<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
/X/ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended March 31, 1996
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 1-12868
JALATE, LTD.
(Exact name of registrant as specified in its charter)
California 95-4121885
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1675 South Alameda Street, Los Angeles, California 90021
(Address of principal executive offices) (Zip code)
(213) 765-5000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Common Stock American Stock Exchange
(Title of each class) (Name of each exchange on which registered)
Securities registered pursuant to Section 12(g) of the Act: None
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
The number of shares outstanding of the registrant's Common Stock, no par value,
at May 6, 1996 was 3,403,000 shares.
This Form 10-Q contains 12 pages.
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
JALATE, LTD.
Condensed Balance Sheets
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
December 31, March 31,
1995 1996
-------------- -----------
ASSETS
<S> <C> <C>
Current assets:
Cash ............................................................... $ 92 $ 77
Due from factor .................................................... 1,127 4,509
Trade accounts receivable, less allowance for doubtful
receivables of $669 in 1995 and $950 in 1996 .................... 989 769
Inventories (Note 4) ............................................... 4,432 4,109
Refundable income taxes............................................. 1,567 1,017
Prepaid expenses and other current assets .......................... 313 572
Due from officers................................................... 106 3
------- --------
Total current assets ................................. 8,626 11,056
Property and equipment, at cost, net ................................... 868 969
Investment in joint venture............................................. 273 358
Other assets, at cost .................................................. 88 87
------- --------
$ 9,855 $ 12,470
======= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Note payable to bank ............................................... $ 90 $ 1,356
Trade accounts payable.............................................. 3,188 3,935
Accrued expenses ................................................... 568 827
Due to customers ................................................... 672 798
------- --------
Total current liabilities ............................ 4,518 6,916
Shareholders' equity:
Preferred stock, no par value. Authorized 3,000,000 shares;
none issued and outstanding....................................... -- --
Common stock, no par value. Authorized 20,000,000
shares; issued and outstanding 3,390,500 and 3,403,000 shares in
1995 and 1996, respectively....................................... 5,177 5,177
Additional paid-in capital.......................................... 134 134
Retained earnings .................................................. 26 243
------- --------
Total shareholders' equity............................ 5,337 5,554
------- --------
$ 9,855 $ 12,470
======= ========
</TABLE>
See accompanying notes to condensed financial statements.
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JALATE, LTD.
Condensed Statements of Operations
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------------
1995 1996
-------- --------
<S> <C> <C>
Net sales................................................... $ 18,761 $ 14,748
Cost of goods sold.......................................... 13,340 10,840
-------- --------
Gross profit............................................ 5,421 3,908
Operating expenses.......................................... 4,150 3,617
-------- --------
Earnings from operations................................ 1,271 291
-------- --------
Other (income) expense:
Factoring interest...................................... 155 138
Other interest.......................................... (2) 21
Equity in earnings of joint venture..................... -- (85)
-------- --------
Total other expense............................ 153 74
-------- --------
Earnings before income taxes............................ 1,118 217
Income tax expense (Note 2)................................. 434 --
-------- --------
Net earnings................................................ $ 684 $ 217
======== ========
Net earnings per common and common equivalent
shares ................................................ $ 0.20 $ 0.06
======== ========
Weighted average common and common equivalent
shares outstanding (Note 3)............................ 3,457 3,399
======== ========
</TABLE>
See accompanying notes to condensed financial statements.
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<PAGE> 4
JALATE, LTD.
Condensed Statements of Cash Flows
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------------
1995 1996
-------- --------
<S> <C> <C>
Cash flow from operating activities
Net earnings .......................................... $ 684 $ 217
-------- --------
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities
Depreciation and amortization .................... 60 82
Increase (decrease) in allowance for doubtful (204) 281
receivables....................................
Undistributed earnings of joint venture........... -- (85)
Changes in assets and liabilities
(Increase) decrease in:
Due from factor .............................. 597 (3,382)
Trade accounts receivable .................... (38) (61)
Inventories................................... (2,017) 323
Refundable income taxes....................... -- 550
Prepaid expenses and other current
assets................................... (211) (259)
Due from officers............................. -- 103
Other assets ................................. (175) 1
Increase (decrease) in:
Trade accounts payable ....................... 1,077 747
Accrued expenses ............................. (69) 259
Due to customers ............................. 263 126
Income taxes payable ......................... 430 --
-------- --------
Total adjustments ....................... (287) (1,315)
-------- --------
Net cash provided by (used in)
operating activities ................. 397 (1,098)
-------- --------
Cash flows from investing activities
Capital expenditures.................................. (29) (183)
Investment in joint venture........................... (100) --
-------- --------
Net cash used in investing activities............ (129) (183)
-------- --------
Cash flows from financing activities
Proceeds from note payable to bank -- 1,266
-------- --------
Net cash provided by financing activities ....... -- 1,266
-------- --------
Net increase (decrease) in cash ................. 268 (15)
Cash at beginning of period ................................... 182 92
-------- --------
Cash at end of period ......................................... $ 450 $ 77
======== ========
Supplemental disclosures of cash flow information
Cash paid during the period for
Interest ........................................ $ 153 $ 159
Income taxes .................................... $ -- $ --
======== ========
</TABLE>
See accompanying notes to condensed financial statements.
