<PAGE> 1
As filed with the Securities and Exchange Commission on March 31, 1997
===============================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (FEE REQUIRED)
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
FOR THE TRANSITION PERIOD FROM ____________ TO ___________
COMMISSION FILE NUMBER: 1-12868
JALATE, LTD.
(Exact name of registrant as specified in its charter)
CALIFORNIA 95-4121885
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
1675 SOUTH ALAMEDA STREET
LOS ANGELES, CALIFORNIA 90021
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (213) 765-5000
Securities registered pursuant to Section 12(b) of the Act:
Common Stock American Stock Exchange
(Title of each class) (Name of each exchange
on which registered)
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No__
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [X]
As of March 14, 1997, the aggregate market value of the Common Stock held by
non-affiliates of the registrant was approximately $3,955,958, based upon the
closing price of the Common Stock on that date.
Number of shares of Common Stock of the registrant outstanding as of March 14,
1997: 3,403,000.
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<PAGE> 2
PART I
Item 1. BUSINESS
GENERAL
Jalate, Ltd. (the "Company") designs, develops and markets moderately
priced women's sportswear and dresses primarily in junior, missy and plus
sizes. In addition, the Company designs, develops and markets moderately
priced childrens wear. The Company's products combine fashionable styling,
quality construction and moderate pricing, and are intended to appeal primarily
to the fashion-conscious young woman who desires to continually upgrade her
wardrobe on a limited clothing allowance. Although the Company regularly
alters the styles offered, its products are characterized by basic designs
which are less costly to manufacture than more detailed high fashion styles.
These cost savings not only permit the Company to aggressively price its
products, but allow it to provide higher quality and more fashionable fabric
for its sportswear. During the year ended December 31, 1996, the Company's
products were sold to over 600 department stores, apparel specialty stores and
discount chains, including Federated Department Stores, J. C. Penney,
Robinson/May Department Stores, Mervyns, and Sears. The Company also provides
product development for apparel retailers including Dillard's Department
Stores, Victoria's Secret and Limited Express.
MARKET
The Company believes that the ability to anticipate, gauge and respond
to changes in consumer preferences, as well as the ability to meet the demands
of the retailer for timely delivery, consistent quality and adaptability to its
individual business practices, are necessary to compete successfully in the
women's and the kids apparel industry.
Consumer acceptance in general depends principally on fashionable
styling, product quality, pricing and brand awareness. The Company believes
that the importance of brand awareness in general has diminished and that
consumers have come to view value pricing as increasingly important. The
Company's products offer a combination of fashionable styling and quality
construction for a moderate price. These products are intended to appeal
primarily to the fashion-conscious young woman who desires to continually
update her wardrobe on a limited clothing allowance. In addition, the
Company's products appeal to youthfully figured women of all ages who desire
the youthful styling and value pricing of the Company's products.
Apparel retailers generally are seeking to obtain both a high degree of
consumer acceptance of their products and superior service from their vendors
in order to improve their own results of operations. The ability of apparel
manufacturers to timely deliver products which are of consistent quality and to
adapt to the business practices of the individual retailer is increasingly
important to the apparel retailer as it seeks to improve its own operating
efficiencies and to reduce the costs and risks of maintaining finished goods
inventory, including the risk of fashion obsolescence. Accordingly, retailers
are concentrating their purchases among an increasingly small group of
dependable vendors who have demonstrated their ability to correctly anticipate
changes in consumer preferences and to provide timely delivery, consistent
quality and adaptability to the business practices of individual retailers.
The continuing consolidation of apparel retailers as a result of weak consumer
demand has substantially increased the competition among apparel manufacturers
and further emphasized the importance of dependable service. The Company
believes that its established reputation for delivering products which achieve
a high degree of retail sell-through at attractive profit margins for both the
Company and the retailer, as well as for providing a high degree of customer
service, will enable it to continue to maintain its competitive position.
STRATEGY
The Company is committed to offering products which achieve a high
degree of consumer acceptance and to meeting the demands of apparel retailers
for dependable service. The Company responds to the needs of consumers and
retailers by granting substantial design and marketing autonomy to each product
division, maintaining an active Product Development effort, closely monitoring
the production costs, quality, timely delivery and sell-through of its
products, developing alternative manufacturing sources and continually
upgrading its operational capabilities. In addition, the Company studies the
preferences of each of its principal customers and adapts its own business
practices to accommodate its customers. The Company believes that its
responsiveness to the needs of consumers and retailers will enable it to
maintain its competitive position.
<PAGE> 3
1996
In response to a continuing decline in retail apparel demand, in 1996
the Company commenced a program of (i) focusing on its Jalate brand of
sportswear and dresses, which accounted for 61% and 39%, respectively, of the
Company's gross sales in 1996, (ii) reducing its operating expenses, (iii)
improving its operational capabilities and (iv) expanding its Product
Development division which designs, develops and manufactures apparel under
private label and (v) starting the Kids Division in July 1996.
PRODUCTS
The Company participates primarily in two segments of the women's
apparel market: sportswear and dresses, which are marketed primarily under the
Jalate brand name. In addition, through its Product Development division, the
Company designs, develops and manufactures apparel under private label. The
Company's sportswear, dresses and product development offerings are each
operated as a separate division with substantial design and marketing autonomy.
The Company believes that such segmentation enables it to more closely monitor
trends in styles, fabrics and colors and in the expectations of individual
retailers.
The Company's products incorporate current styles, fabrics and colors,
designed to appeal to a broad cross-section of young women for casual wear, and
are available in sizes tailored for youthfully figured women. The Company's
sportswear and dresses divisions each introduce ten product lines per year.
Each product line generally contains between three to eight items, each of
which may be produced in as many as eight styles, ten fabrics and twelve colors
and prints. Although the Company regularly alters the styles offered, its
products are characterized by their basic designs which are less costly to
manufacture than more detailed high fashion styles. These cost savings not
only permit the Company to aggressively price its products, but allow it to
provide higher quality and more fashionable fabric for its knit sportswear.
Sportswear. The Company's sportswear line currently consists
primarily of tops and bottoms, which are sold both as separates and related
separates. The Company selects styles, color schemes and fabrics to encourage
consumers to coordinate outfits, resulting in multiple product purchases within
the line. The Company's sportswear is distinguished by the use of fashion
fabrics which, as result of the use of basic designs, gives these products a
high perceived value relative to price. Retail prices range from $15.00 to
$25.00. Sportswear accounted for approximately 50% of the Company's gross
sales for fiscal 1996.
Dresses. As a result of the use of basic designs and common fabrics,
the Company's dresses and rompers compete principally based upon prompt
delivery and aggressive pricing. Retail prices range from $30.00 to $40.00.
The Company's dresses and rompers accounted for approximately 39% of the
Company's gross sales for fiscal 1996.
Product Development. In 1995, the Company commenced designing,
developing and manufacturing apparel under private label for both apparel
specialty and mass merchandise store chains. The Company's product development
offerings accounted for approximately 11% of its gross sales for fiscal 1996.
PRODUCT DESIGN
Each of the Company's divisions maintains its own merchandising and
design staffs which meet weekly to discuss adjustments in product mix,
construction, styles, fabrics and colors. The merchandising staff determines
market trends by visiting retail stores and trade shows throughout the United
States and Europe and consulting with buyers for retail stores and with
representatives of textile suppliers and mills. Based upon such research, the
division's merchandising staff selects the styles, fabrics and colors for each
new product line. The design team then prepares concept boards containing
proposed designs and fabric selections which are reviewed both within the
Company and, on occasion, with major customers. After a review of such
selection by the Company's production staff to determine that each item can be
manufactured within the division's established cost structure, working
prototypes of each garment are prepared and reviewed and the design and
production patterns are finalized. The Company's sales force actively monitors
the sell-through of each product to determine changes in consumer preferences.
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MANUFACTURING
The Company maintains a flexible manufacturing program consisting of (i)
a cutting and sewing joint venture with an affiliate of its largest sewing
contractor in Los Angeles, (ii) using independent sewing contractors in the Los
Angeles area to supplement the joint venture and (iii) manufacturing products
through independent cutting and sewing contractors abroad.
Domestic Sewing Contractors. In fiscal 1996, all of the Company's
domestic products were manufactured to its specifications by sewing contractors
in the Los Angeles area. The Company believes that its use of domestic
contract manufacturers allows it to respond more quickly to the needs of
certain customers than would be the case if it relied solely on importing
finished goods and enables it to avoid the significant capital expenditures and
costs associated with a larger production force which would be incurred if it
were to rely solely on in-house manufacturing. The rapid response to a
customer's needs permitted by contract manufacturing, as well as the Company's
policy of manufacturing products based primarily on orders, enables the Company
and its customers to reduce the costs and risks of making early commitments for
fabric and piece goods and maintaining finished goods inventory, including the
risk of fashion obsolescence.
The Company currently uses 32 domestic sewing contractors, the five
largest of which account for approximately 67% of the Company's products.
Although the Company has no master manufacturing agreements with any of its
contractors and competes with other apparel companies for production capacity,
the Company believes that its relationships with its contractors are
satisfactory and that alternative sources for sewing services are readily
available.
The principal fabrics used in the Company's domestically manufactured
products are solid knits, novelty knits, denim and cotton, which are currently
acquired from suppliers and textile mills located in the United States. One
source accounted for approximately 19% of the Company's fabric for fiscal 1996,
and the five largest accounted for approximately 61% of such fabric. Although
the Company has no long-term agreements with any of its domestic fabric
suppliers and competes with other apparel companies for fabric, the Company
believes that its relationships with its suppliers are satisfactory and that
alternative sources of fabric are readily available.
The Company's employees currently inspect each of its domestic
contractors at least three times each week for compliance with the Company's
specifications and patterns and monitor the timely delivery of finished goods
to the Company. The Company has expanded such quality assurance efforts by
inspecting the quantity and quality of all fabric received from its fabric
suppliers and by inspecting at least 10% of all finished goods received from
its domestic sewing contractors. In the event more than five percent of the
fabric inspected is found to be defective, all such product will be returned to
the fabric supplier and reinspected upon its redelivery to the Company.
In-House Manufacturing. The Company entered into a manufacturing joint
venture (the "Joint Venture") with Lebr Associates, Inc. (the "Partner"), an
affiliate of the Company's largest sewing contractor in November 1994 and the
Joint Venture commenced operations in May 1995. The purposes of the Joint
Venture are to assist the Company to (i) maintain and enhance the quality of
certain products, (ii) decrease the time required for manufacturing certain
products to enhance the Company's responsiveness to its customers, (iii) lower
the manufacturing costs of certain products, (iv) comply with the individual
manufacturing requirements of certain large customers and (v) provide a safe
and productive workplace in conformity with federal and state laws for persons
manufacturing the Company's products. The Joint Venture currently cuts all of
the Company's domestic products and sews approximately 10% of such 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 "General Partner"). The Company and the Partner each have the right to
elect one-half of the directors of the General Partner. Certain actions by the
General Partner or the Joint Venture require the approval of all the directors
of the General Partner, including, but not limited to, acquiring an interest in
real property, expending over $50,000, acquiring or issuing securities,
incurring indebtedness, making any distribution, amending organizational
documents or disposing of any assets, other than in the ordinary course of
business. Larry Brahim, Chairman of the Company, is the President of the Joint
Venture, and Brenda Daitch, the daughter of a principal of the Partner, is the
Chief Operating Officer of the Joint Venture. The Company and the Partner each
are obligated to contribute up to $300,000 to the Joint Venture. As of
December 31, 1996, the Company had contributed approximately $198,000 to the
Joint Venture. The Joint Venture had income of approximately $576,000 for the
fiscal year ended December 31, 1996, of which $288,000 was allocated to the
Company under the equity method of accounting.
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Importing. In July 1994, the Company commenced foreign sourcing from
various points in the Philippines, Hong Kong, and China to attract additional
retail customers which offer product at lower price points and are generally
supplied by offshore manufacturers. Contracting with foreign manufacturers
enables the Company to take advantage of lower prevailing labor rates and,
accordingly, to produce a garment which can be sold in the moderate price range
while maintaining a cost of manufacture lower than that of a domestically
manufactured product. The Company's import sales for 1996 were $6,385,000, 11%
of total volume compared to $11,700,000 for 1995, 15% of total volume.
All foreign manufacturing is performed in accordance with detailed
specifications furnished by the Company, and is subject to quality control
standards with the right to reject products that do not meet such
specifications. As part of its quality control procedure, the Company receives
in Los Angeles pre-production samples and, subsequently, in-production samples
from each factory for inspection by quality control personnel before accepting
shipment of the product to the United States.
The Company currently retains an agent in the Philippines to monitor
production in order to assure timely delivery and maintain quality control,
inspect finished garments and issue inspection certificates before shipment to
the United States. The Company pays a commission based upon the contract cost
of the product for this service. The Company purchases garments directly
through Hong Kong and Taiwanese trading companies for the limited production of
garments in the Philippines, China, and Taiwan. The products produced in Hong
Kong and China are manufactured by factories with whom management has had
previous long standing relationships and favorable prior experiences. The
Company also purchases finished fabric from Taiwan.
The Company arranges for production of its products with foreign
suppliers on a purchase order basis, with each order generally backed by an
irrevocable international letter of credit. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources." The Company has not entered into any long term
arrangements with foreign manufacturers. This provides the Company with
flexibility in the selection of manufacturers for production of goods. The
Company believes that the loss of any particular manufacturer in any country
could be replaced by another manufacturer in a reasonable time period.
However, in the event of the loss of a major manufacturer the Company would
experience a temporary interruption in supply of garments and quota. The
period of time from placement of a purchase order by the Company through
shipment and delivery in the United States ranges from approximately 75 to 150
days.
The Company's operations are subject to the customary risks of doing
business abroad, including fluctuations in the value of currencies, export
duties, quotas, restrictions on the transfer of funds, work stoppage and, in
certain parts of the world, political instability. The Company believes that
its principal competitors, many of whom also rely on manufacturing sources in
the Far East, may experience similar risks.
The Company's product costs, pricing structure and profit margins
depend, in part, on the currency exchange rates between the United States and
the countries in which its products are manufactured. The currencies of these
countries have, from time to time, increased in value against the U.S. dollar
and may experience further increases in the future as a result of various
factors, including the balance of payments, overall economic conditions or
government intervention. Although the Company does not believe that such
fluctuations in exchange rates have had a material effect on its operations to
date, depending upon their extent and duration, such fluctuations could
materially increase the Company's cost of goods, resulting in higher product
prices or lower profits unless alternative manufacturing arrangements can be
implemented.
The Company's foreign manufacturing is conducted under the constraints
imposed by bilateral textile agreements between the United States and a number
of foreign countries, including those from which the Company is currently
sourcing products. These agreements impose quotas on the amount and type of
goods which can be imported into the United States from these countries. The
Company is unable to predict whether legislation which could result in
additional U.S. customs duties, quotas or other restrictions on the importation
of its products will be enacted in the future. The enactment of such
legislation could result in increases in the cost of such products generally
and might adversely affect the sales or profitability of the Company. However,
the trend today is towards lowering tariffs and eliminating textile quotas.
The United States, in the Uruguay Round Agreements Act enacted by the Congress
to implement the GATT Uruguay Round Agreement, has committed itself to doing
both over the next ten years.
The Company does not contract for quota separately from the garment
cost. Quota charges are included in the purchase order cost. For this reason,
the Company views its current factories as valuable sources for the quota
categories it intends to import.
3
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MARKETING
During fiscal 1996, the Company's products were sold to over 600
department stores, apparel specialty stores and discount chains, many of which
have locations throughout the United States. The Company's customers include
Dillard's, Federated Department Stores, J.C. Penney, Robinson/May Department
Stores, Mervyns, and Sears, which accounted for an aggregate of 38% of the
Company's gross sales for fiscal 1996. No single customer accounted for more
than 11% of the Company's gross sales for fiscal 1996. Commencing in 1994, the
Company has sought to reduce its reliance upon lower volume apparel specialty
stores, which generally have higher returns and a less secure credit ratings
than department stores and discount chains, primarily by hiring more
experienced sales personnel with prior relationships with department stores and
discount chains. As a result of such efforts and the consolidation of retail
stores generally, the number of the Company's customers was reduced from 850
in fiscal 1993 to 670 in fiscal 1994 to 640 in fiscal 1995 and 610 in fiscal
1996.
The Company sells its products directly through a 14 person sales staff
located in showrooms in both Los Angeles and New York. In addition, senior
management actively participates in selling to major accounts.
The Company's sportswear and dresses are marketed primarily under the
Jalate brand name. Approximately 25% of the Company's net sales for fiscal
1996 was attributable to the Company's products sold under the customers'
labels. The use of its own label allows a customer to increase its gross
profit margin due to the established value of its brand name.
The Company provides product development for apparel retailers,
including Dillard's Department Stores, Victoria's Secret and Limited Express.
In this effort, the Company's employees work in coordination with a customer to
develop, design and manufacture goods to be sold under the customer's own
label. Approximately 10% of the Company's net sales for fiscal 1996 was
attributable to apparel designed by the Company on behalf of customers. The
Company believes that its commitment to value pricing, which provides consumers
with well-made, fashionable apparel for a moderate price, is generally
recognized by apparel retailers and is a principal reason for the success of
the Company's product development offerings.
BACKLOG
The Company's backlog of orders was approximately $16,906,000 at March
14, 1997, compared to approximately $14,430,000 at March 14, 1996, an increase
of 17%. Ninty-six percent of the orders included in such backlog require
shipment before May 31, 1997. Such orders generally may be canceled only in
the event of late delivery or delivery of non-conforming goods. The Company
generally has not experienced difficulty in shipping orders by the dates
requested by its customers or in material returns of its products. The amount
of backlog which is manufactured and shipped during any period is dependent on
various factors and, accordingly, the amount of backlog at any date is not
necessarily indicative of actual shipments.
COMPETITION
Each segment of the women's and kids apparel industry in which the
Company offers products is highly competitive. 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, including certain of the Company's customers, which sell apparel
under their own labels. The Company's principal competitors include Rampage
Clothing Company, Chorus Line, Oshkosh, and California Concepts. 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 primarily on the basis of fashion fabrics and
moderate pricing in its sportswear and kids line, and timely delivery and
aggressive pricing in its dresses and rompers. Although the Company believes
that its competitive strategy in the past has resulted in its increased market
share, there can be no assurance that the Company will be able to maintain or
increase its revenues or earnings or to correctly anticipate, gauge and respond
to changing preferences of consumers and retailers in a timely manner.
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EMPLOYEES
At February 28, 1997, the Company had 172 full-time employees, of whom
five were engaged in corporate management, 19 in administration, 19 in
merchandising and design, 35 in pattern and sample making, 44 in production, 23
in sales and customer service, five in data entry and 22 in warehousing and
shipping. The Company's employees are not covered by any collective bargaining
agreement, and the Company considers its relations with its employees to be
satisfactory.
ITEM 2. PROPERTIES
TRADEMARKS
The Company has registered certain of its labels and brand names in
selected foreign countries and intends to seek registration of its labels and
brand names in the United States. The Company believes, however, that the
importance of brand awareness in general has diminished and that consumers have
come to view value pricing as increasingly important.
PROPERTIES
In the fourth quarter of 1993, the Company moved its executive offices,
design and production facilities and warehouse to a single building in Los
Angeles, California. These premises contain approximately 61,500 square feet,
of which approximately 8,500 square feet are used for administrative offices,
8,500 square feet for design and production and 44,500 square feet for shipping
and warehousing, and are leased from an independent third party under a lease
which expires on November 14, 1998. The monthly rent on such premises is
presently $24,000. The Company has an option to purchase its Los Angeles
warehouse throughout the lease term. The purchase price is $4,300,000 if
escrow closes within the first 36 months of the lease term, $4,730,000 between
the 37th and 48th month and $5,203,000 between the 49th and 61st month.
On October 11, 1994, the Company entered into a lease with an
independent third party for approximately 90,000 square feet located in City of
Commerce, of which 9,000 square feet is used for administrative offices, 40,000
square feet is used for additional warehousing and inspection of piece goods
and 40,000 square feet is used for manufacturing. The initial term of the
lease is five years and two months, commencing on December 1, 1994, and is
subject to two options to renew for five years each. The annual rent on such
premises is $237,600 subject to adjustment in the 33rd month. The Company has
agreed to sublease 40,000 square feet of these premises to the Joint Venture on
the same terms as set forth in the lease.
In addition the Company leases its showrooms in Los Angeles and New
York. The Company believes that its facilities are adequate for the
foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
The Company is from time to time involved in litigation incidental to
the conduct of its business. The Company does not believe that any currently
pending litigation to which it is a party will have a materially adverse effect
on its financial statements taken as a whole.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's shareholders during
the fourth quarter of fiscal 1996.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
AMEX LISTING
The Company's Common Stock currently trades on the American Stock
Exchange ("AMEX") under the symbol "JLT."
The following table sets forth, for the periods indicated, the range of
high and low closing prices on AMEX.
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<TABLE>
<CAPTION>
1995 Low High
- ---- --- ----
<S> <C> <C>
First Quarter..................................................... $6.75 $7.75
Second Quarter.................................................... $5.375 $7.75
Third Quarter..................................................... $5.00 $6.00
Fourth Quarter.................................................... $2.875 $5.25
1996 Low High
- ------- --- ----
First Quarter..................................................... $2.50 $4.00
Second Quarter.................................................... $3.25 $4.625
Third Quarter...................................................... $3.50 $4.688
Fourth Quarter..................................................... $2.875 $4.50
</TABLE>
On March 11, 1997, the closing price of the Company's Common Stock as
reported on AMEX was $3.00. Shareholders are urged to obtain current market
quotations for the Common Stock. As of March 14, 1997, there were
approximately 382 shareholders of record of the Company.
DIVIDENDS
The Company currently intends to retain any future earnings to provide
funds for the operation and expansion of its business and does not anticipate
paying cash dividends on its Common Stock in the foreseeable future. The
Company is prohibited from paying dividends under the terms of its credit
facilities. The payment of dividends is within the discretion of the Company's
Board of Directors, and will depend upon, among other things, the Company's
earnings, financial condition and capital requirements and general business
conditions.
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ITEM 6
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 6 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-K THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM
THOSE ANTICIPATED BY THE COMPANY'S MANAGEMENT. THE PROVATE SECURITIES
LITIGATION REFORM ACT OF 1995 (THE "ACT") PROVIDES CERTAIN "SAFEHARBOR"
PROVISIONS FOR FORWARD-LOOKING STATEMENTS. ALL FORWARD-LOOKING STATEMENTS MADE
IN THIS YEARLY REPORT ON FORM 10-K ARE MADE PURSUANT TO THE ACT.
SELECTED FINANCIAL DATA
The following selected financial data is qualified in its entirety by,
and should be read in conjunction with, the other information and financial
statements, including the notes thereto, appearing elsewhere herein.
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------------------------------------
1992 1993 1994 1995 1996
Pro Pro Pro
Actual Forma Actual Forma Actual Forma Actual Actual
------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA
Net sales . . . . . . . . . $29,377 $29,377 $38,255 $38,255 $63,887 $63,887 $70,800 $54,021
Cost of goods sold . . . . 21,607 21,607 27,729 27,729 46,872 46,872 56,211 39,514
------- ------- ------- ------- ------- ------- ------- -------
Gross profit . . . . . . . 7,770 7,770 10,526 10,526 17,015 17,015 14,589 14,507
Operating expenses . . . . 7,412 6,343 (1) 8,291 8,291 14,071 14,071 16,977 14,220
------- ------- ------- ------- ------- ------- ------- -------
Earnings (loss) from 358 1,427 2,235 2,235 2,944 2,944 (2,388) 287
operations . . . . . . . .
Interest Expense 228 228 412(3) 412(3) 359 359 896 548
Equity in earnings of joint
venture . . . . . . . . . . - - - - - - (75) (288)
------- ------- ------- ------- ------- ------- ------- -------
Earnings (loss) before 130 1,199 1,823 1,823 2,585 2,585 (3,209) 27
income taxes (benefit) . .
Income taxes (benefit)
Current period . . . . . . 23 487(2) 78 744(2) 720 912(2) (313) _
Settlement of tax
examination . . . . . . . . - - 200(3) 200(3) - - - -
------- ------- ------- ------- ------- ------- ------- -------
Net earnings (loss) . . . . $ 107 $ 712 $ 1,545 $ 879 $ 1,865 $ 1,673 $(2,896) $ 27
======= ======= ======= ======= ======= ======= ======= =======
Net earnings (loss) per
share(4) . . . . . . . . . $ 0.65 $ 0.37 $ 0.59 $0.53 $ (0.85) $ .01
======= ======= ======= ======= ======= =======
Common and common
equivalent shares
outstanding . . . . . . . . 2,393,000 2,393,000 3,149,000 3,149,000 3,390,000 3,488,000
========= ========= ========= ========= ========= =========
</TABLE>
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<PAGE> 10
(1) The Company paid salaries and bonuses to certain officers in the
aggregate amount of $2,119,000, and $1,197,000, respectively, for each
of the years in the two-year period ended December 31, 1993. The
Company entered into employment agreements with such officers effective
as of January 1, 1993 which require aggregate annual base salaries of
$1,050,000 plus certain benefit payments. Pro forma operating expenses
for the year ended December 31, 1992 reflects a pro forma adjustment
reducing the compensation paid to such officers to the amounts that
would have been paid under such employment agreements.
(2) Effective November 1, 1989, the Company elected to be taxed under
Subchapter S of the Internal Revenue Code of 1986, as amended, and
comparable California tax laws. As a result, the earnings of the
Company have been taxed for federal and California income tax purposes
directly to the Company's shareholders rather than to the Company. On
the consummation of the Company's initial public offering, the Company
became subject to federal and California income taxes. Pro Forma
Statement of Operations Data has been adjusted to reflect the income tax
expense that would have been recorded had the Company not been an S
Corporation.
(3) In July 1993, the Internal Revenue Service completed its examination of
the Company's federal income tax returns for October 31, 1989 through
December 31, 1991 Statement of Operations Data includes as an expense
$200,000 of federal and state taxes and $70,000 of interest thereon
recorded by the Company in the year ended December 31, 1993 as a result
of such examination. Such tax assessments related primarily to 1989 and
prior to the Company's S Corporation election.
(4) For information pertaining to the calculation of net earnings (loss) per
common share, see Note 1 of Notes to Financial Statements.
