<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark one)
/X/ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended September 30, 1998
Or
/ / Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
----------- -----------
Commission File Number 1-12868
JALATE, LTD.
(Exact Name of Registrant as Specified in Its Charter)
California 95-4121885
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
2085 South Garfield Avenue, Commerce, CA 90040
(Address of Principal Executive Offices) (Zip Code)
(213) 765-5000
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
--- ---
The number of shares outstanding of the registrant's Common Stock, no par
value, at November 12, 1998 was 4,923,000 shares.
This Form 10-Q contains 20 pages.
===============================================================================
<PAGE> 2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
JALATE, LTD.
Condensed Balance Sheets
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997
------------------ -----------------
<S> <C> <C>
ASSETS
Current assets:
Cash $ 64 $ 170
Trade and other accounts receivable,
less allowance for doubtful accounts
of $231 in 1998 and $324 in 1997 338 119
Inventories 3,680 4,812
Prepaid expenses and other current assets 167 201
------------- ------------
Total current assets 4,249 5,302
Property and equipment, at cost, net of
accumulated depreciation of $1,819 in 1998
and $1,366 in 1997 1,540 961
Investment in unconsolidated subsidiaries 477 551
Other assets, at cost, net 251 79
------------- ------------
$ 6,517 $ 6,893
============= ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Note payable to bank $ 413 $ 1,120
Current portion of long term liabilities 517 --
Due to factor 45 1,315
Trade accounts payable 3,201 3,092
Accounts payable to unconsolidated subsidiary 262 143
Accrued expenses 326 401
------------- ------------
Total current liabilities 4,764 6,071
------------- ------------
Long term liabilities:
Capitalized lease obligations,
less current portion 88 --
Subordinated notes payable,
less current installments 475 --
------------- ------------
Total long term liabilities 563 --
------------- ------------
Shareholders' equity:
Preferred stock, no par value.
Authorized 3,000,000 shares;
none issued and outstanding -- --
Common stock, no par value.
Authorized 20,000,000 shares;
issued and outstanding 3,403,000 shares 5,576 5,311
Accumulated deficit (4,386) (4,489)
------------- ------------
Total shareholders' equity 1,190 822
------------- ------------
$ 6,517 $ 6,893
============= =============
</TABLE>
See accompanying notes to condensed financial statements.
<PAGE> 3
JALATE, LTD.
Condensed Statements of Operations
(In thousands except net earnings (loss) per share
and weighted average shares outstanding)
(Unaudited)
<TABLE>
<CAPTION>
Nine months ended Three months ended
September 30, September 30,
------------------ -----------------
1998 1997 1998 1997
-------- ------- -------- --------
<S> <C> <C> <C> <C>
Net sales $ 36,222 $ 41,732 $ 10,599 $13,167
Cost of goods sold 26,575 32,049 7,522 10,169
--------- ------- -------- --------
Gross profit 9,647 9,683 3,077 2,998
Operating expenses 8,810 11,462 2,846 3,255
--------- ------- -------- --------
Earnings (loss) from operations 837 (1,779) 231 (257)
Other (income) expense:
Interest expense 766 568 242 226
Equity in (income) of
unconsolidated subsidiaries (32) (427) (132) (100)
Other (income) (1) (6) -- (5)
--------- ------- -------- --------
Total other expense 733 135 110 121
--------- ------- -------- --------
Earnings (loss) before income taxes 104 (1,914) 121 (378)
Income taxes -- 2 -- 2
--------- ------- -------- --------
Net earnings (loss) $ 104 $(1,916) $ 121 $ (380)
========= ======== ======== ========
Net earnings (loss) per share:
Basic $ 0.03 $ (0.56) $ 0.03 $ (0.11)
Diluted 0.03 (0.56) 0.03 (0.11)
========= ======= ======== =========
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Weighted average shares outstanding:
Basic 3,403,000 3,403,000 3,403,000 3,403,000
Diluted 3,403,000 3,403,000 3,403,000 3,403,000
========= ========= ========= =========
</TABLE>
See accompanying notes to condensed financial statements.
<PAGE> 4
JALATE, LTD.