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JALATE, LTD.
Notes to Condensed Financial Statements
(Unaudited)
1. General.
The unaudited condensed financial statements have been prepared on the
same basis as the audited financial statements and, in the opinion of
management, reflect all adjustments (consisting of normal recurring
adjustments) necessary for a fair presentation for each of the periods
presented. The results of operations for interim periods are not
necessarily indicative of results to be achieved for full fiscal years.
As contemplated by the Securities and Exchange Commission under Rule
10-01 of Regulation S-X, the accompanying financial statements and
related notes have been condensed and do not contain certain
information that will be included in the Company's annual financial
statements and notes thereto. For further information, refer to the
financial statements and related notes for the year ended December 31,
1995 included in the Company's Annual Report on Form 10-K.
2. Income Taxes.
Income taxes for the three months ended March 31, 1996 were computed
using the effective tax rate estimated to be applicable for the full
fiscal year, which is subject to ongoing review and evaluation by
management. As of December 31, 1995, the Company had deferred tax
assets and a related valuation allowance of $1,084,000. During the
three months ended March 31, 1996, taxable income generated by the
Company was offset by a reduction in the beginning balance of the
valuation allowance against deferred tax assets of $40,000. Management
continues to evaluate the recoverability of the deferred tax assets.
3. Earnings per Share.
Net earnings per share is based on the weighted average number of
shares of Common Stock and Common Stock equivalents outstanding.
4. Inventories.
A summary of inventories at March 31, 1996 is as follows:
<TABLE>
<S> <C>
Piece goods and trim .................. $ 1,110,000
Work in process........................ 1,941,000
Finished goods......................... 1,058,000
-----------
$ 4,109,000
===========
</TABLE>
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5. Adoption of Accounting Standards.
Stock Compensation. Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation" (FAS 123), issued in October 1995
and effective for fiscal years beginning after December 15, 1995, encourages,
but does not require, a fair value based method of accounting for employee stock
options or similar equity instruments. FAS 123 allows an entity to elect to
continue to measure compensation cost under Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" (APBO No. 25), but requires
pro forma disclosures of net earnings and earnings per share as if the fair
value based method of accounting had been applied. The Company has adopted FAS
123 effective January 1, 1996 and has elected to continue to measure
compensation cost under APBO No. 25. Accordingly, FAS 123 has no impact on the
Company's financial position or results of operations.
Impairment of Long-Lived Assets. Statement of Financial Accounting
Standards No. 121 "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed of" (FAS 121), issued in March 1995 and
effective for fiscal years beginning after December 15, 1995, establishes
accounting standards for the recognition and measurement of impairment of
long-lived assets, certain identifiable intangibles, and goodwill either to be
held or disposed of. The Company has adopted FAS 121 effective January 1, 1996
and the adoption has not had a material impact on the Company's financial
position or results of operations.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED HEREIN, THE MATTERS
ADDRESSED IN THIS ITEM 2 CONSTITUTE "FORWARD-LOOKING STATEMENTS" WITHIN THE
MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED, AND SECTION
21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. SUCH FORWARD-LOOKING
STATEMENTS ARE SUBJECT TO A VARIETY OF RISKS AND UNCERTAINTIES, INCLUDING THOSE
DISCUSSED BELOW UNDER THE HEADING "FACTORS THAT MAY AFFECT FUTURE RESULTS" AND
ELSEWHERE IN THIS REPORT ON FORM 10-Q, THAT COULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY FROM THOSE ANTICIPATED BY THE COMPANY'S MANAGEMENT. THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995 (THE "ACT") PROVIDES CERTAIN "SAFE
HARBOR" PROVISIONS FOR FORWARD-LOOKING STATEMENTS. ALL FORWARD-LOOKING
STATEMENTS MADE IN THIS QUARTERLY REPORT ON FORM 10-Q ARE MADE PURSUANT TO THE
ACT.
