-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Ccyk3VFPq0QLvr2O873Kq3hpE94BYVHZ9h2fhzAtPmIJsQli2anEcYnh5cX0vvyc YLJatBcGvLPxO59x27ikig== 0000950148-98-001342.txt : 19980518 0000950148-98-001342.hdr.sgml : 19980518 ACCESSION NUMBER: 0000950148-98-001342 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980515 SROS: AMEX FILER: COMPANY DATA: COMPANY CONFORMED NAME: JALATE LTD INC CENTRAL INDEX KEY: 0000914026 STANDARD INDUSTRIAL CLASSIFICATION: WOMEN'S, MISSES', AND JUNIORS OUTERWEAR [2330] IRS NUMBER: 954121885 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-12868 FILM NUMBER: 98624692 BUSINESS ADDRESS: STREET 1: 1675 SOUTH ALAMEDA STREET CITY: LOS ANGELES STATE: CA ZIP: 90021 BUSINESS PHONE: 2137655000 MAIL ADDRESS: STREET 1: 1675 SOUTH ALAMEDA STREET CITY: LOS ANGELES STATE: CA ZIP: 90021 FORMER COMPANY: FORMER CONFORMED NAME: JALATE LTD DATE OF NAME CHANGE: 19940301 10-Q 1 FORM 10-Q 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 March 31,1998 Or [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from ____________ to ____________ Commission File Number 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 X No _______ The number of shares outstanding of the registrant's Common Stock, no par value, at May 11, 1998 was 3,403,000 shares. This Form 10-Q contains 19 pages. =========================================================================== 2 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS. JALATE, LTD. Condensed Balance Sheets (In thousands) (Unaudited)
December 31, 1997 March 31, 1998 ----------------- -------------- ASSETS Current assets: Cash $ 170 $ 69 Trade accounts receivable, less allowance for doubtful receivables of $324 in 1997 and $284 in 1998 119 246 Inventories 4,812 4,484 Prepaid expenses and other current assets 201 177 --------------- ------------ Total current assets 5,302 4,976 Property and equipment, at cost, net of accumulated depreciation of $1,366 in 1997 and $1,467 in 1998 961 1,344 Investment in unconsolidated subsidiaries 551 580 Other assets, at cost, net 79 286 --------------- ------------ $ 6,893 $ 7,186 =============== ============ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Note payable to bank $ 1,120 $ 820 Current portion of long term liabilities -- 43 Due to factor 1,315 506 Trade accounts payable 3,235 3,387 Accrued expenses 401 374 --------------- ------------ Total current liabilities 6,071 5,130 --------------- ------------ Long term liabilities: Capitalized lease obligations, less current portion -- 139 Subordinated notes payable -- 950 --------------- ------------ Total long term liabilities -- 1,089 --------------- ------------ 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 3,403,000 shares 5,311 5,576 Accumulated deficit (4,489) (4,609) --------------- ------------ Total shareholders' equity 822 967 --------------- ------------ $ 6,893 $ 7,186 =============== ============
See accompanying notes to condensed financial statements. 2 3 JALATE, LTD. Condensed Statements of Operations (In thousands except Net loss per share and Weighted average shares outstanding) (Unaudited)
Three months ended March 31, -------------------------------- 1997 1998 ------------- ------------ Net sales $ 13,919 $ 12,242 Cost of goods sold 10,091 8,906 ------------- ------------ Gross profit 3,828 3,336 Operating expenses 3,887 2,948 ------------- ------------ Earnings (loss) from operations (59) 388 Other (income) expense: Interest expense 131 243 Equity in (income) loss of unconsolidated subsidiaries (156) 265 Other (income) -- (1) ------------- ------------ Total other (income) expense (25) 507 ------------- ------------ Loss before income taxes (34) (119) Income tax expense -- -- ------------- ------------ Net loss $ (34) $ (119) ============= ============ Net loss per share: Basic $ (0.01) $ (0.03) Diluted (0.01) (0.03) ============= ============ Weighted average shares outstanding: Basic 3,403,000 3,403,000 Diluted 3,403,000 3,403,000 ============= ============
See accompanying notes to condensed financial statements. 3 4 JALATE, LTD. Condensed Statements of Cash Flows (In thousands) (Unaudited)
Three months ended March 31, -------------------------------- 1997 1998 ------------- ------------ Cash flows from operating activities: Net loss $ (34) $ (119) ------------- ------------ Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization 105 119 Increase (decrease) in allowance for doubtful receivables 582 (210) Equity in net (earnings) loss of unconsolidated subsidiaries (85) 265 Changes in assets and liabilities: (Increase) decrease in: Trade accounts receivable (644) 82 Inventories (1,494) 328 Refundable income taxes 6 -- Prepaid expenses and other current assets (190) 24 Other assets 4 (10) Increase (decrease) in: Accounts payable 675 152 Accrued expenses 269 (28) ------------- ------------ Total adjustments (772) 722 ------------- ------------ Net cash provided by (used in) operating activities (806) 603 ------------- ------------ Cash flows from investing activities: Capital expenditures (69) (484) Investment in unconsolidated subsidiaries -- (314) ------------- ------------ Net cash used in investing activities (69) (798) ------------- ------------ Cash flows from financing activities: Repayment to factor, net (545) (809) Proceeds from issuance of (repayment of) note payable to bank 1,351 (300) Distributions from unconsolidated subsidiaries -- 20 Proceeds from capitalized leases, net -- 183 Proceeds from issuance of long term subordinated debt -- 950 Proceeds from issuance of warrants -- 50 ------------- ------------ Net cash provided by financing activities 806 94 ------------- ------------ Net decrease in cash (69) (101) Cash at beginning of period 97 170 ------------- ------------ Cash at end of period $ 28 $ 69 ============= ============ Supplemental disclosures of cash flow information: Cash payments (refunds) during the period for - Interest $ 131 $ 213 Income taxes -- -- ============= ============
See accompanying notes to condensed financial statements. 4 5 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 of Jalate, Ltd. (the Company) are generally prepared at the end of each fiscal year 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, 1997 included in the Company's annual report on Form 10-K. 2. INVENTORIES A summary of inventories is as follows:
December 31, 1997 March 31, 1998 ----------------- -------------- Piece goods and trim $ 1,828,000 $ 1,463,000 Work in process 1,657,000 1,614,000 Finished goods 1,327,000 1,407,000 ----------------- -------------- $ 4,812,000 $ 4,484,000 ================= ==============
3. INVESTMENT IN UNCONSOLIDATED SUBSIDIARIES AIRSHOP. In October 1997, the Company purchased 40% of the outstanding common stock and 100% of the outstanding convertible preferred stock of Airshop Ltd. for $500,000, of which $186,000 was paid in 1997 and the remaining $314,000 was paid in 1998. The Company also has an option, through December 31, 2000, to purchase an additional 11% of the outstanding common stock of Airshop. Airshop sells junior women's apparel, footwear, cosmetics and accessories through mail order catalogs and its internet website. Airshop, which began operations during 1997, is currently in the start-up phase of its existence. The Company, which accounts for its investment in Airshop under the equity method of accounting, recorded $40,000 as its share of Airshop's loss in 1997 and $398,000 as its share of Airshop's loss in the first quarter of 1998. JOINT VENTURE. In November 1994, the Company entered into a manufacturing joint venture, Linroz Manufacturing Company, L.P. (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 three months ended March 31, 1997 and 1998, purchases from the Joint Venture aggregated $1,109,000 and $990,000, respectively. The Company had accounts payable to the Joint Venture for purchases of $113,000 and $141,000 at March 31, 1997 and 1998, respectively. The tables below contain unaudited summarized financial information for the Joint Venture: 5 6
Three months ended March 31, -------------------------------- 1997 1998 ------------- ------------ Net sales $ 1,109,000 $ 990,000 Gross profit 411,000 355,000 Operating expenses 88,000 82,000 Net earnings 313,000 266,000 ============= ============
December 31, 1997 March 31, 1998 ----------------- -------------- Current assets $ 405,000 $ 626,000 Non current assets 811,000 764,000 ----------------- -------------- Total assets $ 1,216,000 $ 1,390,000 ================= ============== Current liabilities $ 205,000 $ 183,000 Long-term debt 201,000 171,000 ----------------- -------------- Total liabilities 406,000 354,000 Partners' capital 810,000 1,036,000 ----------------- -------------- $ 1,216,000 $ 1,390,000 ================= ==============
4. NOTE PAYABLE TO BANK The Company has a term loan with its bank lender. On December 31, 1997, the Company was in default of certain restrictive covenants under the loan agreement dated June 30, 1997. Subsequently, the agreement was renegotiated effective January 21, 1998. On March 31, 1998, the Company was in default of certain restrictive covenants under this new agreement. On April 1, 1998, the bank agreed to waive the Company's compliance with those covenants through June 30, 1998. The principal balance of this loan was $1,120,000 on December 31, 1997 and, in keeping with the terms of the loan agreement, had been paid down to $820,000 at March 31, 1998. The loan is scheduled to be paid off by July 17, 1998. 5. FACTOR AGREEMENT The Company has an agreement with its factor that provides for advances to the Company of up to 100% of qualified accounts receivable. The Company was in default of certain restrictive covenants under this factoring agreement from December 31, 1997 through March 31, 1998. On April 1, 1998, these defaults were waived by the factor, and the agreement with the factor was amended by revising these covenants for 1998. The Company currently is in compliance with those amended covenants. In addition, this revised factor agreement increased the amount of the revolving loan available to the Company. Under this revised agreement, the Company may borrow up to $2,200,000 in addition to the advances against the total qualified receivables. This $2,200,000 amount reduces to $1,500,000 on July 1, 1998. As of March 31, 1998, approximately $500,000 was available for borrowings under the agreement. 6. CAPITALIZED LEASES The Company leases various pieces of equipment, primarily computers, under long term leases and has the option to purchase the equipment for a nominal amount at the termination of the lease. At March 31, 1998, future minimum lease payments for these assets aggregate $207,000 ($45,000 per year) through September 2002, of which $25,000 represents interest. 