Condensed Statements of Cash Flows
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine months ended
September 30,
--------------------
1998 1997
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net earnings (loss) $ 104 $ (1,916)
-------- --------
Adjustments to reconcile
net earnings (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 534 331
Increase (decrease) in allowance for
doubtful receivables (93) 844
Equity in net earnings of
unconsolidated subsidiaries (32) (427)
Changes in assets and liabilities:
(Increase) decrease in:
Due from factor, net -- 2,921
Trade accounts receivable (126) (837)
Inventories 1,132 (2,034)
Refundable income taxes -- 111
Prepaid expenses and other current assets 34 (57)
Other assets (39) (49)
Increase (decrease) in:
Accounts payable 228 576
Accrued expenses (75) 185
-------- --------
Total adjustments 1,563 1,564
-------- --------
Net cash provided by (used in)
operating activities 1,667 (352)
-------- --------
Cash flows from investing activities:
Capital expenditures (1,032) (200)
Investment in unconsolidated subsidiaries (314) --
Distributions from unconsolidated subsidiaries 420 361
-------- --------
Net cash provided by (used in)
investing activities (926) 161
-------- --------
Cash flows from financing activities:
Repayment to factor, net (1,270) --
Proceeds from issuance of (repayment of)
note payable to bank (707) 610
Proceeds from capitalized leases 130 --
Proceeds from issuance of long term
subordinated debt 950 --
Proceeds from issuance of warrants 50 --
-------- --------
Net cash provided by (used in)
financing activities (847) 610
-------- --------
Net increase (decrease) in cash (106) 419
Cash at beginning of period 170 97
-------- --------
Cash at end of period $ 64 $ 516
======== ========
Supplemental disclosures of cash flow information:
Cash payments during the period for -
Interest $ 742 $ 567
Income taxes -- --
======== ========
</TABLE>
See accompanying notes to condensed financial statements.
<PAGE> 5
JALATE, LTD.
Notes to Condensed Financial Statements
(Unaudited)
1.GENERAL
The unaudited condensed financial statements have been prepared on the same
basis as the audited financial statements of Jalate, Ltd. (the Company) which
are generally prepared at the end of each fiscal year and, in the opinion of
management, reflect all adjustments (consisting of normal recurring adjustments)
necessary for a fair presentation for each of the periods presented. The
results of operations for interim periods are not necessarily indicative of
results to be achieved for full fiscal years.
As contemplated by the Securities and Exchange Commission under Rule 10-01 of
Regulation S-X, the accompanying financial statements and notes have been
condensed and do not contain certain information that will be included in the
Company's annual financial statements and notes thereto. For further
information, refer to the financial statements and related notes for the year
ended December 31, 1997 included in the Company's annual report on Form 10-K.
2.INVENTORIES
A summary of inventories is as follows:
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997
------------------ -----------------
<S> <C> <C>
Piece goods and trim $ 1,545,000 $ 1,828,000
Work in process 1,176,000 1,657,000
Finished goods 959,000 1,327,000
----------- -----------
$ 3,680,000 $ 4,812,000
=========== ===========
</TABLE>
3.INVESTMENT IN UNCONSOLIDATED SUBSIDIARIES
AIRSHOP. In October 1997, the Company purchased 40% of the outstanding common
stock and 100% of the outstanding convertible preferred stock of Airshop Ltd.
for $500,000, of which $186,000 was paid in 1997 and the remaining $314,000 was
paid in 1998. The Company also has an option, through December 31, 2000, to
purchase an additional 11% of the outstanding common stock of Airshop. Airshop
sells junior women's apparel, footwear, cosmetics and accessories through mail
order catalogs and its internet website.
Airshop, which began operations during 1997, is currently in the start-up phase
of its existence. The Company, which accounts for its investment in Airshop
under the equity method of accounting, recorded $40,000 and $460,000 as its
share of Airshop's loss in 1997 and in the first half of 1998, respectively. The
Company has no commitment to provide additional funds to Airshop.
JOINT VENTURE. In November 1994, the Company entered into a manufacturing joint
venture, Linroz Manufacturing Company, L.P. (Joint Venture), with an affiliate
of its largest sewing contractor (the Partner) to improve the efficiency,
quality and cost of its products. The Joint Venture is a California limited
partnership. The Company and the Partner each are equal limited partners and
each hold one-half of the outstanding capital stock of the sole general partner,
a California corporation. The Joint Venture commenced operations in May 1995.