The following table sets forth, for the periods indicated, the
percentage which certain items in the statement of operations data bear to net
sales and the percentage dollar increase (decrease) of such items from period to
period.
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<TABLE>
<CAPTION>
Percent of Net Sales % Dollar
Three Months Increase
Ended March 31, (Decrease)
----------------------- ----------
1995 1996
------ ------
<S> <C> <C> <C>
Net sales............................ 100.0% 100.0% (21.4%)
Cost of goods sold................... (71.1) (73.5) (18.7%)
----- -----
Gross profit......................... 28.9 26.5 (27.9%)
Operating expenses................... (22.1) (24.5) (12.8%)
----- -----
Earnings from operations............. 6.8 2.0 (77.1%)
Interest expense..................... (0.8) (1.0) 3.9%
Equity in earnings of joint venture.. -- .5 *
----- -----
Earnings before income taxes......... 6.0 1.5 (80.6%)
Income tax expense................... (2.3) -- (100%)
----- -----
Net earnings ........................ 3.7% 1.5% (68.3%)
===== =====
</TABLE>
- -------------------
* Not calculable
Net Sales. Gross sales decreased from $20,013,000 for the three months
ended March 31, 1995 to $16,018,000 for the comparable period of fiscal 1996, a
decrease of 20.0%, due to a decrease in the volume of apparel sold from
2,262,995 units to 1,795,129 units, a decrease of 20.7%. The decrease in volume
was due in part to a 21.7% decrease in the number of units sold by the Zanoni
division and a 14.5% decrease in the number of units sold by the Jalate
division. The average wholesale price per unit was maintained notwithstanding
an increase in the Jalate division of $0.33 per unit and the Zanoni division
of $0.40 per unit which were offset by the decrease in the price per unit on
sales by the discontinued divisions. The decrease in gross sales for the three
month period was due primarily to (i) the discontinuing of the smaller or less
profitable Pottery division and the Kids line of apparel, which was offset in
part by the start-up in the second quarter of 1995 of the Product Development
division, (ii) the conservative stance taken by apparel retailers to maintain
minimum inventory levels as a result of a poor 1995 holiday season, (iii) a
lack of emphasis on the Missy line of apparel while the Company repositioned
that division and (iv) the Company's policy to be more selective in their
customer base in order to maintain adequate profitability levels.
Returns and allowances increased from $748,000 (3.7% of gross sales)
for the three months ended March 31, 1995 to $840,000 (5.2% of gross sales) for
the comparable period of fiscal 1996, an increase of 12.3%. Discounts decreased
from $504,000 (2.5% of gross sales) for the three months ended March 31, 1994 to
$430,000 (2.7% of gross sales) for the comparable period of fiscal 1996, a
decrease of 14.7%.
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The increase in returns and allowances for the three month periods was
due primarily to the increased reliance on returns and allowances by the
Company's customers to improve the results of operations following a weak retail
holiday season. The decrease in discounts in absolute terms was due primarily to
the decrease in gross sales. In the first quarter of 1996, the Company continues
to respond to dilution by (i) requiring authorization for returns that are
within the Company's 60 day return policy, (ii) only granting allowances to
customers when the Company's profitability on that customer warrants it and
(iii) seeking to improve operations by hiring key employees in such areas as
production, piece goods management, MIS and distribution to minimize late
deliveries, quality problems, shipping problems and other errors that result in
dilution.
As a result of the following factors, net sales decreased from
$18,761,000 for the three months ended March 31, 1995 to $14,748,000 for the
comparable period of fiscal 1996, a decrease of 21.4%.
Gross Profit. Gross profit decreased from $5,421,000 (28.9% of net
sales) for the three months ended March 31, 1995 to $3,908,000 (26.5% of net
sales) for the comparable period of fiscal 1996, a decrease of 27.9%. This
decrease in gross profit in absolute terms and as a percent of net sales was due
primarily to (i) weak economic and market conditions for the apparel industry in
general, (ii) the increase in returns and allowances in most product lines,
(iii) a decrease in foreign sourced product, which have a lower cost than
domestically produced goods, from gross sales of $5,420,000 for the three months
ended March 31, 1995 compared to $3,420,000 for the same period in 1996 in order
to be consistent with the Company's general policy of manufacturing products
based primarily on orders in order to minimize the risk of inventory buildup and
(iv) off-price sales on the remaining inventory of the discontinued divisions
which were offset substantially by the maintained operations of the Company's
continuing divisions.