7. SUBORDINATED NOTES PAYABLE AND WARRANTS On January 27, 1998, the Company issued subordinated notes payable to certain shareholders of the Company, totaling $950,000. These notes call for interest (at 10% per annum) to be paid quarterly beginning April 30, 1998 and quarterly installments of principal commencing April 30, 1999. These notes mature on January 31, 2000 and are secured by the Company's interest in Airshop, Ltd. In connection with these transactions, the Company sold 500,000 stock purchase warrants to the shareholders for $50,000. The warrants are exercisable at an exercise price of $1.625 per share and expire on January 27, 2003. These warrants were 6 7 independently valued at $265,000. The $215,000 discount (the difference between the $265,000 valuation and the $50,000 cash received) is included in other assets and is being amortized over the life of the notes, with $9,000 being expensed monthly beginning February 1998. 8. 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 March 31, 1998, the management's estimate of the 1998 effective tax rate is zero. 9. EARNINGS (LOSS) PER SHARE Basic earnings (loss) per share represents net earnings (loss) divided by the weighted average number of shares of common stock outstanding. Diluted earnings (loss) per share represents net earnings (loss) divided by the weighted average number of shares of common stock outstanding inclusive of any dilutive impact of common stock equivalents. During the fiscal quarters ended March 31, 1997 and March 31, 1998, there was no difference between basic and diluted earnings per share because the impact of options to purchase common stock was antidilutive. 10. RECENTLY ISSUED PRONOUNCEMENTS COMPREHENSIVE INCOME. The Company adopted Statement of Financial Accounting Standards (FAS) No. 130 "Reporting Comprehensive Income" on January 1, 1998. There were no differences between "net loss" and "comprehensive income" as those terms are defined in FAS 130. SEGMENT REPORTING. In June 1997, the Financial Accounting Standards Board issued Statement of Accounting Financial Standards Number 131, "Disclosure about Segments of An Enterprise and Related Information" (FAS 131). FAS 131 supersedes previous reporting requirements for reporting on segments of a business enterprise and is effective for the Company's fiscal year ending December 31, 1998. The Company plans to implement FAS 131 in connection with its 1998 fiscal year end reporting on Form 10-K. As FAS 131 only requires additional disclosures, the Company expects there will be no impact on its financial position or results of operations from the implementation. START-UP ACTIVITIES. On April 3, 1998, the American Institute of Certified Public Accountants Accounting Standards Executive Committee issued Statement of Position 98-5 (SOP 98-5), "Reporting on the Costs of Start-up Activities." SOP 98-5 requires that costs of start-up activities, including organization costs, be expensed as incurred. SOP 98-5 is effective for financial statements for fiscal years beginning after December 15, 1998. In the fiscal year in which the SOP is first adopted, the application should be reported as a cumulative effect of a change in accounting principle. The Company has not yet determined whether the application of SOP 98-5 will have a material impact upon the Company's financial position or results of operations. The Company will adopt this statement by the effective date. The effect of this pronouncement has not yet been determined by management. 7 8 LINROZ MANUFACTURING COMPANY, L.P. Condensed Balance Sheets (Unaudited)
December 31, 1997 March 31, 1998 ----------------- -------------- ASSETS Current Assets: Cash $ 237,000 $ 457,000 Accounts receivable from Jalate, Ltd. 143,000 141,000 Prepaid expenses and other current assets 25,000 28,000 ---------- ---------- Total current assets 405,000 626,000 Property and equipment, at cost, net of accumulated depreciation of $570,000 in 1997 and $635,000 in 1998 791,000 744,000 Other assets, at cost 20,000 20,000 ---------- ---------- $1,216,000 $1,390,000 ========== ========== LIABILITIES AND PARTNERS' CAPITAL Current liabilities: Current maturities of long term debt $ 120,000 $ 120,000 Trade accounts payable 34,000 7,000 Accrued expenses and other liabilities 51,000 56,000 ---------- ---------- Total current liabilities 205,000 183,000 Long-term debt, less current maturities 201,000 171,000 Partners' capital 810,000 1,036,000 ---------- ---------- $1,216,000 $1,390,000 ========== ==========
See accompanying notes to condensed financial statements. 8 9 LINROZ MANUFACTURING COMPANY, L.P. Condensed Statements of Operations (Unaudited)
Three months ended March 31, -------------------------------- 1997 1998 ------------- ------------ Net sales $ 1,109,000 $ 990,000 Cost of sales 698,000 635,000 ------------- ------------ Gross profit 411,000 355,000 Operating expenses 88,000 82,000 ------------- ------------ Earnings from operations 323,000 273,000 Interest expense, net 10,000 7,000 ------------- ------------ Net earnings $ 313,000 $ 266,000 ============= ============
See accompanying notes to condensed financial statements. 9 10 LINROZ MANUFACTURING COMPANY, L.P. Condensed Statements of Cash Flows (Unaudited)
Three months ended March 31, -------------------------------- 1997 1998 ------------- ------------ Cash flows from operating activities: Net earnings $ 313,000 $ 266,000 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization of property and equipment 58,000 66,000 Changes in assets and liabilities: (Increase) decrease in: Accounts receivable from Jalate, Ltd (18,000) 2,000 Prepaid expenses and other current assets 28,000 (3,000) Increase (decrease) in: Accounts payable 3,000 (27,000) Accrued expenses and other current liabilities (25,000) 5,000 --------- --------- Net cash provided by operating activities 359,000 309,000 --------- --------- Cash flows from investing activities: Cash used in capital expenditures (31,000) (19,000) --------- --------- Cash flows from financing activities: Principal payments on long-term debt (26,000) (30,000) Distributions to partners (150,000) (40,000) --------- --------- Net cash used in financing activities (176,000) (70,000) --------- --------- Net increase in cash 152,000 220,000 Cash at beginning of period 421,000 237,000 --------- --------- Cash at end of period $ 573,000 $ 457,000 ========= ========= Supplemental disclosures of cash flow information: Cash paid during the period for interest $ 10,000 $ 7,000 ========= =========
See accompanying notes to condensed financial statements. 10 11 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 of Linroz Manufacturing Company, L.P. (the Company) are generally prepared at the end of each fiscal year 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 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 notes thereto. For further information, refer to the financial statements and related notes for the year ending December 31, 1997, included in Jalate, Ltd.'s annual report on Form 10-K. 11 12 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. As contemplated by the Securities and Exchange Commission under Instructions 2 and 3 to Item 303 (b) of Regulation S-K, this discussion and analysis has been prepared assuming that the user has read or has access to Management's Discussion and Analysis for the fiscal year ended December 31, 1997 and the material presented in the Company's Form 8-K dated April 1, 1998. Therefore some material which has not changed materially from that presented in the Form 10-K for December 31, 1997 and the Form 8-K dated April 1, 1998 may have been omitted from this Form 10-Q. 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.
Percent of Net Sales Three months ended March 31, -------------------------------- Increase 1997 1998 (Decrease) ------------- ------------ ------------ Net sales 100.0% 100.0% (12.0)% Cost of goods sold (72.5) (72.7) (11.7) ------------- ------------ ----------- Gross profit 27.5 27.3 (12.9) Operating expenses (27.9) (24.1) (24.2) ------------- ------------ ----------- Earnings (loss) from operations (0.4) 3.2 * Interest expense (0.9) (2.0) 85.5 Equity in earnings (loss) of unconsolidated subsidiaries 1.1 (2.2) * ------------- ------------ ----------- Net loss before taxes (0.2) (1.0) * ============= ============ ===========
* This percent change is not meaningful. GROSS SALES decreased from $15,047,000 for the three months ended March 31, 1997 to $13,330,000 for the comparable period of fiscal 1998, a decrease of 11.4%. The decrease in gross sales was due to a decrease in the volume of apparel sold from 1,642,000 to 1,399,000 units, a decrease of 14.8%, which was partially offset by an increase in the average unit price of items sold. The decrease in volume of apparel sold was due in part to a 19.8 % decrease in the number of units sold by the Jalate division and a 35.6% decrease in the number of units sold by the Zanoni division, which were partially offset by a 118.6% increase in the number of units sold by the Kids division that started in the first quarter of 1997. These decreases in sales volume were due in part to the significant reduction of product imported from the Far East in order to reduce the Company's exposure to loss on unsold inventory and to reduce the need for working capital to finance inventory. The average wholesale unit prices increased 8.7% for the Jalate division, increased 11.3% for the Zanoni division and decreased 0.8% for the Kids division. 12 13 RETURNS AND ALLOWANCES AND DISCOUNTS decreased from $1,128,000 (7.5% of gross sales) for the three months ended March 31, 1997 to $1,088,000 (8.2% of gross sales) for the comparable period of fiscal 1998, a decrease of 3.5% mainly due to the 11.4% decrease in gross sales from 1997 to 1998. NET SALES decreased from $13,919,000 for the three months ended March 31, 1997 to $12,242,000 for the comparable period of fiscal 1998, a decrease of 12.0% as a result of the above mentioned factors. COST OF GOODS SOLD decreased from $10,091,000 (72.5% of net sales) for the three months ended March 31, 1997 to $8,906,000 (72.7% of net sales) for the comparable period of fiscal 1998, a decrease of 11.7% primarily due to a reduction of net sales by 12.0%. GROSS PROFIT decreased from $3,828,000 (27.5% of net sales) for the three months ended March 31, 1997 to $3,336,000 (27.3% of net sales) for the comparable period of fiscal 1998, a decrease of 12.9% primarily due to the reduction in net sales. OPERATING EXPENSES decreased from $3,887,000 (27.9% of net sales) for the three months ended March 31, 1997 to $2,948,000 (24.1% of net sales) for the comparable period of fiscal 1998, a decrease of 24.2% mainly due to staff reductions and other cost cutting actions taken by management during the second half of fiscal 1997. INTEREST EXPENSE primarily reflects interest on advances from the factor, the bank term loan, and the subordinated notes payable. Interest expense increased from $131,000 for the three months ended March 31, 1997 to $243,000 for the comparable period of fiscal 1998, an increase of 85.5% due in part to an increase in interest rates charged to the Company and to an increase in total borrowings needed to meet the working capital requirements for funding the Company's continuing operations. EQUITY IN EARNINGS (LOSS) OF UNCONSOLIDATED SUBSIDIARIES. Investment in the Company's unconsolidated subsidiaries is accounted for by the equity method, under which the Company's share of earnings or loss of the subsidiaries is reflected in income or expense as earned and distributions are credited against the investment in the subsidiaries when received. Joint Venture. Equity earnings decreased from $156,000 for the three months ended March 31, 1997 to $133,000 for the comparable period of fiscal 1998. This 14.7% decrease was mostly attributable to a 10.7% decrease in net sales of the Joint Venture from the first quarter of 1997 to the first quarter of 1998. Airshop. In the fourth quarter of 1997, the Company acquired an interest in Airshop, Ltd. which is still in its start-up phase. The Company's share of Airshop's net loss for the three months ended March 31, 1998 was $398,000. INCOME TAXES for interim periods are 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 March 31, 1998, management's estimate of the 1998 effective tax rate is zero. LIQUIDITY AND CAPITAL RESOURCES At December 31, 1997, the Company had a working capital deficiency of $769,000 compared to a working capital deficiency of $154,000 at March 31, 1998. Cash used by operating activities aggregated $806,000 for the three months ended March 31, 1997 compared with cash provided by operating activities aggregating $603,000 for the three months ended March 31, 1998. Inventory at December 31, 1997 was $4,812,000 compared to $4,484,000 at March 31, 1998. At March 31, 1998, the amount due to the factor consisted of the following: Factor receivables $9,702,000 Advances from factor (9,660,000) Open credit memos (548,000) ---------- $ (506,000) ==========
