<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 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 September 30, 1997
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, CA 90021
(Address of principal executive offices) (Zip code)
(213) 765-5000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes __________ No __________
The number of shares outstanding of the registrant's Common Stock, no par value,
at October 31, 1997 was 3,403,000 shares.
1
<PAGE> 2
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
JALATE, LTD.
Condensed Balance Sheets
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
ASSETS SEPTEMBER 30, 1997 DECEMBER 31, 1996
------------------ -----------------
<S> <C> <C>
Current assets:
Cash $ 516 $ 97
Due from factor (154) 2,767
Trade accounts receivable, less allowance for doubtful
receivables of $1,202 in 1997 and $358 in 1996 814 821
Inventories 5,606 3,572
Refundable income taxes 9 120
Prepaid expenses and other current assets 227 170
------- ------
Total current assets 7,018 7,547
Property and equipment, at cost, net 919 1,050
Investment in joint venture 548 482
Other assets, at cost 143 94
------- ------
$ 8,628 $9,173
======= ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable to bank $1,294 $ 684
Trade accounts payable 3,447 2,871
Accrued expenses 439 254
------- ------
Total current liabilities 5,180 3,809
------- ------
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 5,311 5,311
shares; issued and outstanding 3,403,000 shares
Retained earnings (1,863) 53
------- ------
Total shareholders' equity 3,448 5,364
------- ------
$ 8,628 $9,173
======= ======
</TABLE>
See accompanying notes to condensed financial statements.
2
<PAGE> 3
JALATE, LTD.
CONDENSED STATEMENTS OF OPERATIONS
(in thousands except earning per share and weighted average shares outstanding)
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
1997 1996 1997 1996
---------------------- -------- ---------
<S> <C> <C> <C> <C>
NET SALES $ 13,167 $ 12,926 $ 41,732 $ 43,241
Cost of goods sold 10,183 9,084 32,049 31,491
-------- -------- -------- --------
GROSS PROFIT 2,998 3,842 9,683 11,750
-------- -------- -------- --------
Operating expenses 3,255 3,496 11,462 10,751
-------- -------- -------- --------
EARNINGS (LOSS) FROM OPERATIONS (257) 346 (1,779) 999
Other (Income) Expense:
Interest expense 226 126 568 448
Equity in earnings of joint venture (100) (18) (427) (224)
Other income (5) (2) (6) (5)
-------- -------- -------- --------
EARNINGS (LOSS) BEFORE INCOME TAXES $ (378) $ 240 $ (1,914) $ 780
======== ======== ======== ========
Income tax 2 -- 2 --
NET EARNINGS (LOSS) $ (380) $ 240 $ (1,916) $ 780
======== ======== ======== ========
Net Earnings (LOSS) per share (0.11) 0.07 (0.56) 0.23
Weighted Average Shares Outstanding 3,403,000 3,403,000 3,403,000 3,401,000
</TABLE>
See accompanying notes to condensed financial statements.
3
<PAGE> 4
JALATE, LTD.
Condensed Statements of Cash Flows
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine months ended
September 30
Cash flows from operating activities: 1997 1996
------- -------
<S> <C> <C>
Net earnings (loss) $(1,916) $ 780
------- -------
Adjustments to reconcile net earnings (loss) to net cash
provided by operating activities:
Depreciation and amortization 331 288
Compensation expense-stock options -- --
Changes in assets and liabilities (increase) decrease in:
Due from factor 2,921 (3,384)
Trade accounts receivable 7 (214)
Inventories (2,034) 690
Prepaid expenses and other current assets (57) (24)
Due from officers -- 106
Refundable income taxes 111 1,550
Other assets (49) (4)
Increase (decrease) in:
Trade accounts payable 576 104
Accrued expenses 185 (24)
------- -------
Total adjustments 2,101 (912)
------- -------
Net cash provided (used) by operating activities 75 (132)
------- -------
Cash flows from investing activities:
Capital expenditures (200) (518)
Investment in joint venture (66) (223)
------- -------
Net cash used in investing activities (266) (741)
------- -------
Cash flows from financing activities:
Proceeds from issuance of note payable to bank 610 980
------- -------
Net cash provided by financing activities 610 980
------- -------
Net increase in cash 419 107
Cash at beginning of period 97 92
------- -------
Cash at end of period $ 516 $ 199
======= =======
Supplemental disclosures of cash flow information
Cash paid during the period for
Interest $ 567 $ 440
Income taxes -- --
======= =======
</TABLE>
See accompanying notes to condensed financial statements.
