FORM 10-K/A
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 1999
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
------------------------------- ---------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
1407 Broadway, Suite 2400
New York, New York 10018
------------------------------
(Address of principal executive offices)
(Zip Code)
(212) 704-0002
--------------
(Registrant's telephone number, including area code) 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 (Sec. 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/A or any amendment to this Form 10 K/A. [X]
Aggregate market value of voting and non-voting common equity held by
non-affiliates as of June 23, 1999: $5,171,832.10 (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 18, 1999 the number
of shares of common stock outstanding was 4,003,279 shares.
DOCUMENTS INCORPORATED BY REFERENCE: NONE
<PAGE>
PURPOSE OF AMENDMENT FILING
This Form 10-K Amendment for Jenna Lane, Inc. (the "Company") for the
fiscal year ending March 31, 1999, is being filed for the purpose of correcting
certain financial information and statements contained in the Company's Form
10-K which was filed on June 30, 1999. Items 6, 7 and 8 of Part II of the Form
10-K are accordingly amended as set forth below.
2
<PAGE>
PART II
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
--------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales $ 59,216,370 $ 42,561,796 $ 35,372,386
Operating income 319,313 1,241,394 804,523
Net (loss) income (254,431) 517,157 136,260
Net Income Per Share:
Basic (0.06) 0.11 0.03
Diluted
(0.06) 0.09 0.03
Weighted average common shares outstanding:
Basic 4,445,624 4,719,322 2,305,749
Diluted 4,445,624 5,531,859 2,333,234
<CAPTION>
MARCH 31,
--------
1999 1998 1997
---- ---- ----
BALANCE SHEET DATA:
Working capital $ 6,339,615 $ 7,326,297 $ 7,191,854
Total assets 14,817,296 11,537,169 10,034,842
Long-term debt 690,463 3,653 16,797
Shareholders' equity 7,668,261 8,072,553 7,461,770
</TABLE>
3
<PAGE>
ITEM 7. 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 years ended March 31, 1999.
HIGHLIGHTS
On January 31, 2000 the Company announced that it would conduct a review of
prior financial results. The Company also announced that it had retained the
services of Mahoney Cohen & Company to assist in the review. The review has been
completed and, as a result of its findings, the Company has restated its
previously issued consolidated financial statements for the fiscal year ended
March 31, 1999. It was determined that certain sales were improperly recognized
including sales recognized in the incorrect period and certain costs and
allowances were recorded in the incorrect period or improperly recorded. The
restated adjustments reflect additional charges to sales, sales allowances, and
costs of sales of $1,651,000. Accordingly, net income of $741,569 previously
reported has been restated to reflect a net loss of $254,431, net of an income
tax benefit of $655,000.
The Company designs, manufactures (through contractors) and markets high
quality, popular priced "junior", "missy", and large size basic and fashion
sportswear and other apparel for women and children. The Company primarily
serves both mass merchandise and specialty retail store chains. The Company's
products are manufactured in a variety of woven and knit fabrications.
In January 1998, the Company established the Smart Objects Sales group to sell
junior and large size moderately priced domestic knit sweaters. Full scale
operations started in Fall 1998.
In February 1998, the Company entered into a license agreement with the master
licensee of the United States Polo Association to utilize the US Polo
Association brand. The Company has not made certain payments under the agreement
because of its belief that the licensor has breached the license agreement and
has brought an action against the licensor and other parties (see Item 3 "Legal
Proceedings").
In May 1998, the Company established its children's sales group. On June 19,
1998, the Company purchased substantially all of the assets of children's wear
manufacturer T.L.C. for Girls, Inc. ("TLC"), a debtor-in-possession under
Chapter 11 of the United States Bankuptcy Code, for an aggregate purchase price
of $630,000.
In July 1998, the Company entered into a license agreement for the "Bongo"
trademark. The initial term of the agreement extends to June 2002 and requires
certain guaranteed minimum royalties. The Company has been merchandising large
size women's clothing under this license.
In July 1998, the Company formed a sales group for dresses under the name
"Impatiens" to sell petite, missy and large size moderate price dresses.
4
<PAGE>
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.