13 14 The Company has an agreement with its factor, as more completely described in the Company's annual report on Form 10-K, that provides for advances to the Company of up to 100% of qualified accounts receivable plus a revolving loan facility. The Company was in default of certain restrictive covenants under this factoring agreement from December 31, 1997 through March 31, 1998. On April 1, 1998, these defaults were waived by the factor, and the agreement with the factor was amended by revising these covenants for 1998. The Company currently is in compliance with those amended covenants. Under this revised factor agreement, the amount of the revolving loan available to the Company was increased to allow the Company to borrow up to $2,200,000 in addition to the advances against the total qualified receivables. This $2,200,000 amount reduces to $1,500,000 on July 1, 1998. As of March 31, 1998, approximately $500,000 was available for borrowings under the agreement. In addition, the Company has a term loan with its bank lender. On December 31, 1997, the Company was in default of certain restrictive covenants under the loan agreement dated June 30, 1997. Subsequently, a new agreement was negotiated effective January 21, 1998. On March 31, 1998, the Company was in default of certain restrictive covenants under this new agreement. On April 1, 1998, the bank agreed to waive the Company's compliance with those covenants through June 30, 1998. The principal balance of this loan was $1,120,000 on December 31, 1997 and, in keeping with the terms of the loan agreement, had been paid down to $820,000 at March 31, 1998. The loan is scheduled to be paid off by July 17, 1998. On January 27, 1998, the Company obtained $1,000,000 in additional capital from four shareholders. This amount took the form of $950,000 in subordinated notes payable plus $50,000 in payment for warrants to purchase 500,000 shares of the Company's common stock. These notes call for interest (at 10% per annum) to be paid quarterly beginning April 30, 1998 and quarterly installments of principal commencing April 30, 1999. These notes mature on January 31, 2000 and are secured by the Company's investment in Airshop, Ltd. These warrants, which are exercisable at a price of $1.625 per share, expire on January 27, 2003. These warrants were independently valued at $265,000. The $215,000 discount (the difference between the $265,000 valuation and the $50,000 cash received) is being amortized over the life of the notes with $9,000 being expensed monthly beginning February 1998. The Company is actively pursuing various avenues of providing for its long term liquidity needs and assuring its long term vitality including additional debt financing, new equity investments, and possible merger or other business combinations. Negotiations are currently underway with the Chorus Line Corporation regarding a possible merger of the two companies. However, there is no assurance that additional financing, if obtained, will be sufficient to sustain operations or the merger will be completed. Should management be unsuccessful, the Company may be required to restructure or curtail operations. MERGER On April 13, 1998, the Company signed a letter of intent to merge with Chorus Line Corporation, a competitor of the Company. Chorus Line is a privately held company with revenues approximately triple those of the Company. Consummation of the merger is subject to satisfactory completion of due diligence procedures, negotiation and execution of a definitive merger agreement, approval by the Company's board and stockholders, and other customary closing conditions. It is anticipated that the merger will be completed by September or October 1998. RECENTLY ISSUED PRONOUNCEMENTS The Company adopted Statement of Financial Accounting Standards (FAS) No. 130 "Reporting Comprehensive Income" on January 1, 1998. There were no differences between "net loss" and "comprehensive income" as those terms are defined in FAS 130. In June 1997, the Financial Accounting Standards Board issued Statement of Accounting Financial Standards Number 131, "Disclosure about Segments of An Enterprise and Related Information" (FAS 131). FAS 131 supersedes previous reporting requirements for reporting on segments of a business enterprise and is effective for the Company's fiscal year ending December 31, 1998. The Company plans to implement FAS 131 in connection with its 1998 fiscal year end reporting on Form 10-K. As FAS 131 only requires additional disclosures, the Company expects there will be no impact on its financial position or results of operations from the implementation. On April 3, 1998, the American Institute of Certified Public Accountants Accounting Standards Executive Committee issued Statement of Position 98-5 (SOP 98-5), "Reporting on the Costs of Start-up Activities." SOP 98-5 requires that costs of start-up activities, including organization costs, be expensed as incurred. SOP 98-5 is effective for financial statements for fiscal years beginning after December 15, 1998. In the fiscal year in which the SOP is first adopted, the application should be reported as a 14 15 cumulative effect of a change in accounting principle. The Company has not yet determined whether the application of SOP 98-5 will have a material impact upon the Company's financial position or results of operations. The Company will adopt this statement by the effective date. The effect of this pronouncement has not yet been determined by management. 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. 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). LIQUIDITY. See comments under "Liquidity and Capital Resources." 15 16 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK. The Company does not invest in derivative financial instruments, other financial instruments or derivative commodity instruments. However, significant increases in interest rates could have a materially adverse effect on the Company's operations through its bank borrowings and factor contracts. Likewise, significant increases in the cost of the Company's labor or raw materials could have a materially adverse effect on the Company's operations to the extent that these increases could not be passed on to the Company's customers. Also see "Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations -- Factors That May Affect Future Results." 16 17 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. None. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS. On January 27, 1998, the Company issued subordinated notes payable to certain shareholders of the Company, totaling $950,000. These notes call for interest (at 10% per annum) to be paid quarterly beginning April 30, 1998 and quarterly installments of principal commencing April 30, 1999. These notes mature on January 31, 2000 and are secured by the Company's investment in Airshop, Ltd. In connection with these transactions, the Company sold 500,000 stock purchase warrants to the shareholders for $50,000. The warrants are exercisable at an exercise price of $1.625 per share and expire on January 27, 2003. These warrants were independently valued at $265,000. The $215,000 discount (the difference between the $265,000 valuation and the $50,000 cash received) is being amortized over the life of the notes, with $9,000 being expensed monthly beginning February 1998. ITEM 3. DEFAULTS UPON SENIOR SECURITIES. The Company has an agreement with its factor, as more completely described in the Company's annual report on Form 10-K, that provides for advances to the Company of up to 100% of qualified accounts receivable plus a revolving loan facility. The Company was in default of certain restrictive covenants under this factoring agreement from December 31, 1997 through March 31, 1998. On April 1, 1998, these defaults were waived by the factor, and the agreement with the factor was amended by revising these covenants for 1998. The Company currently is in compliance with those amended covenants. Under this revised factor agreement, the amount of the revolving loan available to the Company was increased to allow the Company to borrow up to $2,200,000 in addition to the advances against the total qualified receivables. This $2,200,000 amount reduces to $1,500,000 on July 1, 1998. As of March 31, 1998, approximately $500,000 was available for borrowings under the agreement. In addition, the Company has a term loan with its bank lender. On December 31, 1997, the Company was in default of certain restrictive covenants under the loan agreement dated June 30, 1997. Subsequently, a new agreement was negotiated effective January 21, 1998. On March 31, 1998, the Company was in default of certain restrictive covenants under this new agreement. On April 1, 1998, the bank agreed to waive the Company's compliance with those covenants through June 30, 1998. The principal balance of this loan was $1,120,000 on December 31, 1997 and, in keeping with the terms of the loan agreement, had been paid down to $820,000 at March 31, 1998. The loan is scheduled to be paid off by July 17, 1998. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None. ITEM 5. OTHER INFORMATION. None. ITEM 6. EXHIBITS AND REPORT ON FORM 8-K. a. Exhibits - The following is a list of exhibits filed as a part of this report.
Exhibit Number Description - ------- ------------------------------------------------------------------ 3.1 Restated Articles of Incorporation of the Company. 3.2 Amendment to by-laws reducing the number of directors to seven. 3.3 Restated by-laws of the Company.
17 18 4.1 Form of stock certificate. [4.3*] (1) 4.2 Underwriters' Warrant Agreement dated March 16, 1994, among the Company, H.J. Meyers & Co., Inc. and Sanders Morris Mundy Inc. [4.2*] (2) 10.1 Letter of Intent to merge with Chorus Line Corporation, a competitor of the Company.