4
<PAGE> 5
LINROZ MANUFACTURING COMPANY L.P.
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 full 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 8-X of the accompanying financial statements and
notes have been condensed and do not contain certain information that
will be included in the Company's annual financial statements and notify
thereto. For further information, refer to the financial statements and
related notes for the year ending December 31, 1996, included in Jalate,
Ltd.'s Annual Report and Form 10-K.
5
<PAGE> 6
LINROZ MANUFACTURING COMPANY, L.P.
Balance Sheets
<TABLE>
<CAPTION>
September 30, 1997 December 31, 1996
------------------ -----------------
(Unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash $ 455,000 $ 421,000
Accounts receivable from Jalate, Ltd. 135,000 95,000
Prepaid expenses and other current assets 35,000 37,000
---------- ----------
Total current assets 625,000 553,000
Property and equipment, at cost, net 850,000 915,000
Other assets, at cost 20,000 20,000
---------- ----------
$1,495,000 1,488,000
========== ==========
LIABILITIES AND PARTNERS' CAPITAL
Current Liabilities:
Current maturities of long term debt $ 119,000 $ 111,000
Trade accounts payable 4,000 50,000
Accrued expenses and other liabilities 54,000 42,000
---------- ----------
Total current liabilities 177,000 203,000
Long-term debt, less current maturities 231,000 321,000
Partners' capital 1,087,000 964,000
---------- ----------
$1,495,000 $1,488,000
========== ==========
</TABLE>
See accompanying notes to condensed financial statements.
6
<PAGE> 7
LINROZ MANUFACTURING COMPANY, L.P.
Condensed Statements of Earnings
For nine months ended September 30, 1997 and 1996
(Unaudited)
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Net sales $3,226,000 $2,622,000
Cost of sales 2,086,000 1,886,000
---------- ----------
Gross profit 1,140,000 736,000
Operating expenses 259,000 254,000
---------- ----------
Earnings from operations 881,000 482,000
Interest expense, net 28,000 35,000
---------- ----------
Net earnings $ 853,000 $ 447,000
========== ==========
</TABLE>
See accompanying notes to condensed financial statements.
7
<PAGE> 8
LINROZ MANUFACTURING COMPANY, L.P.
Statements of Cash Flows
For nine months ended September 30, 1997 and 1996
(Unaudited)
<TABLE>
<CAPTION>
1997 1996
--------- -------
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 853,000 $447,000
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization of property and equipment 175,000 152,000
Changes in assets and liabilities:
(Increases) decreases in:
Accounts receivables from Jalate, Ltd. (40,000) (44,000)
Prepaid expenses and other current assets 1,000 12,000
(Increases) decreases in:
Accounts payable (6,000) (19,000)
Accrued expenses and other current liabilities (19,000) (22,000)
--------- ---------
Net cash provided by operating activities 964,000 520,000
Cash flows from investing activities - capital expenditures (110,000) (87,000)
Cash flows from financing activities:
Principal payments on long-term debt (90,000) (82,000)
Distributions to partners (730,000) --
--------- ---------
Net cash provided by (used in) financing activities (820,000) (82,000)
--------- ---------
Net increase (decrease) in cash 34,000 351,000
Cash at beginning of year 421,000 121,000
--------- ---------
Cash at end of period ended September 30 $ 455,000 $472,000
========= =========
Supplemental disclosures of cash flow information - cash paid during
the year to date period ended September 30 for interest $ 28,000 $ 35,000
========= =========
</TABLE>
See accompanying notes to condensed financial statements.
8
<PAGE> 9
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 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, 1996 included in the Company's
annual report on Form 10-K.
2. INCOME TAXES
Income taxes for the interim period 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 September
30, 1997, the management's estimate of the 1997 effective tax rate is
zero.