<TABLE>
<CAPTION>
December 31,
------------------------------------------------
1992 1993 1994 1995 1996
------- ------- ------- ------- ------
Balance sheet Data
<S> <C> <C> <C> <C> <C>
Working capital . . $ 778 $ 971 $ 7,384 $ 4,108 $3,738
Total assets . . . 3,510 5,229 12,523 9,183 9,173
Total current 2,631 3,712 4,327 3,846 3,809
liabilities . .
Shareholders' equity 879 1,517 8,196 5,337 5,364
</TABLE>
FACTORS THAT MAY AFFECT FUTURE RESULTS
All forward-looking statements contained in this Item 6 are subject to, in
addition to the other matters described in the Report on Form 10-K, 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 caustions 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.
8
<PAGE> 11
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITIONS AND RESULTS OF OPERATIONS
GENERAL
The following discussion is qualified in its entirety by, and should be
read in conjunction with, the other information and financial statements,
including the notes thereto, appearing elsewhere in this Report.
During the last five years, the women's apparel industry has experienced
a continuing decline in consumer demand and a continuing trend in consumer
preference for value-priced products. The result of such changes has been a
continuing consolidation among apparel retailers with an attendant increase in
competition among apparel manufacturers. As a result, the Company has
experienced, and is likely to continue to experience, substantial fluctuations
in the volume, average unit price, gross profit margin and operating expense in
each of its product categories as it responds to changes in the demands of
apparel retailers, consumer preferences and the general economy.
In fiscal 1994, the Company (i) commenced foreign manufacturing in
response to increased competition by importers for budget-priced products, (ii)
commenced development of a manufacturing joint venture with an affiliate of the
Company's largest sewing contractor to improve the efficiency, quality and cost
of its products, (iii) reduced its reliance upon apparel specialty stores and
(iv) expanded its management information systems and computerized marking and
grading equipment.
In fiscal 1995, the Company commenced a program of (i) replacing its
Lajate brand of sportswear and Zanoni brand of dresses with the Jalate name,
which accounted for 50% and 27%, respectively, of the Company's gross sales in
fiscal 1995, (ii) reducing its operating expenses, (iii) improving its
administrative, production, distribution, financial reporting, human resources
and MIS capabilities and (iv) expanding its Product Development division which
designs, develops and manufactures under private label.
In Fiscal 1996, the Company commenced a program of (1) starting a Kids
clothing line which had a sales backlog of $1,000,000 at December 31, 1996,
(ii) implementing improved shipping procedures and managed markdowns which
reduced dilution from 9.9% of sales in 1995 to 7.1% in 1996, and (iii)
improving gross profit margins from 20.6% in 1995 to 26.9% in 1996.
There can be no assurance that such efforts will enable the Company to
maintain its competitive position.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the
percentage which certain items in the pro forma statement of operations data
bear to net sales and the percentage dollar increase (decrease) of such items
from period to period.
<TABLE>
<CAPTION>
Percentage Dollar
Percent of Net Sales Increase (Decrease)
------------------------ --------------------------
Year Ended December 31 1994 1995
------------------------ and and
1994 1995 1996 1995 1996
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Net sales . . . . . . . . . . . . 100.0% 100.0% 100.0% 10.8% (23.7)
Cost of goods sold . . . . . . . (73.4) (79.4) (73.1) 19.9 (29.7)
----- ----- -----
Gross profit . . . . . . . . . . 26.6 20.6 26.9 (14.3) (.6)
Operating expenses . . . . . . . (22.0 (24.0) (26.3) 20.7 (16.2)
----- ----- -----
Earnings (loss) from operations . 4.6 (3.4) .6 (181.1) 112.0
Interest expense . . . . . . . . (0.6) (1.2) (1.0) 149.6 (38.8)
Equity in earnings of joint
venture . . . . . . . . . . . . . - 0.1 .5 - 284.0
----- ----- -----
Earnings (loss) before income
taxes (benefit) . . . . . . . . . 4.0 (4.5) .1 (224.1) 100.8
Income taxes (benefit) . . . . 1.4 (0.4) - (134.3) (100)
----- ----- -----
Net earnings (loss) . . . . . . . 2.4 (4.1) .1 (273.1) 100.9
===== ===== =====
</TABLE>
9
<PAGE> 12
FISCAL 1996 COMPARED TO FISCAL 1995
Net Sales. Gross sales decreased from $78,539,000 in fiscal 1995 to
$58,154,000 in fiscal 1996, a decrease of 26.0%, due to a decrease in the
volume of apparel sold from 8,729,000 units to 5,867,000 units, a decrease of
32.8%, which was offset in part by an increase in the average wholesale price
from $9.00 to $9.91, an increase of 10.1%. The decrease in volume was due
primarily from discontinuing the Pottery and Missy divisions and the Company's
policy to be more selective in its customer base in order to maintain adequate
profitability levels.
Returns and allowances decreased from $5,564,000 (7.1% of gross sales)
for fiscal 1995 to $2,442,000 (4.2% of gross sales) for fiscal 1996, a decrease
of 56.1%. This was due to the decrease in gross sales and the Company's
implementation of improved procedures to manage quality control in the
preproduction, production and distribution operations.
Discounts decreased from $2,175,000 (2.8% of gross sales) for fiscal
1995 to $1,691,000 (2.9% of gross sales) for fiscal 1996, a decrease of 22.3%.
This decrease is due primarily to the decrease in gross sales.
As a result of the foregoing factors, net sales decreased from
$70,800,000 for fiscal 1995 to $54,021,000 for fiscal 1996, a decrease of
23.7%.
Gross Profit. Gross profit decreased from $14,589,000 (20.6% of net
sales) for fiscal 1995 to $14,507,000 (26.9% of net sales) for fiscal 1996, a
decrease of 0.6%. The increase in gross profit as a percentage of net sales
was due primarily to the decrease in discounts, returns and allowances and to
the Company's policy of selecting customers that provide acceptable gross
profit margins.
Operating Expenses. Operating expenses decreased from $16,977,000
(24.1% of net sales) for fiscal 1995 to $14,220,000 (26.3% of net sales) for
fiscal 1996, a decrease of 16.2%. This decrease was due primarily to the
decrease in sales. While the dollar amount of operating expenses decreased,
the percentage of operating expenses to net sales increased 2.3%. The increase
in percentages was partially attributable to the Company's preproduction and
production expenses that increased from $1,828,000 (2.6% of net sales) to
$2,757,000 (5.1% of net sales). The main reason for this was the
implementation of the Company's procedures to improve the performance of these
departments, which resulted in an increase in the experience level and number
of personnel. The results of these improvements had a direct impact on
reducing the amount of returns and allowances, which resulted in the Company's
obtaining a significant improvement in its gross profit. This was partially
offset by a decrease in shipping costs from $2,326,000 (3.3% of net sales) to
10
<PAGE> 13
$1,134,000 (2.1% of net sales). The decrease in shipping costs as percentage
of net sales was due to the Company's restructuring of its distribution center
which among other items resulted in minimizing air shipments. All of the other
categories remained consistent or changed only slightly as a percentage of
sales.
Interest Expense. Interest expense primarily reflects interest payable
on advances from the factor. Interest expense decreased from $896,000 for
fiscal 1995 to $548,000 for fiscal 1996, a decrease of 38.8%. This was
primarily due to the improvements the Company made in managing the level of its
inventories and the related debt to finance inventories.
Equity Earnings in Joint Venture. The Company is a partner in a
manufacturing joint venture with an affiliate of its largest sewing contractor.
The Company accounts for its investment in the joint venture under the equity
method of accounting. The Company's share of equity in earnings in the joint
venture increased from $75,000 in 1995 to $288,000 in 1996. See Note 6 to the
Financial Statements appearing elsewhere in the Form 10-K.
Inome Taxes. The Company did not record any income tax expense or
benefit in 1996 as its effective tax rate was zero due to a reduction in the
valuation allowance resulting from a reversal of certain temporary differences.
The Company recorded an income tax benefit in 1995 in the amount of $313,000,
representing an effective income tax benefit of 9.8%. The benefit was the
result of carrying back certain losses. As of December 31, 1996, the Company
recorded a valuation allowance of $750,000 related to deferred tax assets of
$750,000. In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all of the
deferred tax assets will not be realized. The ultimate realization of deferred
tax assets is dependent upon the generation of future taxable income during the
periods in which those temporary differences become deductible. Management
considers the projected future taxable income and tax planning strategies in
making this assessment. Based upon the level of historical taxable income
(losses) and projections for future taxable income over the periods in which
the deferred tax assets are deductible, management believes it is more likely
than not the Company will not realize the benefits of these deductible
differences. See Note 8 to the Financial Statements appearing elsewhere in
this Form 10-K.
FISCAL 1995 COMPARED TO FISCAL 1994
Net Sales. Gross sales increased from $68,753,000 in fiscal 1994 to
$78,539,000 in fiscal 1995, an increase of 14.2%, due to an increase in the
volume of apparel sold from 7,448,000 units to 8,729,000 units, an increase of
17.2%, which was offset in part by a decrease in the average wholesale price
from $9.23 to $9.00, a decrease of 2.5 %. The large increase in volume was due
primarily to an increase in sales in the Jalate division as a result of the
Company's concentration of effort in that division, which was offset in part by
the consolidation of the Company's woven sportswear and kids lines into the
newly-formed Product Development division.
Returns and allowances increased from $3,269,000 (4.8% of gross sales)
for fiscal 1994 to $5,564,000 (7.1% of gross sales) for fiscal 1995, an
increase of 70.2%, due to the increase in gross sales, weak consumer demand and
the attempt of apparel retailers to improve their own operating results.
Discounts increased from $1,597,000 (2.3% of gross sales) for fiscal
1994 to $2,175,000 (2.8% of gross sales) for fiscal 1995, an increase of 36.2%.
This increase in volume and as a
11
<PAGE> 14
percent of gross sales was due primarily to the Company's increased dealings
with discount chains and department stores which request higher discounts than
apparel specialty stores.
As a result of the foregoing factors, net sales increased from
$63,887,000 for fiscal 1994 to $70,800,000 for fiscal 1995, an increase of
10.8%.
Gross Profit. Gross profit decreased from $17,015,000 (26.6% of net
sales) for fiscal 1994 to $14,589,000 (20.6% of net sales) for fiscal 1995, a
decrease of 14.3%. The decrease in gross profit in absolute terms and as a
percent of net sales was due primarily to mark downs associated with the weak
economic and market conditions for the apparel industry in general which
resulted in lower gross profit margins as well as an increase in the number of
garments sold below cost and the size of the average loss per garment for those
items sold below cost.
Operating Expenses. Operating expenses increased from $14,071,000
(22.0% of net sales) for fiscal 1994 to $16,977,000 (24.0% of net sales) for
fiscal 1995, an increase of 20.7%. This increase was due primarily to the
continued increase in sales. While the dollar amount of all major expense
categories increased, all categories except design and general and
administrative remained consistent or changed only slightly as a percentage of
sales. Design costs increased from $2,222,000 (3.5% of net sales) to
$2,833,000 (4.0% of net sales), an increase of 27.5%, due to increases in the
design staff to handle the increased sales volume. General and administrative
expense increased from $5,302,000 (8.3% of net sales) to $6,627,000 (9.4% of
net sales), an increase of 25.0%, due to increases in liability and health
insurance, rent, public relations, consulting, employee recruiting and
depreciation and amortization expenses, all of which are related to the
increased sales of the Company.
Interest Expense. Interest expense primarily reflects interest payable
on advances from the factor. Interest expense increased from $359,000 for
fiscal 1994 to $896,000 for fiscal 1995, an increase of 149.6%, due to the
financing of higher outstanding debt incurred in connection with the build up
of inventories in anticipation of the increases in sales.
Income Taxes. Income tax benefit for 1995 amounted to $313,000,
representing an effective income tax benefit of 9.8%, compared to income tax
expense of $912,000 (pro forma) for 1994, representing an effective income tax
rate of 35.3%. In 1995, the Company had a loss before income tax benefit of
$3,209,000. Accordingly, the Company recorded a valuation allowance of
$783,000 related to deferred tax assets of $783,000. In assessing the
realizability of deferred tax assets, management considers whether it is more
likely than not that some portion or all of the deferred tax assets will not be
realized. The ultimate realization of deferred tax assets is dependent upon
the generation of future taxable income during the periods in which those
temporary differences become deductible. Management considers the projected
future taxable income and tax planning strategies in making this assessment.
Based upon the level of historical taxable income (losses) and projections for
future taxable income over the periods in which the deferred tax assets are
deductible, management believes it is more likely than not the Company will not
realize the benefits of these deductible differences. See Note 8 to the
Financial Statements appearing elsewhere in this Form 10-K.
Net Earnings. Net earnings decreased from $1,673,000 (pro forma) ($0.53
per common share) for fiscal 1994 to a loss of $2,896,000 ($0.85 per common
share) for fiscal 1995, a decrease of 273.1%, primarily due to the matters
described above.
12
<PAGE> 15
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, (iv)
the timing of the placement or cancellation of customer orders and (v) the
timing of expenditures in anticipation of increased sales and customer delivery
requirements.
In addition, the women's apparel business is seasonal. Historically,
sales by apparel manufacturers to retailers have been lower in the fourth
calendar quarter than in the other three quarters as a result of reduced
purchases by retailers for delivery in the month of December.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its working capital requirements from its cash
flow from operations, advances drawn against factored receivables, a bank line
of credit to finance imports, and the proceeds of its initial public offering
in 1994. The Company believes that its present and currently available sources
of working capital are sufficient to maintain its current level of operations
for the foreseeable future.
On March 23, 1994, the Company completed an initial public offering of
900,000 shares of Common Stock. Net proceeds to the Company totaled
approximately $4,348,000. On April 20, 1994, the Company sold an additional
135,000 shares of Common Stock to the underwriters to cover over-allotments.
Net proceeds to the Company totaled approximately $754,000.
Net cash used by operating activities for fiscal 1996 was $2,000
compared to cash provided by operating activities for fiscal 1995 of $497,000.
At December 31, 1996, working capital was $3,738,000, a decrease of $370,000 as
compared to working capital of $4,108,000 as of December 31, 1995. Inventory
decreased from $4,432,000 at December 31, 1995 to $3,572,000 at December 31,
1996.
The Company currently has an "advance" factoring arrangement with
Congress Talcott Corporation (Western) (the "Factor") pursuant to which the
Company sells to the Factor, without recourse for the financial inability of
the customer to pay, all trade receivables of the Company acceptable to the
Factor at their net invoice price less a commission of 0.45% in the event
annual sales are less than $50 million and 0.40% if annual sales are greater
than $50 million. Prior to such payment, the Company may draw short-term
advances from the Factor up to 90% of the uncollected receivables, which
advances bear interest at an annual rate of prime rate established from time to
time by Philadelphia National Bank (8.25% at December 31, 1996 and March 1,
1997). The Factor collects such advances and interest by offsetting against
amounts due the Company upon collection of factored receivables. The amount of
advances the Company is permitted to draw from the Factor is determined by the
Factor in its sole discretion and the Factor may terminate its obligation to
provide advances to the Company upon the Company's breach or without cause upon
60 days written notice. The Company's obligations to the Factor are secured by
the Company's accounts receivable.
The balance of advances from the Factor was $6,326,000 at December 31,
1995, compared to $2,214,000 at December 31, 1996. At December 31, 1995, the
amount payable to the Company
13
<PAGE> 16
for factored receivables upon the collection thereof less the amount of
outstanding advances (the "amount due from factor") and open credit memos was
$455,000 compared to $2,767,000 at December 31, 1996. Accounts receivable due
primarily to customer chargebacks decreased from $1,492,000 at December 31,
1995 to $594,000 at December 31, 1996. The Company has recorded a reserve for
uncollectible chargebacks of $669,000 as of December 31, 1995, and $358,000 as
of December 31, 1996. The Company also has non factored receivables and bears
the entire risk on these receivables which increased from $166,000 at December
31, 1995 (0.2% of net sales) to $585,000 ($317,600 backed by letters of credit)
at December 31, 1996 (1.1% of net sales). As of December 31, 1996, $2,497,000
was available to the Company under the Factor's advance provisions.
The Company has a $6,000,000 credit facility with Wells Fargo HSBC Trade
Bank, N.A. (formerly known as The Hongkong and Shanghai Banking Corporation
Limited) (the "Bank") to finance the importation of apparel. The credit
facility has a $2,000,000 (amended to $3,000,000 on March 17, 1997) sublimit
for loans against imports created upon the payment of letters of credit, a
$500,000 sublimit for shipping guarantees and a $3,000,000 limit for a standby
letter of credit to takeout existing letters of credit issued by the Factor
under the Company's factoring arrangement. The Company is charged a fee of 1/8%
upon the opening of a letter of credit and 1/8% when the letter of credit is
presented for payment, and $75 per shipping guarantee. Loans against imports
bear interest at the prime rate established from time to time by Wells Fargo
Bank (8.25% at December 31, 1996 and at March 14, 1997) plus 0.75% (reduced to
0.25% on March 17, 1997) and are payable 60 days from the day the advance is
made. Under the credit facility, the Company is subject to certain restrictive
financial covenants including, but not limited to, a maximum debt to tangible
net worth ratio of 1.25 to 1.00, a minimum tangible net worth of $4,750,000, a
minimum current ratio of 1.5 to 1.0, a limitation on capital expenditures to
$750,000 per year and prohibitions on the payment of dividends, the sale of
assets, mergers and advances to or investments in other persons. The credit
facility is secured by a first priority security interest in imported
inventory, a second priority security interest in accounts receivable and an
assignment of amount due from factor. The credit facility is due on demand or,
if no demand is made, on May 31, 1997. The Company had issued letters of
credit amounting to $2,486,000 at December 31, 1996, compared to $2,449,000 at
December 31, 1995, and had loans outstanding against imports amounting to
$684,000 on December 31,1996, compared to $90,000 at December 31, 1995. As of
December 31, 1996, $2,830,000 was available under the credit facility.
In November 1994, the Company entered into a manufacturing joint venture
(the "Joint Venture") with Lebr Associates, Inc., an affiliate of the Company's
largest sewing contractor. For a description of the Joint Venture, see "Item
1. Business - Manufacturing - Inhouse Manufacturing." In May 1995, the Joint
Venture purchased certain sewing machines and ancillary equipment. In
connection with the purchase of such equipment, the Joint Venture borrowed an
aggregate of $306,248 from General Electric Capital Corporation ("GECC"). Such
indebtedness (i) is secured by the equipment, (ii) is payable in sixty (60)
equal consecutive monthly installments and (iii) bears interest at the annual
rate of 3.42% over the one-month commercial paper rate as stated from time to
time in the Federal Reserve Statistical Release (5.5% at December 31, 1996).
See Note 6 to the Financial Statements appearing elsewhere in Form 10-K.
INFLATION
The Company believes that the relatively moderate rates of inflation in
recent years have not had a significant effect on its net sales or its
profitability. Historically, the Company has been able to offset any
inflationary effect by either increasing prices or improving cost efficiencies.
14
<PAGE> 17
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See "Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K" for the Company's financial statements, and the notes thereto, and
the financial statement schedules filed as part of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
The information concerning the directors and executive officers of the
Company is incorporated herein by reference from the section entitled "Proposal
3 - Election of Directors" contained in the definitive Proxy Statement of the
Company to be filed pursuant to Regulation 14A within 120 days after the end of
the Company's last fiscal year (the "Proxy Statement").
ITEM 11. EXECUTIVE COMPENSATION
The information concerning executive compensation is incorporated
herein by reference from the section entitled "Proposal 3 - Election of
Directors" contained in the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information concerning the security ownership of certain beneficial
owners and management is incorporated herein by reference from the sections
entitled "General Information - Security Ownership of Principal Shareholders
and Management" and "Proposal 3 - Election of Directors" contained in the Proxy
Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information concerning certain relationships and related
transactions is incorporated herein by reference from the section entitled
"Proposal 3 - Election of Directors - Certain Relationships and Related
Transactions" contained in the Proxy Statement.
15
<PAGE> 18
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial Statements and Schedules. Reference is made to the
Index to Financial Statements and Schedules on page F-1 for a list of financial
statements and financial statement schedules filed as part of this report. All
other schedules are omitted because they are not applicable or the required
information is shown in the Company's financial statements or the related notes
thereto.
(b) Reports on Form 8-K. The Company filed no reports on
Form 8-K during the fourth quarter of fiscal 1996.
(c) Exhibits. The following is a list of exhibits filed as
a part of this report.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
<S> <C>
3.1 Restated Articles of Incorporation of the Company [3.1*] (1)
3.2 Bylaws of the Company [3.2*] (1)
4.1 Form of stock certificate [4.3*] (2)
4.2 Underwriters' Warrant Agreement dated March 16, 1994, among the Company,
H.J. Meyers & Co., Inc. and Sanders Morris Mundy Inc. [4.2*] (6)
10.1 Employment Agreement dated as of January 1, 1993, between the Company and
Larry Brahim [10.1*] (1)
10.2 Employment Agreement dated as of January 1, 1993, between the Company and
Theodore B. Cooper [10.2*] (1)
10.3 Employment Agreement dated as of January 1, 1993, between the Company and
Jeffrey L. Friedman [10.3*] (1)
10.4 Employment Agreement dated as of January 1, 1993, between the Company and
Jan L. Grossman [10.4*] (1)
10.5 Employment Agreement dated as of February 17, 1994, between the Company
and Martin Zwiebach [10.5*] (2)
10.6 Indemnification Agreement dated as of October 21, 1993, between the
Company and Larry Brahim [10.6*] (1)
10.7 Indemnification Agreement dated as of October 21, 1993, between the
Company and Theodore B. Cooper [10.7*] (1)
10.8 Indemnification Agreement dated as of October 21, 1993, between the
Company and Jeffrey L. Friedman [10.8*] (1)
10.9 Indemnification Agreement dated as of October 21, 1993, between the
Company and Jan L. Grossman [10.9*] (1)
</TABLE>
16
<PAGE> 19
<TABLE>
<S> <C>
10.10 Jalate, Ltd. 1993 Stock Incentive Plan, together with forms of stock
option and restricted stock agreements [10.10*] (1)
10.11 Standard Industrial/Commercial Single-Tenant Lease-Gross dated September
8, 1993, between Swede Sportswear Co., Inc., as lessor, and the Company,
as lessee [10.11*] (1)
10.12 Standard Industrial Lease - Net dated August 15, 1988, between Flora E.
Maclise and Chairman E. Robinson, as lessor, and the Company, as lessee
[10.12*] (1)
10.13 Lease dated November 7, 1989, between California Mart, as lessor, and the
Company, as lessee [10.13*] (1)
10.14 Standard Industrial Lease - Multi-Tenant dated August 21, 1992, between
Eugene J. Mulholland and Leonor Mulholland, D/B/A Contract Associates, as
lessor, and the Company, as lessee [10.14*] (1)
10.15 Discount Factoring Agreement dated August 17, 1987, between Congress
Talcott Corporation and the Company, as amended [10.15*] (1)
10.16 Underwriting Agreement dated March 16, 1994, among the Company, H.J.
Meyers & Co., Inc. and Sanders Morris Mundy Inc. [10.16*] (6)
10.17 Lease dated March 15, 1994, between the Company and Gettinger Associates
[10.16*] (3)
10.18 Letter agreement dated April 21, 1994, between the Company and Congress
Talcott Corporation [10.17*] (4)
10.19 Letter agreement dated April 21, 1994, between the Company and Congress
Talcott Corporation (10.18*] (4)
10.20 Standard Form Month-to-Month Lease dated June 7, 1994, between the
Company and Jack Litt Trust [10.19*] (4)
10.21 Master Equipment Lease dated July 5, 1994, between the Company and
XL/Datacomp, Inc. [10.20*] (4)
10.22 Articles of Incorporation of Linroz Manufacturing, Inc. [10.21*] (5)
10.23 Bylaws of Linroz Manufacturing, Inc. [10.22*] (5)
10.24 Agreement of Limited Partnership of Linroz Manufacturing Company, L.P.
[10.23*] (5)
10.26 Standard Industrial/Commercial Single Tenant Lease - Gross dated October
11, 1994, by the Company, as lessee, and George Familian Testamentary
Trust, as lessor as amended [10.25*] (5)
10.27 Letter agreement dated December 16, 1994, between the Company and
Congress Talcott Corporation [10.26*] (6)
10.28 Consulting Agreement dated August 9, 1995, between the Company and Martin
Zwiebach [10.28*] (7)
</TABLE>
17
<PAGE> 20
<TABLE>
<S> <C>
10.29 Letter agreement dated May 17, 1995, between the Company and Congress
Talcott Corporation (Western) [10.29*] (7)
10.30 Letter Agreement dated May 17, 1995, between the Company and Congress
Talcott Corporation (Western) [10.30*] (7)
10.31 Promissory Note dated May 5, 1995 in the principal amount of $306,247.99
payable by Linroz Manufacturing Company, L.P. (the "Joint Venture") to
General Electric Capital Corporation ("GECC") [10.31*] (7)
10.32 Master Security Agreement dated March 24, 1995, between GECC, as secured
party, and the Joint Venture, as debtor [10.32*] (7)
10.33 Commercial Credit Agreement dated July 24, 1995, between the Company and
The Hongkong and Shanghai Banking Corporation Limited [10.26*] (8)
10.34 Continuing Commercial Letter of Credit and Security Agreement, between
the Company and The Hongkong and Shanghai Banking Corporation Limited
[10.27*] (8)
10.35 Optional Advance Time Note (Loans Against Imports) dated July 24, 1995 in
the amount of U.S. $3,000,000 by the Company in favor of The Hongkong and
Shanghai Banking Corporation Limited [10.28*] (8)
10.36 General Security Agreement dated July 24, 1995, between the Company and
The Hongkong and Shanghai Banking Corporation Limited [10.29*] (8)
10.37 Continuing Standby Letter of Credit and Security Agreement dated July 24,
1995, between the Company and The Hongkong and Shanghai Banking
Corporation Limited [10.30*] (8)
10.38 Continuing Indemnity Agreement dated July 24, 1995, between the Company
and The Hongkong and Shanghai Banking Corporation Limited [10.38*] (8)
10.39 Promissory Noted dated October 1, 1995 in the amount of $34,000 by Larry
Brahim in favor of the Company [10.32*] (8)
10.40 Promissory Note dated October 1, 1995 in the amount of $68,000, by
Theodore B. Cooper in favor of the Company [10.33*] (8)
10.41 Letter agreement dated January 24, 1996, between the Company and I.S.K.,
Inc. (10.41*) (6)
10.42 Engagement Agreement dated July 17, 1995, between the Company and Sonoma
Group, Inc. (10.42*) (6)
10.43 Employment Agreement dated December 1, 1995, between the Company and
Vinton W. Bacon. (10.43*) (6)
10.44 Indemnification Agreement dated January 1, 1996, between the Company and
Vinton W. Bacon. (10.46*) (6)
</TABLE>
18
<PAGE> 21
<TABLE>
<S> <C>
10.47 Indemnification Agreement dated March 26, 1994, between the Company and
Allan E. Dalshaug. (10.47*) (6)
10.48 Indemnification Agreement dated August 21, 1995, between the Company and
I. Jay Goldfarb. (10.48*) (6)
10.49 Indemnification Agreement dated March 26, 1994, between the Company and
Howard L. Hughes. (10.49*) (6)
10.50 Indemnification Agreement dated January 1, 1996, between the Company and
Phillip C. Levin. (10.50*) (6)
10.51 First Amendment to Commercial Credit Agreement dated as of February 29,
1996, between the Company and Wells Fargo HSBC Trade Bank, N.A.