- ---------------------- * Indicates the exhibit number in the original filing. (1) Filed as an exhibit to Amendment No. 1 to Registration Statement on Form S-1 filed with the Securities and Exchange Commission on March 16, 1994. (2) Filed as an exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 1994. b. Reports on Form 8-K. The Company filed a Form 8-K on April 13, 1998 in which it disclosed that both its factor and its bank had issued waivers from technical defaults of certain restrictive covenants contained in the agreements between the factor/bank and the Company. In addition, the factor revised its agreement with the Company granting less restrictive covenants and increased the amount available under the revolving credit facility. Also see "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." c. Financial Data Schedule. The Financial Data Schedule is filed as Exhibit 27 in the EDGAR (electronic) version of this report only. 18 19 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. May 15, 1998 By:/s/ FREDERICK A. FINDLEY --------------------------------------- Frederick A. Findley Vice President, Finance and Chief Financial Officer 19 EX-3.1 2 EXHIBIT 3.1 1 EXHIBIT 3.1 RESTATED ARTICLES OF INCORPORATION OF JALATE, LTD. a California corporation Revised on February 25, 1997 One: The name of this corporation is Jalate, Ltd. Two: The purpose of this corporation is to engage in any lawful act or activity for which a corporation may be organized under the General Corporation Law of California other than the banking business, the trust company business or the practice of a profession permitted to be incorporated by the California Corporations Code. Three: This corporation is authorized to issue two classes of shares designated, respectively, "Common Stock" and "Preferred Stock." The number of shares of Common Stock authorized to be issued is 20,000,000 and the number of shares of Preferred Stock authorized to be issued is 3,000,000, all of which shall be without par value. Upon the amendment of this Article Three to read as hereinabove set forth, each outstanding share of the Common Stock of this corporation shall be split up and converted into 0.86777 shares of Common Stock. Four: The Board of Directors of this corporation, without further action by the holders of the outstanding shares of Common Stock or Preferred Stock, if any, may issue the Preferred Stock from time to time in one or more series, may fix the number of shares and the designation of any wholly unissued series of Preferred Stock, may determine or alter the rights, preferences, privileges and restrictions granted to or imposed upon any such series and, within the limits and restrictions stated in any resolution or resolutions of the Board of Directors originally fixing the number of shares constituting any series of Preferred Stock, may increase or decrease (but not below the number of shares of such series then outstanding) the number of shares of such series subsequent to the issue of shares of that series. Five: The liability of the directors of this corporation for monetary damages shall be eliminated to the fullest extent permissible under California law. This corporation is authorized to provide indemnification of agents (as defined in Section 317 of the California General Corporation Law) through bylaw provisions, agreements with agents, vote of shareholders or disinterested directors or otherwise, in excess of the indemnification otherwise permitted by Section 317 of the California General Corporation Law, subject only 20 2 to the applicable limits set forth in Section 204 of the California General Corporation Law with respect to actions for breach of duty to the corporation and its shareholders. This corporation is authorized to purchase and maintain insurance on behalf of its agents against any liability asserted against or incurred by the agent in such capacity or arising out of the agent's status as such from a company, the shares of which are owned in whole or in part by this corporation, provided that any policy issued by such company is limited to the extent required by applicable law. Any repeal or modification of the foregoing provisions of this Article Five by the shareholders of this corporation shall not adversely affect any right or protection of an agent of this corporation existing at the time of that repeal or modification. Six: A. This corporation is a listed corporation within the meaning of Section 301.5(d) of the California General Corporations Law (the "California Law"), by reason of having its shares of common stock listed on the American Stock Exchange. B. Upon the effectiveness of this Article Six, the election of directors by the shareholders shall not be by cumulative voting. At each election of directors, each shareholder entitled to vote may vote all the shares held by that shareholder for each of several nominees for director up to the number of directors to be elected. The shareholder may not cast more votes for any single nominee than the number of shares held by the shareholder. C. If at any time this corporation ceases to be a listed corporation as defined in Section 301.5 of the California Law, at each succeeding meeting of shareholders at which directors are to be elected, the election of directors by the shareholders shall be by cumulative voting provided the candidates' names have been properly placed in nomination prior to commencement of the voting and a shareholder has given notice prior to commencement of the voting of the shareholder's intention to cumulate votes. Shareholders shall continue to be entitled to elect directors by cumulative voting until the corporation once again qualifies as a listed corporation within the meaning of Section 301.5 of the California Law, and the foregoing provisions of this Article Six shall be reinstated. 21 EX-3.2 3 EXHIBIT 3.2 1 EXHIBIT 3.2 CERTIFICATE OF AMENDMENT OF BYLAWS OF JALATE, LTD. Frederick A. Findley hereby certifies as follows: 1. I am the Secretary of Jalate, Ltd., a California corporation. 2. Section 3.3(b) of the Bylaws of this corporation were amended by the Board of Directors at a meeting duly held on March 24, 1998 to reduce the number of directors to seven. 3. The foregoing action is reflected in the minutes of the March 24, 1998 meeting of the Board of Directors of Jalate, Ltd. I further declare under penalty of perjury under the laws of the State of California that the matters set forth in this Certificate are true and correct of my own knowledge: May 11, 1998 /s/ FREDERICK A. FINDLEY ------------------------------- Frederick A. Findley Secretary 22 EX-3.3 4 EXHIBIT 3.3 1 EXHIBIT 3.3 RESTATED BYLAWS OF JALATE, LTD. a California corporation Revised on March 24, 1998 ARTICLE I OFFICES Section 1.1 PRINCIPAL EXECUTIVE OFFICE. The principal executive office of the corporation is hereby fixed and located at 1675 South Alameda Street, Los Angeles, California 90021. The Board of Directors is hereby granted full power and authority to change said principal executive office from one location to another. Section 1.2 OTHER OFFICES. Other business offices may at any time be established by the Board of Directors at any place or places where the corporation is qualified to do business. ARTICLE II MEETINGS OF SHAREHOLDERS Section 2.1 PLACE OF MEETINGS. All meetings of shareholders shall be held at the principal executive office of the corporation or at any other place within or outside the State of California as may be designated by the Board of Directors. Section 2.2 ANNUAL MEETINGS. (a) Time and Place. The annual meeting of shareholders shall be held each year on a date and at a time designated by the Board of Directors. The date so designated for the initial meeting shall be within fifteen (15) months after the organization of the corporation, and the date so designated for each subsequent meeting shall be within fifteen (15) months after the last annual meeting. (b) Business to be Transacted. At the annual meetings, directors shall be elected, reports of the affairs of the corporation shall be considered, and any other business may be transacted which is within the powers of the shareholders. 23 2 (c) Notice, Means. Written notice of each annual meeting shall be given to each shareholder entitled to vote, either personally or by mail or other means of written communication, charges prepaid, addressed to such shareholder at his address appearing on the books of the corporation or given by him to the corporation for the purpose of notice. If any notice or report addressed to the shareholder at the address of such shareholder appearing on the books of the corporation is returned to the corporation by the United States Postal Service marked to indicate that the United States Postal Service is unable to deliver the notice or report to the shareholder at such address, all future notices or reports shall be deemed to have been duly given without further mailing if the same shall be available for the shareholder upon written demand of the shareholder at the principal executive office of the corporation for a period of one year from the date of the giving of the notice or report to all other shareholders. If a shareholder gives no address, notice shall be deemed to have been given him if sent by mail or other means of written communication addressed to the place where the principal executive office of the corporation is situated, or if published at least once in some newspaper of general circulation in the county in which said principal executive office is located. An affidavit of the mailing or other means of giving any notice of any shareholders' meeting shall be executed by the Secretary, any Assistant Secretary or any transfer agent of the corporation giving the notice, and shall be filed and maintained in the minute book of the corporation. Such affidavit shall be prima facie evidence of the giving of such notice. (d) Notice, Time and Content. All such notices shall be given to each shareholder entitled thereto not less than ten (10) days nor more than sixty (60) days before each annual meeting. Any such notice shall be deemed to have been given at the time when delivered personally or deposited in the mail or sent by other means of written communication. Such notices shall specify: (i) the place, the date, and the hour of such meeting; (ii) those matters which the Board of Directors, at the time of the mailing of the notice, intends to present for action by the shareholders; (iii) if directors are to be elected, the names of nominees intended at the time of the notice to be presented by management for election; (iv) the general nature of a proposal, if any, to take action with respect to approval of, (a) a contract or other transaction with an interested director, (b) amendment of the articles of incorporation, (c) a reorganization of the corporation as defined in Section 181 of the General Corporation Law, (d) voluntary dissolution of the corporation, or (e) a distribution in dissolution other than in accordance with the rights of outstanding preferred shares, if any; and, 24 3 (v) such other matters, if any, as may be expressly required by statute. Section 2.3 SPECIAL MEETINGS. (a) Calling of. Special meetings of the shareholders, for the purpose of taking any action permitted by the shareholders under the General Corporation Law and the Articles of Incorporation of this corporation, may 3 be called at any time by the Chairman of the Board, the Chief Executive Officer, the Board of Directors or by one or more shareholders holding not less than ten percent (10%) of the votes at the meeting. A shareholder entitled to call a special meeting of shareholders for any proper purpose shall submit a request therefor in writing directed to the Chairman of the Board, the Chief Executive Officer, any Vice President or the Secretary. (b) Time and Notice of. Upon receipt of such request, the corporation forthwith shall cause notice to be given to shareholders entitled to vote that a meeting will be held at a time requested by the person or persons calling the meeting, which time shall be not less than thirty-five (35) nor more than sixty (60) days after receipt of the request. If such notice is not given within twenty (20) days after receipt of such request, the persons calling for the meeting may give notice thereof in the manner provided by these Bylaws. Except in special cases where other express provision is made by statute, notice of such special meetings shall be given in the same manner as for annual meetings of shareholders. In addition to the matters required by items (i) and, if applicable (iii) of Section 2.2(d), notice of any special meeting shall specify the general nature of the business to be transacted, and no other business may be transacted at such meeting. Section 2.4 QUORUM. A majority of the shares entitled to vote, represented in person or by proxy, shall constitute a quorum for the transaction of business at a meeting of shareholders. The shareholders present at a duly called or held meeting at which a quorum is present may continue to do business until adjournment, notwithstanding the withdrawal of enough shareholders to leave less than a quorum, if any action taken (other than adjournment) is approved by at least a majority of the shares required to constitute a quorum. Section 2.5 ADJOURNED MEETING AND NOTICE THEREOF. Any shareholders' meeting, annual or special, whether or not a quorum is present, may be adjourned from time to time by the vote of a majority of the shares, the holders of which are either present in person or represented by proxy thereat. When any meeting of shareholders is adjourned to another time or place, written notice need not be given of the adjourned meeting if the time and place are announced at a meeting at which the adjournment is taken, unless a new record date for the adjourned meeting is fixed, or unless the adjournment is for more than forty-five (45) days in which case the Board of Directors shall set a new record date. For any adjourned meeting requiring notice, such notice shall be given to each shareholder of record entitled to vote at the adjourned meeting in accordance with the provisions of Sections 2.2 and 2.3. At any adjourned meeting the corporation may transact any business which might have been transacted at the original meeting. 