3. EARNINGS PER SHARE
Net earnings (loss) 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 September 30, 1997 is as follows:
<TABLE>
<S> <C>
Piece Goods and Trim $1,425,000
Work in Proved 1,714,000
Finished Goods 2,387,000
----------
$5,606,000
==========
</TABLE>
5. INVESTMENT IN JOINT VENTURE
In November 1994, the Company entered into a manufacturing joint venture
(Joint Venture) with an affiliate of its largest sewing contractor (the
Partner) to improve the efficiency, quality and cost of its products.
The Joint Venture is a California Limited partnership. The Company and
the Partner each are equal limited partners and each hold one-half of
the outstanding capital stock of the sole general partner, a California
corporation. The Joint Venture commenced operations in May 1995.
For the nine months ended September 30, 1997 and 1996, purchases from
the Joint Venture aggregated $3,163,000 and $2,596,000, respectively.
The Company had accounts payable to the Joint Venture for purchases of
$135,000 and $85,000 at September 30, 1997 and 1996, respectively.
9
<PAGE> 10
The table below contains the summarized financial information for the Joint
Venture:
<TABLE>
<CAPTION>
Nine months ended September 30
1997 1996
--------- ---------
(Unaudited)
<S> <C> <C>
Net sales $3,226,000 $2,622,000
Gross profit 1,140,000 736,000
Operating expenses 259,000 254,000
Net earnings 853,000 447,000
========= ==========
</TABLE>
<TABLE>
<CAPTION>
September 30, 1997 December 31, 1996
------------------ -----------------
(Unaudited)
<S> <C> <C>
Current assets $ 625,000 $ 553,000
Non current assets 870,000 935,000
---------- ----------
Total assets 1,495,000 1,488,000
========== ==========
Current liabilities 177,000 203,000
Long-term debt 231,000 321,000
---------- ----------
Total liabilities 408,000 524,000
Partners' capital 1,087,000 964,000
---------- ----------
$1,495,000 $1,488,000
========== ==========
</TABLE>
6. ADOPTION OF ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board
("FASB") issued SFAS No. 128, "Earnings Per Share" which is effective
for the Company's fiscal year ending December 31, 1997. The new
standard simplifies the computation of earnings per share (EPS) and
increases comparability to international standards. Under SFAS No.
128, primary EPS is replaced by "Basic" EPS, which excludes dilution
and is computed by dividing income available to common shareholders
by the weighted-average number of common shares outstanding for the
period. "Diluted" EPS, which is computed similarly to fully diluted
EPS, reflects the potential dilution that could occur if securities
or other contracts to issue common stock were exercised or converted
into common stock.
In February 1997, the FASB issued SFAS No. 129, "Disclosure of
Information about Capital Structure", which is effective for the
Company's fiscal year ending December 31, 1997. This statement
establishes standards for disclosing information about an entity's
capital structure.
In June 1997, the FASB issued SFAS No. 130, "Reporting
Comprehensive Income", which is effective for the Company's fiscal
year ending December 31, 1998. This statement establishes standards
for the reporting and display of comprehensive income and its
components in financial statements and thereby report a measure of all
changes in equity of an enterprise that result from transactions and
other economic events other than transactions with owners.
In June 1997, the FASB issued SFAS No. 131, "Disclosure about
Segments of An Enterprise and Related Information", which is effective
for the Company's fiscal year ending December 31, 1998. This statement
changes the requirements under which publicly held companies report
disaggregated information.
The Company will adopt these statements on their respective
effective dates. The effect of these new accounting pronouncements has
not yet been determined by Management.
10
<PAGE> 11
ITEM 2
Managements 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 statements of operations data (unaudited) bear to net
sales and the percentage dollar increase (decrease) of such items (unaudited)
from period to period.