(formerly, The Hongkong and Shanghai Banking Corporation Limited).
(10.51*) (6)
10.52 Letter agreement dated February 16, 1996, between the Company and
Congress Talcott Corporation (Western). (10.52*) (6)
10.53 Employment Agreement with Frederick A. Findley dated May 6, 1996.
10.54 Indemnity Agreement with Frederick A. Findley dated January 1, 1996.
10.55 Continuing Credit Agreement dated June 1, 1996, between the Company and
the Wells Fargo HSBC Trade Bank, N.A. (Formerly, The Hong Kong and
Shanghai Banking Corporation Limited.)
10.56 First Amendment to Agreement dated November 30, 1996 between the Company
and Wells Fargo HSBC Trade Bank, N.A.
10.57 Letter Agreement dated July 25, 1996, between the Company and Congress
Talcott Corporation (Western).
10.58 Letter Agreeemnt dated March 4, 1997, between the Company and Congress
Talcott Corporation (Western).
10.59 Second Amendment to Agreement dated March 17, 1997, between the Company
and Wells Fargo HSBC Trade Bank, N.A.
10.60 Certificate of Amendment dated February 25, 1997, of Restated Article of
Incorporation of Jalate, Ltd.
23.1 Consents of KPMG Peat Marwick LLP
</TABLE>
* Indicates the exhibit number of the document in the original
filing.
19
<PAGE> 22
1. Filed as an exhibit to the Company's Registration Statement on Form S-1
filed with the Securities and Exchange Commission on February 24, 1994
(File No. 33-75694).
2. 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.
3. Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for
the quarter ended March 31, 1994.
4. Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1994.
5. Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1994.
6. Filed as a exhibit to the Company's Annual Report on Form 10-K for the
year ended December 31, 1995.
7. Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for
the quarter ended March 31, 1995.
8. Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1995.
9. Filed as an exhibit to the Company's Quarterly report on Form 10-Q for
the quarter ended September 30, 1995.
20
<PAGE> 23
JALATE, LTD.
Index to Financial Statements and
Financial Statement Schedule
<TABLE>
<CAPTION>
Page
----
<S> <C>
Jalate, Ltd.:
Independent Auditors' Report F-2
Financial Statements of Jalate, Ltd.:
Balance Sheets - December 31, 1995 and 1996 F-3
Statements of Operations - Years ended December 31, 1994, 1995 and 1996 F-4
Statements of Shareholders' Equity - Years ended December 31, 1994, 1995 and 1996 F-5
Statements of Cash Flows - Years ended December 31, 1994, 1995 and 1996 F-6
Notes to Financial Statements F-8
Financial Statement Schedule:
Schedule II - Valuation and Qualifying Accounts F-18
Linroz Manufacturing Company, L.P.:
Independent Auditors' Report F-19
Financial Statements of Linroz Manufacturing Company, L.P.:
Balance Sheets - December 31, 1995 and 1996 (1995 unaudited) F-20
Statements of Earnings - Years ended December 31, 1995 and 1996
(1995 unaudited) F-21
Statements of Partners' Capital - Years ended December 31, 1995 and 1996
(1995 unaudited) F-22
Statements of Cash Flows - Years ended December 31, 1995 and 1996
(1995 unaudited) F-23
Notes to Financial Statements F-24
</TABLE>
All other schedules are omitted because they are not applicable or the required
information is shown in the Company's financial statements or the related notes
thereto.
F-1
<PAGE> 24
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Jalate, Ltd.:
We have audited the accompanying financial statements of Jalate, Ltd. as listed
in the accompanying index. In connection with our audits of the financial
statements, we have also audited the financial statement schedule as listed in
the accompanying index. These financial statements and financial statement
schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Jalate, Ltd. as of December 31,
1995 and 1996 and the results of its operations and its cash flows for each of
the years in the three-year period ended December 31, 1996 in conformity with
generally accepted accounting principles. Also in our opinion, the related
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
KPMG PEAT MARWICK LLP
Los Angeles, California
March 3, 1997
F-2
<PAGE> 25
JALATE, LTD.
Balance Sheets
December 31, 1995 and 1996
<TABLE>
<CAPTION>
ASSETS 1995 1996
----------- -----------
<S> <C> <C>
Current assets:
Cash $ 92,000 97,000
Due from factor, net (notes 2 and 7) 455,000 2,767,000
Trade accounts receivable, less allowance for doubtful receivables of
$669,000 in 1995 and $358,000 in 1996 (notes 2 and 7) 989,000 821,000
Inventories (notes 3 and 7) 4,432,000 3,572,000
Refundable income taxes (note 8) 1,567,000 120,000
Prepaid expenses and other current assets 313,000 170,000
Due from officers (note 5) 106,000 --
----------- ----------
Total current assets 7,954,000 7,547,000
Property and equipment, at cost, net (note 4) 868,000 1,050,000
Investment in joint venture (note 6) 269,000 482,000
Other assets, at cost 92,000 94,000
----------- ----------
$ 9,183,000 9,173,000
=========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Note payable to bank (note 7) $ 90,000 684,000
Trade accounts payable 3,147,000 2,776,000
Accounts payable to joint venture (note 6) 41,000 95,000
Accrued expenses 568,000 254,000
----------- ----------
Total current liabilities 3,846,000 3,809,000
----------- ----------
Shareholders' equity (note 11):
Preferred stock, no par value. Authorized 3,000,000 shares; none
issued and outstanding -- --
Common stock, no par value. Authorized 20,000,000 shares; issued and
outstanding 3,390,500 and 3,403,000 shares in 1995 and 1996,
respectively 5,311,000 5,311,000
Retained earnings 26,000 53,000
----------- ----------
Total shareholders' equity 5,337,000 5,364,000
Commitments and contingencies (notes 2, 7 and 9)
----------- ----------
$ 9,183,000 9,173,000
=========== ==========
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE> 26
JALATE, LTD.
Statements of Operations
Years ended December 31
<TABLE>
<CAPTION>
1994 1995 1996
------------ ------------ ------------
<S> <C> <C> <C>
Gross sales (note 10) $ 68,753,000 78,539,000 58,154,000
Less sales returns, allowances and discounts 4,866,000 7,739,000 4,133,000
------------ ----------- -----------
Net sales 63,887,000 70,800,000 54,021,000
Cost of goods sold (note 6) 46,872,000 56,211,000 39,514,000
------------ ----------- -----------
Gross profit 17,015,000 14,589,000 14,507,000
Operating expenses 14,071,000 16,977,000 14,220,000
------------ ----------- -----------
Earnings (loss) from operations 2,944,000 (2,388,000) 287,000
------------ ----------- -----------
Other (income) expense:
Interest 359,000 896,000 548,000
Equity in earnings of joint venture (note 6) -- (75,000) (288,000)
------------ ----------- -----------
Total other expense 359,000 821,000 260,000
------------ ----------- -----------
Earnings (loss) before income taxes
(benefit) 2,585,000 (3,209,000) 27,000
Income taxes (benefit) (note 8) 720,000 (313,000) --
------------ ----------- -----------
Net earnings (loss) 1,865,000 $(2,896,000) 27,000
=========== ===========
Pro forma income tax adjustment (unaudited) (note 8)
- provision for income taxes incremental to
historical taxes 192,000
------------
Net earnings (loss) after pro forma income tax
adjustment (unaudited) $ 1,673,000
============
Net earnings (loss) per share after pro forma income
tax adjustment (unaudited as to 1994) $ .53 (.85) .01
============ ============ ==========
Weighted average number of common and common
equivalent shares outstanding during the year 3,149,000 3,390,000 3,488,000
============ ============ ==========
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE> 27
JALATE, LTD.
Statements of Shareholders' Equity
Years ended December 31
<TABLE>
<CAPTION>
Common stock Total
----------------------- Retained shareholders'
Shares Amount earnings equity
--------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Balance at December 31, 1993 2,343,000 $ 75,000 1,442,000 1,517,000
Proceeds from issuance of common
stock in connection with initial
public offering 1,035,000 5,102,000 -- 5,102,000
S Corporation distributions -- -- (385,000) (385,000)
Compensation expense recognized
in connection with the vesting
of certain stock options -- 97,000 -- 97,000
Net earnings -- -- 1,865,000 1,865,000
--------- --------- --------- ---------
Balance at December 31, 1994 3,378,000 5,274,000 2,922,000 8,196,000
Exercise of stock options 12,500 -- -- --
Compensation expense recognized in
connection with the vesting of certain
stock options -- 37,000 -- 37,000
Net loss -- -- (2,896,000) (2,896,000)
--------- --------- --------- ---------
Balance at December 31, 1995 3,390,500 5,311,000 26,000 5,337,000
Exercise of stock options 12,500 -- -- --
Net earnings -- -- 27,000 27,000
--------- --------- --------- ---------
Balance at December 31, 1996 3,403,000 $5,311,000 53,000 5,364,000
========= ========== ========= =========
</TABLE>
See accompanying notes to financial statements.
<PAGE> 28
JALATE, LTD.
Statements of Cash Flows
Years ended December 31
<TABLE>
<CAPTION>
1994 1995 1996
----------- ---------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings (loss) $ 1,865,000 (2,896,000) 27,000
----------- ---------- ---------
Adjustments to reconcile net earnings (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization of property and
equipment 148,000 292,000 405,000
Compensation expense recognized in connection with
the vesting of certain stock options 97,000 37,000 --
Increase (decrease) in allowance for doubtful
receivables 500,000 169,000 (311,000)
Undistributed earnings of joint venture -- (75,000) (213,000)
Changes in assets and liabilities:
(Increase) decrease in:
Due from factor, net (2,302,000) 3,349,000 (2,312,000)
Trade accounts receivable (1,441,000) 399,000 479,000
Inventories (2,836,000) 670,000 860,000
Refundable income taxes -- (1,567,000) 1,447,000
Prepaid expenses and other current assets (611,000) 376,000 143,000
Due from officers -- (106,000) 106,000
Deferred public offering costs 449,000 -- --
Other assets (100,000) 43,000 (2,000)
Increase (decrease) in:
Accounts payable 884,000 (434,000) (317,000)
Accrued expenses 243,000 240,000 (314,000)
Income taxes payable (80,000) -- --
----------- ---------- ---------
Total adjustments (5,049,000) 3,393,000 (29,000)
----------- ---------- ---------
Net cash provided by (used in)
operating activities (3,184,000) 497,000 (2,000)
----------- ---------- ---------
Cash flows from investing activities:
Capital expenditures (714,000) (532,000) (587,000)
Investment in joint venture (49,000) (145,000) --
----------- ---------- ---------
Net cash used in investing activities (763,000) (677,000) (587,000)
----------- ---------- ---------
</TABLE>
(Continued)
F-6
<PAGE> 29
JALATE, LTD.
Statements of Cash Flows, Continued
<TABLE>
<CAPTION>
1994 1995 1996
----------- ---------- ---------
<S> <C> <C> <C>
Cash flows from financing activities:
Net proceeds from note payable to bank $ -- 90,000 594,000
Net proceeds from issuance of common stock
5,102,000 -- --
S Corporation distributions paid to
shareholders (1,085,000) -- --
----------- ---------- ---------
Net cash provided by financing
activities 4,017,000 90,000 594,000
----------- ---------- ---------
Net increase (decrease) in cash 70,000 (90,000) 5,000
Cash at beginning of year 112,000 182,000 92,000
----------- ---------- ---------
Cash at end of year $ 182,000 92,000 97,000
=========== ========== =========
Supplemental disclosures of cash flow information:
Cash payments (refunds) during the year for:
Interest $ 359,000 896,000 548,000
Income taxes 1,305,000 724,000 (1,454,000)
=========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-7
<PAGE> 30
JALATE, LTD.
Notes to Financial Statements
December 31, 1995 and 1996
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Jalate, Ltd. (the Company) manufactures women's and children's apparel for
sale to retailers under the labels Jalate, Zanoni, Lajate and Jalate Kids.
The Company also manufactures women's apparel for certain retailers under
their private labels.
INVENTORIES
Inventories are stated at the lower of cost, determined on the first-in,
first-out basis, or market.
DEPRECIATION AND AMORTIZATION
Depreciation on property and equipment is calculated using various
accelerated methods over the estimated useful lives of the assets.
Leasehold improvements are amortized on the straight-line method over the
shorter of the lease term or estimated useful life of the asset.
REVENUE RECOGNITION
Revenue is recognized upon shipment of the merchandise. Allowances for
estimated sales returns, allowances and discounts are provided when
related revenue is recorded.
INVESTMENT IN JOINT VENTURE
Investment in joint venture is accounted for by the equity method, under
which the Company's share of earnings of the joint venture is reflected in
income as earned and distributions are credited against the investment in
joint venture when received.
INCOME TAXES
The Company accounts for income taxes under the asset and liability method
of accounting for income taxes whereby deferred income taxes are
recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred taxes of a
change in tax rates is recognized in income in the period that includes
the enactment date.
EARNINGS (LOSS) PER SHARE
Net earnings (loss) per share is based on the weighted average number of
shares of common and common equivalent stock outstanding (when dilutive)
during the year. Common stock equivalents consist of stock options.
Fully diluted net earnings (loss) per share is not presented since the
amounts do not differ significantly from primary net earnings per share or
are antidilutive.
F-8
<PAGE> 31
JALATE, LTD.
Notes to Financial Statements, Continued
FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair values of the Company's cash, due from factor, trade accounts
receivable, due from officers, advances from factor, note payable to bank,
trade accounts payable and accrued expenses approximate the carrying
values because of the short maturities of these instruments.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
the disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenue and expenses
during the reporting period. Actual results could differ from these
estimates.
STOCK COMPENSATION
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" (FAS 123), encourages, but does not require, a
fair-value-based method of accounting for employee stock options or
similar equity instruments. FAS 123 allows an entity to elect to continue
to measure compensation cost under Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APBO No. 25), but requires
pro forma disclosures of net earnings and earnings per share as if the
fair-value-based method of accounting had been applied to stock options
issued in 1995 or later. The Company has adopted FAS 123 effective
January 1, 1996 and has elected to continue to measure compensation cost
under APBO No. 25 and comply with the pro forma disclosure requirements.
The adoption of FAS 123 has had no impact on the Company's financial
position or results of operations.
IMPAIRMENT OF LONG-LIVED ASSETS
Statement of Financial Accounting Standards No. 121 (FAS 121), "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of," establishes accounting standards for the recognition and
measurement of impairment of long-lived assets, certain identifiable
intangibles and goodwill either to be held or disposed of. The Company
has adopted FAS 121, effective January 1, 1996. The adoption of FAS 121
has not had any impact on the Company's financial position or results of
operations.
RECLASSIFICATIONS
Certain reclassifications have been made to the prior years' financial
statements to conform with the 1996 presentation.
(2) DUE FROM FACTOR
The Company has an agreement, as amended, with a factor whereby the factor
purchases most of the trade accounts receivable and assumes all credit
risks with respect to such accounts for a factoring charge, as defined.
The Company can draw advances from the factor based on a predetermined
percentage of accounts receivable sold. Advances bear interest at the
prime rate (8.25% at December 31, 1996). Advances on receivables sold in
excess of credit limits established for each account are subject to
recourse in the event of nonpayment by the customer. At December 31,
1996, there were no amounts sold in excess of such credit limits. The
Company is contingently liable to the factor for merchandise disputes,
customer claims, and the like, on receivables sold to the factor. Any
F-9
<PAGE> 32
JALATE, LTD.
Notes to Financial Statements, Continued
advances from the factor are secured by all receivables and general
intangibles. The agreement with the factor contains certain restrictive
financial covenants. At December 31, 1996, the Company was in compliance
with all covenants.
A summary of due from factor follows:
<TABLE>
<CAPTION>
DECEMBER 31
---------------------------------
1995 1996
----------- ----------
<S> <C> <C>
Receivables held by factor $7,453,000 5,234,000
Less advances from factor 6,326,000 2,214,000
Less open credit memos 672,000 253,000
---------- ----------
$ 455,000 2,767,000
========== ==========
</TABLE>
(3) INVENTORIES
A summary of inventories is as follows:
<TABLE>
<CAPTION>
DECEMBER 31
--------------------------------
1995 1996
----------- ----------
<S> <C> <C>
Piece goods and trim $ 1,692,000 1,379,000
Work in process 729,000 809,000
Finished goods 2,011,000 1,384,000
----------- ----------
$ 4,432,000 3,572,000
=========== ==========
</TABLE>
(4) PROPERTY AND EQUIPMENT
A summary of property and equipment is as follows:
<TABLE>
<CAPTION>
DECEMBER 31
--------------------------------
1995 1996 USEFUL LIVES
---------- ---------- -----------------------
<S> <C> <C> <C>
Equipment $ 837,000 1,269,000 5 to 7 years
Furniture and fixtures 150,000 137,000 7 years
Computer software 53,000 128,000 3 years
Leasehold improvements 340,000 433,000 Shorter of estimated
---------- ---------- useful lives or lease
1,380,000 1,967,000 terms
Less accumulated depreciation and
amortization 512,000 917,000
---------- ---------
$ 868,000 1,050,000
========== =========
</TABLE>
F-10
<PAGE> 33
JALATE, LTD.
Notes to Financial Statements, Continued
(5) DUE FROM OFFICERS
Amounts due from officers were due on demand and provided for interest at
the prime rate plus .25% per annum, payable monthly. Amounts were repaid
in January 1996.
(6) INVESTMENT IN JOINT VENTURE
In November 1994, the Company entered into a manufacturing joint venture
(Joint Venture) with an affiliate of its largest sewing contractor (the
Partner) to improve the efficiency, quality and cost of its products. The
Joint Venture is a California limited partnership. The Company and the
Partner each are equal limited partners and each hold one-half of the
outstanding capital stock of the sole general partner, a California
corporation. The Joint Venture commenced operations in May 1995.
For the years ended December 31, 1995 and 1996, purchases from the Joint
Venture aggregated $1,939,000 and $3,457,000, respectively. The Company
had accounts payable to the Joint Venture for purchases of $41,000 and
$95,000 at December 31, 1995 and 1996, respectively.
The table below contains the summarized financial information of the Joint
Venture:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------
1995 1996
----------- ----------
(Unaudited)
<S> <C> <C>
Net sales $ 1,939,000 3,457,000
Gross profit 393,000 917,000
Operating expenses 218,000 297,000
Net earnings 150,000 576,000
========== =========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31
--------------------------------
1995 1996
----------- ----------
(Unaudited)
<S> <C> <C>
Current assets $ 188,000 553,000
Noncurrent assets 996,000 935,000
----------- ----------
Total assets $ 1,184,000 1,488,000
=========== ==========
Current liabilities $ 214,000 203,000
Long-term debt 432,000 321,000
----------- ----------
Total liabilities 646,000 524,000
Partners' capital 538,000 964,000
----------- ----------
$ 1,184,000 1,488,000
=========== ==========
</TABLE>
The Company is contingently liable for guarantees on certain indebtedness
of the Joint Venture with aggregate outstanding balance of $416,000 as of
December 31, 1996.
F-11
<PAGE> 34
JALATE, LTD.
Notes to Financial Statements, Continued
(7) NOTE PAYABLE TO BANK
The Company has a $6,000,000 credit facility with a bank to finance
imports. The credit facility has a $2,000,000 sublimit for loans against
imports created upon the payment of letters of credit and a $500,000
sublimit for shipping guarantees. Loans against imports bear interest at
the bank's prime rate (8.25% at December 31, 1996) plus .75% and are
payable 60 days from the day the advance is made. The credit facility is
secured by a first priority security interest in imported inventory, a
second priority security interest in accounts receivable and an assignment
of amount due from factor. The credit facility expires on demand or on
May 31, 1997. As of December 31, 1996, the Company had $2,830,000
available under the amended credit facility. At December 31, 1996, the
Company was contingently liable for outstanding letters of credit of
approximately $2,486,000. Under the credit facility, the Company is
subject to certain restrictive financial covenants. As of December 31,
1996, the Company was in compliance with all covenants, except with a
provision prohibiting the guarantee of obligations of other entities.
However, the Company received a waiver from the bank with respect to the
Company's guarantees of certain indebtedness of the Joint Venture (note
6).
(8) INCOME TAXES
From November 1, 1989 through March 23, 1994, the Company was taxed under
the provisions of Subchapter S of the Internal Revenue Code and under
similar provisions for California franchise tax purposes. Accordingly,
the shareholders reported their equity in the earnings and loss of the
Company on their individual Federal and California income tax returns. On
March 23, 1994, the Company completed an initial public offering of the
common stock and, since that date, has been taxed under the provisions of
Subchapter C of the Internal Revenue Code and under similar provisions for
California franchise tax purposes.
Effective March 23, 1994, the Company revoked its S Corporation election,
becoming a regular tax paying or C Corporation. The tax provisions for the
year ended December 31, 1994 include historical income taxes and pro forma
unaudited income tax adjustments which represent taxes which would have
been reported had the Company been subject to Federal and California income
taxes as a C Corporation. The Company's conversion to a C Corporation on
March 23, 1994 resulted in a one-time noncash credit to earnings equal to
the amount of the net change in the deferred tax asset of $145,000. This
amount is reflected as deferred taxes in the provision for historical
income taxes in the accompanying 1994 statement of operations.
F-12
<PAGE> 35
JALATE, LTD.
Notes to Financial Statements, Continued
The historical and pro forma provisions for income taxes for the years
ended December 31, 1994 and 1995 consist of the following:
<TABLE>
<CAPTION>
1994 1995
--------- ---------
<S> <C> <C>
Historical income taxes (benefit):
Federal:
Current $ 973,000 (828,000)
Deferred (422,000) 386,000
--------- ---------
Total Federal 551,000 (442,000)
--------- ---------
State:
Current 246,000 --
Deferred (77,000) 129,000
--------- ---------
Total state 169,000 129,000
--------- ---------
Total historical income taxes (benefit) 720,000 (313,000)
--------- ---------
Pro forma tax adjustments (unaudited):
Federal 175,000 --
State 17,000 --
--------- ---------
Total pro forma adjustments (unaudited) 192,000 --
--------- ---------
Total income taxes (benefit) $ 912,000 (313,000)
========= =========
</TABLE>
Historical and pro forma income taxes (benefit) differs from the statutory
tax rate of 34% as applied to earnings (loss) before income taxes
(benefit) as follows:
<TABLE>
<CAPTION>
1994 1995 1996
--------- ---------- ------
<S> <C> <C> <C>
Expected income taxes (benefit) $ 879,000 (1,091,000) 9,000
State income taxes, net of Federal
benefit 112,000 -- --
Change in valuation allowance -- 783,000 --
One-time credit upon conversion to C
Corporation status (145,000) -- --
Other 66,000 (5,000) (9,000)
--------- ---------- ------
$ 912,000 (313,000) --
========= ========== ======
</TABLE>
F-13
<PAGE> 36
JALATE, LTD.
Notes to Financial Statements, Continued
Deferred income tax expense results from temporary differences in the
recognition of income and expense for income tax and financial reporting
purposes. The tax-effected differences that give rise to significant
portions of the deferred tax assets are as follows:
<TABLE>
<CAPTION>
1995 1996
--------- --------
<S> <C> <C>
Allowance for doubtful accounts receivable $ 366,000 195,000
Uniform capitalization of inventories 220,000 177,000
Net operating loss carryforward 197,000 378,000
--------- --------
Total deferred tax assets 783,000 750,000
Valuation allowance (783,000) (750,000)
--------- --------
Net deferred tax assets $ -- --
========= ========
</TABLE>
The valuation allowance as of December 31, 1995 was reduced by $33,000 in
1996 to give effect to the reversal of certain temporary differences. The
ultimate realization of deferred tax assets is dependent upon the
generation of future taxable income during the periods in which those
temporary differences become deductible. Management considers the
historical taxable income and projected taxable income and tax planning
strategies in making this assessment. Based upon those factors,
management believes it is more likely than not the Company will not
realize the benefits of these deductible differences. Accordingly, the
Company has recorded a valuation allowance related to these deferred tax
assets.
The Company has net operating loss carryforwards for Federal income tax
purposes of approximately $662,000 and for California franchise tax
purposes of approximately $1,395,000 which expire through 2011.
Refundable income taxes at December 31, 1995 result from recovery of
payment of estimated tax and the carryback of the 1995 tax loss.
Refundable income taxes at December 31, 1996 result from the recovery of
payment of estimated tax.
(9) COMMITMENTS AND CONTINGENCIES
The Company has several noncancelable operating leases for its office,
warehouse and showroom space that expire through May 2000. The Company
has an option to purchase its Los Angeles warehouse throughout the lease
term, which commenced November 1993. The purchase price is $4,730,000 if
escrow closes between the 37th and 48th month of the lease term and
$5,203,000 between the 49th and 61st month.
The Company has subleased a portion of its office and warehouse space to
the Joint Venture for annual rent ranging from $109,000 to $124,000
through January 2000.
Rental expense for operating leases approximated $579,000, $653,000 and
$696,000 during the years ended December 31, 1994, 1995 and 1996,
respectively, net of sublease income of $109,000 in 1995 and $119,000 in
1996.
F-14
<PAGE> 37
JALATE, LTD.