For the nine months ended September 30, 1998 and 1997, purchases from the Joint
Venture aggregated $3,049,000 and $3,163,000, respectively. The Company had
accounts payable to the Joint Venture for purchases of $262,000 and $143,000 at
September 30, 1998 and December 31, 1997, respectively.
<PAGE> 6
The tables below contain unaudited summarized financial information for the
Joint Venture:
<TABLE>
<CAPTION>
Nine months ended September 30,
---------------------------------
1998 1997
---------------- ---------------
(Unaudited)
<S> <C> <C>
Net sales $ 3,089,000 $ 3,226,000
Gross profit 1,230,000 1,140,000
Operating expenses 226,000 259,000
Net earnings 984,000 853,000
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997
------------------ -----------------
(Unaudited)
<S> <C> <C>
Current assets $ 601,000 $ 405,000
Non current assets 645,000 811,000
------------- -------------
Total assets $ 1,246,000 $ 1,216,000
============= =============
Current liabilities $ 182,000 $ 205,000
Long-term debt 110,000 201,000
------------- -------------
Total liabilities 292,000 406,000
Partners' capital 954,000 810,000
------------- -------------
$ 1,246,000 $ 1,216,000
============= =============
</TABLE>
4.SUBORDINATED NOTES PAYABLE AND WARRANTS
On January 27, 1998, the Company issued subordinated notes payable to certain
shareholders of the Company totaling $950,000. These notes call for interest
(at 10% per annum) to be paid quarterly beginning April 30, 1998 and quarterly
installments of principal commencing April 30, 1999. As of September 30, 1998,
$475,000 is classified as a current liability in the accompanying condensed
financial statements. These notes mature on January 31, 2000 and are secured by
the Company's interest in Airshop, Ltd. Interest payments of $25,000, $24,000
and $24,000 were made on April 30, 1998, July 31, 1998 and October 29, 1998,
respectively.
In connection with the issuance of these notes, the Company sold 500,000 stock
purchase warrants to the shareholders for $50,000. The warrants are exercisable
at an exercise price of $1.625 per share and expire on January 27, 2003. These
warrants were independently valued at $265,000. The $215,000 discount is
included on the Balance Sheet in other assets and is being amortized over the
life of the notes, with $9,000 being expensed monthly beginning February 1998.
On November 1, 1998, the Notes were converted to Common Stock (see note 10).
5.FACTOR AGREEMENT
The Company has an agreement with Heller Financial, Inc., its factor, that
provides for advances to the Company of up to 100% of qualified accounts
receivable. This agreement also contains a revolving loan facility which
permits the Company to borrow a maximum of $2,200,000 in addition to the
advances against the total qualified receivables. This $2,200,000 maximum,
which was scheduled to be reduced to $1,500,000 on March 31, 1998, was extended
through July 1, 1998 by the April 1, 1998 amendment and extended again through
December 31, 1998 by the August 1, 1998 amendment. At September 30, 1998, the
Company was in default of certain covenants contained in this agreement. In
November 1998, the Company entered into a new factor agreement with GE Capital
First Factors to replace the current factor agreement that is scheduled to
expire on December 31, 1998 (see note 10).
<PAGE> 7
6.NOTE PAYABLE TO BANK
The Company has a term loan payable to a bank. The principal balance of this
loan was $1,120,000 on December 31, 1997. The agreement previously required the
loan to be paid off completely by July 1998. In July 1998, the loan agreement
was amended and now requires that outstanding balance be paid in monthly
installments through August 1999. These payments of the principal balance are
$10,000 due on the last day of each month from July 1998 through January 1999,
then $60,000 due on the last day of each month from February 1999 through July
1999, with a final payment of any remaining unpaid principal balance due on
August 31, 1999. Interest is due monthly in addition to these principal
payments. Under the terms of the amendment, all financial covenants were
eliminated.
7.CAPITALIZED LEASES
The Company leases various pieces of equipment, primarily computers, under long-
term leases and has the option to purchase the equipment for a nominal amount at
the termination of the leases. At September 30, 1998, future minimum lease
payments for these assets aggregated $150,000 ($45,000 per year through December
2001), of which $20,000 represents interest.
8.INCOME TAXES
Income taxes for interim periods are computed using the effective tax rate
estimated to be applicable for the full fiscal year, which is subject to ongoing
review and evaluation by management. As of September 30, 1998, management's
estimate of the 1998 effective tax rate is zero.