Operating Expenses. Operating expenses decreased from $4,150,000 (22.1%
of net sales) for the three months ended March 31, 1995 to $3,617,000 (24.5% of
net sales) for the comparable period of fiscal 1996, a decrease of 12.8%. While
the dollar amount of all major expense categories decreased, all categories
except shipping increased as a percentage of net sales due primarily to the
decrease in net sales. The decrease in operating expenses in absolute terms was
due primarily to (i) a reduction in the number of full-time employees from 175
on March 31, 1995 to 150 on March 31, 1996, (ii) a significant reduction in the
cost of freight-out as a result of minimizing air shipments and restructuring
the distribution center and (iii) re-analyzing all company expenses and
benefitting from cost-cutting measures where appropriate.
Interest Expense. Interest expense primarily reflects interest payable
on advances from the factor and interest payable on loans against imports.
Interest expense increased from $153,000 for the three months ended March 31,
1995 to $159,000 for the comparable period of fiscal 1996, an increase of 3.9%.
The increase in interest expense was directly related to the trade bank advance
line on imported products which was not in place during the quarter ended March
31, 1995.
Equity in Earnings of Joint Venture. Investment in joint venture is
accounted for by the equity method, under which the Company's share of earnings
of the joint venture is reflected in income as earned and distributions are
credited against the investment in joint venture when received. For the three
months ended March 31, 1996, equity in earnings of the joint venture was
$85,000. The
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joint venture commenced operations in May 1995 and, therefore, investors had no
earnings for the three months ended March 31, 1995.
Income Taxes. As of December 31, 1995, the Company had deferred tax
assets and a related valuation allowance of $1,084,000. During the three months
ended March 31, 1996, taxable income generated by the Company was offset by a
reduction in the deferred tax assets of $40,000. Management continues to
evaluate the recoverability of the deferred tax assets. The estimated effective
tax rate for 1996 is subject to ongoing review and evaluation by management. A
38.8% effective combined federal and state tax rate has been used for the income
tax provision for the three months ended March 31, 1995.
Net Earnings. Net earnings decreased from $684,000 ($0.20 per common
share) for the three months ended March 31, 1995 to $217,000 ($0.06 per common
share) for the comparable period of fiscal 1996, a decrease of 68.3%, primarily
due to the matters described above.
Liquidity and Capital Resources. At March 31, 1996, working capital was
$4,140,000, and for the three months ended March 31, 1996 cash used in operating
activities aggregated $1,098,000.
Inventory at March 31, 1996 was $4,109,000 as compared to $4,432,000 at
December 31, 1995.
At March 31, 1996, advances from factor and the amount due from factor
were $5,460,000 and $4,509,000, respectively, and the balance of outstanding
letters of credit was $730,000.
The Company believes that its present and currently available sources
of working capital are sufficient to maintain its current level of operations
for the foreseeable future.
FACTORS THAT MAY AFFECT FUTURE RESULTS
All forward-looking statements contained in this Item 2 are subject to,
in addition to the other matters described in this Report on Form 10-Q, a
variety of significant risks and uncertainties. The following discussion
highlights some of these risks and uncertainties. Further, from time to time,
information provided by the Company or statements made by its employees may
contain forward-looking information. The Company cautions the reader that there
can be no assurance that actual results or business conditions will not differ
materially from those projected or suggested in such forward-looking statements
as a result of various factors, including those discussed below.
Recent Operating Losses. For the year ended December 31, 1995, the
Company reported a net loss of $2,896,000, primarily due to the factors
described in the Company's Annual Report on Form 10-K. In the second quarter of
1995, the Company commenced a program of seeking to improve operating
efficiencies by expanding and strengthening its management team, including the
hiring of a new CEO, a MIS director, a distribution manager and a piece goods
purchaser. Although the Company's new management has responded to this loss with
the measures described above, and has achieved net earnings of $217,000 for the
first quarter in 1996, there can be no assurance that these or any other
measures will lead to continued profitability for the Company in the remaining
quarters of 1996.
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Management Strategy. As discussed above, the Company's new management
has commenced a restructuring of operations in response to the Company's recent
losses. The planned measures are based upon the new management's current
understanding and assumptions concerning the Company's operations and,
accordingly, management may modify its approach on these measures, or take
additional measures, as it deems appropriate. Further, there can be no assurance
that management's strategy in responding to the Company's losses will continue
to prove successful.
Substantial Competition. The apparel industry is highly competitive.