25 4 Section 2.6 VOTING. (a) Record Date. Unless a record date for voting purposes be fixed as provided in Section 5.1 of Article V of these Bylaws then, subject to the provisions of Sections 702 and 704 of the General Corporation Law of California (relating to voting of shares held by a fiduciary, in the name of a corporation, or in joint ownership), only persons in whose names shares entitled to vote standing on the stock records of the corporation at the close of business on the business day next preceding the day on which notice of the meeting is given or if such notice is waived, at the close of business on the business day next preceding the day on which the meeting of shareholders is held, shall be entitled to vote at such meeting, and such day shall be the record date for such meeting. (b) Ballot. The shareholders' vote may be oral or by ballot; provided, however, all elections for directors must be by ballot if demand for election by ballot is made by a shareholder at the meeting and before the voting begins. If a quorum is present, except with respect to election of directors, the affirmative vote of the majority of the shares represented at the meeting and entitled to vote on any matter shall be the act of the shareholders, unless the vote of a greater number or voting by classes is required by the General Corporation Law of California or the Articles of Incorporation. (c) At a shareholders' meeting at which directors are to be elected, no shareholder shall be entitled to cumulate votes (i.e., cast for any one or more candidates a number of votes greater than the number of the shareholder's shares) unless the candidates' names have been properly placed in nomination prior to commencement of the voting and a shareholder has given notice prior to commencement of the voting of the shareholder's intention to cumulate votes. If any shareholder has given such a notice, then every shareholder entitled to vote may cumulate votes for candidates in nomination and give one candidate a number of votes equal to the number of directors to be elected multiplied by the number of votes to which that shareholder's shares are entitled, or distribute the shareholder's votes on the same principle among any or all of the candidates, as the shareholder thinks fit. The candidates receiving the highest number of votes, up to the number of directors to be elected, shall be elected. Section 2.7 VALIDATION OF DEFECTIVELY CALLED OR NOTICED MEETINGS. The transactions of any meeting of shareholders, either annual or special, however called and noticed, and wherever held, shall be as valid as though had at a meeting duly held after regular call and notice, if a quorum be present either in person or by proxy, and if, either before or after the meeting, each of the persons entitled to vote, who was not present in person or by proxy, signs a written waiver of notice or a consent to a holding of the meeting, or an approval of the minutes. The waiver of notice or consent need not specify either the business to be transacted or the purpose of any annual or special meeting of shareholders, except that if action is taken or proposed to be taken for approval of any of those matters specified in Section 2.2(d)(iv) of Article II, the waiver of notice or consent shall state the 26 5 general nature of the proposal. All such waivers, consents or approvals shall be filed with the corporate records or made a part of the minutes of the meeting. Attendance by a person at a meeting shall also constitute a waiver of notice of that meeting, except when the person objects, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened, and except that attendance at a meeting is not a waiver of any right to object to the consideration of matters required by the General Corporation Law of the State of California to be included in the notice but not so included, if such objection is expressly made at the meeting. Section 2.8 ACTION WITHOUT MEETING. (a) Action by Written Consent and Notice Thereof. Any action which may be taken at any annual or special meeting of shareholders, including the election of directors, may be taken without a meeting and without prior notice if a consent in writing, setting forth the action so taken, is signed by the holders of outstanding shares having not less than the minimum number of votes that would be necessary to authorize or take that action at a meeting at which all shares entitled to vote on that action were present and voted. If the consents of all shareholders entitled to vote have been solicited in writing, and if the unanimous written consents of all shareholders have not been obtained, notice shall be given as provided herein. (i) Notice shall be given of any proposed shareholder approval of, (a) a contract or other transaction with an interested director, (b) indemnification of an agent of the corporation as authorized by Section 3.16 of Article III of these Bylaws, (c) a reorganization of the corporation as defined in Section 181 of the General Corporation Law of California, or (d) a distribution in dissolution other than in accordance with the rights of outstanding preferred shares, if any. The notice referred to herein shall be given at least ten (10) days before the consummation of the action authorized by such approval. (ii) Prompt notice of the taking of any other corporate action shall be given to those shareholders entitled to vote who have not consented in writing. Such notices shall be given in the manner and shall be deemed to have been given as provided in Section 2.2 of Article II of these Bylaws. (b) Election to Fill Vacancy. In the case of an election to fill a vacancy on the Board of Directors which vacancy (1) was not created by removal or (2) has not been filled by the Board of Directors in accordance with Section 3.5(b) of Article III of these Bylaws, a director may be elected to fill such vacancy by the written consent of the holders of a majority of the outstanding shares entitled to vote for the election of directors. An election by the written consent of the shareholders to fill a vacancy created by removal may be made only by the unanimous written consent of the holders of all outstanding shares entitled to vote for the election of directors. 27 6 (c) Filing of Consents; Record Date. All written consents of the shareholders shall be filed with the Secretary of the corporation. Unless, as provided in Section 5.1 of Article V of these Bylaws, the Board of Directors has fixed a record date for the determination of shareholders entitled to notice of and to give such written consent, the record date for such determination shall be the day on which the first written consent is given. (d) Revocation of Consent. Any shareholder giving a written consent, or the shareholder's proxyholders, or a transferee of the shares of a personal representative of the shareholder or his respective proxyholders, may revoke the consent by a writing received by the corporation prior to the time that written consents of the number of shares required to authorize the proposed action have been filed with the Secretary of the corporation, but may not do so thereafter. Such revocation shall be effective upon its receipt by the Secretary of the corporation. Section 2.9 PROXIES. Every person entitled to vote or execute consents shall have the right to do so either in person or by one or more agents authorized by a written proxy executed by such person or his duly authorized agent and filed with the Secretary of the corporation. Any proxy duly executed is not revoked and continues in full force and effect until (i) an instrument revoking it or a duly executed proxy bearing a later date is filed with the Secretary of the corporation prior to the vote pursuant thereto, (ii) the person executing the proxy attends the meeting and votes in person, or (iii) written notice of the death or incapacity of the maker of such proxy is received by the corporation before said proxy is voted and counted. In the determination of the validity and effect of proxies, the dates contained on the forms of proxy shall presumptively determine the order of execution of the proxies, regardless of the postmark dates on the envelopes in which they are mailed. Unless otherwise provided in the proxy, no proxy shall be valid after the expiration of eleven (11) months from the date of such proxy. Section 2.10 INSPECTORS OF ELECTION. (a) Appointment and Number. In advance of any meeting of shareholders, the Board of Directors may appoint any persons, other than nominees for office, as inspectors of election to act at such meeting or any adjournment thereof. If inspectors of election are not so appointed, or if any person so appointed fails to appear or refuses to act, the chairman of any such meeting may, and on the request of any shareholder or his proxy shall, appoint inspectors of election (or persons to replace those who so fail or refuse) at the meeting. The number if inspectors shall be either one (1) or three (3). If appointed at a meeting on the request of one or more shareholders or proxies, the majority of shares represented in person or by proxy shall determine whether one (1) or three (3) inspectors are to be appointed. (b) Duties. The duties of such inspectors shall be as prescribed by Section 707 of the General Corporation Law of California and shall include: determining the number of shares outstanding and the voting power of each, the shares represented at the meeting, the existence of a quorum, the authenticity, validity and effect of proxies; receiving votes, ballots 28 7 or consents; hearing and determining all challenges and questions in any way arising in connection with the right to vote; counting and tabulating all votes or consents; determining when the polls shall close; determining the result; and such acts as may be proper to conduct the election or vote with fairness to all shareholders. The inspectors of election shall perform their duties impartially, in good faith, to the best of their ability and as expeditiously as is practical. If there are three (3) inspectors of election, the decision, act or certificate of a majority is effective in all respects as the decision, act or certificate of all. Any report or certificate made by the inspectors of election is prima facie evidence of the facts stated therein. Section 2.11 NOMINATIONS FOR DIRECTOR. Nominations for election of members of the Board of Directors may be made by the Board of Directors or by any shareholder of any outstanding class of voting stock of the corporation entitled to vote for the election of directors. Notice of intention to make any nominations, other than by the Board of Directors, shall be made in writing and shall be received by the Chief Executive Officer of the corporation no more than 60 days prior to any meeting of shareholders called for the election of directors, and no more than 10 days after the date the notice of such meeting is sent to shareholders pursuant to Section 2.2 of these Bylaws; provided, however, that if only 10 days' notice of the meeting is given to shareholders, such notice of intention to nominate shall be received by the Chief Executive Officer of the corporation not later than the time fixed in the notice of the meeting for the opening of the meeting. Such notification shall contain the following information to the extent known to the notifying shareholder: (a) the name and address of each proposed nominee; (b) the principal occupation of each proposed nominee; (c) the number of shares of voting stock of the corporation owned by each proposed nominee; (d) the name and residence address of the notifying shareholder; and (e) the number of shares of voting stock of the corporation owned by the notifying shareholder. Nominations not made in accordance herewith shall be disregarded by the then chairman of the meeting, and the inspectors of election shall then disregard all votes cast for each such nominee. The first paragraph of this Section 2.11 shall be set forth in any notice of a shareholders' meeting, whether pursuant to Section 2.2 or Section 2.3 of these Bylaws, at which meeting the election of directors is to be considered. ARTICLE III DIRECTORS Section 3.1 POWERS. Subject to any limitations of the Articles of Incorporation and of these Bylaws and of the General Corporation Law of California requiring shareholder authorization or approval for a particular action, the business and affairs of the corporation shall be managed and all corporate powers shall be exercised by or under the direction of the Board of Directors. The Board of Directors may delegate the management of the day-to-day operation of the business of the corporation to a management company or other person, 29 8 provided that the business and affairs of the corporation shall be managed and all corporate powers shall be exercised, under the ultimate direction of the Board of Directors. Section 3.2 COMMITTEES. By resolution adopted by a majority of the authorized number of directors, the Board of Directors may designate an executive and other committees, each consisting of two or more directors, to serve at the pleasure of the Board of Directors. The provisions of this Article apply to committees of the Board of Directors and action by such committees, with such changes in the language of those provisions as are necessary to substitute the committee and its members for the Board of Directors and its members. The Board of Directors may designate one or more directors as alternate members of any committee, who may replace any absent member at any meeting of the committee. The appointment of members or alternate members of a committee shall be made by the vote of a majority of the authorized number of directors. Unless the Board of Directors shall otherwise prescribe the manner of proceedings of any such committee, meetings of such committee may be regularly scheduled in advance and may be called at any time by any two members thereof; otherwise, the provisions of these Bylaws with respect to notice and conduct of meetings of the Board of Directors shall govern. Any such committee, to the extent provided in a resolution of the Board of Directors, shall have all of the authority of the Board of Directors, except with respect to: (i) the approval of any action for which the General Corporation Law of California or the Articles of Incorporation also require shareholder approval; (ii) the filling of vacancies on the Board of Directors or in any committee; (iii) the fixing of compensation of the directors for serving on the Board of Directors or on any committee; (iv) the adoption, amendment or repeal of these Bylaws; (v) the amendment or repeal of any resolution of the Board of Directors which by its express terms is not so amendable or repealable; (vi) any distribution to the shareholders, except at a rate or in a periodic amount or within a price range determined by the Board of Directors; and (vii) the appointment of other committees of the Board of Directors or the members thereof. Section 3.3 NUMBER OF DIRECTORS. (a) The authorized number of directors shall be not less than 5 nor more than 9. The exact number of directors shall be fixed from time to time, within the limits specified in 30 9 this subsection, by