Exhibit 99(a)
ARTHUR ANDERSEN LLP
JERELL, INC AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF OCTOBER 31, 1998
TOGETHER WITH REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
ARTHUR ANDERSEN LLP
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Directors and Stockholders of
Jerell, Inc.:
We have audited the accompanying consolidated balance sheet of Jerell, Inc. (a
Texas corporation) and subsidiaries as of October 31, 1998, and the related
consolidated statements of operations, changes in stockholders' equity, and cash
flows for the year then ended. 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 audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Jerell, Inc. and subsidiaries
as of October 31, 1998, and the results of their operations and their cash flows
for the year then ended in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Dallas, Texas,
December 8, 1998
JERELL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET-OCTOBER 31, 1998
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 126,199
Accounts receivable, net 398,874
Due from factor 3,772,970
Inventories, net 7,374,244
Notes receivable - stockholders 2,627,426
Deferred tax benefit 185,875
Other current assets 550,927
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Total current assets 15,036,515
PROPERTY, PLANT, AND EQUIPMENT, net 1,126,835
OTHER ASSETS 1,162,341
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Total assets $ 17,325,691
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 3,744,760
Accrued liabilities-
Accrued payroll 345,614
Accrued taxes 545,334
Accrued other 1,258,826
Current portion of long-term debt 138,309
Current portion of capital lease obligation 16,762
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Total current liabilities 6,049,605
LONG-TERM DEBT 268,842
OBLIGATIONS UNDER CAPITAL LEASE 56,374
DEFERRED COMPENSATION 317,366
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Total liabilities 6,692,187
COMMITMENTS AND CONTINGENCIES (See Note 12)
STOCKHOLDERS' EQUITY:
Common stock ($0.05 par value, 4,000,000 shares
authorized; 3,421,440 and 1,319,612 shares
issued and outstanding, respectively) 171,072
Additional paid-in capital 2,121,294
Retained earnings 33,612,287
Unrealized loss on securities available for sale, net
of tax of approximately $7,000 (14,174)
Less Treasury stock - 2,101,828 shares at cost (25,256,975)
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Total stockholders' equity 10,633,504
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Total liabilities and stockholders' equity $ 17,325,691
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The accompanying notes are an integral part
of this consolidated financial statement.
JERELL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED OCTOBER 31, 1998
NET SALES $ 65,794,849
COST OF GOODS SOLD 45,490,057
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Gross profit 20,304,792
SELLING, GENERAL, AND ADMINISTRATIVE
EXPENSES (14,256,526)
------------
OPERATING INCOME 6,048,266
INTEREST EXPENSE, net (629,853)
LOSS ON DISPOSAL OF ASSETS (66,825)
------------
INCOME BEFORE PROVISION FOR INCOME TAXES 5,351,588
PROVISION FOR INCOME TAXES 1,912,946
------------
NET INCOME $ 3,438,642
------------
------------
The accompanying notes are an integral part
of this consolidated financial statement.
JERELL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED OCTOBER 31, 1998
Common Stock
$0.05 Par Value
--------------------- Additional Unrealized Loss Total
Shares Paid-ln Retained on Marketable Treasury Stockholders'
Issued Amount Capital Earnings Securities Stock Equity
--------- -------- ----------- ----------- --------------- ------------- -------------
BALANCE, October 31, 1997 3,421,440 $171,072 $ 2,121,294 $30,173,645 $ (6,696) $(24,875,635) $ 7,583,680
Purchase of treasury stock - - - - (381,340) (381,340)
Net income - - - 3,438,642 - - 3,438,642
Change in unrealized loss
on securities available
for sale - - - - (7,478) - (7,478)
--------- -------- ----------- ----------- -------- ------------ -----------
BALANCE, October 31, 1998 3,421,440 $171,072 $ 2,121,294 $33,612,287 $(14,174) $(25,256,975) $10,633,504
--------- -------- ----------- ----------- -------- ------------ -----------
--------- -------- ----------- ----------- -------- ------------ -----------
The accompanying notes are an integral part
of this consolidated financial statement.
