FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended: June 30, 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: 333-11979
JENNA LANE, INC.
(Exact name of registrant as specified in its charter)
Delaware 22-3351399
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
1407 Broadway, Suite 2004
New York, New York 10018
(Address of principal executive offices) (Zip Code)
(212) 704-0002
(Registrant's telephone number, including area code)
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
As of August 10, 1998, there were 4,414,707 shares of registrant's Common Stock,
par value $.01 per share, outstanding.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Index to Financial Statements
Page
Consolidated Balance Sheets as of June 30, 1998 (unaudited) and March 31, 1998. 3
Consolidated Statements of Operations for the three months ended June 30, 1998 and
1997(unaudited). 4
Consolidated Statements of Cash Flows for the three months ended
June 30, 1998 and 1997(unaudited). 5
Notes to Consolidated Financial Statements for the three months ended
June 30, 1998 and 1997(unaudited). 6-7
Item 2. Management's Discussion and Analysis of Financial Condition
and Result of Operations. 8-9
2
JENNA LANE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, March 31,
ASSETS 1998 1998
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(Unaudited)
Current Assets:
Cash $ 63,516 $ 6,595
Due from factors 5,280,427 4,440,310
Inventories 6,638,340 5,888,085
Prepaid expenses and other 545,959 379,270
Deferred income taxes 50,000 43,000
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Total Current Assets 12,578,242 10,757,260
Property and Equipment, net 529,980 501,617
Other Assets 906,339 278,292
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$14,014,561 $11,537,169
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 5,004,722 $ 2,925,661
Accrued liabilities 275,135 187,208
Income taxes payable 252,371 305,645
Current maturities of long-term debt 10,127 12,449
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Total Current Liabilities 5,542,355 3,430,963
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Long-Term Debt 1,987 3,653
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Deferred Income Taxes 32,000 30,000
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Shareholders' Equity:
Common stock, $.01 par value; 18,000,000 shares
authorized; issued and outstanding, 4,414,707 and
4,728,993 shares, respectively 44,147 47,290
Capital in excess of par value 7,980,635 7,980,635
Retained earnings 413,437 44,628
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Total Shareholders' Equity 8,438,219 8,072,553
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$14,014,561 $11,537,169
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See notes to unaudited consolidated financial statements.
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JENNA LANE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended
June 30,
-------------------------
1998 1997
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Net Sales $13,826,800 $11,734,842
Cost of Sales 11,098,673 9,431,783
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Gross Profit 2,728,127 2,303,059
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Operating Expenses:
Selling,general and administrative 1,888,976 1,759,335
Factoring charges and interest 208,342 177,159
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Total Operating Expenses 2,097,318 1,936,494
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Income Before Income Taxes 630,809 366,565
Provision for Income Taxes 262,000 153,072
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Net Income $ 368,809 $ 213,493
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Net Income Per Share:
Basic $ 0.08 $ 0.05
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Diluted $ 0.08 $ 0.04
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See notes to unaudited consolidated financial statements.
- 4 -
JENNA LANE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
June 30,
-------------------------
1998 1997
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Operating Activities:
Net income $ 368,809 $ 213,493
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Depreciation and amortization 26,000 38,827
Deferred income taxes (5,000) (19,000)
Write-off of note receivable 36,350 --
Changes in assets and liabilities:
Due from factors (840,117) (112,637)
Inventories (750,255) (1,544,671)
Prepaid expenses and other (191,380) 200,784
Accounts payable and accrued liabilities 2,113,714 1,139,101
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Net Cash Provided By (Used In) Operating
Activities 758,121 (84,103)
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Investing Activities:
Acquisition of business (630,209) --
Capital expenditures (54,363) (233,994)
Security deposits (804) 1,168
Issuance of notes receivable (23,336) (224,030)
Repayment of notes receivable 14,643 3,338
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Net Cash Used In Investing Activities (694,069) (453,518)
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Financing Activities:
Principal payments on equipment notes payable (3,988) (3,303)
Repurchase of performance shares (3,143) --
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Net Cash Used In Financing Activities (7,131) (3,303)
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Net Increase (Decrease) In Cash 56,921 (540,924)
Cash at beginning 6,595 548,319
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Cash at end $ 63,516 $ 7,395
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Supplemental Disclosures of Cash Flow Information:
Interest paid $ 82,695 $ 46,890
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Income taxes paid $ 317,974 $ --
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See notes to unaudited consolidated financial statements.