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-----------------------------------------------
1999 1998 1997
-------------- -------------- --------
<S> <C> <C> <C>
Net Sales 100.0% 100.0% 100.0%
Cost of Sales 81.0 81.1 82.2
---------- -------- ---------
Gross Profit 19.0 18.9 17.8
Operating Expenses 18.5 16.0 15.5
---------- -------- ---------
Income from operations 0.5 2.9 2.3
Interest Expense 1.1 0.7 1.7
---------- -------- ---------
Income Before Income Taxes 0.6 2.2 0.6
Provision for Income Taxes 0.2 0.9 0.2
---------- -------- ---------
Net Income 0.4% 1.3% 0.4%
========== ======== =========
</TABLE>
Year Ended March 31, 1999 Compared with Year Ended March 31, 1998
Net sales of $59.2 million in the year ended March 31, 1999 represented an
increase of $16.6 million, or 39.0% over net sales of $42.6 million in the year
ended March 31, 1998. The increase in net sales was primarily attributable to
the addition of the Company's sweater sales groups (Smart Objects) and its
children's sales group (TLC) with sales of $3.1 million and $7.1 million,
respectively. In addition, the Company's established core sales groups (Jenna
Lane and Jenna Lane Women), representing domestic and import products,
experienced strong demand.
The Company's gross profit increased $3.2 million, or 40%, to $11.2 million for
the year ended March 31, 1999 from $8.0 million for the year ended March 31,
1998. Gross profit margin remained unchanged at approximately 19% in the years
ended March 31, 1999 and 1998.
Operating expenses increased $4.1 million, or 60.6%, to $10.9 million in the
year ended March 31, 1999 from $6.8 million in the year ended March 31, 1998.
The increase was primarily due to an increase of $2.1 million in payroll and
related costs, including $772,000 in increased selling salaries, as well as
$377,000 in selling-related expenses, which resulted from increased sales
volume.
5
<PAGE>
Factoring costs increased $171,000 as a result of higher sales volume.
As a result of the above factors, income from operations decreased 74.3% from
$1.2 million in the year ended March 31, 1998 to a loss of $0.3 million in the
year ended March 31, 1999.
Interest expense increased from $322,000 in 1998 to $667,000 in 1999. This
increase is primarily the result of additional borrowing for working capital
needs and capital lease obligations.
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 increased $1.3 million, or 24.1%, to $6.8 million in the year
ended March 31, 1998 from $5.5 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 $45,000 as a result of lower commission rates, 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 54.3% from
$805,000 in the year ended March 31, 1997 to $1.2 million in the year ended
March 31, 1998.
Interest expense decreased from $596,000 in 1997 to $322,000 in 1998. This
decrease is primarily attributable to the repayment of promissory notes issued
in November 1995 and repaid in March 1997 from the proceeds of the Company's
initial public offering.
Liquidity and Capital Resources
Since its formation in 1995, 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 $4.6 million in
fiscal 1997, $15,000 in fiscal 1998 and used $224,000 in fiscal 1999.
6
<PAGE>
Operating activities used net cash of $3.9 million in fiscal 1997, $24,000 in
fiscal 1998 and provided net cash of $1.1 million in fiscal 1999. 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 '99 shipments to customers.
The Company's capital expenditures totaled $175,000, $362,000 and $1,060,000 in
fiscal 1997, 1998 1999, respectively. These capital expenditures were for
computer, material handling, design and office equipment, associated with
upgrading information technology and its core business systems as well as
improvements to its new warehouse and distribution center and administrative
offices. $933,000 of the 1999 expenditures have been financed through a leasing
company. The Company does not have any material commitments for capital
expenditures at this time. Also, included in the $818,000 of net cash used in
investing activities is $630,000 which was used in the acquisition of TLC.
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 PRONOUCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities" which requires entities to recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. SFAS No. 133 is effective
for financial statements for fiscal years beginning after June 15, 1999. The
Company is not currently affected by SFAS No. 133.
7
<PAGE>
ITEM 8. FINANCIAL STATEMENT AND SUPPLEMENTARY DATA
See pages F-1 through F-19 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.
8
<PAGE>
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
1.1 Form of Underwriting Agreement between the Company and Walsh
Manning Securities, LLC (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)
9
<PAGE>
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 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 License Agreement between the Company and Quade, Inc. dated as
of February 5, 1998 (incorporated by reference to registrant's
report on Form 10-K for the period ended March 31, 1999)
10
<PAGE>
10.14 Supply and Financing Agreement between the Company and T.L.C.
for Girls, Inc. (incorporated by reference to registrant's
report on Form 10-K for the period ended March 31, 1999)
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.