JERELL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED OCTOBER 31, 1998
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,438,642
Adjustments to reconcile net income to net cash provided by
operating activities-
Depreciation 176,912
Loss on sale of property, plant, and equipment 66,825
Changes in assets and liabilities-
Accounts receivable, net 284,064
Due from factor (1,611,959)
Inventory, net (1,158,446)
Other assets (579,485)
Accounts payable 964,047
Accrued liabilities 630,219
Deferred compensation 128,775
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Net cash provided by operating activities 2,339,594
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant, and equipment (609,776)
Proceeds from sale of property, plant, and equipment 53,068
Net increase in notes receivable - stockholders (1,609,238)
-----------
Net cash used in investing activities (2,165,946)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term debt (243,718)
Payments on capital lease obligations (23,377)
-----------
Net cash used in financing activities (267,095)
-----------
DECREASE IN CASH AND CASH EQUIVALENTS (93,447)
CASH AND CASH EQUIVALENTS:
Beginning of year 219,646
-----------
End of year $ 126,199
-----------
-----------
SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Acquisition of treasury stock in exchange for promissory notes $ 381,340
CASH PAID FOR:
Interest $ 714,579
Taxes 1,940,095
The accompanying notes are an integral part
of this consolidated financial statement.
JERELL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1998
1. NATURE OF OPERATIONS:
GENERAL ORGANIZATION
Jerell, Inc. (a Texas corporation) and its subsidiaries (the "Company")
maintain their headquarters in Dallas, Texas, and are primarily engaged in
the women's apparel products business. The Company designs its own
merchandise which it manufactures primarily through the use of outside
contractors. The Company's products are distributed nationally by an internal
sales force and internationally through various unrelated entities under
licensing agreements. Sales are primarily to department and specialty stores.
The Company also markets its product nationally through its retail outlet and
home sales divisions.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Jerell, Inc.
and its subsidiaries. All significant intercompany balances and
transactions have been eliminated.
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 reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, the Company considers all highly liquid
investments with original maturities of three months or less to be cash
equivalents.
PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment, stated at cost, consisted of the following at
October 31, 1998:
Buildings $ 188,060
Furniture and fixtures 1,030,486
Machinery and equipment 3,975,155
Leasehold improvements 1,314,885
Construction in progress 3,765
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Total 6,512,351
Less- Accumulated depreciation and amortization 5,385,516
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Net property, plant, and equipment $1,126,835
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DEPRECIATION
The Company provides for depreciation using either the double declining balance
or straight-line method through charges to operations in amounts, which allocate
the cost of the assets over their estimated useful lives, as follows:
Buildings and improvements 4 to 30 years
Furniture and fixtures 5 to 10 years
Machinery and equipment 3 to 10 years
Leasehold improvements 10 to 30 years
INCOME TAXES
Income taxes are accounted for using the liability method under the
provisions of Statement of Financial Accounting Standards (SFAS) No. 109
"Accounting for Income Taxes."
REVENUE RECOGNITION
Revenue is recognized upon product shipment to customers.
ADVERTISING
The Company expenses the cost of advertising as incurred. Advertising expense
for the year ended October 31, 1998, was approximately $609,000.
FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosure about Fair Value of Financial Instruments," requires
the disclosure of the fair market value of off- and on-balance sheet financial
instruments. The carrying value of all financial instruments, including
long-term debt and cash and temporary cash investments, approximates their fair
value at year-end.
3. ACCOUNTS RECEIVABLE:
Financial instruments which potentially expose the Company to concentrations of
credit risk as defined by SFAS No. 105 consist primarily of trade accounts
receivable. In the normal course of business, the Company extends credit to some
of its customers with payment terms generally 30 days.
The Company's customers are not concentrated in any specific geographic region,
but are concentrated in the retail apparel industry. One customer accounted for
approximately 43% of the Company's net sales during the year ended October 31,
1998. No other customer accounted for more than 10% of the consolidated
revenues. The loss of the business of one or more of the Company's significant
customers could have a material adverse effect on the Company's results of
operations. The Company performs ongoing credit evaluations of its customers'
financial condition. The Company determines the need for an allowance for
doubtful accounts based upon factors surrounding the credit risk of specific
customers, historical trends, and other information. The allowance for
doubtful accounts was insignificant as of December 31, 1998.