Many of the Company's competitors have substantially greater financial,
distribution, marketing and other resources, including greater brand awareness,
than the Company. The Company competes with numerous apparel manufacturers,
including those with their own retail stores, as well as department stores,
specialty stores, retail chains and mass merchandisers which sell apparel under
their own labels. From time to time, the Company has lowered prices on certain
products to maintain market share, which has adversely affected the Company's
gross profit margin on such products. There can be no assurance that such price
competition will not recur.
Changing Fashion Trends. The Company's success depends in substantial
part on its ability to correctly anticipate, gauge and respond to rapidly
changing consumer preferences in a timely manner. If the Company materially
misjudges the market for a particular product or product line, the Company may
be faced with a substantial reduction in sales and excess inventory. There can
be no assurance that the Company will be able to correctly anticipate, gauge and
respond to changing consumer preferences in a timely manner in the future.
Economic Conditions. The apparel industry historically has been subject
to substantial cyclical variation, and a recession in the general economy or
uncertainties regarding future economic prospects that affect consumer spending
habits have in the past had, and may in the future have, a materially adverse
effect on the Company's results of operations. In addition, certain retailers,
including some of the Company's customers, are experiencing financial
difficulties which increase the risk of extending credit to such retailers. Many
retailers have attempted to improve their own operating efficiencies by
concentrating their purchasing power among an increasingly small group of
vendors. There can be no assurance that the Company will remain a preferred
vendor for its existing customers. A decrease in business from, or loss of, a
major customer could have a material adverse effect on the Company's results of
operations. In addition, there can be no assurance that the Company's factor
will approve the extension of credit to certain retail customers in the future.
If a customer's credit is not approved by the factor, the Company could either
assume the collection risk on sales to such customer itself, or choose not to
make sales to such customer.
Variability of Quarterly Results. The Company has experienced, and
expects to continue to experience, variability in its net sales and operating
results on a quarterly basis. The Company believes the factors which influence
this variability include (i) the timing of the Company's introduction of new
apparel collections, (ii) the level of consumer acceptance of each new
collection, (iii) general economic and industry conditions that affect consumer
spending and retailer purchasing, (v) the timing of the placement or
cancellation of customer orders, (v) the timing of expenditures in anticipation
of increased sales and customer delivery requirements, (vi) the weather and
(vii) actions of competitors. In addition, the women's apparel business is
highly seasonal.
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Reliance on Key Personnel. The operations of the Company depend to a
great extent on the efforts of its senior management, including Vinton W. Bacon,
Larry Brahim, Theodore B. Cooper, Jeffrey L. Friedman and Jan L. Grossman. The
extended loss of the services of one or more of these individuals could have a
materially adverse effect on the Company's operations.
Impact of Foreign Operations. In July 1994, the Company commenced
manufacturing products abroad. As a result, the Company's operations are subject
to the customary risks of doing business abroad, including, but not limited to,
transportation delays, political instability, expropriation, currency
fluctuations and the imposition of tariffs, import and export controls and other
non-tariff barriers (including changes in the allocation of quotas).
PART II - OTHER INFORMATION
Item 1. Legal Proceedings. None
Item 2. Changes in Securities. None
Item 3. Defaults Upon Senior Securities. None
Item 4. Submission of Matters to a Vote of Security Holders. None
Item 5. Other Information. None
Item 6. Exhibits and Reports on Form 8-K.
a. Exhibits - None
b. Reports on Form 8-K - None
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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.
JALATE, LTD.
Date: May 6, 1996 By /s/ Vinton W. Bacon
--------------------------------
Vinton W. Bacon,
Chief Executive Officer
12
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S STATEMENTS OF OPERATIONS AND BALANCE SHEETS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH MARCH 31, 1996 FORM 10-Q FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> MAR-31-1996
<CASH> 77
<SECURITIES> 0
<RECEIVABLES> 769
<ALLOWANCES> 950
<INVENTORY> 4,109
<CURRENT-ASSETS> 11,056
<PP&E> 969
<DEPRECIATION> 594
<TOTAL-ASSETS> 12,470
<CURRENT-LIABILITIES> 6,916
<BONDS> 0
0
0
<COMMON> 5,177
<OTHER-SE> 377
<TOTAL-LIABILITY-AND-EQUITY> 12,470
<SALES> 14,748
<TOTAL-REVENUES> 14,748
<CGS> 10,840
<TOTAL-COSTS> 3,617
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 281
<INTEREST-EXPENSE> 159
<INCOME-PRETAX> 217
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 217
<EPS-PRIMARY> 0.06
<EPS-DILUTED> 0
</TABLE>