(incorporated by reference to registrant's report on Form 10-K
for the period ended March 31, 1999)
10.16 Employment Agreement, dated as of July 6, 1998, between the
Registrant and Andrew Miller (incorporated by reference to
registrant's report on Form 10-Q for the period ended June 30,
1998)
10.17 Amendment to Employment Agreement, dated as of July 5, 1998,
between the Registrant and Eric Holtz (incorporated by
reference to registrant's report on Form 10-Q for the period
ended June 30, 1998)
10.18 License Agreement dated as of July 1, 1998, between Jenna Lane
Licensing I, Inc. And Michael Caruso & Co. (incorporated by
reference to registrant's report on Form 10-Q for the period
ended June 30, 1998)
10.19 Factoring Agreement, dated July 14, 1998, between T.L.C. for
Kidz, Inc. and Republic Business Credit Corporation
(incorporated by reference to registrant's report on Form 10-Q
for the period ended June 30, 1998)
10.20 Factoring Agreement, dated July 14, 1998, between Jenna Lane
Polo Association and Republic Business Credit Corporation
(incorporated by reference to registrant's report on Form 10-Q
for the period ended June 30, 1998)
10.21 Separation agreement, dated April 19, 1999, between the
Registrant and Andrew Miller. (incorporated by reference to
registrant's report on Form 10-K for the period ended March
31, 1999, filed June 30, 1999)
10.22 Lease, dated January 5, 1999, between the Company and
Gettinger Associates. (incorporated by reference to
registrant's report on Form 10-K for the period ended March
31, 1999, filed June 30, 1999)
10.23 Lease, dated October 13, 1998, between the Company and Hartz
Mountain Associates. (incorporated by reference to
registrant's report on Form 10-K for the period ended March
31, 1999, filed June 30, 1999)
21.1 Subsidiaries (incorporated by reference to registrant's report
on Form 10-K for the period ended March 31, 1999, filed June
30, 1999)
27.1 Financial Data Schedule
11
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
JENNA LANE, INC.
Date: May 25, 2000
By: /s/ Gary Coffey
---------------
Gary Coffey
Vice-President and Principal
Accounting Officer
12
<PAGE>
JENNA LANE, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Independent Auditors' Report F-2
Consolidated Balance Sheets - March 31, 1999 and 1998 F-3
Consolidated Statements of Operations -
Years Ended March 31, 1999, 1998 and 1997 F-4
Consolidated Statements of Shareholders' Equity -
Years Ended March 31, 1999, 1998 and 1997 F-5
Consolidated Statements of Cash Flows -
Years Ended March 31, 1999, 1998 and 1997 F-6
Notes to Consolidated Financial Statements F-7 - F-19
F-1
<PAGE>
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 Subsidiaries as of March 31, 1999 and 1998, and the related consolidated
statements of operations, shareholders' equity and cash flows for each of the
three years in the period ended March 31, 1999. 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
Subsidiaries as of March 31, 1999 and 1998, and the results of their operations
and their cash flows for each of the three years in the period ended March 31,
1999, in conformity with generally accepted accounting principles.
EDWARD ISAACS & COMPANY LLP
New York, New York
June 7, 1999, except Note 2 as to
which the date is February 15, 2000
F-2
<PAGE>
JENNA LANE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31,
--------------------------------
ASSETS 1999 1998
----------- -----------
<S> <C> <C>
Current Assets:
Cash $ 41,465 $ 6,595
Due from factor - 4,359,310
Other receivables 365,616 81,000
Advances to suppliers and others 664,704 145,389
Inventories 10,591,842 5,888,085
Prepaid expenses and other 445,713 233,881
Prepaid and refundable income taxes 542,847 -
Deferred income taxes 70,000 43,000
------------ ------------
Total Current Assets 12,722,187 10,757,260
Property and Equipment, net 1,310,337 501,617
Other Assets 784,772 278,292
------------ ------------
$ 14,817,296 $ 11,537,169
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Due to factor $ 1,258,674 $ -
Accounts payable 4,610,341 2,925,661
Accrued liabilities 329,281 187,208
Income taxes payable - 305,645
Current maturities of long-term debt 184,276 12,449
------------ ------------
Total Current Liabilities 6,382,572 3,430,963
------------ ------------
Long-Term Debt 690,463 3,653
------------ ------------
Deferred Income Taxes 76,000 30,000
------------ ------------
Shareholders' Equity:
Common stock, $.01 par value; 18,000,000 shares
authorized; issued 4,414,707 and 4,728,993 shares,
outstanding 4,339,707 and 4,728,993 shares, respectively 44,147 47,290
Capital in excess of par value 7,980,635 7,980,635
Retained earnings (deficit) (209,803) 44,628
Treasury stock, at cost; 75,000 shares in 1999 (146,718) -
------------ ------------
Total Shareholders' Equity 7,668,261 8,072,553
------------ ------------
$ 14,817,296 $ 11,537,169
============ ============
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
JENNA LANE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended March 31,
------------------------------------------------------------------
1999 1998 1997
-------------------- -------------------- -------------------
<S> <C> <C> <C>
Net Sales $59,216,370 $42,561,796 $ 35,372,386
Cost of Sales 47,966,745 34,514,628 29,087,860
----------- ----------- ------------
Gross Profit 11,249,625 8,047,168 6,284,526
Operating Expenses 10,930,312 6,805,774 5,480,003
----------- ----------- ------------
Operating Income 319,313 1,241,394 804,523
Interest Expense 666,676 322,072 595,592
----------- ----------- ------------
(Loss) Income Before Income Taxes (347,363) 919,322 208,931
Provision for Income Taxes (92,932) 402,165 72,671
----------- ----------- ------------
Net (Loss) Income $ (254,431) $ 517,157 $ 136,260
=========== =========== ============
Net (Loss) Income Per Share:
Basic $ (0.06) $ 0.11 $ 0.03
=========== =========== ============
Diluted $ (0.06) $ 0.09 $ 0.03
=========== =========== ============
</TABLE>
See notes to consolidated financial statements.