an amendment of subsection (b) of this section adopted by the Board of Directors. (b) The exact number of directors shall be seven until changed as provided in subsection (a) of this section. (c) The maximum or minimum authorized number of directors may only be changed by an amendment of this section approved by the vote or written consent of a majority of the outstanding shares entitled to vote; provided, however, that an amendment reducing the minimum number to a number less than five shall not be adopted if the votes cast against its adoption at a meeting (or the shares not consenting in the case of action by written consent) exceed 16-2/3% of such outstanding shares; and provided further, that in no case shall the stated maximum authorized number of directors exceed two times the stated minimum number of authorized directors minus one. Section 3.4 ELECTION AND TERM OF OFFICE. The directors shall be elected at each annual meeting of shareholders but, if any such annual meeting is not held or the directors are not elected thereat, the directors may be elected at any special meeting of shareholders held for that purpose. All directors shall hold office until the next annual meeting of the shareholders and until his successor is elected and qualified, subject to the General Corporation Law of California and the provisions of these Bylaws with respect to vacancies on the Board of Directors. Section 3.5 VACANCIES. (a) When a Vacancy Exists. A vacancy in the Board of Directors exists whenever any authorized position of director is not then filled by a duly elected director, whether caused by death, resignation, removal, change in the authorized number of directors or otherwise. (b) Filling of Vacancies by Directors. Vacancies in the Board of Directors, except for a vacancy created by the removal of a director (see Section 3.5(c)) may be filled by a majority of the remaining directors, though less than a quorum, or by a sole remaining director, and each director so elected shall hold office until his successor is elected at an annual or a special meeting of shareholders. If the Board of Directors accepts the resignation of a director tendered to take effect at a future time, the Board of Directors (or the shareholders) may elect a successor to take office when the resignation becomes effective. (c) Filling of Vacancies by Shareholders. The shareholders may elect a director or directors at any time to fill any vacancy or vacancies not filled by the directors. Except for an election to fill a vacancy created by the removal of a director, any such election by written consent shall require the consent of holders of a majority of the outstanding shares entitled to vote for the election of directors. A vacancy in the Board of Directors created by the removal of a director may only be filled by the vote of a majority of the shares entitled to vote for the election of directors represented at a duly held meeting at which a quorum is present, or by 31 10 the unanimous written consent of the holders of all of the outstanding shares entitled to vote for the election of directors. (d) Removal for Cause. The Board of Directors may declare vacant the office of a director who has been declared of unsound mind by an order of court or convicted of a felony. (e) Removal without Cause. Any or all of the directors may be removed without cause if such removal is approved by a majority of the outstanding shares entitled to vote; provided, however, that no director may be removed (unless the entire Board of Directors is removed) whenever the votes cast against removal, or not consenting in writing to such removal, would be sufficient to elect such director if voted cumulatively at an election at which the same total number of votes were cast (or, if such action is taken by written consent, all shares entitled to vote were voted) and the entire number of directors authorized at the time of his most recent election were then being elected. (f) Resignation. Any director may resign effective upon giving written notice to the Chairman of the Board, the Chief Executive Officer, the Secretary or the Board of Directors of the corporation, unless the notice specifies a later time for the effectiveness of such resignation. If the resignation is effective at a future time, a successor may be elected to take office when the resignation becomes effective. (g) When Reduction in Number Effective. No reduction of the authorized number of directors shall have the effect of removing any director prior to the expiration of his term of office. Section 3.6 PLACE OF MEETING. Regular meetings of the Board of Directors shall be held at any place within or without the State of California which has been designated from time to time by resolution of the Board of Directors. In the absence of such designation, regular meetings shall be held at the principal executive office of the corporation. Special meetings of the Board of Directors may be held either at a place so designated or at the principal executive office. Section 3.7 ANNUAL MEETING. Immediately following each annual meeting of shareholders the Board of Directors shall hold a regular meeting at the place of said annual meeting or at such other place as shall be fixed by the Board of Directors, for the purpose of organization, election of officers, and the transaction of other business. Call and notice of such meetings are hereby dispensed with. Section 3.8 OTHER REGULAR MEETINGS. Other regular meetings of the Board of Directors shall be held at such day and hour as shall be fixed from time to time by the Board of Directors by resolution or in the Bylaws. If such day falls upon a legal holiday, then said meeting shall be held at the same time on the next day thereafter ensuing which is a full business day. Notice of all such regular meetings of the Board of Directors is hereby dispensed with. 32 11 Section 3.9 SPECIAL MEETINGS. Special meetings of the Board of Directors for any purpose or purposes shall be called at any time by the Chairman of the Board, the Chief Executive Officer, any Vice President, the Secretary or by any two directors. Written notice of the time and place of special meetings shall be delivered personally to each director or communicated to each director by telephone, or by telegraph or mail, charges prepaid, addressed to him at his address as it is shown upon the records of the corporation or, if it is not so shown on such records or if not readily ascertainable, at the place at which the meetings of the directors are regularly held. In case such notice is mailed or telegraphed, it shall be deposited in the United States mail or delivered to the telegraph company in the place in which the principal executive offices of the corporation are located at least four (4) days prior to the time of the holding of the meeting. In case such notice is delivered, personally or by telephone, as above provided, it shall be so delivered at least forty-eight (48) hours prior to the time of the holding of the meeting. Such mailing, telegraphing or delivery, personally or by telephone, as above provided, shall be due, legal and personal notice to such director. Any notice shall state the date, place and hour of the meeting. Section 3.10 ACTION WITHOUT MEETING. Any action by the Board of Directors may be taken without a meeting if all members of the Board of Directors shall individually or collectively consent in writing to such action. Such written consent or consents shall be filed with the minutes of the proceedings of the Board of Directors and shall have the same force and effect as a unanimous vote of such directors. Section 3.11 ACTION AT A MEETING; QUORUM AND REQUIRED VOTE. Presence of a majority of the authorized number of directors at a meeting of the Board of Directors constitutes a quorum for the transaction of business. Members of the Board of Directors may participate in a meeting through use of conference telephone or similar communications equipment, so long as all members participating in such meeting can hear one another. Participation in a meeting as permitted in the preceding sentence constitutes presence in person at such meeting. Every act or decision done or made by a majority of the directors present at a meeting duly held at which a quorum is present shall be regarded as the act of the Board of Directors, unless a greater number, or the same number after disqualifying one or more directors from voting, is required by law, by the Articles of Incorporation, or by these Bylaws. A meeting at which a quorum is initially present may continue to transact business notwithstanding the withdrawal of a director, provided that any action taken is approved by at least a majority of the required quorum for such meeting. Section 3.12 VALIDATION OF DEFECTIVELY CALLED OR NOTICED MEETINGS. The transactions of any meeting of the Board of Directors, however called and noticed or wherever held, shall be as valid as though had at a meeting duly held after regular call and notice, if a quorum is present and if, either before or after the meeting, each of the directors who was not present signs a written waiver of notice or a consent to holding such meeting or an approval of the minutes thereof. All such waivers, consents or approvals shall be filed with the corporate records or made a part of the minutes of the meeting. 33 12 Section 3.13 WAIVER OF NOTICE BY ATTENDANCE. Attendance of a director at any meeting shall constitute a waiver of notice of such meeting, unless a director attends for the express purpose of objecting to the transaction of any business because the meeting is not lawfully called, noticed, or convened. Section 3.14 ADJOURNMENT. A majority of the directors present, whether or not a quorum is present, may adjourn any meeting to another time and place. If the meeting is adjourned for more than 24 hours, written notice of any adjournment to another time or place shall be given prior to the time of the adjourned meeting to the directors who were not present at the time of the adjournment. Section 3.15 FEES AND COMPENSATION. Directors and members of committees may receive such compensation, if any, for their services, and such reimbursement for expenses, as may be fixed or determined by resolution of the Board of Directors. Section 3.16 INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES, AND OTHER AGENTS. (a) The corporation shall, to the maximum extent and in the manner permitted by the California Corporations Code ("Code"), indemnify each of its directors against expenses (as defined in Section 317(a) of the Code), judgments, fines, settlements, and other amounts actually and reasonably incurred in connection with any proceeding (as defined in Section 317(a) of the Code), arising by reason of the fact that such person is or was an agent of the corporation. For purposes of this Section 3.16, a "director" of the corporation includes any person (i) who is or was a director of the corporation, (ii) who is or was serving at the request of the corporation as a director of another corporation, partnership, joint venture, trust or other enterprise, or (iii) who was a director of a corporation which was a predecessor corporation of the corporation or of another enterprise at the request of such predecessor corporation. (b) The corporation shall have the power, to the extent and in the manner permitted by the Code, to indemnify each of its officers, employees and agents against expenses (as defined in Section 317(a) of the Code), judgments, fines, settlements, and other amounts actually and reasonably incurred in connection with any proceeding (as defined in Section 317(a) of the Code), arising by reason of the fact that such person is or was an officer, employee or agent of the corporation. For purposes of this Section 3.16, an "officer", "employee" or "agent" of the corporation includes any person (i) who is or was an officer, employee or agent of the corporation, (ii) who is or was serving at the request of the corporation as an officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, or (iii) who was an officer, employee or agent of the corporation which was a predecessor corporation of the corporation or of another enterprise at the request of such predecessor corporation. (c) Expenses incurred in defending any civil or criminal action or proceeding for which indemnification is required pursuant to Section 3.16(a) shall be paid by the corporation 34 13 in advance of the final disposition of such action or proceeding upon receipt of an undertaking by or on behalf of the indemnified party to repay such amount if it shall ultimately be determined that the indemnified party is not entitled to be indemnified as authorized in this Section 3.16. Expenses incurred in defending any civil or criminal action or proceeding for which indemnification is permitted pursuant to Section 3.16(b) may be paid by the corporation in advance of the final disposition of such action or proceeding upon receipt of an undertaking by or on behalf of the indemnified party to repay such amount if it shall ultimately be determined that the indemnified party is not entitled to be indemnified as authorized in this Section 3.16. (d) The indemnification provided by this Section 3.16 shall not be deemed exclusive of any other rights to which those seeking indemnification may be entitled under any bylaw, agreement, vote of shareholders or disinterested directors or otherwise, both as to action in an official capacity and as to action in another capacity while holding such office, to the extent that such additional rights to indemnification are authorized in the Articles of Incorporation. (e) The corporation shall have the power to purchase and maintain insurance on behalf of any person who is or was an agent of the corporation against any liability asserted against or incurred by such person in such capacity or arising out of such person's status as such, whether or not the corporation would have the power to indemnify him against such liability under the provisions of this Section 3.16. (f) No indemnification or advance shall be made under this Section 3.16, except where such indemnification or advance is mandated by law or the order, judgment or decree of any court of competent jurisdiction, in any circumstance where it appears: (1) That it would be inconsistent with a provision of the Articles of Incorporation, these Bylaws, a resolution of the shareholders or an agreement in effect at the time of the accrual of the alleged cause of the action asserted in the proceeding in which the expenses were incurred or other amounts were paid, which prohibits or otherwise limits indemnification; or (2) That it would be inconsistent with any condition expressly imposed by a court in approving a settlement. Section 3.17 