9.EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per share represent net earnings (loss) divided by the
weighted average number of shares of common stock outstanding. Diluted earnings
(loss) per share represents net earnings (loss) divided by the weighted average
number of shares of common stock outstanding inclusive of any dilutive impact of
common stock equivalents. During the three and nine month periods ended
September 30, 1998 and September 30, 1997, there was no difference between basic
and diluted earnings per share because the impact of options and warrants to
purchase common stock was antidilutive.
10.SUBSEQUENT EVENTS
SUBORDINATED NOTES PAYABLE AND WARRANTS. On November 1, 1998, the $950,000
subordinated notes payable (see note 4) were converted to common stock of the
Company at $0.625 per share, resulting in the issuance of 1,520,000 shares. The
price of the last trade of the Company's common stock on the AMEX prior to this
conversion was $0.1875 per share. In connection with the conversion of these
notes payable to Common Stock, the warrants (see note 4) were modified by
reducing the exercise price to $0.625 and extending the expiration date to
October 31, 2003. This conversion results in an increase in shareholders' equity
at October 31, 1998 of approximately $816,000, consisting of the $950,000 of
subordinate notes less the $134,000 unamortized discount. Additionally, had this
conversion been reflected in the Balance Sheet as of September 30, 1998, working
capital would have been increased by $475,000.
FACTOR AGREEMENT. In November 1998 the Company signed a one-year agreement with
GE Capital First Factors to replace the current factor agreement that is
scheduled to expire on December 31, 1998. Under the terms of this new factor
agreement, the Company may borrow up to 90% of eligible trade accounts
receivable, up to 60% of certain eligible inventory balances, and up to
$1,500,000 in excess of the collateral, on a revolving basis.
ACQUISITION. During the fourth quarter of 1998, the Company entered into an
agreement to purchase substantially of all the assets of ARC Manufacturing,
Inc., consisting primarily of inventory and a license to use the trademark
Breaker Jeans , for approximately $920,000. The purchase agreement requires a
series of payments beginning in November 1998, and continuing through
approximately March 1999. Additionally, under the agreement, the Company has
agreed to employ the two owners of ARC Manufacturing, Inc. in connection with
the acquisition.
<PAGE> 8
11.RECENTLY ISSUED PRONOUNCEMENTS
COMPREHENSIVE INCOME. The Company adopted Statement of Financial Accounting
Standards (FAS) No. 130 Reporting Comprehensive Income on January 1, 1998.
There were no differences between net earnings (loss) and comprehensive income
as those terms are defined in FAS 130 for the nine and three month periods
ending September 30, 1998.
SEGMENT REPORTING. In June 1997, the Financial Accounting Standards Board
issued Statement of Accounting Financial Standards Number 131, Disclosure about
Segments of An Enterprise and Related Information (FAS 131). FAS 131 supersedes
previous reporting requirements for reporting on segments of a business
enterprise and is effective for the Company's fiscal year ending December 31,
1998. The Company plans to implement FAS 131 in connection with its 1998 fiscal
year end reporting on Form 10-K. As FAS 131 only requires additional
disclosures, the Company expects there will be no impact on its financial
position or results of operations from the implementation.
START-UP ACTIVITIES. On April 3, 1998, the American Institute of Certified
Public Accountants (AICPA) Accounting Standards Executive Committee issued
Statement of Position 98-5 (SOP 98-5), Reporting on the Costs of Start-up
Activities. SOP 98-5 requires that costs of start-up activities, including
organization costs, be expensed as incurred. SOP 98-5 is effective for
financial statements for fiscal years beginning after December 15, 1998. In the
fiscal year in which the SOP is first adopted, the application should be
reported as a cumulative effect of a change in accounting principle. Based on
information currently available, the Company does not expect the adoption of SOP
98-5 to have a significant impact on its financial position or results of
operations.
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. In 1998, the Financial
Accounting Standards Board issued FAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. FAS No. 133 modifies the accounting for
derivative and hedging activities and is effective for fiscal years beginning
after December 15, 1999. The adoption of FAS No. 133 may require the Company to
modify its method for accounting for its interest rate hedging activities. Based
on information currently available, the Company does not expect the adoption of
FAS No. 133 to have a significant impact on its financial position or results of
operations.