- 5 -
JENNA LANE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Jenna
Lane, Inc. and its wholly-owned subsidiaries (collectively, the "Company"). The
financial statements have been prepared in accordance with generally accepted
accounting principles for interim financial information and the instructions for
Form 10-Q. Accordingly, certain information and footnote disclosures normally
included in consolidated financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted. These
consolidated financial statements should be read in conjunction with the
financial statements and notes thereto included in the Company's Annual Report
on Form 10-K filed with the Securities and Exchange Commission for the year
ended March 31, 1998. In the opinion of management, all adjustments (which
include only normal recurring adjustments) considered necessary for a fair
presentation of interim results have been included. The results of operations
for the three months ended June 30, 1998 are not necessarily indicative of the
operating results for the full year.
2. INVENTORIES
June 30, March 31,
1998 1998
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(Unaudited)
Raw materials $ 2,754,739 $ 2,308,517
Work-in-process 1,304,332 368,954
Finished goods 2,579,269 3,210,614
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$ 6,638,340 $ 5,888,085
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3. EARNINGS PER SHARE
The Company adopted Statement of Financial Accounting Standards No. 128
"Earnings per Share" which modifies the calculation of earnings per share
("EPS"). The Standard replaces the previous presentation of primary and fully
diluted EPS. Basic EPS excludes dilution and is computed by dividing income
available to common shareholders by the weighted average number of common shares
outstanding during the period. Diluted EPS includes the dilution of common stock
equivalents, and is computed similarly to fully diluted EPS pursuant to APB
Opinion 15. All prior periods presented have been restated to reflect this
adoption.
- 6 -
JENNA LANE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
3. EARNINGS PER SHARE (Continued)
The following table reconciles the number of common shares outstanding
with the number of common and common equivalent shares used in computing
earnings per share:
Three Months Ended
June 30,
-------------------------
1998 1997
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Basic:
Common shares outstanding 4,414,707 4,718,993
Effect of using weighted average 209,087 --
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Weighted average number of shares outstanding 4,623,794 4,718,993
Diluted:
Effect of assuming exercise of outstanding stock
options and warrants based on the treasury
stock method 76,047 694,548
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Shares used in computing diluted earnings per share 4,699,841 5,413,541
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Additional shares issuable assuming conversion of warrants is antidilutive for
the three months ended June 30, 1998.
4. SHAREHOLDERS' EQUITY
During the three months ended June 30, 1998, the Company repurchased
314,286 performance shares for $3,143 ($.01 per share).
5. ACQUISITION
On June 19, 1998, the Company acquired substantially all the assets of
T.L.C. for Girls, Inc. (TLC), a manufacturer of children's wear for
approximately $630,000 in cash, including related acquisition costs. The
acquisition has been accounted for as a purchase and accordingly, TLC's results
are included in the consolidated financial statements since the date of
acquisition. The excess of the purchase price over assets acquired (goodwill)
represents substantially the entire acquisition cost.
6. LICENSE AGREEMENT
In July 1998, the Company entered into a license agreement to
manufacture large size women's sportswear under the "BONGO" trademark. The
agreement requires royalty payments based on net sales with annual minimums of
$250,000, $425,000 and $650,000 during the initial three year term. An advance
royalty of $88,000 was paid in June 1998.
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following is a discussion of the financial condition and results of
operations of the Company for the three months ended June 30, 1998 and 1997.
Results of Operations
The following table sets forth, for the periods indicated, the Company's
statements of operation data as a percentage of net sales.
Three Months Ended
June 30,
-----------------------
1998 1997
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Net sales 100.0% 100.0%
Cost of sales 80.3 80.4
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Gross profit 19.7 19.6
Operating expenses 15.2 16.5
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Income before income taxes 4.5 3.1
Provision for income taxes 1.9 1.3
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Net Income 2.6% 1.8%
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Three Months Ended June 30, 1998 Compared with Three Months Ended June 30, 1997
Net sales of $13.8 million in the three months ended June 30, 1998 represented
an increase of $2.1 million, or 17.8% over net sales of $11.7 million in the
three months ended June 30, 1998. The increase in net sales was primarily
attributable to the addition of the Company's sweater division (Smart Objects)
with sales of $526,000 and its children's sales group (T.L.C. for Kidz) with
sales of $1,326,000.
The Company's gross profit increased $425,000, or 18.5% to $2.7 million for the
three months ended June 30, 1998 from $2.3 million for the three months ended
June 30, 1997. Gross profit margin increased slightly to 19.7% in the three
months ended June 30, 1998 from 19.6% in the three months ended June 30, 1997.
Operating expenses, including all transactions with the factor, increased $
161,000, or 8.3%, to $2.1 million in the three months ended June 30, 1998 from
$1.9 million in the three months ended June 30, 1997. The increase was primarily
due to an increase of $155,000 in payroll and related costs, including $74,000
in increased selling salaries, as well as $60,000 in selling related expenses
which resulted from the expanded sales force for its new divisions. Factoring
costs increased $31,000 as a result of higher sales volume. These expense
increases are partially offset by a $243,500 credit loss provision which was
reflected in the three months ended June 30, 1997 relating to Montgomery Ward's
bankruptcy filing.