Notes to Financial Statements, Continued
Future minimum lease payments under noncancelable operating leases are as
follows:
<TABLE>
<CAPTION>
Year ending December 31:
<S> <C>
1997 $ 803,000
1998 796,000
1999 437,000
2000 56,000
-----------
2,092,000
Less sublease income 394,000
-----------
$ 1,698,000
===========
</TABLE>
The Company has two employment contracts with certain officers requiring,
among other things, an aggregate annual base salary of $440,000 plus
incentives through December 31, 1998.
The Company is from time to time involved in litigation incidental to the
conduct of its business. The Company does not believe that any currently
pending litigation to which it is a party will have a materially adverse
effect on the financial statements taken as a whole.
(10) CONCENTRATION OF RISKS
The Company sells its products principally to customers throughout the
United States. The Company has an agreement with a factor whereby the
factor purchases most of the trade accounts receivable and assumes all
credit risks with respect to such accounts for a factoring charge, as
defined (see note 2). Management performs regular evaluations concerning
the ability of its customers to satisfy their obligations.
The Company has a customer accounting for approximately 11% of net sales
in 1996.
The Company sources certain products from various points in the
Philippines, Hong Kong and China. The Company's operations are subject to
the customary risks of doing business abroad, including, but not limited
to, currency fluctuations, customs duties and related fees, various import
controls and other nontariff barriers (e.g., quotas), restrictions on the
transfer of funds, labor unrest and strikes and, in certain parts of the
world, political instability. The Company believes that it has acted to
reduce these risks by diversifying manufacturing among various countries
and within those countries, among various factories. To date, these
factors have not had a material adverse impact on the Company's
operations.
(11) SHAREHOLDERS' EQUITY
On March 23, 1994, the Company completed an initial public offering of
900,000 shares of common stock. Net proceeds to the Company totaled
approximately $4,348,000. On April 20, 1994, the Company sold an
additional 135,000 shares of common stock to the underwriters to cover
overallotments. Net proceeds to the Company totaled approximately
$754,000.
F-15
<PAGE> 38
JALATE, LTD.
Notes to Financial Statements, Continued
In October 1993, the Board of Directors of the Company adopted the 1993
Employee Stock Incentive Plan (the Plan), pursuant to which officers,
directors, employees and independent contractors of the Company will be
eligible to receive shares of the common stock of the Company or other
securities or benefits with a value derived from the value of the common
stock of the Company. The maximum number of shares of common stock that
may be issued pursuant to awards granted under the Plan is 754,941.
Shares subject to option under the Plan were as follows:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
EXERCISE PRICE
SHARES
-------- ----------------
<S> <C> <C>
Outstanding at December 31, 1993 -- $ --
Granted in connection with the public offering 375,500 5.64
Granted subsequent to the public offering 84,000 7.94
Canceled (3,700) 6.50
--------
Outstanding at December 31, 1994 455,800 6.05
Granted 222,500 3.71
Exercised (12,500) .01
Canceled (200,400) 5.59
--------
Outstanding at December 31, 1995 465,400 5.29
Granted 615,700 2.89
Exercised (12,500) .01
Canceled (479,800) 5.21
--------
Outstanding at December 31, 1996 588,800 2.96
======== ====
</TABLE>
The following table summarizes information about stock options outstanding
at December 31, 1996:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------------- -------------------------------
NUMBER WEIGHTED AVERAGE
OUTSTANDING AT REMAINING WEIGHTED NUMBER WEIGHTED
RANGE OF DECEMBER 31, CONTRACTUAL LIFE AVERAGE EXERCISABLE AT AVERAGE
EXERCISE 1996 EXERCISE DECEMBER 31, EXERCISE
PRICES PRICE 1996 PRICE
------------ --------------- ---------------- ---------- -------------- ----------
<S> <C> <C> <C> <C> <C>
$2.75 - 3.94 579,200 9.2 years $ 2.89 254,204 $ 2.81
6.50 - 7.38 9,600 7.5 years 6.96 4,475 6.92
------- ====== -------
2.75 - 7.38 588,800 258,679 2.88
============ ======= ======= ======
</TABLE>
F-16
<PAGE> 39
JALATE, LTD.
Notes to Financial Statements, Continued
The per share weighted average fair value of stock options granted during
1995 and 1996 was $2.55 and $2.04 on the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions: 1995 and 1996 - expected dividend yield 0%, expected
volatility of 51% and an expected life of 10 years. The assumed risk-free
interest rate was 5.75% and 6.36% in 1995 and 1996, respectively. The
Company applies APBO No. 25 in accounting for its plans and, accordingly,
has recognized compensation cost under APBO No. 25 for its stock options
in the accompanying financial statements. Had the Company determined
compensation cost based on the fair value at the grant date for its stock
options under FAS 123, the Company's pro forma net loss and loss per share
would be as follows:
<TABLE>
<CAPTION>
1995 1996
------------ ---------
<S> <C> <C>
Net loss $(2,961,000) (460,000)
Loss per share (.87) (.13)
=========== ========
</TABLE>
Pro forma net loss and loss per share reflect only options granted in 1995
and 1996. Therefore, the full impact of calculating compensation cost for
stock options under FAS 123 is not reflected in the pro forma net loss and
loss per share amounts presented above because compensation cost is
reflected over the options' vesting period of up to five years and
compensation cost for options granted prior to January 1, 1995 is not
considered.
(12) FOURTH QUARTER INFORMATION
During the fourth quarter of 1995, the Company wrote down inventories to
reflect lower of cost or market revisions by approximately $916,000 and
recorded bad debt expense of approximately $537,000.
F-17
<PAGE> 40
Schedule II
JALATE, LTD.
Valuation and Qualifying Accounts
Years ended December 31, 1994, 1995 and 1996
<TABLE>
<CAPTION>
BALANCE AT ADDITIONS
BEGINNING CHARGED TO BALANCE AT END
OF YEAR OPERATIONS DEDUCTIONS OF YEAR
---------- ----------- ----------- --------------
<S> <C> <C> <C> <C>
Allowance for doubtful
accounts receivable:
1994 $ -- 500,000 -- 500,000
========== ========= ======= =======
1995 $ 500,000 1,055,000 886,000 669,000
========== ========= ======= =======
1996 $ 669,000 533,000 844,000 358,000
========== ========= ======= =======
</TABLE>
F-18
<PAGE> 41
INDEPENDENT AUDITORS' REPORT
The Partners
Linroz Manufacturing Company, L.P.:
We have audited the accompanying balance sheet of Linroz Manufacturing Company,
L.P. as of December 31, 1996 and the related statements of earnings, partners'
capital and cash flows for the year then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Linroz Manufacturing Company,
L.P. as of December 31, 1996 and the results of its operations and its cash
flows for the year then ended in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Los Angeles, California
March 3, 1997
F-19
<PAGE> 42
LINROZ MANUFACTURING COMPANY, L.P.
Balance Sheets
December 31, 1995 and 1996
<TABLE>
<CAPTION>
ASSETS 1995 1996
---------- ---------
(Unaudited)
<S> <C> <C>
Current assets:
Cash $ 121,000 421,000
Accounts receivable from Jalate, Ltd. (note 4) 41,000 95,000
Prepaid expenses and other current assets 26,000 37,000
----------- ----------
Total current assets 188,000 553,000
Property and equipment, at cost, net (notes 2, 3 and 4) 976,000 915,000
Other assets, at cost 20,000 20,000
----------- ----------
$ 1,184,000 1,488,000
=========== ==========
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities:
Current maturities of long-term debt (note 3) $ 100,000 111,000
Trade accounts payable 90,000 35,000
Accounts payable to related party (note 4) -- 15,000
Accrued expenses 24,000 42,000
----------- ----------
Total current liabilities 214,000 203,000
Long-term debt, less current maturities (note 3) 432,000 321,000
Partners' capital 538,000 964,000
Commitments (note 5)
----------- ----------
$ 1,184,000 1,488,000
=========== ==========
</TABLE>
See accompanying notes to financial statements.
F-20
<PAGE> 43
LINROZ MANUFACTURING COMPANY, L.P.
Statements of Earnings
Years ended December 31, 1995 and 1996
<TABLE>
<CAPTION>
1995 1996
----------- ----------
(Unaudited)
<S> <C> <C>
Net sales (note 4) $ 1,939,000 3,457,000
Cost of sales 1,546,000 2,540,000
----------- ----------
Gross profit 393,000 917,000
Operating expenses 218,000 297,000
----------- ----------
Earnings from operations 175,000 620,000
Interest expense, net 25,000 44,000
----------- ----------
Net earnings $ 150,000 576,000
=========== ==========
</TABLE>
See accompanying notes to financial statements.
F-21
<PAGE> 44
LINROZ MANUFACTURING COMPANY, L.P.
Statements of Partners' Capital
Years ended December 31, 1995 and 1996
<TABLE>
<S> <C>
Partners' capital at December 31, 1994 (unaudited) $ 98,000
Net earnings (unaudited) 150,000
Partners' contributions (unaudited) 290,000
---------
Partners' capital at December 31, 1995 (unaudited) 538,000
Net earnings 576,000
Distribution to partners (150,000)
---------
Partners' capital at December 31, 1996 $ 964,000
=========
</TABLE>
See accompanying notes to financial statements.
F-22
<PAGE> 45
LINROZ MANUFACTURING COMPANY, L.P.
Statements of Cash Flows
Years ended December 31, 1995 and 1996
<TABLE>
<CAPTION>
1995 1996
----------- --------
(Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 150,000 576,000
Adjustments to reconcile net earnings to net cash provided by operating
activities:
Depreciation and amortization of property and equipment 101,000 218,000
Changes in assets and liabilities:
Increase in:
Accounts receivable from Jalate, Ltd. (41,000) (54,000)
Prepaid expenses and other assets (4,000) (11,000)
Increase (decrease) in:
Trade accounts payable 90,000 (55,000)
Accounts payable to related party -- 15,000
----------- --------
Accrued expenses 25,000 18,000
----------- --------
Net cash provided by operating activities 321,000 707,000
----------- --------
Cash flows from investing activities - capital expenditures (1,076,000) (157,000)
----------- --------
Cash flows from financing activities:
Proceeds from issuance of long-term debt 569,000 --
Principal payments on long-term debt (37,000) (100,000)
Distributions to partners -- (150,000)
Partners' contributions 290,000 --
----------- --------
Net cash provided by (used in) financing activities 822,000 (250,000)
----------- --------
Net increase in cash 67,000 300,000
Cash at beginning of year 54,000 121,000
----------- --------
Cash at end of year $ 121,000 421,000
=========== ========
Supplemental disclosures of cash flow information - cash paid during the
year for interest $ 24,000 46,000
=========== ========
</TABLE>
See accompanying notes to financial statements.
F-23
<PAGE> 46
LINROZ MANUFACTURING COMPANY, L.P.
Notes to Financial Statements
December 31, 1995 and 1996
(1995 Unaudited)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Linroz Manufacturing Company, L.P., a California limited partnership (the
Company), was formed on November 2, 1994 and commenced operations in May
1995. The general partner is Linroz Manufacturing , Inc., which holds a
1% interest in the Company and is owned equally by Jalate, Ltd. (Jalate)
and Lebr Associates, Inc. (Lebr). Jalate and Lebr each own 49.5% limited
partnership interests in the Company.
Profits and losses and distributions are allocated to the partners based
on their respective ownership percentage of the partnership. The
partnership agreement expires on December 31, 2018.
The Company performs cutting and sewing of women's apparel solely for
Jalate, Ltd.
DEPRECIATION AND AMORTIZATION
Depreciation on property and equipment is calculated on the straight-line
method over the estimated useful lives of the assets (five years).
Leasehold improvements are amortized on the straight-line method over the
shorter of the lease term or estimated useful life of the asset.
REVENUE RECOGNITION
Revenue is recognized upon shipment of the merchandise.
INCOME TAXES
The Company is a limited partnership and is not directly subject to
income taxes. Any liability for income taxes is passed to the partners.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and the disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and expenses
during the reporting period. Actual results could differ from these
estimates.
IMPAIRMENT OF LONG-LIVED ASSETS
Statement of Financial Accounting Standards No. 121 (FAS 121),
"Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets
to Be Disposed Of," establishes accounting standards for the recognition
and measurement of impairment of long-lived assets, certain identifiable
intangibles and goodwill either to be held or disposed of. The Company
has adopted FAS 121 effective January 1, 1996. The adoption of FAS 121
has not had any impact on the Company's financial position or results of
operations.
F-24
<PAGE> 47
LINROZ MANUFACTURING COMPANY, L.P.
Notes to Financial Statements, Continued
(2) PROPERTY AND EQUIPMENT
A summary of property and equipment is as follows:
<TABLE>
<CAPTION>
DECEMBER 31
---------------------------------
1995 1996
---------- ----------
<S> <C> <C>
Machinery and equipment $ 765,000 906,000
Office equipment 43,000 54,000
Equipment under capital lease 24,000 24,000
Leasehold improvements 245,000 250,000
---------- ---------
1,077,000 1,234,000
Less accumulated depreciation and amortization 101,000 319,000
---------- ---------
$ 976,000 915,000
========== =========
</TABLE>
(3) LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31
-------------------------------
1995 1996
--------- --------
<S> <C> <C>
Note payable, secured by equipment and guaranteed by Jalate, due in
monthly installments of $6,345 including interest at the
commercial paper rate (5.5% at December 31, 1996) plus 3.42%,
maturing November 2000 $ 277,000 224,000
Note payable, secured by equipment and guaranteed by Jalate, due in
monthly installments of $4,942 including interest at the
commercial paper rate plus 3.42%, maturing June 2000 232,000 192,000
Capital lease obligation, secured by the underlying equipment and
guaranteed by Contractor Associates, a company owned by the
shareholders of Lebr, due in monthly installments of $877
including interest at 19.5%, maturing October 1998 23,000 16,000
--------- --------
532,000 432,000
Less current maturities 100,000 111,000
--------- --------
$ 432,000 321,000
========= ========
</TABLE>
F-25
<PAGE> 48
LINROZ MANUFACTURING COMPANY, L.P.
Notes to Financial Statements, Continued
Annual maturities of long-term debt as of December 31, 1996 are as
follows:
<TABLE>
<S> <C>
1997 $ 111,000
1998 120,000
1999 122,000
2000 79,000
---------
$ 432,000
=========
</TABLE>
(4) RELATED PARTY TRANSACTIONS
The Company had sales to Jalate, its sole customer, of $1,939,000 and
$3,457,000 in 1995 and 1996, respectively. Accounts receivable from
Jalate aggregated $41,000 and $95,000 at December 31, 1995 and 1996,
respectively.
During 1996, the Company purchased machinery from Contractor Associates, a
company owned by the shareholders of Lebr, for $49,000. At December 31,
1996, a balance of $15,000 was outstanding related to the machinery
purchase and is included in accounts payable to related party in the
accompanying December 31, 1996 balance sheet. Accounts receivable from
Jalate and accounts payable to related party are unsecured and
non-interest bearing. See related party leasing transaction in note 5.
(5) COMMITMENTS
The Company subleases it manufacturing and office facility from Jalate
through January 2000. Future minimum lease payments under the
noncancelable sublease as of December 31, 1996 are as follows:
<TABLE>
<CAPTION>
Year ending December 31:
<S> <C>
1997 $ 124,000
1998 130,000
1999 130,000
2000 10,000
---------
$ 394,000
=========
</TABLE>
Rent expense was $109,000 and $119,000 in 1995 and 1996, respectively.
Shared expenses amounted to $52,000 for the year ended December 31, 1996
and are included in operating expenses in the accompanying 1996 statement
of earnings.
F-26
<PAGE> 49
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized on March 25, 1997.
JALATE, LTD.
By: /s/ Frederick A. Findley
-------------------------------------
Frederick A. Findley
Vice President and Chief
Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Company and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Vinton W. Bacon Chief Executive Officer, Chief Operating March 25, 1997
------------------------------------- Officer and Director
Vinton W. Bacon
/s/ Larry Brahim Executive Vice President and Director March 25, 1997
-------------------------------------
Larry Brahim
/s/ Frederick A. Findley Vice President - Finance & C F O March 25, 19977
-------------------------------------
Frederick A. Findley
/s/ Executive Vice President and Director March 25, 1997
-------------------------------------
Theordore B. Cooper
/s/ Jeffrey L. Friedman Vice President - Marketing March 25, 1997
-------------------------------------
Jeffrey L. Friedman
/s/ Jan L. Grossman Vice President - Merchandising and Director March 25, 1997
-------------------------------------
Jan L. Grossman
/s/ Allan E. Dalshaug Director March 25, 1997
-------------------------------------
Allan E. Dalshaug
/s/ Joseph S. Davis Director March 25, 1997
-------------------------------------
Joseph S. Davis
/s/ I. Jay Goldfarb Director March 25, 1997
-------------------------------------
I. Jay Goldfarb
</TABLE>
S-1
<PAGE> 50
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Director March 25, 1997
-------------------------------------
Victor Nichols
/s/ William Soady Director March 25, 1997
-------------------------------------
William Soady
</TABLE>
S-2
<PAGE> 1
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT is made and effective as of the sixth
day of May, 1996, by and between JALATE, LTD., a California corporation (the
"Company"), and FREDERICK A. FINDLEY (the "Employee"), with respect to the
following facts:
A. The Company desires to be assured of the continued association
and services of the Employee in order to take advantage of his experience,
knowledge and abilities in the Company's business, and is willing to employ the
Employee, and the Employee desires to be so employed, on the terms and
conditions set forth in this Agreement.
B. The Employee from time to time in the course of his employment
may learn trade secrets and other confidential information concerning the
Company, and the Company desires to safeguard such trade secrets and
confidential information against unauthorized use and disclosure.
ACCORDINGLY, on the basis of the representations, warranties and
covenants contained herein, the parties hereto agree as follows:
1. EMPLOYMENT
1.1 EMPLOYMENT. The Company hereby employs the
Employee as Vice President-Finance and Chief Financial Officer, and the Employee
hereby accepts such employment, on the terms and conditions set forth below, to
perform during the term of this Agreement such services as are required
hereunder.
1.2 DUTIES. The Employee shall render such
services to the Company, and shall perform such duties and acts, as reasonably
may be required by the Company's Board of Directors in connection with the
Company's business and as may be consistent with his position.
1.3 SERVICE TO OTHERS. The Employee shall devote
substantially all his productive time, ability and attention to, and shall
diligently and conscientiously use his best efforts to further, the Company's
business, and shall not, without prior written consent of the Company's Board
of Directors in each instance, perform services of any kind, whether or not for
compensation, for any person other than the Company, which services, in the sole
opinion of the Company's Board of Directors, might materially interfere with
the performance of his duties hereunder.
1
<PAGE> 2
2. COMPENSATION
2.1 COMPENSATION. As the total consideration for
the services which the Employee renders hereunder, the Employee shall be
entitled to the following:
(a) an annual base salary of $140,000,
subject to such periodic increases, if any, as the Board of Directors may deem
to be appropriate in its sole discretion, less income taxes and other
applicable withholdings, payable in weekly installments;
(b) an annual bonus in such amount and
subject to such performance criteria as the Board of Directors may deem to be
appropriate in its sole discretion, less income taxes and other applicable
withholding;
(c) participation in all plans or programs
sponsored by the Company for executive officers in general, including, without
limitation, participation in any group health plan, medical reimbursement plan,
life insurance plan, incentive plan or pension and profit sharing plan;
(d) reimbursement of any and all reasonable
and documented expenses incurred by the Employee from time to time in the
performance of his duties hereunder, which reimbursement shall be made in
accordance of the Company's policies and procedures adopted by the Board of
Directors as the same may be amended from time to time;
(e) four (4) weeks paid vacation per year
at such time or times as the Company's Board of Directors may authorize;
provided, however, that such vacation shall be taken annually and shall not
cumulate from year to year;
(f) an automobile allowance in the amount
of $750.00 per month; and
(g) an option to purchase from the Company
up to 60,000 shares of the Common Stock of the Company on the terms set forth
in EXHIBIT A attached hereto.
2.2 ILLNESS. Subject to the limitations contained
in Section 3.3, if the Employee shall be unable to render the services required
hereunder on account of personal injuries or physical or mental illness, he
shall continue to receive all payments provided in this Agreement; provided,
however, that any such payments may, at the sole option of the Company, be
reduced by any amount that the Employee receives for the period covered by such
payments as disability compensation under insurance policies, if any,
maintained by the Company or under government programs.
2
<PAGE> 3
3. TERM OF EMPLOYMENT AND TERMINATION
3.1 TERM. Unless sooner terminated pursuant to
Section 3.2 hereof, the term of employment under this Agreement shall be for a
period commencing on the date hereof and ending on December 31, 1997; PROVIDED,
however, that such term of employment automatically shall be renewed for
successive one (1) year terms unless written notice of termination is given by
either the Company or the Employee not less than ninety (90) days prior to the
end of the initial term or any subsequent one (1) year term.
3.2 AT WILL EMPLOYMENT. Each party hereby
acknowledges and agrees that, except as expressly set forth in Section 3.3, (i)
the Employee's employment under this Agreement is AT WILL and can be terminated
at the option of either the Company of the Employee in their sole and absolute
discretion, for any or no reason whatsoever, with or without cause, (ii) no
representations, warranties or assurances have been made concerning the length
of such employment by the Company or the aggregate amount of compensation to be
received by the Employee and (iii) after the termination of his employment, the
Employee shall have no right, title or interest in or claim to any revenues
received by the Company from any person for any goods sold or services rendered
by the Company to such person, whether or not the Employee was the cause, in
whole or in part, for such person to purchase goods from the Company or to
retain the Company to perform such services.
3.3 DUTIES UPON TERMINATION. In the event that
employment under this Agreement is terminated, whether at the expiration of the
initial term or any subsequent one (1) year term or prior thereto pursuant to
Section 3.2, neither the Company nor the Employee shall have any remaining dues
or obligations hereunder, except that (i) the Company shall pay to the
Employee, or his estate, such compensation as is due pursuant to Section 2.1,
prorated through the date of termination, (ii) the Employee shall continue to
be bound by Section 4 hereof and (iii) in the event the Company shall terminate
such employment "without cause" (as defined below) or there shall occur a
"change in control" of the Company (as defined below), the Company shall
continue to pay to the Employee, or his estate, for a period of six months
after the effective date of such termination of employment or change in control
such compensation as otherwise would be due pursuant to Section 2.1 during such
six month period.
3.4 "WITHOUT CAUSE." The employment of the
Employee shall be deemed to have been terminated by the Company without cause
if, but only if, it is terminated by the Company other than upon the happening
of any of the following events:
(ii) the death of the Employee, or
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(iii) if in the reasonable judgment of the Company's
Board of Directors the Employees has become so physically or mentally disabled
as to be incapable of substantially performing his duties hereunder for a
period of three (3) consecutive months or an aggregate of 90 days in any six
(6) month period; or
(iv) in the event of (A) a material breach of this
Agreement by reason of the Employee's continued and willful failure or refusal
to substantially perform his duties in accordance with this Agreement or (B)
the conviction of the Employee of a felony or of a misdemeanor involving
financial impropriety or (C) the material breach of the Employee's fiduciary
duty to the Company; provided, however, that no termination shall occur under
clause (A) unless the Employee first shall have received written notice
specifying the acts or omissions alleged to constitute such breach and, if such
breach can be corrected, it continues after the Employee shall have had
reasonable opportunity (but in no event less than thirty (30) days) to correct
the same.
4. "Change in Control." The term "Change of Control" shall mean
the first to occur of the following events:
(i) any date upon which the directors of the Company who
were last nominated by the Board of Directors (the "Board") for election as
directors cease to constitute a majority of the directors of the Company:
(ii) the date of the first public announcement that any
person or entity, together with all Affiliated and Associates (as such
capitalized terms are defined in Rule 12b-2 promulgated under the Securities
Exchange Act of 1934, as amended (the "Exchange Act")) of such person or
entity, shall have become the Beneficial Owner (as defined in Rule 13d-3
promulgated under the Exchange Act) of voting securities of the Company
representing 25% or more of the voting power of the Company (a "25%
Stockholder"): provided, however, that the terms "person" and "entity," as used
in this clause (ii), shall not include (1) the Company or any of its
subsidiaries, (2) any employee benefit plan of the Company or any of its
subsidiaries, (3) any entity holding voting securities of the Company for or
pursuant to the terms of any such plan (4) any person or entity if the
transaction that resulted in such person or entity becoming a 25% Stockholder
was approved in advance by the Board or (5) any person or entity who was a 25%
Stockholder on the date hereof; or
(iii) a reorganization, merger or consolidation of the
Company (other than a reorganization, merger or consolidation the sole purpose
of which is to change the Company's domicile solely within the United States)
the consummation of which results in the outstanding shares of Common Stock of
the Company being exchanged for or converted into cash, property or a different
kind of securities.
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5. TRADE SECRETS
5.1 TRADE SECRETS. The Employee shall not, without
the prior written consent of the Company's Board of Directors in each instance,
disclose or use in any way, either during his employment by the Company or
thereafter, except as required in the course of such employment, any
confidential business or technical information or trade secret of the Company
acquired in the course of such employment, whether or not patentable,
copyrightable or otherwise protected by law, and whether or not conceived of or
prepared by him (collectively, the "Trade Secrets"), including, without
limitation, any information concerning customer lists, products, procedures,
operations, investments, financing, costs, employees, purchasing, accounting,
marketing, merchandising, sales, salaries, pricing, profits and plans for
future development, the identity, requirements, preferences, practices and
methods of doing business of specific parties with whom the Company transacts
business, and all other information which is related to any product, service or
business of the Company, other than information which is generally known in the
industry in which the Company transacts business or is acquired from public
sources, all of which Trade Secrets are the exclusive and valuable property of
the Company.
5.2 TANGIBLE ITEMS. All files, accounts, records,
documents, books, forms, notes, reports, memoranda, studies, compilations of
information, correspondence and all copies, abstracts and summaries of the
foregoing, and all other physical items related to the Company, other than a
merely personal item, whether of a public nature or not, and whether prepared
by the Employee or not, are and shall remain the exclusive property of the
Company and shall not be removed from the premises of the Company, except as
required in the course of employment by the Company, without the prior written
consent of the Company's Board of Directors in each instance, and the same
shall be promptly returned to the Company by the Employee upon the expiration or
termination of his employment by the Company or at any time prior thereto upon
the request of the Company.