COMPUTER SOFTWARE. In 1998, the AICPA issued Statement of Position (SOP) 98-1,
Accounting for the Costs of Computer Software Developed or Obtained for Internal
Use. The Company will adopt SOP 98-1 in 1999. The adoption of SOP 98-1 will
require the Company to modify its method of accounting for software. Based on
information currently available, the Company does not expect the adoption of SOP
98-1 to have a significant impact on its financial position or results of
operations.
<PAGE> 9
LINROZ MANUFACTURING COMPANY, L.P.
Condensed Balance Sheets
(Unaudited)
<TABLE>
<CAPTION>
September 30, 1998 December 31,1997
------------------ ----------------
<S> <C> <C>
ASSETS
Current Assets:
Cash $ 305,000 $ 237,000
Accounts receivable from Jalate Ltd. 262,000 143,000
Prepaid expenses and
other current assets 34,000 25,000
------------ -----------
Total current assets 601,000 405,000
Property and equipment, at cost less
accumulated depreciation of
$767,000 in 1998 and $570,000 in 1997 625,000 791,000
Other assets, at cost 20,000 20,000
------------ -----------
$ 1,246,000 $ 1,216,000
============ ===========
LIABILITIES AND PARTNERS' CAPITAL
Current Liabilities:
Current maturities of
long term debt $ 117,000 $ 120,000
Trade accounts payable 8,000 34,000
Accrued expenses and
other current liabilities 57,000 51,000
------------ -----------
Total current liabilities 182,000 205,000
Long-term debt, less current maturities 110,000 201,000
Partners' capital 954,000 810,000
------------ -----------
$ 1,246,000 $ 1,216,000
============ ===========
</TABLE>
See accompanying notes to condensed financial statements.
<PAGE> 10
LINROZ MANUFACTURING COMPANY, L.P.
Condensed Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Nine months ended Three months ended ,
September 30, September 30,
-------------------- --------------------
1998 1997 1998 1997
----------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Net sales $ 3,089,000 $ 3,226,000 $ 924,000 $ 942,000
Cost of sales 1,859,000 2,086,000 586,000 654,000
--------- --------- ---------- ---------
Gross profit 1,230,000 1,140,000 338,000 288,000
Operating expenses 226,000 259,000 69,000 79,000
--------- --------- ---------- --------
Earnings from
operations 1,004,000 881,000 269,000 209,000
Interest expense, net 20,000 28,000 6,000 9,000
--------- --------- ---------- ---------
Net earnings $ 984,000 $ 853,000 $ 263,000 $ 200,000
========= =========== ========== =========
</TABLE>
See accompanying notes to condensed financial statements.
<PAGE> 11
LINROZ MANUFACTURING COMPANY, L.P.
Condensed Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Nine months ended September 30,
------------------------------
1998 1997
------------- -------------
<S> <C> <C>
Net earnings $ 984,000 $ 853,000
Adjustments to reconcile net
earnings to net cash
provided by operating activities:
Depreciation and amortization of
property and equipment 197,000 175,000
Changes in assets and liabilities:
(Increase) decrease in:
Accounts receivable from Jalate, Ltd. (119,000) (40,000)
Prepaid expenses and other current assets (9,000) 1,000
Increase (decrease) in:
Trade accounts payable (26,000) (6,000)
Accrued expenses and other
current liabilities 6,000 (19,000)
------------ -----------
Net cash provided by
operating activities 1,033,000 964,000
------------ -----------
Cash flows from investing activities:
Cash used in capital expenditures (31,000) (110,000)
------------ -----------
Cash flows from financing activities:
Principal payments on long-term debt (94,000) (90,000)
Distributions to partners (840,000) (730,000)
------------ -----------
Net cash used in financing activities (934,000) (820,000)
------------ -----------
Net increase in cash 68,000 34,000
Cash at beginning of period 237,000 421,000
------------ -----------
Cash at end of period 305,000 455,000
============ ===========
Supplemental disclosures of
cash flow information:
Cash paid during the period for interest $ 20,000 $ 28,000
============ ============
</TABLE>
See accompanying notes to condensed financial statements.
<PAGE> 12
LINROZ MANUFACTURING COMPANY L.P.
Notes to Condensed Financial Statements
(Unaudited)
1. GENERAL
The unaudited condensed financial statements have been prepared on the same
basis as the audited financial statements of Linroz Manufacturing Company, L.P.