4. DUE FROM FACTOR:
The Company has a factoring agreement with Heller Financial, Inc. (Heller) for
the purpose of providing working capital and credit administration for the
Company.
-3-
Under the terms of the factoring agreement, Heller purchases substantially all
of the Company's trade accounts receivable without recourse. The Company is
entitled to draw advances against 90% of the outstanding assigned trade accounts
receivable, and interest charges on advances are at Heller's prime rate plus 1%
(9% at October 31, 1998). As of October 31, 1998, the Company had borrowed
approximately $6,760,000 against the outstanding assigned trade accounts
receivable of approximately $10,530,000. At October 31, 1998, the Company had
approximately $850,000 of outstanding letters of credit with Heller.
The arrangement with Heller provides for a total credit facility of $10,000,000,
which includes advances under the factoring agreement, letters of credit limited
to $2,100,000 and a special $250,000 line of credit. Available funds are based
on and collateralized by a percentage of eligible accounts receivable. In
addition, equipment, furniture and fixtures have been used to collateralize this
agreement, as well as assets held by the Company's principal stockholder. The
agreement also contains various covenants and restrictions relating to
maintenance of working capital, net worth and other financial ratios.
5. INVENTORIES:
Inventories are stated at the lower of cost (first-in, first-out) or market, and
consisted of the following at October 31, 1998:
Piece goods $2,105,560
Trimming and supplies 199,874
Work-in-process 1,965,274
Finished garments 3,103,536
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$7,374,244
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Work-in-process and finished garments inventories consisted of materials, labor
and manufacturing overhead.
6. NOTES RECEIVABLE - STOCKHOLDERS:
Notes receivable due from stockholders consisted of the following at October 31,
1998:
Note receivable - stockholder. The note balance is payable at
maturity on April 30, 1999. Interest on the note accrues at prime
plus 1% (9% at October 31, 1998). The note is secured by stock in
the Company. $1,500,000
Note receivable - stockholder. The note balance is payable at
maturity on November 1, 1998. Interest on the note is 8% per
annum. The note is unsecured. 405,839
Note receivable - stockholder. Interest is payable annually and
accrues at the rate of 8% per annum. Principal is due at maturity
on April 30, 1999. The note is secured by stock in the Company. 625,900
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2,531,739
Accrued interest 95,687
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Total notes receivable - stockholders $2,627,426
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7. OTHER ASSETS:
Other assets consisted of the following at October 31, 1998:
Notes receivable from employees $ 357,070
Cash surrender value of life insurance 351,261
Investment securities 37,409
Other assets 416,601
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$1,162,341
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The Company's investments in securities are classified as available for sale.
Unrealized holding gains and losses, net of tax, are reported in a separate
component of stockholders' equity until realized. The fair values of investment
securities are estimated based on quoted market prices for those or similar
investments.
8. LONG-TERM DEBT:
Long-term debt consisted of the following at October 31, 1998:
Notes payable to various terminated employees for the
purchase of treasury stock, payable in annual installments
through 2002, with interest at 6% per annum. $407,151
Less- Current maturities 138,309
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Long-term debt $268,842
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FUTURE OBLIGATIONS
Maturities under long-term debt agreements are as follows:
Year ending
October 31, Amount
----------- --------
1999 $138,309
2000 122,189
2001 84,574
2002 62,079
2003 -
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Total $407,151
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9. CAPITAL LEASE OBLIGATIONS:
The Company is the lessee of certain equipment under capital leases expiring
through June 2002. The assets and liabilities under the capital leases are
recorded at the present value of the minimum lease payments, which approximates
the fair value of the equipment. The equipment is being depreciated over its
estimated productive life. Depreciation charged to expense on leased equipment
in 1998 was $33,000.