F- 4
<PAGE>
JENNA LANE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK CAPITAL IN TREASURY
--------------------------- EXCESS OF UNEARNED STOCK, RETAINED
SHARES AMOUNT PAR VALUE COMPENSATION AT COST EARNINGS TOTAL
-------------- ----------- --------------- ------------------ ------------- -------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
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)
Amortization 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
Amortization 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
Repurchase of stock (75,000) - - - (146,718) - (146,718)
Repurchase of performance
shares (314,286) (3,143) - - - - (3,143)
Net loss - - - - - (254,431) (254,431)
-------------- ---------- --------------- ----------------- ------------ ------------ ----------
Balance at March 31, 1999 4,339,707 $44,147 $7,980,635 $ - $(146,718) $(209,803) $7,668,261
============== ========== =============== ================= ============ ============= ==========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
JENNA LANE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended March 31,
--------------------------------------------------
1999 1998 1997
---------------- -------------- --------------
<S> <C> <C> <C>
Operating Activities:
Net income (loss) $ (254,431) $ 517,157 $ 136,260
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 251,404 168,292 166,436
Deferred income taxes 19,000 (37,000) 24,000
Amortization of debt discount - - 104,167
Write-off of note receivable 35,760 - -
Changes in assets and liabilities:
Receivables 4,440,310 514,152 (2,853,753)
Inventories (4,703,757) (2,255,172) (850,778)
Advances to suppliers and others (371,072) (27,051) (87,338)
Prepaid expenses and other (211,832) (13,789) (127,723)
Income taxes (848,492) 488,634 (339,989)
Due to factor 893,058 - -
Accounts payable and accrued liabilities 1,826,753 620,491 (37,594)
---------------- -------------- --------------
Net Cash Provided by (Used in) Operating Activities 1,076,701 (24,286) (3,866,312)
---------------- -------------- --------------
Investing Activities:
Acquisition of business (630,209) - -
Capital expenditures (127,085) (361,514) (143,374)
Security deposits and other (37,689) (18,515) (54,488)
Issuance of notes receivable (135,754) (304,900) -
Repayment of notes receivable 113,169 152,083 -
---------------- -------------- --------------
Net Cash Used in Investing Activities (817,568) (532,846) (197,862)
---------------- -------------- --------------
Financing Activities:
Issuance of common stock, net of offering costs - - 5,352,043
Exercise of stock options - 30,000 -
Repayment of notes payable - - (1,000,000)
Proceeds from issuance of units - - 500,000
Principal payments on equipment notes payable (74,402) (14,592) (8,203)
Repurchase of stock (146,718) - -
Repurchase of performance shares (3,143) - (300)
Offering costs (preferred stock and units) - - (57,297)
Dividends paid - - (175,000)
---------------- -------------- --------------
Net Cash (Used in) Provided by Financing Activities (224,263) 15,408 4,611,243
---------------- -------------- --------------
Net Increase (Decrease) in Cash 34,870 (541,724) 547,069
Cash at beginning 6,595 548,319 1,250
---------------- -------------- ---------------
Cash at end $ 41,465 $ 6,595 $ 548,319
================ ============== ==============
Supplemental Disclosures of Cash Flow Information:
Interest paid $ 666,676 $ 322,072 $ 595,592
================ ============== ==============
Income taxes paid $ 726,942 $ 50,335 $ 391,018
================ ============== ==============
Noncash Transactions:
Capital lease obligations for the acquisition of equipment $ 933,039 $ - $ 32,325
================ ============== ==============
Issuance of performance shares $ - $ - $ 77,220
================ ============== ==============
Conversion of Series A Convertible Preferred Stock to
Common Stock $ - $ - $ 828,030
================ ============== ==============
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
JENNA LANE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED 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 subsidiaries (collectively, 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, in 1998 and
1997, 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.