TRANSACTIONS BETWEEN CORPORATIONS AND DIRECTORS. (a) No contract or other transaction between the corporation and one or more of its directors, or between the corporation and any corporation, firm or association in which one or more of its directors has a material financial interest, is either void or voidable because such director or directors or such other corporation, firm or association are parties or because such director or directors are present at the meeting of the Board of Directors or a committee thereof which authorizes, approves or ratifies the contract or transaction, if: 35 14 (1) the material facts as to the transaction and as to such director's interest are fully disclosed or known to the shareholders and such contract or transaction is approved in good faith by the affirmative vote of a majority of the shares entitled to vote represented at a duly held meeting at which a quorum is present or by the written consent of shareholders, with the shares owned by the interested director or directors not being entitled to vote thereon; (2) the material facts as to the transaction and as to such director's interest are fully disclosed or known to the Board of Directors or committee, and the Board of Directors or committee authorizes, approves or ratifies the contract or transaction in good faith by a vote sufficient without counting the vote of the interested director or directors and the contract or transaction is just and reasonable as to the corporation at the time it is authorized, approved or ratified; or (3) as to contracts or transactions not approved as provided in paragraph (a) or (b) of this subdivision, the person asserting the validity of the contract or transaction sustains the burden of proving that the contract or transaction was just and reasonable as to the corporation at the time it was authorized, approved or ratified. (b) No contract or other transaction between a corporation and any corporation or association of which one or more of its directors are directors is either void or voidable because such director or directors are present at the meeting of the Board of Directors or a committee thereof which authorizes, approves or ratifies the contract or transaction, if: (1) The material facts as to the transaction and as to such director's other directorship are fully disclosed or known to the Board of Directors or committee, and the Board of Directors or committee authorizes, approves or ratifies the contract or transaction in good faith by a vote sufficient without counting the vote of the common director or directors or the contract or transaction is approved by the shareholders (Section 153) of the General Corporation Law in good faith; or (2) As to contracts or other transactions not approved as provided in paragraph (1) of this subdivision, the contract or transaction is just and reasonable as to the corporation at the time it is authorized, approved or ratified. This subsection (b) does not apply to contracts or transactions covered by subsection (a). (c) A mere common directorship does not constitute a material financial interest within the meaning of subsection (a) of this Section 3.17. A director is not interested within the meaning of subsection (a) of this Section 3.17 in a resolution fixing the compensation of another director as a director, officer or employee of the corporation, notwithstanding the fact that the first director is also receiving compensation from the corporation. 36 15 (d) Interested or common directors may be counted in determining the presence of a quorum at a meeting of the Board of Directors or a committee thereof which authorizes, approves or ratifies a contract or transaction. ARTICLE IV OFFICERS Section 4.1 OFFICERS. The officers of the corporation shall be a Chief Executive Officer, a Secretary and a Chief Financial Officer. The corporation may also have, at the discretion of the Board of Directors, a Chairman of the Board, one or more Vice Presidents, one or more Assistant Secretaries, one or more Assistant Treasurers and such other officers as may be appointed in accordance with the provisions of Section 4.3 of this article. Any number of offices may be held by the same person. Section 4.2 ELECTION. The officers of the corporation, except such officers as may be appointed in accordance with the provisions of Section 4.3 or Section 4.5 of this article, shall be chosen annually by the Board of Directors, and each shall hold his office until he shall resign or shall be removed or otherwise disqualified to serve, or his successor shall be elected and qualified. Section 4.3 SUBORDINATE OFFICERS, ETC. The Board of Directors may appoint, and may empower the Chairman of the Board, if there be such an officer, or the Chief Executive Officer, to appoint such other officers as the business of the corporation may require, each of whom shall hold office for such period, have such authority and perform such duties as are provided in the bylaws or as the Board of Directors may from time to time determine. Any appointment of an officer shall be evidenced by a written instrument filed with the secretary of the corporation and maintained with the corporate records. Section 4.4 REMOVAL AND RESIGNATION. Subject, in each case, to the rights, if any, of an officer under any contract of employment, any officer may be removed, either with or without cause, by the Board of Directors at any regular or special meeting thereof, or, except in case of an officer chosen by the Board of Directors, by any officer upon whom such power of removal may be conferred by the Board of Directors. Any officer may resign at any time by giving written notice to the Board of Directors or to the Chief Executive Officer or to the Secretary of the corporation, without prejudice, however, to the rights, if any, of the corporation under any contract to which such officer is a party. Any such resignation shall take effect at the date of the receipt of such notice or at any later time specified therein; and, unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. Section 4.5 VACANCIES. A vacancy in any office because of death, resignation, removal, disqualification or any other cause shall be filled in the manner prescribed in these bylaws for regular appointments to such office. 37 16 Section 4.6 CHAIRMAN OF THE BOARD. The Chairman of the Board, if there shall be such an officer, shall, if present, preside at all meetings of the Board of Directors and exercise and perform such other powers and duties as may be from time to time assigned to him by the Board of Directors or prescribed by these bylaws. Section 4.7 CHIEF EXECUTIVE OFFICER. Subject to such supervisory powers, if any, as may be given by the Board of Directors to the Chairman of the Board, if there be such an officer, the Chief Executive Officer shall be the chief executive officer of the corporation and shall, subject to the control of the Board of Directors, have general supervision, direction and control of the business and officers of the corporation. He shall preside at all meetings of the shareholders and, in the absence of the Chairman of the Board, or if there be none, at all meetings of the Board of Directors. He shall have the general powers and duties of management usually vested in the office of Chief Executive Officer of a corporation, and shall have such other powers and duties as may be prescribed by the Board of Directors or the bylaws. Section 4.8 VICE PRESIDENT. In the absence or disability of the Chief Executive Officer, the vice presidents, if any, in order of their rank as fixed by the Board of Directors or, if not ranked, the Vice President designated by the Board of Directors, shall perform all the duties of the Chief Executive Officer, and when so acting shall have all the powers of, and be subject to all the restrictions upon, the Chief Executive Officer. The Vice Presidents shall have such other powers and perform such other duties as from time to time may be prescribed for them respectively by the Board of Directors or these bylaws, or as the chief executive officer may from time to time delegate. Section 4.9 SECRETARY. (a) Corporate Records. The Secretary shall keep or cause to be kept, at the principal executive office and such other place as the Board of Directors may direct, the seal of the corporation, copies of the Articles of Incorporation and Bylaws of the corporation, a book of minutes of actions taken at all meetings of shareholders, the Board of Directors and committees of the Board of Directors with the time and place of holding, whether regular or special, and, if special, how authorized, the notice given, the names of those present at directors' meetings, the number of shares present or represented at shareholders' meetings, and the proceedings thereof. (b) Share Register. The Secretary shall keep, or cause to be kept, at the principal executive office or at the office of the corporation's transfer agent, a share register, or a duplicate share register, showing the names of the shareholders and their addresses, the number and classes of shares held by each, the number and date of certificates issued for the same, and the number and date of cancellation of every certificate surrendered for cancellation. 38 17 (c) Other Duties. The Secretary shall give, or cause to be given, notice of all the meetings of the shareholders and of the Board of Directors required by the Bylaws or by law to be given, and he shall keep the seal of the corporation in safe custody, and shall have such other powers and perform such other duties as may be prescribed by the Board of Directors or by the bylaws. Section 4.10 CHIEF FINANCIAL OFFICER. (a) Books of Account. The Chief Financial Officer of the corporation shall keep and maintain, or cause to be kept and maintained, adequate and correct accounts of the properties and business transactions of the corporation, and shall send or cause to be sent to the shareholders of the corporation such financial statements and reports as are by law or these bylaws required to be sent to them. The books of account shall at all reasonable times be open to inspection by any director. (b) Other Duties. The Chief Financial Officer shall deposit all monies and other valuables in the name and to the credit of the corporation with such depositaries as may be designated by the Board of Directors. The chief financial officer shall disburse the funds of the corporation as may be ordered by the Board of Directors, shall render to the Chief Executive Officer and directors, whenever they request it, an account of all of his transactions as chief financial officer and of the financial condition of the corporation, and shall have such other powers and perform such other duties as may be prescribed by the Board of Directors or the Bylaws. ARTICLE V GENERAL CORPORATE MATTERS Section 5.1 RECORD DATE. (a) When Fixed by Board of Directors. The Board of Directors may fix a time in the future as a record date for the determination of the shareholders entitled to notice of and to vote at any meting of shareholders or entitled to give consent to corporate action in writing without a meeting, to receive any report, to receive any dividend or distribution, or any allotment of rights, or to exercise rights in respect to any change, conversion, or exchange of shares. The record date so fixed shall be not more than sixty (60) days nor less than ten (10) days prior to the date of any meeting, nor more than (60) days prior to any other event for the purposes of which it is fixed. When a record date is so fixed, only shareholders of record at the close of business on that date are entitled to notice of and to vote at any such meeting, to give consent without a meeting, to receive any report, to receive a dividend, distribution, or allotment of rights, or to exercise the rights, as the case may be, notwithstanding any transfer of any shares on the books of the corporation after the record date, except as otherwise provided in the Articles of Incorporation or these Bylaws. 39 18 (b) When Not Fixed by Board of Directors. In the event no record date is fixed by the Board of Directors: (1) The record date for determining the shareholders entitled to notice of or to vote at a meeting of shareholders shall be at the close of business on the business day next preceding the day on which notice is given or, if notice is waived, at the close of business on the business day next preceding the day on which the meeting is held. (2) The record date for determining shareholders entitled to give consent to corporate action in writing without a meeting, when no prior action by the Board of Directors has been taken, shall be the day on which the first written consent is given. (3) The record date for determining shareholders for any other purpose shall be at the close of business on the date on which the Board of Directors adopts the resolution relating thereto, or the sixtieth day prior to the date of such other action, whichever is later. Section 5.2 INSPECTION OF CORPORATE RECORDS. (a) By Shareholders. The accounting books and records, the record of shareholders, and minutes of proceedings of the shareholders and the Board of Directors and committees of the Board of Directors of this corporation and any subsidiary of this corporation shall be open to inspection upon the written demand on the corporation of any shareholder or holder of a voting trust certificate at any reasonable time during usual business hours, for a purpose reasonably related to such holder's interests as a shareholder or as the holder of such voting trust certificate. Such inspection by a shareholder or holder of a voting trust certificate may be made in person or by agent or attorney, and the right of inspection includes the right to copy and make extracts. (b) By Directors. Every director shall have the absolute right at any reasonable time to inspect and copy all books, records and documents of every kind and to inspect the physical properties of the corporation. Such inspection by a director may be made in person or by agent or attorney and the right of inspection includes the right to copy and make extracts. Section 5.3 MAINTENANCE AND INSPECTION OF BYLAWS. The corporation shall keep at its principal executive office, or if its principal executive office is not in the State of California, at its principal business office in this state, the original or a copy of the Bylaws as amended to date, which shall be open to inspection by the shareholders at all reasonable times during office hours. If the principal executive office of the corporation is outside the State of California and the corporation has no principal business office in this state, the Secretary shall, upon the written request of any shareholder, furnish to that shareholder a copy of the