<TABLE>
<CAPTION>
Percent of Net Sales Percent of Net Sales
Three Months Ended Nine Months Ended
September 30 Increase September 30 Increase
1997 1996 (Decrease) 1997 1996 (Decrease)
------ ------- --------- ------ ------ ---------
<S> <C> <C> <C> <C> <C> <C>
Net sales 100.0% 100.0% 1.9% 100.0% 100.0% -3.5%
Cost of goods sold (77.3) (70.3) 12.1 (76.8) (72.8) 1.8
----- ----- ----- ----- ----- -----
Gross profit 22.7 29.7 (22.0) 23.2 27.2 (17.6)
----- ----- ----- ----- ----- -----
Operating expenses (24.7) (27.0) (6.9) (27.4) (24.9) 6.6
----- ----- ----- ----- ----- -----
Earnings (loss) from operations (2.0) 2.7 - (4.3) 2.3 -
Interest expense (1.7) (1.0) 78.2 (1.3) (1.0) 26.9
Equity in earnings of joint venture 0.8 0.1 455.6 1.0 0.5 90.6
----- ----- ----- ----- ----- -----
Earnings (loss) before taxes (2.9) 1.8 - (4.6) 1.8 -
===== ===== ===== ===== ===== =====
</TABLE>
GROSS SALES increased from $13,870,000 for the three months ended September 30,
1996 to $14,382,000 for the comparable period of fiscal 1997, an increase of
3.7%, and decreased from $46,629,000 for the nine months ended September 30,
1996 to $45,531,000, for the comparable period of fiscal 1997, a decrease of
2.4%. The decrease in gross sales for the nine month period was due to a
decrease in the volume of apparel sold from 4,814,000 to 4,721,000 units, a
decrease of 1.9%. The decrease in volume of apparel sold was due in part to a
3.7 % decrease in the number of units sold by the Jalate division and 14.0%
decrease in volume of the Zanoni division. The average wholesale prices
increased 3.6% for the Zanoni division and increased 2.4% for the Jalate
division.
RETURNS AND ALLOWANCES AND DISCOUNTS increased from $944,000 (6.9% of gross
sales) for the three months ended September 30, 1996 to $1,215,000 (8.4% of
gross sales) for the comparable period of fiscal 1997, an increase of 28.7% and
from $3,389,000 (7.3% of gross sales) for the nine months ended September 30,
1996 to $3,799,000 (8.4% of gross sales) for the comparable period of fiscal
1997, an increase of 12.1% due in part to returns of one line of apparel
(shipped during the fiscal second quarter) because of defective design and
production problems which were remedied during the fiscal third quarter.
As a result of the above mentioned factors, net sales increased from $12,926,000
for the three months ended September 30, 1996 to $13,167,000 for the comparable
period of fiscal 1997, an increase of 1.9% and decreased from $43,241,000 for
the nine months ended September 30, 1996 to $41,732,000 for the comparable
period of fiscal 1997, a decrease of 3.5%.
11
<PAGE> 12
GROSS PROFIT decreased from $3,842,000 (29.7% of net sales) for the three months
ended September 30, 1996 to $2,998,000 (22.8% of net sales) for the comparable
period of fiscal 1997, a decrease of 22.0%, and decreased from $11,750,000
(27.2% of net sales) for the nine months ended September 30, 1996 to $9,683,000
(23.2% of net sales) for the comparable period of fiscal 1997, a decrease of
17.6%.
The decrease in gross profit as a percent of net sales for both the three month
period and nine month period for fiscal 1997 compared to fiscal 1996 was due
primarily to lower margins earned on resales of customer returns and sales of
slow moving finished goods inventory.
OPERATING EXPENSES decreased from $3,496,000 (27.1% of net sales) for the three
months ended September 30, 1996 to $3,255,000 (24.7% of net sales) for the
comparable period of fiscal 1997, a decrease of 6.9%, and increased from
$10,751,000 (24.9% of net sales) for the nine months ended September 30, 1996 to
$11,462,000 (27.5% of net sales) for the comparable period of fiscal 1997, a
increase of 6.6%.
INTEREST EXPENSE primarily reflects interest payable on advances from the factor
and interest payable on loans against imports. Interest expense increased from
$126,000 for the three months ended September 30, 1996 to $226,000 for the
comparable period of fiscal 1997, an increase of 79.4%, and from $448,000 for
the nine months ended September 30, 1996 to $568,000 for the comparable period
of fiscal 1997, an increase of 26.9% partly due to a 62.9% increase in import
sales and financing required for the 78% increase in average monthly inventory
balances.