Goodwill:
The excess of the cost over the fair value of net assets of purchased
businesses is recorded as goodwill (included in other assets) and is
amortized on a straight-line basis over the estimated future periods to
be benefited (not exceeding 40 years). The Company continually evaluates
the recoverability of this goodwill.
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 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
<PAGE>
JENNA LANE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED 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 1999, the warrants were anti-dilutive. 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
earnings per share computations have been restated.
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31
-------------------------------------------------------
1999 1998 1997
------------- -------------- -----------------
<S> <C> <C> <C>
BASIC EARNINGS PER SHARE COMPUTATION
Numerator:
Net (loss) income $ (254,431) $ 517,157 $ 136,260
Preferred dividends - - 75,000
------------- -------------- ---------------
Net (loss) income applicable to common
shares $ (254,431) $ 517,157 $ 61,260
============= ============== ===============
Denominator:
Average common shares outstanding 4,445,624 4,719,322 2,305,749
============= ============== ===============
BASIC (LOSS) EARNINGS PER SHARE $ (0.06) $ 0.11 $ 0.03
============= ============== ===============
DILUTED EARNINGS PER SHARE COMPUTATION
Numerator:
Net (loss) income applicable to common
shares $ (254,431) $ 517,157 $ 61,260
============= ============== ===============
Denominator:
Average common shares outstanding 4,445,624 4,719,322 2,305,749
Dilutive effect of:
Options - 185,125 27,485
Warrants - 627,412 -
------------- -------------- ---------------
Total average common shares outstanding 4,445,624 5,531,859 2,333,234
------------- -------------- ---------------
DILUTED (LOSS) EARNINGS PER SHARE $ (0.06) $ 0.09 $ 0.03
============= ============== ===============
</TABLE>
Computation of diluted earnings per share is not reflected for the year
ended March 31, 1999 because including potential common shares will
result in an antidilutive per-share amount due to the net loss in the
period. 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.
F-8
<PAGE>
JENNA LANE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. THE COMPANY AND ITS SIGNIFICANT ACCOUNTING PRINCIPLES (CONTINUED)
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.
Advertising costs:
The Company expenses advertising costs as incurred which amounted to
approximately $118,000, $68,000 and $15,000 for the years ended March
31, 1999, 1998 and 1997, 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.
Segment Information:
Effective April 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 131"). SFAS 131 superseded
FASB Statement No. 14, "Financial Reporting for Segments of a Business
Enterprise". SFAS 131 establishes standards for the way that public
business enterprises report information about operating segments in
annual financial statements and requires that those enterprises report
selected information about operating segments in interim financial
reports. SFAS 131 also establishes standards for related disclosures
about products and services, geographic areas, and major customers.
The Company has organized its business in one operating segment, since
the Company's only business is in the sale of apparel to the domestic
retail market.
Recent Accounting Pronouncements:
In June 1998, the Financial Accounting Standards Board issued the
Statement of Financial Accounting Standards No. 133 ("SFAS 133"),
"Accounting for Derivative Instruments and Hedging Activities", which
will be effective for the Company's fiscal year 2000. This statement
establishes accounting and reporting standards requiring that every
derivative instrument be recorded in the balance sheet as either an
asset or liability measured at its fair value. The statement also
requires that changes in the derivative's fair value be recognized in
earnings unless specific hedge accounting criteria are met. The Company
is not currently affected by SFAS 133.
Reclassification:
Certain prior year amounts have been reclassified to conform with the
current year's presentation.