5.3 SOLICITATION OF EMPLOYEES. During his
employment by the Company and for one (1) year thereafter (such period not to
include any period of violation hereof by the Employee or period which is
required for litigation to enforce this paragraph and during which the Employee
is in violation hereof), the Employee shall not, directly or indirectly, either
for his own benefit or purposes or the benefit or purposes of any other person
employ or offer to employ, call on, solicit, interfere with or attempt to
divert or entice away any employee or independent contractor of the Company (or
any person whose employment or status as an independent contractor has
terminated within the twelve (12) months preceding the date of such
solicitation) in any capacity if that person possesses or has knowledge of any
Trade Secrets or the Company.
5.4 INJUNCTIVE RELIEF. The Employee hereby
acknowledges and agrees that it would be difficult to fully compensate the
Company for damages resulting from the breach or threatened breach of the
foregoing provisions and, accordingly, that the Company shall be
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entitled to temporary and injunctive relief, including temporary restraining
orders, preliminary injunctions and permanent injunctions, to enforce such
provisions without the necessity of proving actual damages and without the
necessity of posting any bond or other undertaking in connection therewith.
This provision with respect to injunctive relief shall not, however, diminish
the Company's right to claim and recover damages.
5.5 "COMPANY". For the purposes of this Section 4 only,
the term "Company" shall mean collectively Jalate, Ltd., a California
corporation, and its successors, assigns and nominees, and all individuals,
corporations and other entities that directly, or indirectly through one or more
intermediaries, control or are controlled by or are under common control with
any of the foregoing.
6. MISCELLANEOUS
6.1 SEVERABLE PROVISIONS. The provisions of this Agreement
are severable, and if any one or more provisions may be determined to be
illegal or otherwise unenforceable, in whole or in part, the remaining
provisions, and any partially unenforceable provisions to the extent
enforceable, shall nevertheless be binding and enforceable.
6.2 SUCCESSORS AND ASSIGNS. All of the terms, provisions
and obligations of this Agreement shall inure to the benefit of and shall be
binding upon the parties hereto and their respective heirs, representatives,
successors and assigns. Notwithstanding the foregoing, neither this Agreement
nor any rights hereunder shall be assigned, pledged, hypothecated or otherwise
transferred by the Employee without the prior written consent of the Company in
each instance.
6.3 GOVERNING LAW. The validity construction and
interpretation of this Agreement shall be governed in all respects by the laws
of the State of California applicable to contracts made and to be performed
wholly within that State.
6.4 CONSENT TO JURISDICTION. Each party hereto, to the
fullest extent it may effectively do so under applicable law, irrevocably (i)
submits to the exclusive jurisdiction of any court of the State of California
or the United States of America sitting in the City of Los Angeles over any
suit, action or proceeding arising out of or relating to this Agreement, (ii)
waives and agrees not to assert, by way of motion, as a defense or otherwise,
any claim that it is not subject to the jurisdiction of any such court, any
objection that it may now or hereafter have to the establishment of the venue
of any such suit, action or proceeding brought in any such court and any claim
that any such suit, action or proceeding brought in any such court has been
brought in an inconvenient forum, (iv) consents to process being served in any
such suit, action or proceeding by mailing a
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copy thereof by registered or certified air mail, postage prepaid, return
receipt requested, to the address of such party specified in or designated
pursuant to Section 5.7. Each party agrees that such service (i) shall be
deemed in every respect effective service of process upon such party in any
such suit, action or proceeding and (ii) shall, to the fullest extent permitted
by law, be taken and held to be valid personal service upon and personal
delivery to such party.
6.5 HEADINGS. Section and subsection headings are
not to be considered part of this Agreement and are included solely for
convenience and reference and in no way define, limit or describe the scope of
this Agreement or the intent of any provisions hereof.
6.6 ENTIRE AGREEMENT. This Agreement constitutes
the entire agreement between the parties hereto pertaining to the subject
matter hereof, and supersedes all prior agreements, understandings,
negotiations and discussions, whether oral or written, relating to the subject
matter of this Agreement. No supplement, modification, waiver or termination
of the Agreement shall be valid unless executed by the party to be bound
thereby. No waiver of any of the provisions of this Agreement shall be deemed
or shall constitute a waiver of any other provisions hereof (whether or not
similar), nor shall such waiver constitute a continuing waiver unless
otherwise expressly provided.
6.7 NOTICE. Any notice or other communication
required or permitted hereunder shall be in writing and shall be deemed to have
been given (i) if personally delivered, when so delivered, (ii) if mailed, one
(1) week after having been placed in the United States mail, registered or
certified, postage prepaid, addressed to the party to whom it is directed at
the address set forth below or (iii) if given by telex or telecopier, when such
notice or other communication is transmitted to the telex or telecopier number
specified below and the appropriate answerback or telephonic confirmation is
received. Either party may change the address to which such notices are to be
addressed by giving the other party notice in the manner herein set forth.
6.8 ATTORNEYS' FEES. In the event any party takes
legal action to enforce any of the terms of this Agreement, the unsuccessful
party to such action shall pay the successful party's expenses, including
attorneys' fees, incurred in such action.
6.9 THIRD PARTIES. Nothing in this Agreement,
expressed or implied, is intended to confer upon any person other than the
Company or Employee any rights or remedies under or by reason of this Agreement.
6.10 LEGAL COUNSEL. EACH PARTY HEREBY ACKNOWLEDGES
THAT IN CONNECTION WITH THIS AGREEMENT IT HAS SOUGHT THE ADVICE OF SUCH
INDEPENDENT LEGAL COUNSEL AS IT SHALL HAVE DETERMINED TO BE NECESSARY OR
ADVISABLE IN ITS SOLE AND ABSOLUTE DISCRETION.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the date and year first set forth above.
JALATE, LTD.
BY___________________________
Authorized Representative
1675 South Alameda Street
Los Angeles, California 90021
/s/ FREDERICK A. FINDLEY
_____________________________
FREDERICK A. FINDLEY
318 Arroyo Drive
South Pasadena, California 91030
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<PAGE> 1
INDEMNIFICATION AGREEMENT
This Indemnification Agreement, dated as of January 1, 1996, is made by
and between JALATE, LTD., a California corporation (the "Company"), and
FREDERICK A. FINDLEY, an officer of the Company (the "Indemnitee").
RECITALS
A. The Company and the Indemnitee recognize that the present state
of the law is too uncertain to provide the Company's officers and directors
with adequate and reliable advance knowledge or guidance with respect to the
legal risks and potential liabilities to which they may become personally
exposed as a result of performing their duties for the Company;
B. The Company and the Indemnitee are aware of the substantial
growth in the number of lawsuits filed against corporate officers and directors
in connection with their activities in such capacities and by reason of their
status as such;
C. The Company and the Indemnitee recognize that the cost of
defending against such lawsuits, whether or not meritorious, is typically
beyond the financial resources of most officers and directors of the Company;
D. The Company and the Indemnitee recognize that the legal risks
and potential liabilities, and the threat thereof, associated with proceedings
filed against the officers and directors of the Company bear no reasonable
relationship to the amount of compensation received by the Company's officers
and directors;
E. The Company, after reasonable investigation prior to the date
hereof, has determined that the liability insurance coverage available to the
Company as of the date hereof is inadequate, unreasonably expensive or both.
The Company believes, therefore, that the interest of the Company's
shareholders would be best served by a combination of (i) such insurance as the
Company may obtain pursuant to the Company's obligations hereunder and (ii) a
contract with its officers and directors, including the Indemnitee, to indemnify
them to the fullest extent permitted by law (as in effect on the date hereof,
or, to the extent any amendment may expand such permitted indemnification, as
hereafter in effect) against personal liability for actions taken in the
performance of their duties to the Company;
F. Section 317 of the California General Corporation Law empowers
California corporations to indemnify their officers and directors and further
states that the indemnification provided by Section 317 "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 such
additional rights to indemnification are authorized in the articles of the
corporation"; thus, Section 317 does not by
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itself limit the extent to which the Company may indemnify persons serving as
its officers and directors;
G. The Company's Articles of Incorporation and Bylaws
authorize the indemnification of the officers and directors of the Company in
excess of that expressly permitted by Section 317, subject to the limitations
set forth in Section 204(a)(11) of the California General Corporation Law, or
limitations set forth in a statute, regulation or rule promulgated by any state
or federal regulatory agency with jurisdiction over the Company's activities;
H. The Board of Directors of the Company has concluded
that, to retain and attract talented and experienced individuals to serve as
officers and directors of the Company and to encourage such individuals to take
the business risks necessary for the success of the Company, it is necessary
for the Company to contractually indemnify its officers and directors, and to
assume for itself liability for expenses and damages in connection with claims
against such officers and directors in connection with their service to the
Company, and has further concluded that the failure to provide such contractual
indemnification could result in great harm to the Company and its shareholders;
I. The Company desires and has requested the Indemnitee to
serve or continue to serve as a director or officer of the Company, free from
undue concern for the risks and potential liabilities associated with such
services to the Company; and
J. The Indemnitee is willing to serve, or continue to
serve, the Company, provided, and on the expressed condition, that he is
furnished with the indemnification provided for herein.
AGREEMENT
NOW, THEREFORE, the Company and Indemnitee agree as follows:
1. DEFINITIONS.
(a) "Expenses" means, for the purposes of this
Agreement, all direct and indirect costs of any type or nature whatsoever
(including, without limitation, any fees and disbursements of Indemnitee's
counsel, accountants and other experts and other out-of-pocket costs) actually
and reasonably incurred by the Indemnitee in connection with the investigation,
preparation, defense or appeal of a Proceeding; provided, however, that
Expenses shall not include judgments, fines, penalties or amounts paid in
settlement of a Proceeding.
(b) "Proceeding" means, for the purposes of this
Agreement, any threatened, pending or completed action or proceeding, whether
civil, criminal, administrative or investigative (including an action bought by
or in the right of the Company) in which Indemnitee may be or may have been
involved as a party or otherwise, by reason of the fact that
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Indemnitee is or was a director or officer of the Company, by reason of any
action taken by him or of any inaction on his part, whether before or after the
date hereof, while acting as such director or officer or by reason of the fact
that he is or was serving at the request of the Company as a director, officer,
employee or agent of another foreign or domestic corporation, partnership,
joint venture, trust or other enterprise, or was a director or officer of the
foreign or domestic corporation which was a predecessor corporation to the
Company or of another enterprise at the request of such predecessor corporation,
whether or not he is serving in such capacity at the time any liability or
expense is incurred for which indemnification or reimbursement can be provided
under this Agreement.
2. AGREEMENT TO SERVE. Indemnitee agrees to serve or
continue to serve as a director or officer of the Company to the best of his
abilities at the will of the Company or under separate contract, if such
contract exists, for so long as Indemnitee is duly elected or appointed and
qualified or until such time as he tenders his resignation in writing. Nothing
contained in this Agreement is intended to create in Indemnitee any right to
continued employment.
3. INDEMNIFICATION.
(a) THIRD PARTY PROCEEDINGS. The Company shall
indemnify Indemnitee against Expenses, judgements, fines, penalties or amounts
paid in settlement (if the settlement is approved in advance by the Company)
actually and reasonably incurred by Indemnitee in connection with a Proceeding
(other than a Proceeding by or in the right of the Company) if Indemnitee acted
in good faith and in a manner Indemnitee reasonably believed to be in the best
interests of the Company, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe Indemnitee's conduct was
unlawful. The termination of any Proceeding by judgment, order, settlement,
conviction, or upon a plea of nolo contendere or its equivalent, shall not, of
itself, create a presumption that Indemnitee did not act in good faith and in a
manner which Indemnitee reasonably believed to be in the best interests of the
Company, or, with respect to any criminal Proceeding, had no reasonable cause
to believe that Indemnitee's conduct was unlawful.
(b) PROCEEDINGS BY OR IN THE RIGHT OF THE COMPANY.
To the fullest extent permitted by law, the Company shall indemnify Indemnitee
against Expenses and amounts paid in settlement, actually and reasonably
incurred by Indemnitee in connection with a Proceeding by or in the right of
the Company to procure a judgement in its favor if Indemnitee acted in good
faith and in a manner Indemnitee reasonably believed to be in the best
interests of the Company and its shareholders. Notwithstanding the foregoing,
no indemnification shall be made in respect of any claim, issue or matter as to
which Indemnitee shall have been adjudged liable to the Company in the
performance of Indemnitee's duty to the Company and its shareholders unless and
only to the extent that the court in which such action or proceeding is or was
pending shall determine upon application that, in view of all the circumstances
of the case, Indemnitee is fairly and reasonably entitled to indemnity for
expenses and then only to the extent that the court shall determine.
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(c) SCOPE. Notwithstanding any other provision of this
Agreement but subject to Section 14(b), the Company shall indemnify the
Indemnitee to the fullest extent permitted by law, notwithstanding that such
indemnification is not specifically authorized by other provisions of this
Agreement, the Company's Restated Articles of Incorporation, the Company's
Bylaws or by statue.
4. LIMITATIONS ON INDEMNIFICATION. Any other provision herein to
the contrary notwithstanding, the Company shall not be obligated pursuant to
the terms of this Agreement:
(a) EXCLUDED ACTS. To indemnify Indemnitee for any acts or
omissions or transactions from which a director may not be relieved to
liability under Section 204 of the California General Corporation Law;
(b) EXCLUDED INDEMNIFICATION PAYMENTS. To indemnify or
advance Expenses in violation of any prohibition or limitation on
indemnification under the statutes, regulations or rules promulgated by any
state or federal regulatory agency having jurisdiction over the Company.
(c) CLAIMS INITIATED BY INDEMNITEE. To indemnify or
advance Expenses to Indemnitee with respect to Proceedings or claims initiated
or brought voluntarily by Indemnitee and not by way of defense, except with
respect to proceedings brought to establish or enforce a right to
indemnification under this Agreement or any other statute or law or otherwise
as required under Section 317 of the California General Corporation Law, but
such indemnification or advancement of Expenses may be provided by the Company
in specific cases if the Board of Directors has approved the initiation or
bringing of such suit;
(d) LACK OF GOOD FAITH. To indemnify Indemnitee for any
Expenses incurred by the Indemnitee with respect to any proceeding instituted
by Indemnitee to enforce or interpret this Agreement, if a court of competent
jurisdiction determines that each of the material assertions made by the
Indemnitee in such proceeding was not made in good faith or was frivolous;
(e) INSURED CLAIMS. To indemnify Indemnitee for Expenses
or liabilities of any type whatsoever (including, but not limited to,
judgments, fines, ERISA excise taxes or penalties, and amounts paid in
settlement) which have been paid directly to or on behalf of Indemnitee by an
insurance carrier under a policy of directors' and officers' liability
insurance maintained by the Company or any other policy of insurance maintained
by the Company or Indemnitee;
(f) CLAIMS UNDER SECTION 16(b). To indemnify Indemnitee
for Expenses and the payment of profits arising from the purchase and sale by
Indemnitee of securities in violation of Section 16(b) of the Securities
Exchange Act of 1934, as amended, or any similar successor statute.
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5. DETERMINATION OF RIGHT TO INDEMNIFICATION.
Upon receipt of a written claim addressed to the Board of
Directors for indemnification pursuant to Section 3, the Company shall
determine by any of the methods set forth in Section 317(e) of the California
General Corporation Law whether Indemnitee has met the applicable standards of
conduct which makes it permissible under applicable law to indemnify
Indemnitee. If a claim under Section 3 is not paid in full by the Company
within ninety (90) days after such written claim has been received by the
Company, the Indemnitee may at any time thereafter bring suit against the
Company to recover the unpaid amount of the claim and, unless such action is
dismissed by the court as frivolous or brought in bad faith, the Indemnitee
shall be entitled to be paid also the expense of prosecuting such claim. The
court in which such action is brought shall determine whether Indemnitee or the
Company shall have the burden of proof concerning whether Indemnitee has or
has not met the applicable standard of conduct.
6. ADVANCEMENT AND REPAYMENT OF EXPENSES.
Subject to Section 4 hereof, the Expenses incurred by
Indemnitee in defending and investigating any Proceeding shall be paid by the
Company in advance of the final disposition of such Proceeding within 30 days
after receiving from Indemnitee the copies of invoices presented to Indemnitee
for such Expenses, if Indemnitee shall provide an undertaking to the Company to
repay such amount to the extent it is ultimately determined that Indemnitee is
not entitled to indemnification. In determining whether or not to make an
advance hereunder, the ability of Indemnitee to repay shall not be a factor.
Notwithstanding the foregoing, in a proceeding brought by the Company directly,
in its own right (as distinguished from an action bought derivatively or by any
receiver or trustee), the Company shall not be required to make the advances
called for hereby if the Board of Directors determines, in its sole discretion,
that it does not appear that Indemnitee has met the standards of conduct which
make it permissible under applicable law to indemnify Indemnitee and the
advancement of Expenses would not be in the best interests of the Company and
its shareholders.
7. PARTIAL INDEMNIFICATION. If the Indemnitee is entitled
under any provision of this Agreement to indemnification or advancement by the
Company of some or a portion of any Expenses or liabilities of any type
whatsoever (including, but not limited to, judgments, fines, penalties, and
amounts paid in settlement) incurred by him in the investigation, defense,
settlement or appeal of a Proceeding, but is not entitled to indemnification or
advancement of the total amount thereof, the Company shall nevertheless
indemnify or pay advancements to the Indemnitee for the portion of such
Expenses or liabilities to which the Indemnitee is entitled.
8. NOTICE TO COMPANY BY INDEMNITEE. Indemnitee shall
notify the Company in writing of any matter with respect to which Indemnitee
intends to seek indemnification hereunder as soon as reasonably practicable
following the receipt by Indemnitee of written notice thereof; provided,
however, that any delay in so notifying the Company shall not constitute a
waiver by Indemnitee of his rights hereunder. The written notification to the
Company shall be
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addressed to the Board of Directors and shall include a description of the
nature of the Proceeding and the facts underlying the Proceeding and be
accompanied by copies of any documents filed with the court in which the
Proceeding is pending. In addition, Indemnitee shall give the Company such
information and cooperation as it may reasonably require and as shall be within
Indemnitee's power.
9. MAINTENANCE OF LIABILITY INSURANCE.
(a) Subject to Section 4 hereof, the Company hereby
agrees that so long as Indemnitee shall continue to serve as a director or
officer of the Company and thereafter so long as Indemnitee shall be subject to
any possible Proceeding, the Company, subject to Section 9(b), shall use its
best efforts to obtain and maintain in full force and effect directors' and
officers' liability insurance ("D&O Insurance") which provides Indemnitee the
same rights and benefits as are accorded to the most favorably insured of the
Company's directors, if Indemnitee is a director; or of the Company's
officers, if Indemnitee is not a director of the Company but is an officer.
(b) Notwithstanding the foregoing, the Company
shall have no obligation to obtain or maintain D&O Insurance if the Company
determines in good faith that such insurance is not reasonably available, the
premium costs for such insurance are disproportionate to the amount of coverage
provided, the coverage provided by such insurance is limited by exclusions so
as to provide an insufficient benefit, or the Indemnitee is covered by similar
insurance maintained by a subsidiary or parent of the Company.
(c) Notice to Insurers. If, at the time of the
receipt of a notice of a claim pursuant to Section 8 hereof, the Company has
D&O Insurance in effect, the Company shall give prompt notice of the
commencement of such Proceeding to the insurers in accordance with the
procedures set forth in the respective policies. The Company shall thereafter
take all necessary or desirable action to cause such insurers to pay, on
behalf of the Indemnitee, all amounts payable as a result of such Proceeding in
accordance with the terms of such policies.
10. DEFENSE OF CLAIM. In the event that the Company shall
be obligated under Section 6 hereof to pay the Expenses of any Proceeding
against Indemnitee, the Company, if appropriate, shall be entitled to assume
the defense of such Proceeding, with counsel approved by Indemnitee, which
approval shall not be unreasonably withheld, upon the delivery to Indemnitee of
written notice of its election to do so. After delivery of such notice,
approval of such counsel by Indemnitee and retention of such counsel by the
Company, the Company will not be liable to Indemnitee under this Agreement for
any fees of counsel subsequently incurred by Indemnitee with respect to the
same Proceeding, provided that (i) Indemnitee shall have the right to employ
his counsel in any such Proceeding at Indemnitee's expense; and (ii) if (A) the
employment of counsel by Indemnitee has been previously authorized by the
Company, or (B) Indemnitee shall have reasonably concluded that there may be a
conflict of interest between the Company and the Indemnitee in the conduct of
such defense or (C) the Company
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shall not, in fact, have employed counsel to assume the defense of such
Proceeding, then the fees and expenses of Indemnitee's counsel shall be at the
expense of the Company.
11. ATTORNEYS' FEES. In the event that Indemnitee or the
Company institutes an action to enforce or interpret any terms of this
Agreement, the Company shall reimburse Indemnitee for all of the Indemnitee's
reasonable fees and expenses in bringing and pursuing such action or defense,
unless as part of such action or defense, a court of competent jurisdiction
determines that the material assertions made by Indemnitee as a basis for such
action or defense were not made in good faith or were frivolous.
12. CONTINUATION OF OBLIGATIONS. All agreements and
obligations of the Company contained herein shall continue during the period
the Indemnitee is a director or officer of the Company, or is or was serving at
the request of the Company as a director, officer, fiduciary, employee or agent
of another corporation, partnership, joint venture, trust or other enterprise,
and shall continue thereafter so long as the Indemnitee shall be subject to any
possible proceeding by reason of the fact that Indemnitee served in any
capacity referred to herein.
13. SUCCESSORS AND ASSIGNS. This Agreement establishes
contract rights that shall be binding upon, and shall inure to the benefit of,
the successors, assigns, heirs and legal representatives of the parties hereto.
14. NON-EXCLUSIVITY.
(a) The provisions for indemnification and
advancement of expenses set forth in this Agreement shall not be deemed to be
exclusive of any other rights that the Indemnitee may have under any provision
of law, the Company's Restated Articles of Incorporation or Bylaws, the vote of
the Company's shareholders or disinterested directors, other agreements or
otherwise, both as to action in his official capacity and action in another
capacity while occupying his position as a director or officer of the Company.
(b) In the event of any changes, after the date of
this Agreement, in any applicable law, statute, or rule which expand the right
of a California corporation to indemnify its officers and directors, the
Indemnitee's rights and the Company's obligations under this Agreement shall be
expanded to the full extent permitted by such changes. In the event of any
changes in any applicable law, statute or rule, which narrow the right of a
California corporation to indemnify a director or officer, such changes, to the
extent not otherwise required by such law, statute or rule to be applied to
this Agreement, shall have no effect on this Agreement or the parties' rights
and obligations hereunder.
15. EFFECTIVENESS OF AGREEMENT. To the extent that the
indemnification permitted under the terms of certain provisions of this
Agreement exceeds the scope of the indemnification provided for in the
California General Corporation Law, such provisions shall not be effective
unless and until the Company's Restated Articles of Incorporation authorize
such additional rights of indemnification. In all other respects, the balance
of this Agreement shall
7
<PAGE> 8
be effective as of the date set forth on the first page and may apply to acts
of omissions of Indemnitee which occurred prior to such date if Indemnitee was
an officer, director, employee or other agent of the Company, or was serving at
the request of the Company as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, at the time
such act or omission occurred.
16. SEVERABILITY. Nothing in this Agreement is intended to
require or shall be construed as requiring the Company to do or fail to do any
act in violation of applicable law. The Company's inability, pursuant to court
order, to perform its obligations under this Agreement shall not constitute a
breach of this Agreement. The provisions of this Agreement shall be severable
as provided in this Section 16. If this Agreement or any portion hereof shall
be invalidated on any ground by any court of competent jurisdiction, then the
Company shall nevertheless indemnify Indemnitee to the full extent permitted by
any applicable portion of this Agreement that shall not have been invalidated,
and the balance of this Agreement not so invalidated shall be enforceable in
accordance with its terms.
17. GOVERNING LAW. This Agreement shall be interpreted and
enforced in accordance with the laws of the State of California. To the extent
permitted by applicable law, the parties hereby waive any provisions of law
which render any provision of this Agreement unenforceable in any respect.
18. NOTICE. All notices, requests, demands and other
communications under this Agreement shall be in writing and shall be deemed duly
given (i) if delivered by hand and receipted for by the party addressee or (ii)
if mailed by certified or registered mail with postage prepaid, on the third
business day after the mailing date. Addresses for notice to either party are
as shown on the signature page of this Agreement, or as subsequently modified
by written notice.
19. MUTUAL ACKNOWLEDGMENT. Both the Company and Indemnitee
acknowledge that in certain instances, federal law or applicable public policy
may prohibit the Company from indemnifying its directors and officers under
this Agreement or otherwise. Indemnitee understands and acknowledges that the
Company has undertaken or may be required in the future to undertake with the
appropriate state or federal regulatory agency to submit for approval any
request for indemnification, and has undertaken or may be required in the
future to undertake with the Securities and Exchange Commission to submit the
question of indemnification to a court in certain circumstances for a
determination of the Company's right under public policy to indemnify
Indemnitee.
20. COUNTERPARTS. This Agreement may be executed in one
or more counterparts, each of which shall constitute an original.
8
<PAGE> 9
21. AMENDMENT AND TERMINATION. No amendment, modification,
termination or cancellation of this Agreement shall be effective unless in
writing signed by both parties hereto.
IN WITNESS WHEREOF, the parties have executed this Agreement as
of the day and year set forth above.
JALATE, LTD.
1675 South Alameda Street
Los Angeles, California 90021
By [SIG]
-------------------------
INDEMNITEE:
/s/ FREDERICK A. FINDLEY
- ---------------------------
FREDERICK A. FINDLEY
318 Arroyo Drive
South Pasadena, California 91030
<PAGE> 1
-----------------------------------------------
-----------------------------------------------
CREDIT AGREEMENT
by and between
JALATE LIMITED, INC., a California corporation
and
WELLS FARGO HSBC TRADE BANK, N.A.
Dated as of
June 1, 1996
-------------------------------------------------
-------------------------------------------------
Exhibit A - Addendum to Agreement
Exhibit B - Facility Supplement(s)
Exhibit C - Collateral/Credit Support Document
<PAGE> 2
WELLS FARGO HSBC TRADE BANK CREDIT AGREEMENT
- --------------------------------------------------------------------------
JALATE LIMITED, INC., a California corporation ("Borrower"), organized under
the laws of the State of California whose chief executive office is located at
the address specified after its signature to this Agreement ("Borrower's
Address") and WELLS FARGO HSBC TRADE BANK, N.A. ("Trade Bank"), whose address
is specified after its signature to this Agreement, have entered into this
CREDIT AGREEMENT as of June 1, 1996 ("Effective Date"). All references to this
"Agreement" include those covenants included in the Addendum to Agreement
("Addendum") attached as Exhibit A hereto.