(the Company) which are generally prepared at the end of each fiscal year and,
in the opinion of management, reflect all adjustments (consisting of normal
recurring adjustments) necessary for a fair presentation for each of the periods
presented. The results of operations for interim periods are not necessarily
indicative of results to be achieved for full fiscal years.
As contemplated by the Securities and Exchange Commission under Rule 10-01 of
Regulation S-X, the accompanying financial statements and notes have been
condensed and do not contain certain information that will be included in the
Company's annual financial statements and notes thereto. For further
information, refer to the financial statements and related notes for the year
ending December 31, 1997 included in Jalate, Ltd.'s annual report on Form 10-K.
<PAGE> 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED HEREIN, THE MATTERS ADDRESSED IN
THIS ITEM 2 CONSTITUTE "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF
SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE
SECURITIES EXCHANGE ACT OF 1934 AS AMENDED. SUCH FORWARD-LOOKING STATEMENTS ARE
SUBJECT TO A VARIETY OF RISKS AND UNCERTAINTIES, INCLUDING THOSE DISCUSSED BELOW
UNDER THE HEADING "FACTORS THAT MAY AFFECT FUTURE RESULTS" AND ELSEWHERE IN THIS
REPORT ON FORM 10-Q THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM
THOSE ANTICIPATED BY THE COMPANY'S MANAGEMENT. THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995 (THE "ACT") PROVIDES CERTAIN "SAFE HARBOR"
PROVISIONS FOR FORWARD-LOOKING STATEMENTS. ALL FORWARD-LOOKING STATEMENTS MADE
IN THIS QUARTERLY REPORT ON FORM 10-Q ARE MADE PURSUANT TO THE ACT.
As contemplated by the Securities and Exchange Commission under Instructions 2
and 3 to Item 303 (b) of Regulation S-K, this discussion and analysis has been
prepared assuming that the user has read or has access to Management's
Discussion and Analysis for the fiscal year ended December 31, 1997. Therefore
some material which has not changed materially from that presented in the Form
10-K for December 31, 1997 may have been omitted from this Form 10-Q.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage which
certain items in the statements of operations data (unaudited) bear to net sales
and the percentage dollar increase (decrease) of such items (unaudited) from
period to period.
<TABLE>
<CAPTION>
Percent of Net Sales Percent of Net Sales
--------------------- --------------------
Nine months ended Three months ended
September 30, Increase September 30, Increase
-------------------- -------------------
1998 1997 (Decrease) 1998 1997 (Decrease)
-------- -------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Net sales 100.0% 100.0% (13.2)% 100.0% 100.0% (19.5)%
Cost of
goods sold (73.4) (76.8) (17.1) (71.0) (77.3) (26.0)
-------- -------- -------- -------- -------- -------
Gross profit 26.6 23.2 (0.4) 29.0 22.7 2.6
Operating expenses (24.3) (27.4) (23.1) (26.8) (24.7) (12.6)
-------- -------- -------- -------- -------- -------
Earnings (loss)
from operations 2.3 (4.3) * 2.2 (2.0) *
Interest expense (2.1) (1.3) 34.9 (2.3) (1.7) 7.1
Equity in
earnings of
Unconsolidated
subsidiaries 0.1 1.0 * 1.2 0.8 32.0
-------- -------- -------- -------- -------- -------
Net earnings
(loss) 0.3 (4.6) * 1.1 (2.9) *
======== ======== ======== ======== ======== ========
</TABLE>
* This percent change is not meaningful.
<PAGE> 14
GROSS SALES decreased to $39,024,000 for the nine months ended September 30,
1998 from $45,532,000 for the comparable period of fiscal 1997, a decrease of
14.3%, and decreased to $11,350,000 for the three months ended September 30,
1998 from $14,382,000, for the comparable period of fiscal 1997, a decrease of
21.1%. The decrease in gross sales for the nine month period was primarily due
to a decrease in the volume of apparel sold to 3,616,000 units from 4,720,000
units, a decrease of 23.4%. The decrease in gross sales for the three month
period was primarily due to a decrease in the volume of apparel sold to 980,000
units from 1,303,000 units, a decrease of 24.8%. These decreases in the volume
of apparel sold were partially offset by increases in the average unit price of
items sold.