F-9
<PAGE>
JENNA LANE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. RESTATEMENT OF FINANCIAL RESULTS
On January 31, 2000 the Company announced that it would conduct a
review of prior financial results. The Company also announced that it
had retained the services of Mahoney Cohen & Company to assist in the
review. The review has been completed and, as a result of its findings,
the Company has restated its consolidated financial statements for
1999. It was determined that certain sales were improperly recognized
including sales recognized in the incorrect period and certain costs
and allowances were recorded in the incorrect period or improperly
recorded. The restatement adjustments reflect additional charges to
sales, sales allowances, and costs of sales of $1,651,000. Accordingly,
net income of $741,569 previously reported has been restated to reflect
a net loss of $254,431, net of an income tax benefit of $655,000. The
following consolidated balance sheet and statement of operations
compare the previously reported and restated financial information:
F-10
<PAGE>
JENNA LANE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. RESTATEMENT OF FINANCIAL RESULTS (CONTINUED)
<TABLE>
<CAPTION>
AT MARCH 31, 1999
AS PREVIOUSLY AS
REPORTED RESTATED
----------------------- --------------------
----------------------- --------------------
<S> <C> <C>
BALANCE SHEET
Current Assets:
Cash $ 41,465 $ 41,465
Receivables 282,942 365,616
Advances to suppliers 664,704 664,704
Inventories 10,464,842 10,591,842
Prepaid expense and other 445,713 445,713
Refundable income taxes - 542,847
Deferred income taxes 70,000 70,000
----------------------- --------------------
Total Current Assets 11,969,666 12,722,187
Property and Equipment, Net 1,310,337 1,310,337
Other Assets 784,772 784,772
----------------------- --------------------
$ 14,064,775 $ 14,817,296
======================= ====================
Current Liabilities:
Acounts payable $ 4,008,341 $ 4,610,341
Due to factor - 1,258,674
Accrued liabilities 329,281 329,281
Income taxes payable 112,153 -
Current maturities of debt 184,276 184,276
----------------------- --------------------
Total current liabilities 4,634,051 6,382,572
Long-Term Debt 690,463 690,463
Deferred Income Taxes 76,000 76,000
Shareholders' Equity:
Common stock 44,147 44,147
Capital in excess of par value 7,980,635 7,980,635
Retained earnings 786,197 (209,803)
Treasury stock (146,718) (146,718)
----------------------- --------------------
Total Shareholders' Equity 8,664,261 7,668,261
----------------------- --------------------
$ 14,064,775 $ 14,817,296
======================= ====================
INCOME STATEMENT FOR THE YEAR ENDED MARCH 31, 1999
Net Sales $ 60,392,370 $ 59,216,370
Cost of Sales 47,491,745 47,966,745
----------------------- --------------------
Gross Profit 12,900,625 11,249,925
Operating Expenses 10,930,312 10,930,312
----------------------- --------------------
Operatins (Loss) Income 1,970,313 319,313
Interest Expense 666,676 666,676
----------------------- --------------------
(Loss) Income Before Income Taxes 1,303,637 (347,363)
(Credit) Provision for Income Taxes 562,068 (92,932)
----------------------- --------------------
Net (Loss) Income $ 741,569 $ (254,431)
======================= ====================
Net (Loss) Income Per Share
Basic $ 0.17 $ (0.06)
======================= ====================
Diluted $ 0.16 $ (0.06)
======================= ====================
</TABLE>
F-11
<PAGE>
JENNA LANE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. DUE FROM (TO) FACTOR
Due From (To) Factor consists of the following:
MARCH 31,
------------------------
1999 1998
----------- -----------
Due from factors $ 202,326 $ 4,919,310
Less: allowance for customers' claims (1,461,000) (560,000)
----------- ------------
$(1,258,674) $ 4,359,310
=========== ============
The Company has agreements with two commercial factors which provide for
the factoring of substantially all its trade accounts receivable on a
pre-approved non-recourse basis (except as to customer claims). The
factoring charge ranges from 0.65% to 0.85% of the receivables assigned.
Factor charges for the years ended March 31, 1999, 1998 and 1997 were
approximately $598,000, $427,000 and $472,000, respectively. The
uncollected balance of receivables held by the factors amounted to
approximately $15,704,000 and $9,489,000 at March 31, 1999 and 1998,
respectively.
The Company receives advances and loans under the agreement with its
primary factor, which bear interest at 1.0% below the prime rate. The
factor also guarantees the Company's letters of credit. The aggregate
amounts of such advances and guarantees are limited by formula and any
overadvance permitted is at the lender's discretion. Substantially all
the Company's assets are pledged as collateral under the agreements.
