form of Underwriting Agreement between the Company and the
Underwriter (incorporated by reference to registrant's
Registration Statement on Form S-1, registration number
333-11979)
1.2 Form of Warrant Agreement among the Company, the Underwriter and
American Stock Transfer Company, as warrant agent (incorporated
by reference to registrant's Registration Statement on Form S-1,
registration number 333-11979)
3.1 Certificate of Incorporation of Registrant (incorporated by
reference to registrant's Registration Statement on Form S-1,
registration number 333-11979)
3.3 By-laws of Registrant (incorporated by reference to registrant's
Registration Statement on Form S-1, registration number
333-11979)
4.1 Specimen common stock certificate (incorporated by reference
to registrant's Registration Statement on Form S-1,
registration number 333-11979)
4.2 Specimen preferred stock certificate (incorporated by
reference to registrant's Registration Statement on Form S-1,
registration number 333-11979)
4.3 Form of Underwriter's Warrant for the Purchase of Units
(incorporated by reference to registrant's Registration
Statement on Form S-1, registration number 333-11979)
4.4 Form of Warrant Agreement between the Company and American Stock
Transfer Company, as warrant agent (incorporated by reference to
registrant's Registration Statement on Form S-1, registration
number 333-11979)
10.1 Amended and Restated Employment Agreement, dated as of February
1, 1997, between the Registrant and Mitchell Dobies
(incorporated by reference to registrant's Registration
Statement on Form S-1, registration number 333-11979)
10.2 Amended and Restated Employment Agreement, dated as of February
1, 1997, between the Registrant and Charles Sobel (incorporated
by reference to registrant's Registration Statement on Form
S-1, registration number 333-11979)
10.3 Employment Agreement, dated May 21, 1997, between the
Registrant and Eric Holtz. (incorporated by reference to
registrant's annual report on Form 10-K for the fiscal year
ended March 31, 1997)
10.4 Letter Agreement between the Registrant and Lawrence Kaplan
(incorporated by reference to registrant's Registration
Statement on Form S-1, registration number 333-11979)
10.5 Termination and Performance Shares Repurchase Agreement, dated
February 8, 1996, by and between the Registrant and Ernie
Baumgarten (incorporated by reference to registrant's
Registration Statement on Form S-1, registration number
333-11979)
10.6 Factoring Agreement, dated March 17, 1995, between the
Registrant and Republic Factors Corp. ("Republic"), as amended
to date (incorporated by reference to registrant's Registration
Statement on Form S-1, registration number 333-11979)
10.7 Security Agreement, dated March 17, 1995, between the Registrant
and Republic (incorporated by reference to registrant's
Registration Statement on Form S-1, registration number
333-11979)
10.8 1996 Incentive Stock Option Plan of Jenna Lane, Inc.
(incorporated by reference to registrant's Registration
Statement on Form S-1, registration number 333-11979)
10.9 Collective Bargaining Agreement by and between United
Production Workers
28
Union Local 17-18 and the Company, dated
June 15, 1996 (incorporated by reference to registrant's
Registration Statement on Form S-1, registration number
333-11979)
10.10 Form of Letter Agreement between the Company and the Underwriter
regarding consulting services (incorporated by reference to
registrant's Registration Statement on Form S-1, registration
number 333-11979)
10.11 Form of Registration Rights Agreement between the Company and
certain warrant holders (incorporated by reference to
registrant's Registration Statement on Form S-1, registration
number 333-11979)
10.12 Form of Selected Dealer Agreement for initial public offering
(incorporated by reference to registrant's Registration
Statement on Form S-1, registration number 333-11979)
10.13 Agreement for USPA license
10.14 Supply and Financing Agreement between the Company and T.L.C.
for Girls, Inc.
10.15 Purchase Agreement between Jenna Lane Kids, Inc. (now known
as T.L.C. for Kidz, Inc.) and T.L.C. for Girls, Inc.
21.1 Subsidiaries (incorporated by reference to registrant's
Registration Statement on Form S-1, registration number
333-11979)
27.1.1 Financial Data Schedule (submitted electronically only)
29