-5-
Minimum future lease payments under the capital leases as of October 31, 1998,
are as follows:
Year ending
October 31, Amount
----------- --------
1999 $ 22,907
2000 22,907
2001 22,907
2002 20,570
2003 -
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Total minimum lease payments 89,291
Less- Amount representing interest 16,155
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Present value of minimum lease payments 73,136
Less- Current portion of capital lease obligations 16,762
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Long-term obligation under capital leases $ 56,374
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10. DEFERRED COMPENSATION:
The Company is obligated under salary continuation agreements with key employees
to pay a minimum of $5,000 annually for a period of ten years from the date of
retirement. The maximum annual amount which can be paid is $10,000, contingent
upon the future annual financial performance of the Company. The present value
of the deferred compensation liability has been calculated using a discount rate
of 8% applied to the maximum annual obligation of $10,000.
11. INCOME TAXES:
The effective income tax rate for fiscal 1998 differed from the statutory rate
because of state income taxes and certain permanent tax differences.
Deferred income taxes are provided for the temporary differences between the
financial reporting basis and the tax reporting basis of the Company's assets
and liabilities. Deferred income taxes are classified as current or
noncurrent depending on the classification of the assets and liabilities to
which they relate. Deferred income taxes arising from temporary differences that
are not related to an asset or liability are classified as current or noncurrent
depending on the periods in which the temporary differences are expected to
reverse. Deferred tax expense was insignificant in fiscal 1998.
-6-
Deferred tax assets consisted of the following at October 31, 1998:
Deferred compensation $106,842
Allowances for accounts receivable 93,500
Inventory 58,000
Accrued vacation 34,375
Accumulated depreciation 11,000
Tax credit carryforward 41,000
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Gross deferred tax assets 344,717
Deferred tax asset valuation allowance (41,000)
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$303,717
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The Company has available at October 31, 1998, foreign tax credit carryforwards
of approximately $41,000, which expire in the year 2001. The Company has
recorded a valuation allowance for the full amount of the foreign tax credit due
to the uncertainty of the amount of foreign taxable income generated in future
years.
12. COMMITMENTS:
OPERATING LEASES
The Company leases its facilities along with certain of its manufacturing,
computer and automotive equipment under agreements, which expire at various
dates through 2002. The following is a schedule of future minimum rental
payments required under operating leases at October 31, 1998:
Year ending
October 31, Amount
----------- --------
1999 $ 759,000
2000 378,000
2001 159,000
2002 10,000
2003 -
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Total $1,306,000
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Total rental expense under operating leases for the year ended October 31, 1998,
was approximately $841,000.
LITIGATION
The Company is involved in various claims and lawsuits incidental to its
business. In the opinion of management, these claims and suits in the
aggregate will not have a material adverse effects on the Company's financial
position or the results of operations for future periods.
13. EMPLOYEE STOCK OWNERSHIP PLAN:
The Company and its subsidiaries have an Employee Stock Ownership Plan (ESOP)
covering substantially all employees. The ESOP is funded by Company
contributions through an Employee Stock Ownership Trust (ESOT) in amounts
determined at the discretion of the Board of Directors. Contributions for the
year ended October 31, 1998, were approximately $6,000.
-7-
14. STOCK OPTION PLAN:
The Company has an incentive stock option plan available to certain key
employees and directors of the Company. Under the plan, the Company may grant
options for up to 215,000 shares of common stock. The exercise price of each
option is equal to the market price of the Company's stock on the date of the
grant. The maximum term of each option is ten years and the options vest upon
the sale of the Company's stock. On September 23, 1997, the Company granted an
option to purchase 20,000 shares of common stock at $7.12 per share. On June 22,
1998, the Company granted an option to purchase 12,000 shares of common stock at
$16.23 per share. The Company accounts for the stock option plan under
Accounting Principles Board Opinion No. 25, under which no compensation cost has
been recognized. Had compensation cost for these options been determined
consistent with SFAS No. 123, "Accounting for Stock-Based Compensation," the
impact on the Company's net income would have been insignificant.
15. SUBSEQUENT EVENT:
In December 1998, the Company signed a definitive agreement to sell all of the
Company's stock to an unrelated third party.