4. INVENTORIES
Inventories consist of the following:
MARCH 31,
------------------------
1999 1998
----------- -----------
Raw materials $ 2,921,489 $2,308,517
Work-in-process 1,612,193 368,954
Finished goods 6,058,160 3,210,614
----------- ----------
$10,591,842 $5,888,085
=========== ==========
5. PROPERTY AND EQUIPMENT
Property and equipment consist of:
MARCH 31,
------------------------
1999 1998
----------- -----------
Furniture and equipment $ 1,346,085 $ 543,387
Leasehold improvements 378,288 120,862
----------- -----------
1,724,373 664,249
Less: Accumulated depreciation and amortization 414,036 162,632
----------- -----------
$ 1,310,337 $ 501,617
=========== ===========
F-12
<PAGE>
JENNA LANE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. LONG-TERM DEBT
Long-term debt consists of capital lease obligations for equipment
payable in monthly installments, with interest ranging from 9.96% to
11.6%, maturing through fiscal year 2004. Annual maturities of long-term
debt at March 31, 1999 are as follows:
YEAR ENDING MARCH 31,
---------------------
2001 $ 200,148
2002 157,178
2003 173,862
2004 159,275
---------
$ 690,463
=========
7. INCOME TAXES
The provision for income taxes consists of the following:
MARCH 31,
-------------------------------------------
1999 1998 1997
------------ ------------ ------------
Current:
Federal $ (83,405) $ 337,335 $ 22,970
State (28,527) 101,830 25,701
Deferred 19,000 (37,000) 24,000
---------- ----------- -----------
$ (92,932) $ 402,165 $ 72,671
========== =========== ===========
Reconciliation of the statutory Federal income tax rate to the Company's
effective tax rate on pre-tax income (loss) is as follows:
<TABLE>
<CAPTION>
MARCH 31,
-------------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Statutory Federal income tax rate (34.0)% 34.0% 34.0%
State income taxes, net of Federal benefit (5.5) 7.3 8.1
Non - deductible items and other 12.7 2.5 (7.3)
------- ----- -----
Effective income tax rate (26.8)% 43.8% 34.8%
======= ===== =====
</TABLE>
Significant components of the Company's deferred tax assets and
liabilities as of March 31, 1999 and 1998 are summarized as follows:
MARCH 31,
-----------------------
1999 1998
---------- -----------
Current deferred tax asset - inventory $ 70,000 $ 43,000
========= ==========
Noncurrent deferred tax liability - depreciation $ 76,000 $ 30,000
========= ==========
F-13
<PAGE>
JENNA LANE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. 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.
Stock Repurchase:
In September 1998, the Company adopted a share repurchase program to buy
back up to 500,000 shares of the Company's stock over an eighteen month
period. As of March 31, 1999, the Company has repurchased 75,000 shares
at an aggregate cost of $146,718.
Performance Shares:
Performance shares represent common shares issued as compensation to
certain key executives and a director. 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 and $58,000 for the years ended March 31, 1998 and 1997,
respectively.
The shares are to be repurchased by the Company at par value ($.01 per
share) because the Company did not achieve certain annual pre-tax
earnings in fiscal 1998 and 1999. 314,286 shares were repurchased in
1999, and an additional 314,286 shares are to be repurchased subsequent
to March 31, 1999.
F-14
<PAGE>
JENNA LANE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. COMMITMENTS AND CONTINGENCIES
Leases:
The Company leases warehouse, office and showroom space and equipment
under capital and operating leases extending to 2006. The leases provide
for payment by the Company of taxes and other expenses. Rent expense was
approximately $862,000, $461,000 and $358,000 for the years ended March
31, 1999, 1998 and 1997, respectively.
Minimum rental payments under noncancellable leases are as follows:
<TABLE>
<CAPTION>
YEAR ENDING MARCH 31, OPERATING CAPITAL
--------------------- --------- -------
<S> <C> <C>
2000 $1,244,000 $ 264,000
2001 1,225,000 261,000
2002 1,017,000 233,000
2003 983,000 196,000
2004 928,000 129,000
Thereafter 1,463,000 -
---------- ----------
$6,860,000 1,083,000
==========
Less: Amount representing interest 208,000
----------
$ 875,000
==========
</TABLE>
Net book value of equipment under capital leases included in the balance
sheet amounted to approximately $863,000 and $29,000 at March 31, 1999
and 1998, respectively.
Employment Agreements:
The Company has executed employment agreements with several of its
executives and employees which, among other things, provide for
aggregate annual base compensation of approximately $1.6 million for
fiscal 2000 and minimum bonuses plus profit participation, as defined.
Letters of Credit:
At March 31, 1999, the Company was contingently liable for open letters
of credit aggregating approximately $2,285,000.
F-15
<PAGE>
JENNA LANE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. COMMITMENTS AND CONTINGENCIES (Continued)
Licensing Agreements:
The Company has entered into licensing agreements that provide for
royalty payments ranging from 5% to 7% of net sales of licensed
products. Based on minimum sales requirements, future minimum royalty
payments required under these agreements are:
YEAR ENDING MARCH 31,
---------------------
2000 $ 275,000
2001 672,000
2002 956,000
2003 228,000
-----------
$ 2,131,000
The Company incurred royalty expense of $79,000 for the year ended March
31, 1999. As a result of pending litigation with one licensor, minimum
guaranteed royalties of $120,000 due in January 1999 are in dispute and
remain unpaid. Future minimum guaranteed royalties of $450,000 that are
also in dispute are included above (see litigation note below).
Litigation:
The Company is a party to litigation with one of its licensors and
certain other parties. The Company initiated an action alleging breach
of license and related tort claims. The licensor has moved to compel
arbitration and is seeking $1,000,000 in damages, including unpaid
minimum guaranteed royalties. The Company is vigorously defending the
claim and believes it has meritorious defenses. However, it is not
possible at this time to predict the outcome of this matter.