As a result of the above factors, pre-tax income increased from $367,000 in the
three months ended June 30, 1997 to $631,000 in the three months ended June 30,
1998.
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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.
Operating activities provided net cash of $758,000 for the three months ended
June 30, 1998. The principal use of operating cash during the quarter was to
finance the acquisition of substantially all the assets of T.L.C. for Girls,
Inc. for $630,000. Inventory levels increased as a result of the corresponding
increased production to support the growth in sales from its new divisions
(sweaters and children's), and continued expansion of import product categories.
The Company's capital expenditures totalled $54,000 for the three months ended
June 30, 1998. These capital expenditures were for computer and office
equipment. The Company does not have any material commitments for capital
expenditures at this time; however, plans to upgrade information technology and
its core business systems over the next twelve months may require up to
$500,000, but no assurance thereof, can be given.
In July 1998, the Company signed a license agreement to manufacture large size
women's sportswear under the "BONGO" trademark. The agreement requires annual
minimum royalties of $250,000, $425,000 and $650,000 during the initial three
year term.
The Company believes that existing cash, anticipated cash flows from operations
and availability of advances under its factoring arrangement will be sufficient
to support the Company's operations for at least the next 12 months.
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 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.
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PART II - OTHER INFORMATION
Item 1. 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 2. Changes in Securities: None.
Item 3. Defaults Upon Senior Securities: None.
Item 4. Submissions of Matters to a Vote of Security Holders: None.
Item 5. Other Information:
BONGO License Agreement
In July 1998, a wholly-owned subsidiary of the Company (referred to in
this paragraph as the "Company"), entered into a license agreement with Michael
Caruso & Co., the owner of the federally registered "BONGO" trademarks. The
license grants the Company the exclusive right to manufacture large size women's
sportswear of various types. The license includes the use of the name BONGO and
its logos. The license agreement continues until March 31, 2002, and the Company
has an option to extend the license for an additional three years thereafter.
Under the license agreement, the Company pays a royalty of 5% of net sales
generated, with a guaranteed minimum royalty of $250,000 in the first year,
$425,000 in the second year, and $650,000 in the third year, and sums ranging
from $900,000.00 to $1,400,000.00 during the three years of the extended term of
the agreement. The Company also is obligated to achieve minimum annual net sales
of $5,000,000.00 in the first year, $8,500,000.00 in the second year, and
$13,000,000.00 in the third year, and sums ranging from $18,000,000.00 to
$28,000,000.00 during the three years of the extended term of the agreement. The
Company's efforts with respect to this license are coordinated from its
headquarters at 1407 Broadway in Manhattan.
Employment Agreement with Andrew Miller
Andrew Miller, who became the Company's President and Chief Operating
Officer on July 6, 1998, executed an employment agreement with the Company
effective on such date (the "Miller Agreement"). The Miller Agreement provides
for (i) a term of two years, provided, that the Company may terminate the Miller
Agreement with certain consequences prior to the expiration of the term, (ii) a
base salary equal to $4,000 per week, (iii) a $4,000 per month expense
allowance, plus reimbursement of business expenses incurred on behalf of the
Company, (iv) a cash bonus equal to two and one-half percent (2-1/2%) of the
excess above $1,000,000 of the net income before taxes of the Company for each
full fiscal year of the Company during the term of the Miller Agreement, with a
minimum bonus of $15,000 and (iv) perquisites comparable to Messrs. Dobies and
Sobel, including health insurance for him and his family.
The Miller Agreement also includes non-competition, confidentiality and
non-solicitation provisions and provides for certain severance payments upon
termination of his employment
10
without Cause (as defined in the Miller Agreement).
The Miller Agreement also includes a grant of 100,000 non-qualified
stock options, outside the Option Plan, of which 25,000 shares will vest on July
6, 1999 and have an exercise price of $4.00 per share, 50,000 shares will vest
on July 6, 2000 and have an exercise price of $6.00 per share and 25,000 shares
will vest on July 6, 2001 and have an exercise price of $8.00 per share. The
Company further agreed to issue to Mr. Miller 10,000 shares of Common Stock upon
the earlier to occur of (i) the execution and delivery of a letter of intent
regarding a public offering of the Company's securities involving gross proceeds
to the Company of at least $15,000,000 and a public offering price of at least
$20.00 per share and (ii) seven days prior to the filing by the Company of a
registration statement with the Securities and Exchange Commission concerning
such a public offering. These shares will be placed in escrow and returned to
the Company if the public offering is not completed within six months
thereafter.