DISCOUNTS, RETURNS AND ALLOWANCES decreased 29.8% to $1,906,000 (4.9% of gross
sales) for the nine months ended September 30, 1998 from $2,717,000 (6.0% of
gross sales) for the comparable period of fiscal 1997, and 52.7% to $438,000
(3.9% of gross sales) for the three months ended September 30, 1998 from
$926,000 (6.4% of gross sales) for the comparable period of fiscal 1997. The
1997 figures were unusually high primarily due to significant returns of one
line of apparel (shipped during the second quarter of 1997) because of defective
design and production problems which were remedied during the third quarter of
1997. In addition, other causes of the high level of returns and allowances
experienced during 1997 have been identified and improved.
GROSS PROFIT decreased $36,000 to $9,647,000 (26.6% of net sales) for the nine
months ended September 30, 1998 from $9,683,000 (23.2% of net sales) for the
comparable period of fiscal 1997, and increased $79,000 to $3,077,000 (29.0% of
net sales) for the three months ended September 30, 1998 from $2,998,000 (22.7%
of net sales) for the comparable period of fiscal 1997. The increases in gross
profit percentages for both the nine and three month periods of 1998 were
primarily due to the combined effect of management's cost reduction initiatives
and the reduced level of discounts, returns and allowances noted above.
OPERATING EXPENSES decreased $2,652,000, a decrease of 23.1%, to $8,810,000
(24.3% of net sales) for the nine months ended September 30, 1998, and $409,000,
decreased 12.6% to $2,846,000 (26.8% of net sales) for the three months ended
September 30, 1998, primarily due to management's cost control initiatives and
the impact of lower sales volume.
INTEREST EXPENSE primarily reflects interest related to advances from the
factor, on the subordinated notes payable, and on the term loan with the bank.
Interest expense increased 34.9% to $766,000 for the nine months ended September
30, 1998, and 7.1% to $242,000 for the three months ended September 30, 1998,
primarily due to increased borrowings to finance the Company's operations.
EQUITY IN EARNINGS (LOSS) OF UNCONSOLIDATED SUBSIDIARIES. Investment in the
Company's unconsolidated subsidiaries is accounted for by the equity method,
under which the Company's share of earnings or loss of each subsidiary is
reflected in income or expense as earned and distributions are credited against
the investment in the subsidiaries when received.
Joint Venture. Equity in earnings increased to $492,000 for the nine months
ended September 30, 1998 from $427,000 for the comparable period of fiscal 1997,
an increase of 15.2%, and increased to $132,000 for the three months ended
September 30, 1998 from $100,000 for the comparable period of fiscal 1997, an
increase of 32.0%. The increases are primarily attributable to an improvement
in the operating margins of the Joint Venture.
Airshop. In the fourth quarter of 1997, the Company acquired an interest in
Airshop, Ltd. which is still in its start-up phase. The Company's share of
Airshop's net loss was $40,000 for the fourth quarter of 1997 and $460,000 for
the six months ended June 30, 1998. After recognizing this loss in the first
six months of 1998, the Company's investment in Airshop was reduced to zero.
Even though Airshop, Ltd.'s net losses continued into the third quarter of 1998,
those losses were not recognized by the Company because generally accepted
accounting principles limits the Company's loss to its total investment in
Airshop, Ltd. The Company has no further commitment to provide additional funds
to Airshop.
INCOME TAXES for the interim periods were computed using the effective tax rate
estimated to be applicable for the full fiscal year, which is subject to ongoing
review and evaluation by management. As of September 30, 1998, management's
estimate of the 1998 effective tax rate is zero.
<PAGE> 15
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its working capital requirements from advances drawn
against factored receivables, a revolving loan agreement with a factor,
distributions from a joint venture, proceeds from issuing subordinated notes
payable and proceeds from its initial public offering in 1994. Cash provided by
operating activities aggregated $1,667,000 for the nine months ended September
30, 1998 compared with cash used in operating activities of $352,000 for the
comparable period of 1997, an improvement of $2,019,000 over the prior year. At
September 30, 1998, the Company had a working capital deficiency of $515,000,
compared to a working capital deficiency of $344,000 at June 30, 1998, and
$769,000 at December 31, 1997. However, had the conversion of subordinated
notes payable into common stock, which was completed on November 1, 1998, been
reflected in the Balance Sheet as of September 30, 1998, the working capital
deficiency would have been $40,000. This conversion eliminates principal
payments of $712,500 and $237,500 for the years 1999 and 2000, respectively, and
interest payments of $94,000 from November 1998 through December 1999.