10. SALES TO MAJOR CUSTOMERS
For the year ended March 31, 1999, one customer accounted for
approximately 23% and another accounted for 11% of sales compared to one
customer that accounted for approximately 18% for the year ended March
31, 1998.
11. 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.
F-16
<PAGE>
JENNA LANE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. STOCK INCENTIVE PLAN (Continued)
The following table summarizes stock option activity for the three years
ended March 31, 1999 (including 450,582 stock options issued outside the
Plan):
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED
SHARES SUBJECT AVERAGE EXERCISE
STOCK OPTION ACTIVITY TO OPTIONS PRICE PER SHARE
--------------------- -------------- -----------------
<S> <C> <C>
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
Granted 686,500 3.06
Cancelled (34,240) 4.03
Exercised - -
----------
Outstanding, March 31, 1999 969,501 3.33
==========
</TABLE>
The following table summarizes information about stock options
outstanding and exercisable at March 31, 1999:
<TABLE>
<CAPTION>
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
--------- --------- ------------ --------- --------- ---------
<S> <C> <C> <C> <C> <C>
$1.82 - 2.73 517,750 9.1 2.13 100,000 $2.73
$4.00 - 4.55 376,751 8.4 4.30 138,418 4.55
$6.00 - 8.00 75,000 9.3 6.67 - -
--------- ----- ----- ------- -----
969,501 8.8 $3.33 238,418 $3.79
========= ===== ===== ======= =====
</TABLE>
F-17
<PAGE>
JENNA LANE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. STOCK INCENTIVE PLAN (Continued)
The following table reflects pro forma net income and earnings per share
had compensation cost been determined based on the fair value at the
grant date for awards granted in fiscal 1999, 1998, and 1997 consistent
with the requirements of Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation":
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31, 1999 1998 1997
-------------------- ------------- ------------- --------
<S> <C> <C> <C>
NET (LOSS) INCOME:
Actual $ (254,431) $ 517,157 $ 136,260
Pro forma $ (378,897) $ 436,561 $ 121,738
BASIC (LOSS) EARNINGS PER SHARE:
Actual $ (0.06) $ 0.11 $ 0.03
Pro forma $ (0.09) $ 0.09 $ 0.02
DILUTED (LOSS) EARNINGS PER SHARE:
Actual $ (0.06) $ 0.09 $ 0.03
Pro forma $ (0.09) $ 0.08 $ 0.02
</TABLE>
These pro forma amounts may not be representative of future disclosures
since the estimated fair value of stock options is amortized to expense
over the vesting period, and additional options may be granted in future
years.
The estimated fair value of each option granted included in the pro
forma results is calculated using the minimum value calculation for the
options issued prior to the Company going public, and the Black-Scholes
option-pricing model with the following weighted-average assumptions
used for grants in 1999 and 1997, respectively: no common stock
dividends paid for all years; expected volatility of 65.0% and 23.5%;
risk-free interest rates of 5.11% and 6.12%; and expected lives of 5.0
and 3.5 years. The weighted average fair values of options at their
grant date during 1999 and 1997, were $0.95 and $1.01, respectively.
12. 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, 1999, 1998 and 1997.
13. 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 $630,000 which has been accounted for as
a purchase and consisted substantially of goodwill. The pro forma
results for 1999 assuming the acquisition had been made at the beginning
of the year, would not be materially different from reported results.
F-18
<PAGE>
JENNA LANE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table presents summarized quarterly results:
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
MARCH 31, 1999
<S> <C> <C> <C> <C>
Net Sales $13,826,800 $17,120,399 $9,253,459 $19,015,712
Gross Profit 2,728,127 3,617,024 1,896,864 3,007,610
Operating Income (Loss) 713,504 806,038 (566,998) (633,231)
Net Income (Loss) 368,809 348,468 (394,837) (576,871)
Earnings Per Share:
Basic 0.08 0.08 (0.09) (0.13)
Diluted 0.08 0.08 (0.09) (0.13)
Market Price Per Share:
High 8.50 2.94 2.25 2.69
Low 1.75 1.53 1.03 1.88
MARCH 31, 1998
Net Sales $11,734,842 $11,295,038 $7,723,861 $11,808,055
Gross Profit 2,303,059 2,119,719 1,249,749 2,374,641
Operating Income (Loss) 412,048 638,870 (387,434) 577,910
Net Income (Loss) 213,493 322,268 (286,374) 267,770
Earnings Per Share:
Basic 0.05 0.07 (0.09) 0.06
Diluted 0.04 0.06 (0.09) 0.05
Market Price Per Share:
High 9.43 9.77 12.39 11.25
Low 7.73 8.75 9.66 8.69
</TABLE>
F-19