Amendment to Employment Agreement with Eric Holtz
Eric Holtz, Director of the Company's Import Sales Group, who had
executed an employment agreement with the Company on May 21, 1997, executed an
amendment to that agreement as of July 5, 1998 (the "Holtz Agreement"). The
Holtz Agreement, as amended to date, provides for (i) a term extended to the
year ended May 21, 1999, provided, that either party may terminate the Holtz
Agreement upon 90 days' written notice (or no notice in the event of Cause (as
defined below); (ii) a base salary equal to $3,846.16 per week or, if greater,
an amount equal to seventy-two and one-half percent (721/2%) of the applicable
base salary of each of the Company's Co-Chief Executive Officers of the Company;
(iii) a $2,500 per month expense allowance, plus reimbursement of business
expenses incurred on behalf of the Company; (iv) participation in the Management
Profit Participation; (v) a minimum bonus equal to $7,500 or an amount not less
than one-half of the bonus paid to either of the Company's Co-Chief Executive
Officers; and (vi) perquisites comparable to Messrs. Dobies and Sobel, including
health insurance for him and his family.
The Holtz Agreement also includes non-competition, confidentiality and
non-solicitation provisions. Cause is defined in a substantively similar manner
to those contained in the Dobies/Sobel Agreements.
In addition to 110,000 previously granted incentive stock options, the
Holtz Agreement acknowledges the granting of 8,000 additional incentive stock
options to Mr. Holtz, vesting as follows: 2,666 shares on April 28, 1999, 2,667
shares on April 28, 2000, and 2,667 shares on April 28, 2001. The Holtz
Agreement also provides for the granting of additional options equal to one-half
of the number of options issued to each of the Company's Co-Chief Executive
Officers as they are granted. The Holtz Agreement further includes the Company's
agreement to grant 25,000 additional incentive stock options on each of July 15,
1998, July 15, 1999 and July 15, 2000 (or an aggregate of 75,000 options), with
each such 25,000 additional options vesting over the three-year period following
grant.
The Holtz Agreement provides for certain severance and other payments
upon termination of his employment, death or disability.
11
Factoring Agreements with Republic Factors
In July 1998, T.L.C. for Kidz, Inc. ("T.L.C.") and Jenna Lane Polo
Association Ltd. ("JLPA"), each wholly owned subsidiaries of the Company,
entered into factoring agreements and related documents with Republic Business
Credit Corporation ("Republic"), which also serves as the principal factor for
the Company's receivables. The terms of these factoring agreements are
substantially identical to agreements between Republic and the Company. The
Company also guaranteed the obligations of the subsidiaries in these factoring
agreements.
Item 6. Exhibits and Reports on Form 8-K:
(A) Exhibits:
EXHIBIT
NUMBER DESCRIPTION
10.15 Employment Agreement, dated as of July 6, 1998, between the
Registrant and Andrew Miller.
10.16 Amendment to Employment Agreement, dated as of July 5, 1998,
between the Registrant and Eric Holtz.
10.17 License Agreement, dated as of July 1, 1998, between Jenna Lane
Licensing I, Inc. and Michael Caruso & Co.
10.18 Factoring Agreement, dated July 14, 1998, between T.L.C. for
Kidz, Inc. and Republic Business Credit Corporation.
10.19 Factoring Agreement, dated July 14, 1998, between Jenna Lane Polo
Association, Ltd. and Republic Business Credit Corporation.
27.1 Financial Data Schedule (submitted electronically only)
(B) Reports on Form 8-K: None.
12
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Dated: August 12, 1998
JENNA LANE, INC.
By: /s/ Mitchell Dobies
Mitchell Dobies
Vice-Chairman & Co-Chief Executive Officer
By: /s/ Charles Sobel
Charles Sobel,
Vice-Chairman & Co-Chief Executive Officer
13
Exhibit Index
10.15 Employment Agreement, dated as of July 6, 1998, between the
Registrant and Andrew Miller.
10.16 Amendment to Employment Agreement, dated as of July 5, 1998,
between the Registrant and Eric Holtz.
10.17 License Agreement, dated as of July 1, 1998, between Jenna Lane
Licensing I, Inc. and Michael Caruso & Co.
10.18 Factoring Agreement, dated July 14, 1998, between T.L.C. for
Kidz, Inc. and Republic Business Credit Corporation.
10.19 Factoring Agreement, dated July 14, 1998, between Jenna Lane Polo
Association, Ltd. and Republic Business Credit Corporation.
27.1 Financial Data Schedule (submitted electronically only)
14