bylaws as amended to date. 40 19 Section 5.4 ANNUAL AND OTHER REPORTS. The Board of Directors of the corporation shall cause an annual report to be sent to the shareholders at least fifteen (15) days prior to the annual meeting of shareholders but not later than one hundred twenty (120) days after the close of the fiscal year in accordance with the provisions of the General Corporation Law. Section 5.5 CHECKS, DRAFTS, ETC. All checks, drafts or other orders for payment of money, notes or other evidences of indebtedness, issued in the name of or payable to the corporation, shall be signed or endorsed by such person or persons and in such manner as, from time to time, shall be determined by resolution of the Board of Directors. Section 5.6 CONTRACTS, ETC., HOW EXECUTED. The Board of Directors, except as in the Bylaws otherwise provided, may authorize any officer or officers, agent or agents, to enter into any contract or execute any instrument in the name of and on behalf of the corporation, and such authority may be general or confined to specific instances; and, unless so authorized or ratified by the Board of Directors or within the agency power of an officer, no officer, agent or employee shall have any power or authority to bind the corporation by any contract or engagement or to pledge its credit or to render it liable for any purpose or to any amount. Section 5.7 CERTIFICATE FOR SHARES. Every holder of shares in the corporation shall be entitled to have a certificate signed in the name of the corporation by the Chairman of the Board or the Chief Executive Officer or a Vice President and by the Chief Financial Officer or an Assistant Treasurer or the Secretary or an Assistant Secretary, certifying the number of shares and the class or series of shares owned by the shareholder. Any of the signatures on the certificate may be a facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the corporation with the same effect as if such person were an officer, transfer agent or registrar at the date of issue. Section 5.8 LOST, STOLEN OR DESTROYED CERTIFICATES. No new certificates for shares shall be issued to replace an old certificate unless the latter is surrendered and cancelled at the same time; provided, however, that the Board of Directors or the Chief Executive Officer and any Vice President may, however, in case any certificate for shares is lost, stolen, mutilated or destroyed, authorize the issuance of a new certificate in lieu thereof, upon such terms and conditions, including reasonable indemnification of the corporation, as the Board of Directors or the Chief Executive Officer or any Vice President shall determine. In the event of the issuance of a new certificate, the rights and liabilities of the corporation, and of the holders of the old and new certificates, shall be governed by the relevant provisions of the California Commercial Code. Section 5.9 REPRESENTATION OF SHARES OF OTHER CORPORATIONS. The Chairman of the Board, the Chief Executive Officer or any Vice President, or any other person authorized by resolution of the Board of Directors or by any of the foregoing 41 20 designated officers, are authorized to vote, represent and exercise on behalf of this corporation all rights incident to any and all shares of any other corporation or corporations standing in the name of this corporation. The authority herein granted to said officers to vote or represent on behalf of this corporation any and all shares held by this corporation in any other corporation or corporations may be exercised either by such officers in person or by any other person authorized so to do by proxy or power of attorney duly executed by these officers. Section 5.10 CONSTRUCTION AND DEFINITIONS. Unless the context otherwise requires, the general provisions, rules of construction and definitions contained in the General Corporation Law of California shall govern the construction of these Bylaws. Without limiting the generality of the foregoing, the masculine gender includes the feminine and neuter, the singular number includes the plural and the plural number includes the singular, and the term "person" includes a corporation as well as a natural person. ARTICLE VI AMENDMENTS Section 6.1 POWER OF SHAREHOLDERS. New bylaws may be adopted or these Bylaws may be amended or repealed by the affirmative vote or written consent of a majority of the outstanding shares entitled to vote thereon, except as otherwise provided by law or by the Articles of Incorporation. Section 6.2 POWER OF DIRECTORS. Subject to the right of shareholders as provided in Section 6.1 of this Article VI to adopt, amend or repeal bylaws, bylaws may be adopted, amended or repealed by the Board of Directors; provided, however, that the Board of Directors may adopt a bylaw or amendment thereof changing the authorized number of directors only for the purpose of fixing the exact number of directors within the limits specified in the articles of incorporation or in Section 3.2 of Article III of these Bylaws. 42 EX-10.1 5 EXHIBIT 10.1 1 EXHIBIT 10.1 [Jalate letterhead] April 9, 1998 Andrew Cohen President CHORUS LINE CORPORATION 4505 Bandini Boulevard Los Angeles, California 90040 Dear Andy: This letter of intent sets forth the basic terms and conditions relating to the proposed combination of JALATE LTD. ("JL") and CHORUS LINE CORPORATION ("CLC") pursuant to a statutory merger or other mutually acceptable transaction (the "Merger") which would result in common ownership of CLC and JL. Subject to Consideration of other forms of transactions which may be mutually acceptable, the parties currently intend that the Merger would qualify as a tax-free reorganization under Section 368 of the Internal Revenue Code of 1986, as amended. 1. Post Closing Ownership Immediately following the effective time of the Merger, holders of CLC Common Stock immediately prior to the Merger will in the aggregate hold 80% of the shares of the Common Stock of the surviving corporation outstanding immediately following the effective time of the Merger (on a fully diluted basis assuming (but not requiring) the exercise of cancellation of all outstanding options and warrants of JL and CLC). 2. Corporate Name Upon the effective time of the Merger, the name of the surviving corporation shall be "Chorus Line Corporation" or another name acceptable to CLC shareholders. 3. Board Representation The post-closing Board of Directors of the surviving corporation will consist of five directors (plus such additional directors satisfactory to CLC as may be required by any stock exchange), four of whom shall be nominated by the current CLC directors and one of whom shall be nominated by the current JL directors. Management of the surviving corporation shall use its reasonable efforts to cause the nominee of the JL directors and the nominees of the CLC directors to be elected to the Board of Directors for the period through the third anniversary of the effective time of the Merger. 43 2 4. Shareholder Agreements Concurrently with the execution of the definitive merger agreement (the "Merger Agreement"), Vint Bacon, Larry Brahim, William DeArman, John Drury, Don Sanders, Katherine Sanders, Levine Leichtman Capital Partners, L.P., ING Capital Corporation, Jay Balaban, Andy Cohen and any of their respective affiliates will enter into mutually agreeable shareholder agreements which will include, but not be limited to, provisions relating to prohibitions on their sale of stock for mutually agreeable periods of time and agreements relating to voting for directors of the surviving corporation in accordance with paragraph 3 above. 5. Operating Plan Within 90 days after the date of this letter of intent, JL and CLC will develop a mutually agreeable operation plan for the surviving corporation which will include, but not be limited to (i) expenses, that will be eliminated by amount and implementation date, (ii) necessary factoring relationship, (iii) manufacturing facility usage, (iv) monthly income statement, balance sheet and liquidity position for April 1998 through December 1999. 6. Merger Agreement The Merger Agreement would contain representations, warranties and other provisions customary in transactions of this type. All representations, warranties, covenants and indemnities would terminate on the effective date of the Merger. 7. Securities Law Matters The Common Stock to be issued in the merger would be registered on a Form S-4 registration statement and listed on an exchange mutually acceptable to the parties. 8. Conditions Consummation of the Merger would be subject to the satisfaction of the following conditions, among others: (a) the negotiation and execution of a definitive merger agreement, containing representations, warranties, covenants, conditions and indemnification provisions customary for transactions of this nature and which are satisfactory in form and substance to both parties; (b) the obtaining of all required governmental and regulatory consents or approvals with respect to the Merger (including without limitation the Hart-Scott-Rodino Act); (c) approval of the definitive Merger Agreement by the Boards of Directors and stockholders of both JL and CLC: 44 3 (d) no material adverse change in the business, financial condition, results of operations or properties of either party after the execution of a definitive agreement; and (e) JL shall have repaid in full all indebtedness (except for unsecured trade payables and except for factor indebtedness secured by receivables), and all liens on assets securing such indebtedness shall have been released. 9. Closing The parties intend to work diligently and in good faith toward the negotiation and execution of a definitive merger agreement. Execution of any definitive agreement would be subject, among other things, to the satisfactory completion of legal, accounting and business due diligence by no later than 90 days from the date hereof by both JL and CLC in their sole discretion. Following execution of a definitive agreement, if any, the parties would work toward consummation of the transactions by September 30, 1998, but in no event later than October 31, 1998. 10. Conduct of Due Diligence Each party will provide the other reasonable access to its premises and its books and records and shall cause its officers, financial advisors and auditors to furnish to the other party and its representatives such financial information, operation data and other information as such other party may reasonable [sic] request. 11. Confidentiality, Etc. Neither party shall (i) disclose to any person other than its own representatives any non-public information it acquires by reason of its negotiations of the terms of the Merger or its due diligence investigations or (ii) until at least one year shall have passed after any termination of this letter of intent, solicit for employment by it any of the employees of the other party. The parties shall continue to be bound by the terms of any confidentiality agreement entered into prior to the date of this letter of intent. 12. Publicity CLC recognizes that, since JL is a public company, JL may be obligated to issue a press release relating to the terms of this letter of intent. Any such press release shall be reasonably satisfactory to CLC, and JL and CLC shall cooperate in conjunction with issuing any such press release and any other public disclosure of the matters contemplated hereby. 13. Expense Each party will be responsible for its own expenses in connection with all matters relating to the transaction, except as may otherwise be agreed to by the parties in writing. If for any reason this proposed transaction shall not be consummated, neither party will be responsible for any of the other's expenses except as may be provided in the definitive Merger Agreement. Each party will 45 4 indemnify, defend and hold harmless the other against the claims of any broker or finders claiming by, through or under the indemnifying party. 14. Notice of Certain Events Each party shall provide the other with prompt notice if it (i) solicits or entertains inquiries or proposals, or enters into negotiations with any other person, with respect to the sale of its assets (other than sales of inventory in the ordinary course of business) or a merger, consolidation or other acquisition or business combination involving it, or (ii) makes any material changes in its capital structure, incurs new material indebtedness (other than borrowings related to existing credit or factor arrangements) or makes any material changes in its business plans. 15. Binding Nature Except for matters set forth in paragraphs 11 (Confidentiality, Etc.), 12 (Publicity), 13 (Expenses), 14 (Notice of Certain Events) and this paragraph 15 (Binding Nature), this letter does not create and will not be deemed to be a binding, legal obligation among the parties for any reason but merely represents the present good faith intention of the parties. Except as set forth in the preceding sentence, there shall be no binding agreement between the parties hereto unless and until a definitive Merger Agreement is executed and delivered by the parties hereto. This letter agreement shall be governed by California law. 16. Termination Either party may terminate negotiations at any time prior to the execution of the Merger Agreement without liability to the other party whatsoever, subject to the parties' obligations under Sections 11 and 13, which shall survive any termination of this letter of intent. The parties also agree that if the Merger Agreement has not been executed by both parties by July 31, 1998, this letter of intent will automatically be terminated and be of no further force or effect, subject only to the parties' obligations under Sections 11 and 13. 17. Counterparts This letter of intent may be executed in counterparts. Your signature below shall confirm your agreement with the foregoing letter of intent. Very truly yours, JALATE LTD. By: /s/ VINTON BACON ------------------------------------ Name: Vinton Bacon Title: President and CEO 46 5 Agree to and Accepted this 13th day of April, 1998. CHORUS LINE CORPORATION By: /s/ ANDREW COHEN -------------------------------- Name: Andrew Cohen Title: President and CEO 47 EX-27 6 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM JALATE, LTD. CONDENSED BALANCE SHEET AS OF MARCH 31, 1998 AND CONDENSED STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH STATEMENTS FILED IN JALATE, LTD.'S QUARTERLY REPORT FILED ON FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 1998. 1,000 3-MOS DEC-31-1998 JAN-01-1998 MAR-31-1998 69 0 530 284 4,484 4,976 2,811 1,467 7,186 5,130 139 5,576 0 0 (4,609) 7,186 12,242 12,242 8,906 8,906 0 161 243 (119) 0 (119) 0 0 0 (119) (0.03) (0.03)
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