EQUITY IN EARNINGS OF JOINT VENTURE. Investment in the Company's 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 the joint venture when
received. Equity earnings increased from $18,000 for the three months ended
September 30, 1996 to income of $100,000 for the comparable period of fiscal
1997, and from income of $224,000 for the nine months ended September 30,
1996 to $427,000 for the comparable period of fiscal 1997. The increases are
mostly attributable to a 26.8% increase in net sales from $2,622,000 for the
nine month period ended September 30, 1996 to $3,226,000 for the comparable
period of fiscal 1997 and a 54.9% increase in gross margins from $736,000
(28.1% of net sales) for the nine month period ended September 30, 1996 to
$1,140,000 (35.3%) for the comparable period of fiscal 1997. The operating
expenses increased 2.0% from $254,000 (9.7% of net sales) for the nine month
period ended September 30, 1996 to $259,000 (8.0%) for the comparable period
of fiscal 1997.
INCOME TAXES for the interim periods 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 September 30, 1997, management's
estimate of the 1997 effective tax rate is zero.
LIQUIDITY AND CAPITAL RESOURCES. At September 30, 1997, working capital was
$1,838,000 compared to $4,431,000 at September 30, 1996. Cash provided by
operating activities aggregated $75,000 for the nine months ended September 30,
1997, compared with cash used by operating activities aggregating $132,000 for
the nine months ended September 30, 1996.
Inventory at September 30, 1997 was $5,606,000 as compared to $3,572,000 at
December 31, 1996.
12
<PAGE> 13
At September 30, 1997, the amount due to the factor consisted of the following:
<TABLE>
<S> <C>
Factor receivables $ 8,479,000
Advances from factor (8,147,000)
Open credit memos (486,000)
-----------
$ (154,000)
</TABLE>
The Company has an agreement with its factor, that provides for advances to the
Company of up to 100% of qualified factor receivables.
On October 3, 1997, the Company was notified by Wells Fargo HSBC Trade Bank,
N.A. (the "Bank") that the Company was in default of certain financial covenants
relating to the maintenance of required level of working capital and maximum
allowable year-to-date pre-tax loss (the "Events of Default") under the Credit
Agreement dated as of May 31, 1997, between the Company and the Bank (the
"Credit Agreement"). On October 23, 1997, the Bank agreed to waive compliance
with such financial covenants with respect to future periods until maturity of
the Note under the Credit Agreement on December 1, 1997 and to forbear until
December 1, 1997 from exercising its rights and remedies with respect to the
Events of Default, subject to the following amendments to the Credit Agreement:
(1) advances under the Credit Agreement shall be payable on the earlier of the
due date thereof or 30 days after such advance is made (rather than 60 days
after the date of such advance); and (2) the letter of credit facility under the
Credit Agreement shall terminate on October 1, 1997, rather than on December 1,
1997 (the "Credit Agreement Amendments").
In addition, the Company was notified by its factor, Heller Financial, Inc. (the
"Factor") in October 1997, that the Company was in default under certain
financial covenants in its existing Revolving Loan Facility Agreement. The
Factor waived these defaults on November 11, 1997. Additionally, the Factor has
made a proposal to amend the Company's existing factoring and financing facility
to provide for additional borrowing capacity equal to up to 50% of the value of
the Company's eligible raw materials and finished good inventory. The Factor
will consider including Work-in-Process and Trim as eligible for inventory
advances, subject to the Factor's customary eligibility requirements.
Availability under this proposal would be based on the Company's cash flow
projections and would be subject to a maximum outstanding loan limit of
$3,000,000. In addition, the Factor proposed to guaranty the payment of letters
of credit issued by a mutually agreed upon bank for the benefit of certain of
the Company's suppliers.
Assuming that the Company consummates the amendment with the Factor, the Company
believes that it will have sufficient working capital to maintain its current
level of operations over the short term. The Company intends to seek additional
sources of debt financing or equity investments in the Company in addition to
the amended facility the Factor proposes.