1. CREDIT FACILITIES
1.1 THE FACILITIES. Subject to the terms and conditions of this
Agreement, Trade Bank will make available to Borrower each of those credit
facilities ("Facilities") for which a Facility Supplement ("Supplement") is
attached as Exhibit B hereto. Additional terms for each individual Facility
(and each subfacility thereof ("Subfacility")) are set forth in the Supplement
for that Facility. Each Facility will be available from the Closing Date until
the Facility Termination Date for that Facility. Collateral and credit support
required for each Facility are also set forth in the Supplement for each
Facility. Definitions for those capitalized terms not otherwise defined are
contained in Article 8 below.
1.2 CREDIT EXTENSION LIMIT. The aggregate outstanding amount of
all Credit Extensions may at no time exceed SIX MILLION DOLLARS ($6,000,000)
("Overall Credit Limit"). The aggregate outstanding amount of all Credit
Extensions outstanding at any time under any Facility may not exceed that
amount specified as the "Credit Limit" in the Supplement for that Facility, and
the aggregate outstanding amount of all Credit Extensions outstanding at any
time under each Subfacility (or any subcategory thereof) may not exceed that
amount specified as the "Credit Sublimit" in the Supplement for the relevant
Facility. An amount equal to 100% of each unfunded Credit Extension shall be
used in calculating the outstanding amount of Credit Extensions under this
Agreement.
1.3 REPAYMENT: INTEREST AND FEES. Each funded Credit Extension
shall be repaid by Borrower, and shall bear interest from the date of
disbursement at those per annum rates and such interest shall be paid, at the
times specified in the applicable Supplement, Note or Facility Document. With
respect to each Facility, Borrower agrees to pay to Trade Bank the fees
specified in the related Supplement as well as those fees specified in the
relevant Facility Document(s). Interest and fees will be calculated on the
basis of a 360 day year, actual days elapsed. Any overdue payments of
principal (and interest to the extent permitted by law) shall bear interest at
a per annum floating rate equal to the Prime Rate plus 5.0%.
1.4 PREPAYMENTS. Credit Extensions under any Facility may only be
prepaid in accordance with the terms of the related Supplement. At the time of
any prepayment (including, but not limited to, any prepayment which is a result
of the occurrence of an Event of Default and an acceleration of the
Obligations) Borrower will pay to Trade Bank all interest accrued on the amount
so prepaid to the date of such prepayment and all costs, expenses and fees
specified in the Loan Documents.
II. REPRESENTATIONS AND WARRANTIES
Borrower represents and warrants to Trade Bank that the following
representations and warranties are true and correct:
2.1 LEGAL STATUS. Borrower is duly organized and existing and in
good standing under the laws of the jurisdiction indicated in this Agreement,
and is qualified or licensed to do business in all jurisdictions in which such
qualification or licensing is required and in which the failure to so qualify
or to be so licensed could have a material adverse affect on Borrower.
2.2 AUTHORIZATION AND VALIDITY. The execution, delivery and
performance of this Agreement, and all other Loan Documents to which Borrower
is a party, have been duly and validly authorized, executed and delivered by
Borrower and constitute legal, valid and binding agreements of Borrower, and
are enforceable against Borrower in accordance with their respective terms.
2.3 BORROWER'S NAME. The name of Borrower set forth at the end of
this Agreement is its correct name. If Borrower is conducting business under a
fictitious business name, Borrower is in compliance with all laws relating to
the conduct of such business under such name.
2.4 FINANCIAL CONDITION AND STATEMENTS. All financial statements
of Borrower delivered to Trade Bank have been prepared in conformity with GAAP,
and completely and accurately reflect the financial condition of Borrower (and
any consolidated Subsidiaries) at the times and for the periods stated in such
financial statements. Neither Borrower nor any Subsidiary has any material
contingent liability not reflected in the aforesaid statement. Since the date
of the financial statements delivered to Trade Bank for the last fiscal period
of Borrower to end before the Effective Date, there has been no material adverse
change in the financial condition, business or prospects of Borrower. Borrower
is solvent.
2.5 LITIGATION. Except as disclosed in writing to Trade Bank prior
to the Effective Date, there is no action, claim, suit, litigation, proceeding
or investigation pending or (to best of Borrower's knowledge) threatened by or
against or affecting Borrower or
Page 1 of 8
<PAGE> 3
any Subsidiary in any court or before any governmental authority, administrator
or agency which may result in (a) any material adverse change in the financial
condition or business of Borrower, or (b) any material impairment of the
ability of Borrower to carry on its business in substantially the same manner
as it is now being conducted.
2.6 OTHER OBLIGATIONS. Except as disclosed in writing to Trade
Bank prior to the Effective Date, neither Borrower not any Subsidiary are in
default of any obligation for borrowed money, any purchase money obligation or
any material lease, commitment, contract, instrument or obligation.
2.7 NO DEFAULTS. No Event of Default, and event which with the
giving of notice or the passage of time or both would constitute an Event of
Default, has occurred and is continuing.
2.8 INFORMATION PROVIDED TO TRADE BANK. The information provided to
the Trade Bank concerning Borrower's business is true and correct.
2.9 ENVIRONMENTAL MATTERS. Except as disclosed by Borrower to Bank
in writing prior to the Effective Date, Borrower (as well as any Subsidiary) is
each in compliance in all material respects with all applicable Federal or
state environmental, hazardous waste, health and safety statutes, and any rules
or regulations adopted pursuant thereto, which govern or affect any of
Borrower's or any Subsidiary's operations and/or properties, including without
limitation, the Comprehensive Environmental Response, Compensation and
Liability Act of 1980, the Superfund Amendments and Reauthorization Act of 1986,
the Federal Resource Conservation and Recovery Act of 1976, the Federal Toxic
Substances Control Act and the California Health and Safety Code, as any of the
same may be amended, modified or supplemented from time to time. None of the
operations of Borrower or of any Subsidiary is the subject of any Federal or
state investigation evaluating whether any remedial action involving a material
expenditure is needed to respond to a release of any toxic or hazardous waste
or substance into the environment.
III. CONDITIONS TO EXTENDING FACILITIES
3.1 Conditions to Initial Credit Extension. The obligation of
Trade Bank to make the first Credit Extension is subject to the fulfillment to
Trade Bank's satisfaction of the following conditions;
(a) APPROVAL OF TRADE BANK COUNSEL. All legal matters
relating to making the Facilities available to Borrower
must be satisfactory to counsel for Trade Bank.
(b) DOCUMENTATION. Trade Bank must have received, in form
and substance satisfactory to Trade Bank, the following
documents and instruments duly executed and in full
force and effect:
(1) a corporate borrowing resolution and incumbency
certificate if Borrower is a corporation, a
partnership or joint venture borrowing
certificate if Borrower is a partnership or
joint venture, and a limited liability company
borrowing certificate if Borrower is a limited
liability company;
(2) the Facility Documents for each Facility,
including, but not limited to, note(s) ("Notes")
for any Revolting Credit or Term Loan Facility,
Trade Bank's standard Continuing Commercial
Letter of Credit Agreement or Continuing Standby
letter of Credit Agreement for any letter of
credit Facility;
(3) those guarantees, security agreements, deeds of
trust, subordination agreements, intercreditor
agreements, factoring agreements, tax service
contracts, and other Collateral Documents
required by Trade Bank to evidence the
collateral/credit support specified in the
Supplement;
(4) if an audit or inspection of any books, records
or property is specified in the Supplement for
any Facility, an audit or inspection report from
Wells Fargo or another auditor or inspector
acceptable to Trade Bank reflecting values and
property conditions satisfactory to Trade Bank;
(5) if an Eximbank guarantee is indicated in any
Facility Supplement, the Borrower Agreement
required by Eximbank together with the U.S.
Small Business Administration/Export-Import Bank
of the United States Joint Application For
Working Capital Guarantee, the "Loan
Authorization Agreement", the "Loan
Authorization Notice", and the latest "Country
Limitation Schedule of Eximbank";
(6) if Eximbank insurance is indicated in any
Facility Supplement, the "Export Credit
Insurance Policy" issued by Eximbank together
with a financial institution endorsement with
respect to that Insurance Policy and Eximbank's
premium payment report evidencing Borrower's
payment in full of all payments required under
the Insurance Policy in accordance with the
terms of the Insurance Policy, and an assignment
agreement accepted by Eximbank and acceptable to
Trade Bank;
(7) if an appraisal of any real property is
specified in any Facility Supplement, an
appraisal from an appraiser acceptable to Trade
Bank reflecting values satisfactory to Trade
Bank;
Page 2 of 8
<PAGE> 4
(8) if a policy of title insurance is specified in any
Facility Supplement, an ALTA policy containing the
endorsements, and issued by a company, acceptable to
Trade Bank; and
(9) if insurance is required in the Addendum, the insurance
policies specified in the Addendum (or other
satisfactory proof thereof) from insurers acceptable to
Trade Bank.
3.2 CONDITIONS TO MAKING EACH CREDIT EXTENSION. The obligation of Trade
Bank to make each Credit Extension is subject to the fulfillment to Trade
Bank's satisfaction of the following conditions:
(a) REPRESENTATIONS AND WARRANTIES. The representations and
warranties contained in this Agreement, the Facility Documents
and the Collateral Documents will be true and correct on as of
the date of the Credit Extension with the same effect as though
such representations and warranties had been made on and as of
such date;
(b) DOCUMENTATION. Trade Bank must have received, in form and
substance satisfactory to Trade Bank, the following documents
and instruments duly executed and in full force and effect:
(1) if the Credit Extension is the issuance of a Commercial
Letter of Credit, Trade Bank's standard Application For
Commercial Letter of Credit or standard Application and
Agreement For Commercial Letter of Credit;
(2) if the Credit Extension is the issuance of a Standby
Letter of Credit, Trade Bank's standard Application For
Standby Letter of Credit or standard Application and
Agreement For Standby Letter of Credit;
(3) if the Credit Extension is supported by an Eximbank
guarantee, Eximbank's "Preliminary Commitment and
Eximbank's Export Certificate";
(4) if the Credit Extension is the discount of foreign
accounts receivable and the Credit Extension is insured
by Eximbank, an assignment of the accounts being
discontinued in a form acceptable to Eximbank and Trade
Bank, a notice to each account debtor on each such
account, and copies of the invoices, bills of lading or
other evidence of export, together with copies of the
purchase order or contract of sale, pertaining to the
accounts being discounted duly executed by the account
debtor;
(5) if the Credit Extension is insured by Eximbank but is
not the discount of foreign accounts receivable, such
documents and instruments as are required by Eximbank;
(6) if a Borrowing Base Certificate is required for the
Credit Extension, a Borrowing Base Certificate
demonstrating compliance with the requirements for such
Credit Extension.
(c) FEES. Trade Bank must have received any fees required by the
Loan Documents to be paid at the time such Credit Extension is
made.
IV. AFFIRMATIVE COVENANTS
Borrower covenants that so long as Trade Bank remains committed to make
Credit Extensions to Borrower, and until payment of all Obligations and Credit
Extensions, Borrower will comply with each of the following covenants: (For
purposes of this Article IV, and Article V below, reference to "Borrower" may
also extend to Borrower's subsidiaries, if so specified in the Addendum.)
4.1 PUNCTUAL PAYMENTS. Punctually pay all principal, interest, fees and
other Obligations due under this Agreement or under any Loan Document at the
time and place and in the manner specified herein or therein.
4.2 NOTIFICATION TO TRADE BANK. Promptly, but in no event more than 5
calendar days after the occurrence of each such event, provide written notice
in reasonable detail of each of the following:
(a) OCCURRENCE OF A DEFAULT. The occurrence of any Event of Default
or any event which with the giving of notice or the passage of
time of both would constitute an Event of Default;
(b) BORROWER'S TRADE NAMES; PLACE OF BUSINESS. Any change of
Borrower's (or any Subsidiary's) name, trade name or place of
business, or chief executive officer;
(c) LITIGATION. Any action, claim, proceeding, litigation or
investigation threatened or instituted by or against or
affecting Borrower (or any Subsidiary) in any court or before
any government authority, administrator or
Page 3 of 8
<PAGE> 5
agency which may materially and adversely affect Borrower's (or
any Subsidiary's) financial condition or business or Borrower's
ability to carry on its business in substantially the same
manner as it is now being conducted;
(d) UNINSURED OR PARTIALLY UNINSURED LOSS. Any uninsured or
partially uninsured loss through liability or property damage or
through fire, theft or any other cause affecting Borrower's (or
any Subsidiary's) property in excess of the aggregate amount
required hereunder;
(e) REPORTS MADE TO INSURANCE COMPANIES. Copies of all material
reports made to insurance companies; and
(f) ERISA. The occurrence and nature of any Reportable Event or
Prohibited Transaction, each as defined in ERISA, or any funding
deficiency with respect to any Plan.
4.3 BOOKS AND RECORDS. Maintain at Borrower's address books and records in
accordance with GAAP, and permit any representative of Trade Bank, at any
reasonable time, to inspect, audit and examine such books and records, to make
copies of them, and to inspect the properties of Borrower.
4.4 TAX RETURNS AND PAYMENTS. Timely file all tax returns and reports
required by foreign, federal, state and local law, and timely pay all foreign,
federal, state and local taxes, assessments, deposits and contributions owed by
Borrower. Borrower may, however, defer payment of any contested taxes, provided
that Borrower (i) in good faith contests Borrower's obligation to pay the taxes
by appropriate proceedings promptly instituted and diligently conducted, (ii)
notifies Trade Bank in writing of the commencement of, and any material
development in, the proceedings, (iii) posts bonds or takes any other steps
required to keep the contested taxes from becoming a lien upon any of the
Collateral, and (iv) makes provision, to Trade Bank's satisfaction, for eventual
payment of such taxes in the event Borrower is obligated to make such payment.
4.5 COMPLIANCE WITH LAWS. Comply in all material respects with the
provisions of all foreign, federal, state and local laws and regulations
relating to Borrower, including, but not limited to, those relating to
Borrower's ownership of real or personal property, the conduct and licensing of
Borrower's business, and health and environmental matters.
4.6 INSURANCE. Maintain and keep in force insurance of the types and in
amounts customarily carried in lines of business similar to that of Borrower,
including, but not limited to, fire, extended coverage, public liability, flood,
property damage and worker's compensation, with all such insurance to be in
amounts satisfactory to Trade Bank and to be carried with companies approved by
Trade Bank before such companies are retained, and deliver to Trade Bank from
time to time at Trade Bank's request schedules setting forth all insurance then
in effect. All insurance policies shall name Trade Bank as additional loss
payee, and shall contain a lender's loss payee endorsement in form reasonably
acceptable to Trade Bank. Upon Trade Bank's receipt of any insurance proceeds
pertaining to the Collateral, Trade Bank shall apply such proceeds to reduce the
outstanding funded Credit Extensions, and any remaining amounts after such
application may be held by Trade Bank as collateral for unfunded Credit
Extensions. All such proceeds (including any interest thereon) in excess of the
amounts required to reduce outstanding Credit Extensions and to collateralize
unfunded Credit Extensions shall be released by Trade Bank and remitted to
Borrower. Trade Bank shall have no obligation to Borrower or any creditor of
Borrower to determine which portion, if any, of such insurance proceeds belongs
to Borrower or any creditor of Borrower, other than Trade Bank. If an Event of
Default shall then exist and be continuing, Trade Bank shall be entitled to
apply all proceeds of insurance that Borrower may otherwise be entitled to
reduce the Credit Extensions and/or to collateralize unfunded Credit Extensions.
If Borrower fails to provide or pay for any insurance, Trade Bank may, but is
not obligated to, obtain the insurance at Borrower's expense.
4.7 FURTHER ASSURANCES. At Trade Bank's request and in form and substance
satisfactory to Trade Bank, execute all documents and take all such actions at
Borrower's expense as Trade Bank may deem reasonable necessary or useful to
perfect and maintain Trade Bank's perfected security interest in the Collateral
and in order to fully consummate all of the transactions contemplated by the
Loan Documents.
V. NEGATIVE COVENANTS
Borrower covenants that so long as Trade Bank remains committed to make any
Credit Extensions to Borrower and until all Obligations and Credit Extensions
have been paid, Borrower will not:
5.1 MERGE OR CONSOLIDATION, TRANSFER OF ASSETS. Merge into or consolidate
with any other entity; make any substantial change in the nature of Borrower's
business as conducted as of the date hereof; acquire all or substantially all of
the assets of any other entity; nor sell, lease, transfer or otherwise dispose
of all or a substantial or material portion of Borrower's assets except in the
ordinary course of its business.
5.2 LIENS. Except for Permitted Liens, mortgage, pledge, grant or permit to
exist a security interest in, or lien upon, all or any portion of Borrower's
assets now owned or hereafter acquired.
5.3 USE OF PROCEEDS. Borrower will not use the proceeds of any Credit
Extension except for the purposes, if any, specified for such Credit Extension
in the Supplement covering the Facility under which such Credit Extension is
made.
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<PAGE> 6
VI. EVENTS OF DEFAULT AND REMEDIES
6.1 EVENTS OF DEFAULT. The occurrence of any of the following
shall constitute and "Event of Default.":
(a) FAILURE TO MAKE PAYMENTS WHEN DUE. Borrower's failure to
pay principal, interest, fees or other amounts when due
under any Loan Document.
(b) FAILURE TO PERFORM OBLIGATIONS. Any failure by Borrower
to comply with any covenant or obligation in this
Agreement or in any Loan Document (other than those
referred to in subsection (a) above), and such default
shall continue for a period of twenty calendar days from
the earlier of (i) Borrowers failure to notify Trade
Bank of such Event of Default pursuant to Section 4.2(a)
above, or (ii) Trade Bank's notice to Borrower of such
Event of Default.
(c) UNTRUE OR MISLEADING WARRANTY OR STATEMENT. Any
warranty, representation, financial statement, report or
certificate made or delivered by Borrower under any Loan
Document is untrue or misleading in any material respect
when made or delivered.
(d) DEFAULTS UNDER OTHER LOAN DOCUMENTS. Any "Event of
Default" occurs under any other Loan Document;
any Guaranty is no longer in full force and effect
(or any claim thereof made by Guarantor) or any failure
of a Guarantor to comply with the provisions thereof; or
any breach of the provisions of any Subordination
Agreement or Intercreditor Agreement by any party other
than the Trade Bank.
(c) DEFAULTS UNDER OTHER AGREEMENTS OR INSTRUMENTS. Any
default in the payment or performance of any obligation,
or the occurrence of any event of default, under the terms
of any other agreement or instrument pursuant to which
Borrower, any Subsidiary or any Guarantor or general
partner of Borrower has incurred any debt or other material
liability to any person or entity.
(f) CONCEALING OR TRANSFERRING PROPERTY. Borrower conceals,
removes or transfers any part of its property with intent
to hinder, delay or defraud its creditors, or makes or
suffers any transfer of any of its property which may be
fraudulent under any bankruptcy, fraudulent conveyance or
similar law.
(g) JUDGEMENTS AND LEVIES AGAINST BORROWER. The filing of a
notice of judgement lien against Borrower, or the
recording of any abstract of judgement against Borrower,
in any county in which Borrower has an interest in
real property, or the service of a notice of levy and/or
of a writ of attachment or execution, or other like
process, against the assets of Borrower, or the entry of
a judgement against Borrower.
(h) EVENT OR CONDITION IMPAIRING PAYMENT OR PERFORMANCE. Any
event occurs or condition arises which Trade Bank in good
faith believes impairs or is substantially likely to
impair the prospect of payment or performance by Borrower
of the Obligations, including, but not limited to any
material adverse change in Borrower's financial condition,
business or prospects.
(i) VOLUNTARY INSOLVENCY. Borrower, any Subsidiary or any
Guarantor (i) becomes insolvent, (ii) suffers or consents
to or applies for the appointment of a receiver, trustee,
custodian or liquidator of itself or any of its property,
(iii) generally fails to pay its debts as they become due,
(iv) makes a general assignment for the benefit of
creditors, or (v) files a voluntary petition in bankruptcy,
or seeks reorganization, in order to effect a plan or
other arrangement with creditors or any other relief under
the Bankruptcy Reform Act, Title 11 of the United States
Code, as amended or recodified from time to time
("Bankruptcy Code"), or under any state or Federal
law granting relief to debtors, whether now or hereafter
in effect.
(j) INVOLUNTARY INSOLVENCY. Any involuntary petition or
proceeding pursuant to the Bankruptcy Code or any other
applicable state or federal law relating to bankruptcy,
reorganization or other relief for debtors is filed or
commenced against Borrower, any Subsidiary or Guarantor,
or (b) have an order for relief entered against it by any
court of competent jurisdiction under the Bankruptcy Code
or any other applicable state or federal law relating to
bankruptcy, reorganization or other relief for debtors.
(k) CHANGE IN OWNERSHIP. Any change in the ownership of
Borrower, any general partner of Borrower or any Guarantor
which the Trade Bank determines, in its sole discretion,
may adversely affect the creditworthiness of Borrower or
credit support for the Obligations.
6.2 REMEDIES. Upon the occurrence of any Event of Default, or at any
time thereafter, Trade Bank, at its option, and without notice or demand of any
kind (all of which are hereby expressly waived by Borrower), may do any one or
more of the following: (a) terminate Trade Bank's obligation to make Credit
Extensions or to make available to Borrower the Facilities or other financial
accommodations; (b) accelerate and declare all or any part of the Obligations
to be immediately due, payable, and performable, notwithstanding any deferred
or installment payments allowed by any instrument evidencing or relating to any
Credit
Page 5 of 8
<PAGE> 7
Extension; and/or (c) exercise all its rights, powers and remedies available
under the Loan Documents, or accorded by law, including, but not limited to,
the right to resort to any or all Collateral or other security for any of the
Obligations and to exercise any or all of the rights of a beneficiary or
secured party pursuant to applicable law. Notwithstanding the provisions in
the foregoing sentence, if an Event of Default set out in subsections (i) and
(j) of Section 6.1 above shall occur, then all the remedies specified in the
preceding sentence shall automatically take effect without notice or demand of
any kind (all of which are hereby expressly waived by Borrower) with respect to
any and all Obligations which are not supported by an Eximbank guarantee or are
not insured by Eximbank. All rights, powers and remedies of Trade Bank may be
exercised at any time by Trade Bank and from time to time after the occurrence
of an Event of Default, are cumulative and not exclusive, and shall be in
addition to any other rights, powers or remedies provided by law or equity.
VII. GENERAL PROVISIONS
7.1 NOTICES. All notices to be given under this Agreement shall be
in writing and shall be given personally or by regular first-class mail, by
certified mail return receipt requested, by a private delivery service which
obtains a signed receipt, or by facsimile transmission addressed to Trade Bank
or Borrower at the address indicated after their signature to this Agreement,
or at any other address designated in writing by one party to the other party.
Trade Bank is hereby authorized by Borrower to act on such instructions or
notices sent by facsimile transmission or telecommunications device which Trade
Bank believes come from Borrower. All notices shall be deemed to have been
given upon delivery, in the case of notices personally delivered or delivered
by private delivery service, upon the expiration of 3 calendar days following
the deposit of the notices in the United States mail, in the case of notices
deposited in the United States mail with postage prepaid, or upon receipt, in
the case of notices sent by facsimile transmission.
7.2 WAIVERS. No delay or failure of Trade Bank in exercising any
right, power or remedy under any of the Loan Documents shall affect or operate
as a waiver of such right, power or remedy; nor shall any single or partial
exercise of any such right, power or remedy preclude, waive or otherwise
affect any other or further exercise thereof or the exercise of any other right,
power or remedy. Any waiver, consent or approval by Trade Bank under any of
the Loan Documents must be in writing and shall be effective only to the extent
set out in such writing.
7.3 BENEFIT OF AGREEMENT. The provisions of the Loan Documents
shall be binding upon and inure to the benefit of the respective successors,
assigns, heirs, executors, administrators, beneficiaries and legal
representatives of Borrower and Trade Bank; provided, however, that Borrower may
not assign or transfer any of its rights under any Loan Document without the
prior written consent of Trade Bank, and any prohibited assignment shall be
void. No consent by Trade Bank to any assignment shall release Borrower from
its liability for the Obligations unless such release is specifically given by
Trade Bank to Borrower in writing. Trade Bank reserves the right to sell,
assign, transfer, negotiate or grant participations in all or any part of, or
any interest in, Trade Bank's rights and benefits under each of the Loan
Documents. In connection therewith, Trade Bank may disclose any information
relating to the Facilities, Borrower or its business, or any Guarantor or its
business.
7.4 JOINT AND SEVERAL LIABILITY. If Borrower consists of more
than one person or entity, the liability of each of them shall be joint and
several, and the compromise of any claim with, or the release of, any one such
Borrower shall not constitute a compromise with, or a release of, any other
such Borrower.
7.5 NO THIRD PARTY BENEFICIARIES. This Agreement is made and
entered into for the sole protection and benefit of Borrower and Trade Bank and
their respective permitted successors and assigns, and no other person or
entity shall be a third party beneficiary of, or have any direct or indirect
cause of action or claim in connection with, any of the Loan Documents to which
it is not a party.
7.6 GOVERNING LAW AND JURISDICTION. This Agreement shall, unless
provided differently in any Loan Document, be governed by, and be construed in
accordance with, the internal laws of the State of California, except to the
extent Trade Bank has greater rights or remedies under federal law whether as a
national bank or otherwise. Borrower and Trade Bank (a) agree that all actions
and proceedings relating directly or indirectly to this Agreement shall be
litigated in courts located within California; (b) consent to the jurisdiction
of any such court and consent to service of process in any such action or
proceeding by personal delivery or any other method permitted by law; and (c)
waive any and all rights Borrower may have to object to the jurisdiction of any
such court or to transfer or change the venue of any such action or proceeding.
7.7 MUTUAL WAIVER OF JURY TRIAL. Borrower and Trade Bank each
hereby waive the right to trial by jury in any action or proceeding based upon,
arising out of, or in any way relating to, (a) any Loan Document, (b) any other
present or future agreement, instrument or document between Trade Bank and
Borrower, or (c) any conduct, act or omission of Trade Bank or Borrower or any
of their directors, officers, employees, agents, attorneys or any other persons
or entities affiliated with Trade Bank or Borrower, which waiver will apply in
all of the mentioned cases whether the case is a contract or tort case or any
other case. Borrower represents and warrants that no officer, representative
or agent of Trade Bank has represented, expressly or otherwise, that Trade Bank
would not seek to enforce this waiver of jury trial.