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.
13
<PAGE> 14
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 the 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.
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, women's apparel business is highly seasonal.
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, and Jeffrey L. Friedman. 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).
14
<PAGE> 15
PART II - OTHER INFORMATION
Item 1. Legal Proceedings. None
Item 2. Changes in Securities. None
Item 3. Defaults Upon Senior Securities. See "Management's
Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources."
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 -
3.1 Restated Articles of Incorporation of the Company (1)
3.2 Bylaws of the Company (1)
4.1 Form of stock certificate (2)
4.2 Underwriters' Warrant Agreement dated March 16, 1994, among the Company,
H.J. Meyers & Co., Inc. and Sanders Morris Mundy Inc. (6)
10.1 Letter Agreement, dated as of October 23, 1997, by and between Wells
Fargo HSBC Trade Bank, N.A. amending the Credit Agreement, dated as of
May 31, 1997, by and between the Company and Wells Fargo HSBC Trade
Bank, N.A.
b. Reports on Form 8-k - None
15
<PAGE> 16
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.
November 14, 1997 By: /s/ Fredrick A. Findley
---------------------------------------
Frederick A. Findley
Vice President, Finance
and Chief Financial Officer
16
<PAGE> 1
EXHIBIT 10.1
October 23, 1997
Mr. Frederick A. Findley
Vice President/CFO
Jalate Limited, Inc.
6557 Flotilla Street
City of Commerce, CA 90040
Dear Mr. Findley:
Reference is made to that certain Credit Agreement by and between Jalate
Limited, Inc., a California corporation ("Borrower") and Wells Fargo HSBC Trade
Bank, N.A. ("Bank") dated as of May 31, 1997 and all related documentation
executed in connection therewith ("Credit Agreement") governing, among other
things that certain Loans Against Imports Facility evidenced by a Loans Against
Imports Note in the amount of Two Million ($2,000,000) dollars ("Note").
Capitalized terms used herein but not defined shall have the meanings set forth
in the Credit Agreement.
By letter dated October 3, 1997 Borrower was notified by Bank of the
occurrence of certain events of default under the Credit Agreement ("Events of
Default"). Specifically, based on financial information provided to Bank by
Borrower for Borrower's fiscal eight month period ended August 31, 1997,
Borrower is in default of certain financial covenants ("Covenants") governing
Borrower's minimum required level of working capital and maximum allowable
year-to-date pre-tax loss.
Borrower has requested that Bank: 1) forbear until December 1, 1997,
from exercising its rights and remedies with regard to the above-described
Events of Default; and 2) waive compliance with the Covenants for future fiscal
periods through the maturity of the Note, December 1, 1997.
<PAGE> 2
Mr. Frederick A. Findley
October 23, 1997
Page 2
Bank will agree to the requested forbearance and waiver strictly subject
to the following conditions: 1) such forbearance by Bank shall not be deemed a
waiver by Bank of any of Bank's rights and remedies, or an agreement to forbear
or a waiver by Bank of any of Bank's rights and remedies, or an agreement to
forbear or a waiver by Bank with respect to any other Event of Default which may
occur; 2) that certain provision in the Note which states that "Each advance
shall be payable on the earlier of (i) the due date thereof, as inscribed by
Bank on its records, or (ii) 60 days after the date such advance is made." shall
be changed to state that "Each advance shall be payable on the earlier of the
earlier of (i) the the due date thereof, as inscribed by Bank on its records, or
(ii) 30 days after the date such advance is made."; and 3) the Facility
Termination Date of the L/C Facility shall be changed from December 1, 1997 to
October 1, 1997. Except as modified by this letter, the terms and conditions of
the Credit Agreement shall remain in full force and effect.
Please acknowledge your agreement to the foregoing by signing a copy of
this letter in the space provided below and returning it to Bank. The
forbearance and waiver provided herein shall not be effective until this letter
has been signed by Borrower and returned to Bank.
Sincerely,
/s/ Greg Richardson
Vice President
Acknowledged and Agreed to by:
JALATE LIMITED, INC.
By: /s/ Fred Findley
Title: _______________________
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