7.8 SEVERABILITY. Should any provision of any Loan Document be
prohibited by, or invalid under applicable law, or held by any court of
competent jurisdiction to be void or unenforceable, such defect shall not
affect, the validity of the other provisions of the Loan Documents.
7.9 ENTIRE AGREEMENT AMENDMENTS. This Agreement and the other
Loan Documents are the final, entire and complete agreement between Borrower
and Trade Bank concerning the Credit Extensions and Facilities; supersede all
prior and
Page 6 of 8
<PAGE> 8
contemporaneous negotiations and oral representations and agreements. There
are no oral understandings, representations or agreements between the parties
concerning the Credit Extensions or the Facilities which are not set forth in
the Loan Documents. This Agreement and the Supplements may not be waived,
amended or superseded except in a writing executed by Borrower and Trade Bank.
7.10 COLLECTION OF PAYMENTS. Unless otherwise specified in any Loan
Document, other than this Agreement or any Note, all principal, interest and
any fees due to Trade Bank by Borrower under this Agreement, any Addendum, any
Supplement, any Facility Document, any Collateral Document or any Note, will be
paid by Trade Bank having Wells Fargo debit any of Borrower's accounts with
Wells Fargo and forwarding such amount debited to Trade Bank, without
presentment, protest, demand for reimbursement or payment, notice of dishonor
or any other notice whatsoever, all of which are hereby expressly waived by
Borrower. Such debit will be made at the time principal, interest or any fee
is due to Trade Bank pursuant to this Agreement, any Addendum, any Supplement,
any Facility Document, any Collateral Document or any Note.
7.11 COSTS, EXPENSES AND ATTORNEYS' FEES. Borrower will reimburse
Trade Bank for all costs and expenses in connection with field audits or
collateral examinations and property appraisal reports as may be deemed
necessary to Trade Bank in its sole discretion, the preparation, execution,
delivery, filing, recording, analysis, amending and administration of any of
the Loan Documents, including reasonable attorneys' fees (to include outside
counsel fees and all allocated costs of Trade Bank's in-house counsel),
incurred by Trade Bank in exercising any right, power, privilege or remedy
conferred by this Agreement or in the enforcement thereof, including any of the
foregoing incurred in connection with any bankruptcy proceeding relating to
Borrower or the valuation of the Collateral and/or Proceeds, including without
limitation, the seeking of relief from or modification of the automatic stay or
the negotiation and drafting of a cash collateral order. All of the foregoing
shall be paid by Borrower with interest at a rate per annum equal to the
greater of ten percent (10%) or the Prime Rate in effect from time to time.
The "Prime Rate" is a base rate that Wells Fargo Bank, N.A. from time to time
establishes and which serves as the basis upon which effective rates of
interest are calculated for those loans making reference thereto. Borrower's
failure to pay costs, fees and expenses incurred, within 30 days from Trade
Bank's demand, will cause such costs, fees and expenses to be added to
principal of the loan and will bear interest thereafter until paid at the rate
stated above.
VIII. DEFINITIONS
8.1 "AGREEMENT" means this Agreement and the Addendum attached
hereto, as corrected or modified from time to time by Trade Bank and Borrower.
8.2 "BANKING DAY" means each day except Saturday, Sunday and a day
specified as a holiday by federal or California statute.
8.3 "CLOSING DATE" means the date on which the first Credit
Extension is made.
8.4 "COLLATERAL" means all property securing the Obligations.
8.5 "COLLATERAL DOCUMENTS" means those security agreement(s),
deed(s) of trust, guarantee(s), subordination agreement(s), intercreditor
agreement(s), and other credit support documents and instruments required by
the Trade Bank to effect the collateral and credit support requirements set
forth in the Supplement with respect to the Facilities.
8.6 "CREDIT EXTENSION" means each extension of credit under the
Facilities (whether funded or unfunded), including, but not limited to, (a) the
issuance of sight or usance commercial letters of credit supported by back-up
letters of credit, (b) the issuance of standby letters of credit, (c) the
issuance of shipping guarantees, (d) the making of loans against imports for
letters of credit, (d) the making of clean import loans outside letters of
credit; (e) the making of advances against export orders, (f) the making of
advances against outgoing collections; (g) the making of revolving credit
working capital loans, (h) the making of term loans, (i) the discounting of
drafts or foreign receivables with recourse, (j) the discounting or purchasing
of promissory notes with recourse to Borrower, and (k) the entry into foreign
exchange contracts.
8.7 "CREDIT LIMIT" means, with respect to any Facility, the amount
specified under the column labeled "Credit Limit" in the Supplement for that
Facility.
8.8 "CREDIT SUBLIMIT" means, with respect to any Subfacility, the
amount specified after the name of that Subfacility under the column labeled
"Credit Sublimit" in the Supplement for the related Facility.
8.9 "DOLLARS" and "S" means United States dollars.
8.10 "EXIMBANK" means the Export-Import Bank of the United States.
8.11 "FACILITY DOCUMENTS" means, with respect to any Facility, those
documents specified in the Supplement for that Facility, and any other
documents customarily required by Trade Bank for such Facility.
8.12 "FACILITY TERMINATION DATE" means, with respect to any
Facility, the date specified in the Supplement for that Facility after which no
further Credit Extensions will be made under that Facility.
8.13 "GAAP" means generally accepted accounting principles, which
are applicable to the circumstances, as of the date of determination, set out in
the opinions and pronouncements of the Accounting Principles Board and the
America Institute of Certified Public Accountants and in the statements and
pronouncements of the Financial Accounting Standards Board or in such other
statements by such other entity as may be approved by a significant segment of
the accounting profession.
Page 7 of 8
<PAGE> 9
8.14 "LOAN DOCUMENTS" means this Agreement, the Addenda, the
Supplements, the Facility Documents and the Collateral Documents.
8.15 "NOTE" has the meaning specified in Section 3.1(b)(2) above.
8.16 "OBLIGATIONS" means (a) the obligation of Borrower to pay
principal, interest and fees on all funded Credit Extensions and fees on all
unfunded Credit Extensions, and (b) the obligation of Borrower to pay and
perform when due all other indebtedness, liabilities, obligations and covenants
required under the Loan Documents.
8.17 "PERMITTED LIENS" shall have the meaning provided in the
Addendum.
8.18 "PERSON" means and includes natural persons, corporations,
limited partnerships, general partnerships, joint stock companies, joint
ventures, associations, companies, trusts, banks, trust companies, land trusts,
business trusts or other organizations, whether or not legal entities, and
governments and agencies and political subdivisions thereof.
8.19 "PRIME RATE" means the rate most recently announced by Wells
Fargo at its principal office in San Francisco, California as its "PRIME RATE",
with the understanding that the Prime Rate is one of Wells Fargo's base rates
and serves as the basis upon which effective cases of interest are calculated
for those loans making reference thereto, and is evidenced by the recording
thereof after its announcement in such internal publication or publications as
Wells Fargo may designate. Any change in an interest rate resulting from a
change in the Prime Rate shall become effective as of 12:01 a.m. of the Banking
Day on which each change in the Prime Rate is announced by Wells Fargo.
8.20 "SUBSIDIARY" means (i) any corporation at least the majority of
whose securities having ordinary voting power for the election of directors
(other than securities having such power only by reason of the happening of a
contingency) are at the time owned by Borrower and/or one or more Subsidiaries,
and (ii) any joint venture or partnership in which Borrower and/or one or more
Subsidiaries has a majority interest.
8.21 "WELLS FARGO" means Wells Fargo Bank, N.A.
Borrower and Trade Bank have caused this Agreement to be executed by
their duly authorized officers or representatives on the date specified below.
"BORROWER"
JALATE LIMITED, INC.
By: [SIG]
--------------------------
Title: V.P. Finance & C.F.O.
--------------------------
Borrower's Address:
------------------
1675 South Alameda Street
Los Angeles, CA 90021
"LENDER"
WELLS FARGO HSBC TRADE BANK,
NATIONAL ASSOCIATION
By: [SIG]
-----------------------------
John Cobus
Title: Assistant Vice President
Lender's Address:
----------------
333 South Grand Avenue, 3rd Floor
Los Angeles, CA 90071
Page 8 of 8
<PAGE> 10
EXHIBIT A
WELLS FARGO HSBC TRADE BANK ADDENDUM TO CREDIT AGREEMENT
===============================================================================
THIS ADDENDUM IS ATTACHED TO THE CREDIT AGREEMENT ("CREDIT AGREEMENT") BETWEEN
WELLS FARGO HSBC TRADE BANK AND THE FOLLOWING BORROWER:
NAME OF BORROWER: JALATE LIMITED, INC.
ADDITIONAL AFFIRMATIVE COVENANTS
The following covenants are part of Article IV of the Credit Agreement:
REPORTS. Borrower will furnish the following information or deliver the
following reports to Trade Bank at the times indicated below:
- - ANNUAL FINANCIAL STATEMENTS. Not later than 90 calendar days after and
as of the end of each of Borrower's fiscal years, an annual audited financial
statement of Borrower prepared by a certified public accountant acceptable to
Trade Bank and prepared in accordance with GAAP, to include balance sheet,
income statement, statement of cash flow, and source and application of funds
statement.
- - ANNUAL FORM 10-K STATEMENTS. Not later than 90 calendar days after and
as of the end of each of Borrower's fiscal years, a 10-K Statement.
- - QUARTERLY FORM 10-Q STATEMENTS. Not later than 60 calendar days after
and as of the end of each of Borrower's fiscal quarters, a 10-Q Statement.
- - monthly FINANCIAL STATEMENTS. Not later than 30 calendar days after
and as of the end of each calendar month, a financial statement of Borrower
prepared by Borrower, to include balance sheet and income statement.
CERTIFICATE OF ACCURACY AND NO EVENT OF DEFAULT. At the time
each financial statement of Borrower required above is delivered to Trade Bank,
a certificate of the president or chief financial officer of Borrower that said
financial statements are accurate and that there exists no Event of Default
under the Agreement nor any condition, act or event which with the giving of
notice or the passage of time or both would constitute an Event of Default.
- - INVENTORY LIST: Not later than 30 calendar days after and as of the
end of each of Borrower's fiscal quarters, an inventory report showing the
types, locations and unit or dollar values of all the inventory collateral,
starting 12/31/96.
- - INSURANCE: Borrower will maintain in full force and effect insurance
coverage on all Borrower's property, including, but not limited to, the
following types of insurance coverage:
policies of fire insurance
marine cargo insurance
business personal property insurance
All the insurance referred to in the preceding sentence must be in
form, substance and amounts, and issued by companies, satisfactory to Trade
Bank, and cover risks required by Trade Bank and contain loss payable
endorsements in favor of Trade Bank.
FINANCIAL COVENANTS. Borrower will maintain the following (if Borrower has any
Subsidiaries which must be consolidated under GAAP, the following applies to
borrower and the consolidated Subsidiaries):
- - CURRENT RATIO. Not at any time less than 1.5 to 1.0 ("CURRENT RATIO"
means total current assets divided by total current liabilities, and "CURRENT
ASSETS" and "CURRENT LIABILITIES" have the meanings given to them in accordance
with GAAP; provided, however, that "current liabilities" will include
indebtedness which is subordinated to the Obligations to Trade Bank under a
subordination agreement in form and substance acceptable to Trade Bank or by
subordination language acceptable to Trade Bank in the instrument evidencing
such indebtedness.)
- - WORKING CAPITAL. Not at any time less than $3,500,000. ("WORKING
CAPITAL" means total current assets minus total current liabilities; provided,
however, that "current liabilities" will include indebtedness which is
subordinated to the Obligations to Trade Bank under a subordination agreement
in form and substance acceptable to Trade Bank or by subordination language
acceptable to Trade Bank in the instrument evidencing such
indebtedness.)
- - TANGIBLE NET WORTH. Not at any time less than $4,750,000. ("TANGIBLE
NET WORTH" means the excess of total assets over total liabilities determined
in accordance with GAAP, (a) excluding, however, in determining total assets
(i) all assets which would be classified as intangible assets under GAAP,
including, but not limited to, goodwill, licenses, patents, trademarks, trade
names, copyrights, capitalized software and organizational costs, licenses and
franchises, and (ii) assets which Trade Bank determines in its business
judgment would not be available or would be of relatively small value in a
liquidation of Borrower's business,
Page 1 of 2
<PAGE> 11
including, but not limited to, prepaid expenses, loans to officers or
affiliates and other items, and (b) including, in determining total
liabilities, indebtedness which is subordinated to the Obligations to
Trade Bank.)
- - TOTAL LIABILITIES DIVIDED BY TANGIBLE NET WORTH. Not at any time
greater than 1.25 to 1.0. ("Tangible Net Worth" has the meaning given
to it above, and "Total Liabilities" includes indebtedness which is
subordinated to the Obligations to Trade Bank under a subordination
agreement in form and substance acceptable to Trade Bank or by
subordination language acceptable to Trade Bank in the instrument
evidencing such indebtedness.)
- - QUARTERLY PRE-TAX PROFIT. Not less than $1.00 on a quarterly basis
(determined as of each 1st, 2nd and 3rd fiscal quarter end).
- - ANNUAL PRE-TAX PROFIT. Not less than $1.00 on an annual basis
(determined for a full 12-month period).
ADDITIONAL NEGATIVE COVENANTS
The following covenants are part of Article V of the Credit Agreement (Borrower
shall also cause any Subsidiary to comply with the following covenants):
- - USE OF PROCEEDS. Borrower will not use the proceeds of any Credit
Extension except for the purposes, if any, specified for such Credit
Extension in the Supplement covering the Facility under which such
Credit Extension is made.
- - LIENS. Borrower will not create or permit any liens, charges, security
interests, encumbrances or adverse claims with respect to any of its
property or other assets except for the following "PERMITTED LIENS":
purchase money security interests in specific items of Borrower's
equipment;
leases of specific items of Borrower's equipment;
liens for Borrower's taxes not yet payable;
additional security interests and liens consented to in writing by
Trade Bank in its sole discretion;
Congress Talcott Corporation (Western) lien on Borrower's accounts
receivable;
- - ACQUISITIONS OF ASSETS. Borrower will not acquire any assets or enter
into any other transaction outside the ordinary course of Borrower's
business.
- - LOANS AND INVESTMENTS. Borrower will not make any loans or advances to,
or investments in, any person or entity except for accounts receivable
created in the ordinary course of Borrower's business.
- - INDEBTEDNESS FOR BORROWED MONEY. Borrower will not incur any
indebtedness for borrowed money, except to Trade Bank and except for
indebtedness subordinated to the Obligations by an instrument or
agreement in form acceptable to Trade Bank, and to Congress Talcott
Corporation (Western).
- - GUARANTEES. Borrower will not guarantee or otherwise become liable
with respect to the obligations of any other person or entity, except
for endorsement of instruments for deposit into Borrower's account in
the ordinary course of Borrower's business.
- - DIVIDENDS AND DISTRIBUTIONS OF CAPITAL OF CORPORATION. If Borrower is a
corporation, Borrower will not pay or declare any dividends or make any
distribution of capital on Borrower's stock (except for dividends
payable solely in stock of Borrower).
- - STOCK REDEMPTIONS. Borrower will not redeem, retire, purchase or
otherwise acquire, directly or indirectly, any of Borrower's stock.
- - INVESTMENTS IN, OR ACQUISITIONS OF, SUBSIDIARIES. Borrower will not
make any investments in, or form or acquire, any subsidiaries.
- - CAPITAL EXPENDITURES. Borrower shall not, without the prior written
consent of Trade Bank, make any capital expenditures in any fiscal year,
in excess of $250,000.
- - COMPENSATION. Borrower will not, without the prior written consent of
Trade Bank, pay, accrue or obligate itself to pay, directly or
indirectly, any salaries, bonuses or other compensation or fees to its
officers, directors, shareholders or partners, or any members of their
immediate families, in excess of $2,500,000.
BY SIGNING HERE BORROWER AGREES TO THE DESIGNATED PROVISIONS IN THIS ADDENDUM:
[SIG]
---------------------------------------
(SIGNATURE)
PAGE 2 OF 2
<PAGE> 12
EXHIBIT B
WELLS FARGO HSBC TRADE BANK SIGHT COMMERCIAL LETTERS OF CREDIT SUPPLEMENT
===============================================================================
THIS SUPPLEMENT IS AN INTEGRAL PART OF THE CREDIT AGREEMENT BETWEEN WELLS FARGO
HSBC TRADE BANK AND THE FOLLOWING BORROWER:
NAME OF BORROWER: JALATE LIMITED, INC.
FACILITY TERMINATION DATE: MAY 31, 1997
CREDIT LIMIT FOR THIS SIGHT COMMERCIAL CREDITS FACILITY AND SUBLIMITS: CREDIT
LIMIT: $6,000,000
CREDIT SUBLIMITS
---------------------------
- - GOODS CONSIGNED TO, OR CONTROLLED BY, TRADE BANK $6,000,000
THE AGGREGATE AMOUNT OF CREDIT EXTENSIONS OUTSTANDING UNDER THIS FACILITY AND
THE FOLLOWING OTHER FACILITIES MAY NOT AT ANY ONE TIME EXCEED $6,000,000:
1. LOANS UNDER THE LOANS AGAINST IMPORTS FOR L/C REIMBURSEMENTS SUPPLEMENT
2. GUARANTEES UNDER THE SHIPPING GUARANTEES SUPPLEMENT
FACILITY DESCRIPTION:
Trade Bank will issue sight commercial letters of credit (each a "Sight
Commercial Credit") for the account of Borrower as indicated under the heading
"Facility Purpose" below. Subject to the credit sublimits specified above,
these Sight Commercial Credits will be transferable or not transferable and have
the goods related to them consigned to or not consigned to, or controlled by or
not controlled by, Trade Bank. The Facility Credit Limit specified above refers
to the aggregate undrawn amount of all Sight Commercial Credits which may be at
any one time outstanding under this Facility together with the aggregate amount
of drafts drawn under such Sight Commercial Credits which have not been
reimbursed as provided below at such time. The Facility Credit Sublimits
specified above refer to the aggregate undrawn amount of all Sight Commercial
Credits which may be at any one time outstanding under each subcategory under
this Facility together with the aggregate amount of all drafts drawn under such
Sight Commercial Credits which have not been reimbursed as provided below at
such time.
FACILITY PURPOSE: The Facility may only be used for the following purpose(s):
To assist Borrower in its business of importing, manufacturing and wholesaling
of women's and children's apparel.
FACILITY DOCUMENTS:
BEFORE THE FIRST SIGHT COMMERCIAL CREDIT IS ISSUED:
Trade Bank's standard form Continuing Commercial Letter of Credit
Agreement (Form TB 020)
BEFORE EACH SIGHT COMMERCIAL CREDIT IS ISSUED:
Trade Bank's standard form Application For Commercial Letter of Credit
(Form TB 002)
BEFORE EACH SIGHT COMMERCIAL CREDIT IS AMENDED:
Trade Bank's standard form Application For Amendment To Letter of
Credit (Form TB 010)
SUBFACILITY DOCUMENTS:
- - GOODS CONSIGNED TO, OR CONTROLLED BY, TRADE BANK: See Exhibit C-
Collateral/Credit Support Document.
TERM: No Sight Commercial Credit may expire more than 120 calendar days after
the date it is issued.
REIMBURSEMENTS FOR DRAWINGS:
The amount of each drawing paid by Trade Bank under a Sight Commercial Credit
will be reimbursed to Trade Bank as follows:
- - By Trade Bank having Wells Fargo Bank, N.A. debit any of Borrower's
accounts with Wells Fargo Bank, N.A. and forwarding such amount debited
to Trade Bank.
- - Immediately on demand of Trade Bank.
- - By treating such amount drawn as an advance to Borrower to be repaid at
the end of any term specified by Trade Bank to Borrower in writing.
Page 1 of 2
<PAGE> 13
FEES: The following fees will apply to the Sight Commercial Credits:
- - FACILITY FEE: Borrower will pay the following Facility Fee to Trade
Bank before this Facility is made available to Borrower: $7,500.
- - FACILITY FEES/FEES FOR INCREASING CREDIT AMOUNTS OR EXTENDING EXPIRATION
DATES: (Minimum $50) 1/8 of 1% per annum for every 120-day period or
fraction thereof of the term of each Sight Commercial Credit on the
amount of each Sight Commercial Credit and of any increase in such
amount.
PAYABLE: At the time each Sight Commercial Credit is issued or
increased and at the time the expiration date of any Sight Commercial
Credit is extended.
- - AMENDMENT FEES: (Minimum $50)
$50 for each amendment, unless the amendment is an increase in the Sight
Commercial Credit amount or an extension of the expiration date, in
which case the Issuance Fee above will substitute for any Amendment Fee.
PAYABLE: At the time each amendment is issued.
- - NEGOTIATION/PAYMENT/EXAMINATION FEES: (Minimum $75) 1/8 of 1% of the
face amount of each drawing under each Sight Commercial Credit.
PAYABLE: At the time any draft or other documents are negotiated, paid
or examined.
INTEREST RATE:
All drawings under Sight Commercial Credits not reimbursed on the day they are
paid by Trade Bank will bear interest at the following rate from the date they
are paid by Trade Bank to the date such payment is fully reimbursed;
- - PRIME RATE: The Prime Rate plus 5% per annum.
- - INTEREST PAYMENT DATES: Interest on unreimbursed drawings under Sight
Commercial Credits will be paid on the date the unreimbursed drawing is
fully reimbursed.
COLLATERAL/CREDIT SUPPORT DOCUMENTS: See Exhibit C - Collateral/Credit
Support Document.
BY INITIALING HERE BORROWER AGREES TO ALL THE TERMS OF THIS SUPPLEMENT:_________
Page 2 of 2
<PAGE> 14
EXHIBIT B
LOANS AGAINST IMPORTS
WELLS FARGO HSBC TRADE BANK FOR LETTER OF CREDIT REIMBURSEMENT SUPPLEMENT
- ------------------------------------------------------------------------------
THIS SUPPLEMENT IS AN INTEGRAL PART OF THE CREDIT AGREEMENT BETWEEN WELLS
FARGO HSBC TRADE BANK AND THE FOLLOWING BORROWER:
NAME OF BORROWER: Jalate Limited, Inc.
FACILITY TERMINATION DATE: May 31, 1997
CREDIT LIMIT FOR THIS LOANS AGAINST IMPORTS FACILITY AND SUBLIMITS: Credit
Limit: $2,000,000
Credit Sublimits
-------------------------------
- - Supported by Guarantee or Insurance or
Other Collateral $2,000,000
Floating Interest Rate
No Borrowing Base
The aggregate amount Credit Extensions outstanding under this Facility and the
following other Facilities may not at any one time exceed $2,000,000:
1. Guarantees under the Shipping Guarantees Supplement
FACILITY DESCRIPTION
Trade Bank will make loans to Borrower solely for the purpose of financing
Borrower's obligations to reimburse Trade Bank for amounts paid by Trade Bank
under sight and usance Commercial Credits issued by Trade Bank for the account
of Borrower in connection with Borrower's imports. Loans made by Trade Bank
under this Facility cannot be used by Borrower to repay outstanding clean
import loans that have matured. Subject to the credit sublimits specified
above, these loans may be supported by (i) a standby letter of credit in favor
of Trade Bank or (ii) a guarantee or other collateral.
FACILITY DOCUMENTS: Promissory Note
SubFacility Documents:
- - Supported by Accounts Receivable, Inventory or Other Collateral:
See Exhibit C - Collateral/Credit Support Document.
TERM: Each loan made under this Facility must be repaid within 60 calendar
days after it is made.
FEES: The following fees will apply to this Facility:
- - FACILITY FEE: Borrower will pay the following Facility Fee to Trade
Bank before this Facility is made available to Borrower: $7,500.
INTEREST RATE: All advances under this Facility will bear interest at the
following rate:
Prime Rate Provisions: So long as Borrower's Tangible New Worth (as defined in
Exhibit A Addendum to Credit Agreement), as reported in Borrower's current
monthly financial statement as required in Exhibit A, Addendum to Credit
Agreement, is less than $6,250,000, all loans made under this Facility shall
bear interest per annum at the Prime Rate plus 0.75% effective as of the date of
Borrower's current monthly financial statement. If at any time prior to the
Facility Termination Date (as defined above), Borrower's Tangible Net Worth, as
reported in Borrower's monthly financial statement, is $6,250,000 or more, but
less than $7,000,000, all loans made under this Facility shall bear interest per
annum at the Prime Rate plus 0.50%, effective as of the date of Borrower's
current monthly financial statement. If at any time prior to the Facility
Termination Date, Borrower's Tangible Net Worth is equal to or greater that
$7,000,000, all loans made under this Facility shall bear interest per annum at
the Prime Rate plus 0.25%. All adjustments to the interest rate applicable to
the Advances pursuant to the foregoing shall take effect as of the date of the
financial statement entitling Borrower to such adjustment. Notwithstanding the
foregoing, Borrower acknowledges and agrees that no adjustment in the interest
rate shall become effective if any Event of Default (after giving effect to any
available grace and/or cure periods) exists as of the date of the delivery of
the financial statements entitling Borrower to such adjustment, and such
adjustment shall be suspended and shall only become effective when Borrower
shall have cured such Event of Default to Trade Bank's satisfaction, or Trade
Bank shall have permanently waived such Event of Default. Notwithstanding any
of the foregoing, any overdue payments of principal (and interest to the extent
permitted by law) shall bear interest at a per annum floating rate equal to the
Prime Rate plus 5.0%.
Interest Payment Dates: Interest on the outstanding advances under this
Facility will be paid at the maturity of each advance.
PREPAYMENTS: Prepayments of the outstanding loans under this Facility are
permitted in any amounts.
COLLATERAL/CREDIT SUPPORT DOCUMENTS: See Exhibit C- Collateral/Credit Support
Document.
BY INITIALING HERE BORROWER AGREES TO ALL THE TERMS OF THIS SUPPLEMENT:
Page 1 of 1
<PAGE> 15
EXHIBIT B
WELLS FARGO HSBC TRADE BANK SHIPPING GUARANTEES SUPPLEMENT
- ----------------------------------------------------------------------------
THIS SUPPLEMENT IS AN INTEGRAL PART OF THE CREDIT AGREEMENT BETWEEN WELLS FARGO
HSBC TRADE BANK AND THE FOLLOWING BORROWER:
NAME OF BORROWER: Jalate Limited, Inc.
FACILITY TERMINATION DATE: May 31, 1997
CREDIT LIMIT FOR THIS SHIPPING GUARANTEES FACILITY AND SUBLIMITS: Credit
Limit: $500,000
CREDIT SUBLIMITS
-------------------------------
- - SHIPPING GUARANTEE FACILITY $500,000
The aggregate amount Credit Extensions outstanding under this Facility and the
following other Facilities may not at any one time exceed $2,000,000.
1. Loans under the Loans Against Imports for L/C Reimbursements Supplement
FACILITY DESCRIPTION AND PURPOSE:
Trade Bank will issue shipping guarantees for the account of Borrower. These
shipping guarantees will be undertakings for delivery of cargo without surrender
of bills of lading, or any other undertakings, agreements, guarantees,
indemnities, releases, bonds, letters, documents or authorizations to or in
favor of a carrier or other person or entity in order to permit delivery to
Borrower of property. The Credit Limit specified above for this Facility refers
to the aggregate amount of all shipping guarantees which may be outstanding at
any one time.
FACILITY DOCUMENTS:
Indemnity For Undertakings In Connection With Deliveries of Goods or Issuance
of Duplicate Bills of Lading.
TERM:
No shipping guarantee issued by Trade Bank for Borrower will expire more than
90 calendar days after the date it is issued.
REIMBURSEMENTS FOR PAYMENTS UNDER GUARANTEES:
The amount of each payment made by Trade Bank under shipping guarantees issued
by Trade Bank for Borrower will be reimbursed to Trade Bank as follows:
- - By Trade Bank having Wells Fargo Bank, N.A. debit any of Borrower's accounts
with Wells Fargo Bank, N.A. and forwarding such amount debited to Trade Bank.
- - Immediately on demand of Trade Bank.
- - By treating such amount drawn as an advance to Borrower to be repaid at the
end of any term specified by Trade Bank to Borrower in writing.
FEES: The following fees will apply to this Facility and the issuance of each
shipping guarantee:
- - Facility Fee: Borrower will pay the following Facility Fee to Trade Bank
before this Facility is made available to Borrower: $7,500.
- - Issuance Fee: (Minimum $75).
Payable: At the time each shipping guarantee is issued.
INTEREST RATE:
All payments made by Trade Bank under shipping guarantees issued for Borrower
which are not reimbursed on the day they are made by Trade Bank will bear
interest at the following rate from the date they are made to the date such
payment is fully reimbursed:
- - Prime Rate: The Prime Rate plus 5% per annum.
PAGE 1 OF 2
<PAGE> 16
- - Interest Payment Dates: Interest on payments made by Trade Bank under this
Facility which are not reimbursed on the day the are made will be paid on the
date the payment is fully reimbursed.
PREPAYMENTS: Permitted in any amounts.
COLLATERAL/CREDIT SUPPORT DOCUMENTS: See Exhibit C - Collateral/Credit Support
Document.
BY INITIALING HERE BORROWER AGREES TO ALL THE TERMS OF THIS SUPPLEMENT:_______
Page 2 of 2
<PAGE> 17
EXHIBIT C
WELLS FARGO HSBC TRADE BANK COLLATERAL/CREDIT SUPPORT DOCUMENT
==============================================================================
* PERSONAL PROPERTY SECURITY FROM BORROWER:
First priority lien in the following assets of Borrower:
inventory
Second priority lien in the following assets of Borrower:
accounts receivable
COLLATERAL DOCUMENTS:
Security Agreement: Rights to Payment and Inventory
UCC-1 Financing Statement
UCC-3 Search
* INTERCREDITOR AGREEMENT: The creditor or creditors named below under
the heading "Collateral Documents" will enter into an intercreditor
arrangement with Trade Bank with respect to the Obligations under this
Facility.
COLLATERAL DOCUMENTS:
Intercreditor Agreement with Congress Talcott Corporation
(Western).
BY INITIALING HERE BORROWER AGREES TO ALL THE TERMS OF THE EXHIBIT:___________
Page 1 of 1
<PAGE> 1
FIRST AMENDMENT TO CREDIT AGREEMENT
THIS FIRST AMENDMENT TO CREDIT AGREEMENT (this "Amendment"), is entered
into as of November 30, 1996, by and between JALATE LIMITED, INC.,
("Borrower"), and WELLS FARGO HSBC TRADE BANK, N.A. ("Bank").
RECITALS
WHEREAS, Borrower is currently indebted to Bank pursuant to the terms
and conditions of certain Credit Agreement dated as of June 1, 1996 (the
"Agreement").
WHEREAS, Bank and Borrower have agreed to certain changes in the terms
and conditions set forth in the Agreement and have agreed to amend the
Agreement to reflect said changes.
NOW THEREFORE, for valuable consideration, the receipt and sufficiency
of which are hereby acknowledged, the parties hereto agree that the Agreement
shall be amended as follows:
I. EXHIBIT A, ADDENDUM TO CREDIT AGREEMENT, shall be
amended by:
A. deleting in its entirety the section "CAPITAL
EXPENDITURES", under ADDITIONAL NEGATIVE COVENANTS on Page 2 of 2, and by
substituting the following therefor:
* "CAPITAL EXPENDITURES. Borrower shall not, without the prior
written consent of Trade Bank, make any capital expenditures
in any fiscal year, in excess of $750,000."
Except as specifically provided herein, all terms and
conditions of the Agreement remain in full force and effect, without waiver or
modification. All terms defined in the Agreement shall have the same meaning
when used in this Amendment. This Amendment and the Agreement shall be read
together as one document.
Borrower hereby remakes all representations and warranties
contained in the Agreement and reaffirms all covenants set forth therein.
Borrower further certifies that as of the date of this Amendment there exists no
Event of Default as defined in the Agreement, nor any condition, act or event
which with the giving of notice of the passage of time or both would constitute
any such Event of Default.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed as of the day and year first written above.
JALATE LIMITED, INC. WELLS FARGO HSBC TRADE
BANK, N.A.
By: [SIG] By: /s/ JOHN COBUS JOHN COBUS
------------------ -------------------------
Title: V.P. Finance & CFO Title: A.V.P.
------------------ -------------------------
<PAGE> 2
THE TRADE BANK 333 SOUTH GRAND AVENUE, 8TH FLOOR
WELLS FARGO HSBC TRADE BANK, N.S. LOS ANGELES, CA 90071
January 2, 1997
Mr. Fred Findley, C.F.O.
Jalate Limited, Inc.
6557 Flotilla Drive
Commerce, CA 90040
Dear Fred,
Attached, you will find the first amendment to your credit agreement with us.
The amendment is to increase the limit on capital expenditures which was
exceeded during this current fiscal year. Additionally, we have included a
waiver of this same covenant which occurred during the third quarter ending
September 30, 1996. We ask you to kindly sign the amendment and return it to
us as soon as possible and you can retain the covenant waiver letter for your
files.
If you should have further questions, you can reach me at (213) 253-3527.
Best Regards,
/s/ JOHN COBUS
John Cobus
Relationship Manager
[ICON]
WELLS FARGO A JOINT VENTURE HSBC [ICON]
<PAGE> 3
[THE TRADE BANK LOGO] 333 SOUTH GRAND AVENUE, 8TH FLOOR
WELLS FARGO HSBC TRADE BANK, N.A. LOS ANGELES, CA 90071
December 15, 1996
Mr. Fred Findley, C.F.O.
Jalate Limited, Inc.
6557 Flotilla Drive
Commerce, CA 90040
Re: Capital Expenditure Covenant
Dear Fred:
We have learned of the following breach of the terms of your Commercial Credit
Agreement with the Wells Fargo HSBC Trade Bank, N.A., successor to the
HongKongBank, dated June 1, 1996 (the "Agreement"):
Jalate's Capital Expenditures as of September 30, 1996 were greater than the
minimum permitted amount of US$250,000.00, as required by Exhibit A of the
Addendum to the Credit Agreement.
Subject to the terms and conditions that follow, we have decided to waive our
default rights with respect to this breach until December 31, 1996. Please
note, however, that this waiver applies only to the specific instance described
above. It is not a waiver of any subsequent breach of the same provision of the
Agreement, nor is it a waiver of any breach of any other provision of the
Agreement.
Except as expressly stated in this letter, we reserve all of the rights, powers
and remedies available to us under the Agreement and any other contracts or
instruments signed by you including the right to cease making advances to you
and the right to accelerate any of your indebtedness or if any subsequent
breach of the same provision or any other provision of the Agreement should
occur.
Sincerely,
Wells Fargo HSBC Trade Bank, National Association
/s/ JOHN COBUS
By: John Cobus
Title: Relationship Manager and Assistant Vice President
[ICON]
WELLS FARGO A JOINT VENTURE HSBC [ICON]
<PAGE> 4
[JALATE LIMITED LOGO]
January 20, 1997
John Cobus
Relationship Manager and AVP
THE WELLS FARGO HSBC TRADE BANK
333 South Grand Avenue, 8th Floor
Los Angeles, CA 90071
Dear Mr. Cobus:
Enclosed is the First Amendment to Credit Agreement.
Sincerely,
/s/ FREDERICK A. FINDLEY
Frederick A. Findley
Vice President Finance & CFO
HEADQUARTERS: 1675 S. Alameda Los Angeles, California 90021 (213) 765-5000
Fax (213) 765-5020/30
L.A. SHOWROOM: 110 E. 9th St. Suite 81201 Los Angeles, California 90079
(213) 628-1692 Fax (213) 627-3660
N.Y. SHOWROOM: 1407 Broadway Suite 316 New York, N.Y. 10018 (212) 921-5258
Fax (212) 944-1046
ACCOUNTING OFFICES: 6557 Flotilla St. City of Commerce, California 90040
(213) 890-8060 Fax (213) 728-3752
<PAGE> 1
Congress Talcott Corporation (Western)
5670 Wilshire Boulevard Suite 1750
Los Angeles California 90036
213 954 5300
July 25, 1996
Jalate, Ltd.
1675 S. Alameda
Los Angeles, CA 90021 [CONGRESS TALCOTT LOGO]
Gentlemen:
This letter will modify and amend Paragraph # 7 of the Discount
Factoring Agreement between us dated 8/17/87, (as amended), to reduce the
commission rate from .50% to .45% on factored sales up to $50,000,000 and .40%
on factored sales in excess of $50,000,000, retroactive to 4/1/96.
This letter will also modify and amend Paragraph # 6a of the Discount
Factoring Agreement between us dated 8/17/87, (as amended), to reduce the
interest rate from Prime plus .25% to Prime (in excess of the prime commercial
interest rate from time to time publicly announced by CoreStates Bank, N.A.,
whether or not such announced rate is the best rate available at such bank).
This decrease shall be retroactive to 4/1/96.
This agreement shall be effective for an initial term of one (1) year
commencing as of 7/1/96 and shall automatically renew from year to year
thereafter, unless sooner terminated pursuant to the terms hereof. You may
terminate this agreement on the anniversary of the date hereof in any year by
giving to us at least sixty (60) days prior written notice by registered or
certified mail, return receipt requested. We may terminate this agreement at
any time by giving to you at least sixty (60) days prior written notice.
Nothing herein contained shall vary, alter or amend any provisions of
the said Discount Factoring Agreement between us, except as specifically
provided herein.
Very truly yours,
CONGRESS TALCOTT
CORPORATION (WESTERN)
By: /s/ MATTHEW J. PICCOLO
------------------------
Matthew J. Piccolo
Title: Vice President
---------------------
AGREED TO AND ACCEPTED:
JALATE, LTD.
By: [SIG]
----------------------
Title:___________________
[CONGRESS TALCOTT LOGO NEW YORK * LOS ANGELES]
<PAGE> 1
Congress Talcott Corporation (Western)
5670 Wilshire Boulevard Suite 1750
Los Angeles California 90036
213 954-5300
March 4, 1997
Mr. Fred Findley
Jalate, Ltd. [CONGRESS TALCOTT LOGO]
1675 S. Alameda
Los Angeles, CA 90015
Re: Jalate, Ltd. ("Client");
Congress Talcott Corporation (Western) ("Congress")
Dear Fred,
Reference is hereby made to that certain Discount Factoring Agreement dated
August 17, 1987 between Client and Congress as amended from time to time (the
"Factoring Agreement"). In connection with the Factoring Agreement, Congress
and Client entered into a letter agreement, dated May 17, 1995 (the "May 17th
agreement"). This letter agreement supersedes the May 17th agreement as
follows:
1) Purchase of any fixed or capital assets not to exceed
$750,000.00 in the aggregate during any one year term of the
Factoring Agreement. Jalate, Ltd. shall not, without the prior
written consent of Congress Talcott Corporation (Western) make
any capital expenditures in any fiscal year in excess of
750,000.00.
Except as specifically provided herein, all terms and conditions of the
agreement remain in full force and effect, without waiver or modification. If
you agree to the terms and conditions contained in this letter agreement,
please indicate your agreement by executing this letter agreement where
indicated below and returning this letter agreement to the undersigned.
Very truly yours,
Congress Talcott Corporation (Western)
/s/ MATTHEW J. PICCOLO
Matthew J. Piccolo
Vice President
Agreed and Accepted this 7th day March, 1997
Jalate, Ltd.
By:_______________________________
Title:____________________________
[CONGRESS TALCOTT LOGO NEW YORK * LOS ANGELES]
<PAGE> 1
SECOND AMENDMENT TO CREDIT AGREEMENT
THIS SECOND AMENDMENT TO CREDIT AGREEMENT (this "Amendment"), is
entered into as of March 17, 1997, by and between JALATE LIMITED, INC.
("Borrower"), and WELLS FARGO HSBC TRADE BANK, N.A. ("Bank").
RECITALS
WHEREAS, Borrower is currently indebted to Bank pursuant to the terms
and conditions of certain Credit Agreement dated as of June 1, 1996, (the
"Agreement").
WHEREAS, Bank and Borrower have agreed to certain changes in the terms
and conditions set forth in the Agreement and have agreed to amend the
Agreement to reflect said changes.
NOW THEREFORE, for valuable consideration, the receipt and sufficiency
of which are hereby acknowledged, the parties hereto agree that the Agreement
shall be amended as follows:
I. EXHIBIT A, ADDENDUM TO CREDIT AGREEMENT shall be amended by deleting in
its entirety, under ADDITIONAL NEGATIVE COVENANTS, the section,
"GUARANTEES", and by substituting the following therefor:
"- GUARANTEES. Borrower will not guarantee or otherwise become
liable with respect to the obligations of any other person or
entity, except for endorsement of instruments for deposit into
Borrower's account in the ordinary course of Borrower's
business, and except for guarantees of the obligations of Linroz
Manufacturing Company to General Electric Credit Corporation
(arising from leases maturing June 1, 2000 and November 17,
2000) which do not exceed in the aggregate at any one time
outstanding $544,800."
II. EXHIBIT B, LOANS AGAINST IMPORTS FOR LETTERS OF CREDIT REIMBURSEMENT
SUPPLEMENT, shall be amended by:
A. deleting "$2,000,000" as the "CREDIT LIMIT", and substituting
"$3,000,000", therefor;
B. deleting "$2,000,000" as the "CREDIT SUBLIMIT", and substituting
"$3,000,000", therefor;
C. deleting "$2,000,000" as "THE AGGREGATE AMOUNT OF CREDIT
EXTENSIONS OUTSTANDING UNDER THIS FACILITY AND THE FOLLOWING
OTHER FACILITIES MAY NOT ANY ONE TIME EXCEED", and substituting
"$3,000,000", therefor;
D. adding to the section, "FEES: The following fees will apply to
this Facility:
"- Borrower will pay the following documentation fee to Trade
Bank: $1,000."; and
<PAGE> 2
E. deleting the section, "INTEREST RATE:" in its entirety and
substituting the following therefor:
"INTEREST RATE: All advances under this Facility will bear
interest at the following rate:
- PRIME RATE: The Prime Rate plus 0.25% per annum."
III. EXHIBIT B, SHIPPING GUARANTEES SUPPLEMENT, shall be amended by deleting
"$2,000,000" as "THE AGGREGATE AMOUNT OF CREDIT EXTENSIONS OUTSTANDING
UNDER THIS FACILITY AND THE FOLLOWING OTHER FACILITIES MAY NOT AT ANY
ONE TIME EXCEED", and by substituting "$3,000,000", therefor.
Except as specifically provided herein, all terms and conditions of the
Agreement remain in full force and effect, without waiver or modification. All
terms defined in the Agreement shall have the same meaning when used in this
Amendment. This Amendment and the Agreement shall be read together as one
document.
Borrower hereby remakes all representations and warranties contained in
the Agreement and reaffirms all covenants set forth therein. Borrower further
certifies that as of the date of this Amendment there exists no Event of
Default as defined in the Agreement, nor any condition, act or even which with
the giving of notice or the passage of time or both would constitute any such
Event of Default.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed as of the day and year first written above.
JALATE LIMITED, INC. WELLS FARGO HSBC TRADE BANK, N.A.
By: /s/ F. A. FINDLEY By: /s/ JAN MACY-BUESCHER
------------------- ----------------------
Jan Macy-Buescher
Title: VP Finance & CFO Title: Vice President
-------------------
<PAGE> 3
WELLS FARGO HSBC TRADE BANK LOANS AGAINST IMPORTS NOTE
- -------------------------------------------------------------------------------
$3,000,000 March 17, 1997
FOR VALUE RECEIVED, the undersigned JALATE LIMITED, INC., A CALIFORNIA
CORPORATION (jointly and severally, if the undersigned be more than one)
("Borrower") hereby promises to pay to the order of WELLS FARGO HSBC TRADE
BANK, N.A. ("Bank"), when due as provided herein, at its 333 South Grand
Avenue, 8th Floor, Los Angeles, CA 90071 office, in lawful money of the United
States and in immediately available funds, the principal sum of Three Million
Dollars ($3,000,000) or, if less, the aggregate unpaid principal amount of all
advances made by Bank to Borrower from time to time, as evidenced on the
records of Bank, together with interest thereon as hereinafter provided.
Borrower may from time to time from the date of this Note up to and including
May 31, 1997, borrow and partially or wholly repay its outstanding advances,
and reborrow, subject to all of the limitations, terms and conditions of this
Note and of that certain Credit Agreement between Borrower and Trade Bank dated
as of June 1, 1996, as amended from time to time ("Credit Agreement") executed
in connection with or governing this Note; provided that the total advances
made under this Note shall not exceed the principal amount stated above. The
unpaid principal balance of this obligation at any time shall be the total
amounts advanced hereunder by the holder hereof less the amount of principal
payments made hereon by or for any Borrower, which balance may be endorsed
hereon from time to time by the holder.
The principal amount and maturity of each advance shall be agreed upon by
Borrower and Bank prior to the making of each advance, and such terms, together
with the applicable interest rate of each advance and all payments of principal
and interest made on this Note shall be inscribed by Bank on its records. Each
advance shall be payable on the earlier of (i) the due date thereof, as
inscribed by Bank on its records, or (ii) 60 days after the date of such advance
is made. All payments shall be made free of any setoff, counterclaims or
withholdings. Each entry set forth on Bank's records shall be the prima facie
evidence of the facts so set forth. No failure by Bank to make, or no error by
Bank in making, any inscription on its records shall affect Borrower's
obligation to repay the full principal amount advanced by Bank to or for the
account of Borrower, or Borrower's obligation to pay interest thereon at the
agreed upon rate.
Each advance shall bear interest at the Prime Rate (defined herein) plus
one-quarter of one percent (.25%). Interest will be calculated for each day at
1/360th of the applicable per annum rate, which will result in a higher
effective annual rate. Accrued interest shall be payable at such times and
dates as shall be agreed upon by Borrower and Bank prior to the making of each
advance and evidenced on the records of Bank, provided that, all accrued
interest on an advance shall be due and payable at the maturity (by acceleration
or otherwise) of such advance. After maturity, whether by acceleration or
otherwise, accrued interest shall be payable on demand. "Prime Rate" means the
rate of interest most recently announced by Wells Fargo Bank, N.A. at its
principal office in San Francisco, California as its "Prime Rate", with the
understanding that the Prime Rate is one of Wells Fargo Bank's base rates and
serves as the basis upon which effective rates of interest are calculated for
those loans making reference thereto, and is evidenced by the recording thereof
after its announcement in such internal publication or publications as Wells
Fargo Bank may designate. Any change in an interest rate resulting from a
change in the Prime Rate shall become effective as of 12:01 a.m. of the Banking
Day on which each change in the Prime Rate is announced by Wells Fargo Bank.
Advances hereunder, to the total amount of the principal sum stated above and
up to and including the date set forth in the preceding paragraph, may be made
by the holder at the oral or written request of Frederick A. Findley, Vinton
Bacon, any one acting alone, who are authorized to request advances and direct
the disposition of any advances until written notice of the revocation of such
authority is received by the holder at the office designated above, or (b) any
person, with respect to advances deposited to the credit of any account of any
Borrower with the holder, which advances, when so deposited, shall be
conclusively presumed to have been made to or for the benefit of each Borrower
regardless of the fact that persons other than those authorized to request
advances may have authority to draw against such account. The holder shall have
no obligation to determine whether any person requesting an advance is or has
been authorized by any Borrower.
Upon the occurrence of any Event of Default as defined in the Credit Agreement,
the holder of this Note, at the holder's option, may declare all sums of
principal and interest outstanding hereunder to be immediately due and payable
without presentment, demand, protest or notice of dishonor, all of which are
expressly waived by each Borrower, and the obligation, if any, of the holder to
extend any further credit hereunder shall immediately cease and terminate. Each
Borrower shall pay to the holder immediately upon demand the full amount of all
payments, advances, charges, costs and expenses, including reasonable attorneys'
fees (to include outside counsel fees and all allocated costs of the holder's
in-house counsel), incurred by the holder in connection with the enforcement of
the holder's rights and/or the collection of any amounts which become due to
the holder under this Note, and the prosecution or defense of any action in any
way related to this Note, including without limitation, any action for
declaratory relief, and including any of the foregoing incurred in connection
with any bankruptcy proceeding relating to any Borrower.
Page 1 of 2
<PAGE> 4
Should more than one person or entity sign this Note as a Borrower, the
obligations of each such Borrower shall be joint and several.
This Note shall be governed by and construed in accordance with the laws of the
State of California, except to the extent Bank has greater rights or remedies
under Federal law, whether as a national bank or otherwise, in which case such
choice of California law shall not be deemed to deprive Bank of any such rights
and remedies as may be available under Federal law.
This Note supersedes and replaces that certain Loans Against Imports Note dated
June 1, 1996.
"BORROWER"
JALATE LIMITED, INC.
By: /s/ FREDERICK A. FINDLEY
-------------------------------------
Title: V.P. Finance & CFO
----------------------------------
Borrower's Address:
6557 Flotilla
City of Commerce, CA 90040
Page 2 of 2
<PAGE> 1
EXHIBIT 10.60
CERTIFICATE OF AMENDMENT
OF
RESTATED ARTICLES OF INCORPORATION OF
JALATE, LTD.
A CALIFORNIA CORPORATION
VINTON W. BACON and JAN L. GROSSMAN hereby certify as follows:
1. They are the President and the Secretary, respectively, of Jalate, Ltd.,
a California corporation.
2. The Restated Articles of Incorporation of this corporation is amended to
add thereto the following Article 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
<PAGE> 2
California Law, and the foregoing provisions of this Article Six
shall be reinstated.
3. The foregoing amendment of the Restated Articles of Incorporation of
this corporation has been duly approved by the Board of Directors.
4. The foregoing amendment of the Restated Articles of Incorporation of
this corporation has been duly approved by the required vote of the
shareholders of this corporation in accordance with Section 902 of the
California Corporations Code. The total number of outstanding shares of
this corporation is 3,403,000. The number of shares voting in favor of
the amendment equaled or exceeded the vote required. The percentage vote
required was more than 50%.
We 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 our own knowledge.
Dated 2/25, 1997
/s/ VINTON W. BACON
--------------------------
VINTON W. BACON, President
/s/ JAN L. GROSSMAN
--------------------------
JAN L. GROSSMAN, Secretary
-2-
<PAGE> 1
Exhibit 23.1
Independent Auditors' Consent
The Board of Directors
Jalate, Ltd.:
We consent to incorporation by reference in the registration statement on
Form S-8 of Jalate, Ltd. of our report dated March 3, 1997, relating to the
balance sheets of Linroz Manufacturing Company, L.P. as of December 31, 1996
and the related statements of earnings, partners' capital, and cash flows for
the year then ended, which report appears in the December 31, 1996 annual
report on Form 10-K of Jalate, Ltd.
KPMG PEAT MARWICK LLP
Los Angeles, California
March 27, 1997
<PAGE> 2
Independent Auditors' Consent
The Board of Directors
Jalate, Ltd.:
We consent to incorporation by reference in the registration statement on
Form S-8 of Jalate, Ltd. of our report dated March 3, 1997, relating to the
balance sheets of Jalate, Ltd. as of December 31, 1996, and 1995, and the
related statements of operations, shareholders' equity, and cash flows for
each of the years in the three-year period ended December 31, 1996, and the
related schedule, which report appears in the December 31, 1996 annual report
on Form 10-K of Jalate, Ltd.
KPMG PEAT MARWICK LLP
Los Angeles, California
March 27, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 97,000
<SECURITIES> 0
<RECEIVABLES> 3,588,000
<ALLOWANCES> 358,000
<INVENTORY> 3,572,000
<CURRENT-ASSETS> 7,547,000
<PP&E> 1,967,000
<DEPRECIATION> 917,000
<TOTAL-ASSETS> 9,173,000
<CURRENT-LIABILITIES> 3,809,000
<BONDS> 0
0
0
<COMMON> 5,177,000
<OTHER-SE> 187,000
<TOTAL-LIABILITY-AND-EQUITY> 9,173,000
<SALES> 54,021,000
<TOTAL-REVENUES> 54,021,000
<CGS> 39,514,000
<TOTAL-COSTS> 53,734,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 548,000
<INCOME-PRETAX> 27,000
<INCOME-TAX> 0
<INCOME-CONTINUING> 27,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 27,000
<EPS-PRIMARY> .01
<EPS-DILUTED> 0
</TABLE>