Inventory at September 30, 1998 was $3,680,000, a decrease from $4,812,000 at
December 31, 1997. Inventory at September 30, 1997 was $5,606,000. This
reduction in inventory was achieved by management's efforts to reduce inventory
costs combined with lower inventory needs related to reduced sales levels.
At September 30, 1998 the net amount due to the factor consisted of the
following:
<TABLE>
<CAPTION>
<S> <C>
Receivables held by factor $ 7,191,000
Advances from factor (6,976,000)
Open credit memos (260,000)
-------------
$ (45,000)
=============
</TABLE>
In November 1998 the Company signed a one-year agreement with GE Capital First
Factors to replace the current factor agreement that is scheduled to expire on
December 31, 1998. Under the terms of this new factor agreement, the Company
may borrow up to 90% of eligible trade accounts receivable, up to 60% of certain
eligible inventory balances, and an additional $1,500,000 on a revolving basis.
The Company has a term loan payable to a bank. The principal balance of this
loan was $1,120,000 on December 1997. The agreement previously required the
loan to be paid off completely by July 1998. In July 1998, the loan agreement
was amended and now requires that outstanding balance be paid in monthly
installments through August 1999. These payments of the principal balance are
$10,000 due on the last day of each month from July 1998 through January 1999,
then $60,000 due on the last day of each month from February 1999 through July
1999, with a final payment of any remaining unpaid principal balance due on
August 31, 1999. Interest is due monthly in addition to these principal
payments. Under the terms of the amendment, all financial covenants were
eliminated.
The Company is actively pursuing various options of providing for its long term
liquidity needs and assuring its long term vitality including additional debt or
equity financing, and possible mergers or other business combinations. However,
there is no assurance that additional financing, if obtained, will be sufficient
to sustain operations. Should management be unsuccessful, the Company may be
required to restructure or curtail operations.
<PAGE> 16
FOURTH QUARTER EXPECTATION
The Company expects sales volume in the fourth quarter of 1998 to be similar or
slightly lower than the fourth quarter of 1997. However, the expected gross
margin percentage in the fourth quarter of 1998 should be more comparable to the
first nine months of 1998 rather than the fourth quarter of 1997. The Company
expects to incur net losses for the fourth quarter and the fiscal year 1998, but
not nearly to the extent of the losses in fiscal 1997.
ACQUISITION
During the fourth quarter of 1998, the Company entered into an agreement to
purchase substantially of all the assets of ARC Manufacturing, Inc., consisting
primarily of inventory and a license to use the trademark. Breaker Jeans, for
approximately $920,000. The purchase agreement requires a series of payments
beginning in November 1998, and continuing through approximately March 1999.
This acquisition is not expected to have a material impact on the company's
operating results for the fourth quarter 1998 or the fiscal year 1998.
MERGER
On April 13, 1998, the Company signed a letter of intent to merge with Chorus
Line Corporation. In June 1998, the Company announced that negotiations
relative to this merger had been terminated.
YEAR 2000 ISSUE
The year 2000 issue results from computer programs written using two digits to
identify the year in the date field. These computer programs were designed and
developed without consideration of the impact of the upcoming change in the
century. If not corrected, those programs could create erroneous information by
or at the year 2000.
The Company is assessing the internal readiness of its computer systems for
handling the year 2000 issue. The Company expects to implement the systems and
programming changes necessary to address year 2000 issues with respect to its
internal systems and does not believe that the cost of such actions will have a
material adverse effect on its results of operations or financial condition.
Although the Company is not aware of any material operational issues or costs
associated with preparing its internal systems for the year 2000, there can be
no assurance that there will not be a delay in, or increased costs associated
with, the implementation of the necessary systems and changes to address the
year 2000 issues, and the Company's inability to implement such systems and
changes in a timely manner could have an adverse effect on future results of
operations.
The Company is in the process of evaluating the extent to which the Company is
vulnerable to third parties' failure to address their own year 2000 issues.
Those parties include customers, suppliers and other third party business
partners. The Company has not yet completed a review process with respect to
these third parties. As a result, the Company cannot determine at this time the
extent, if any, to which the Company may be exposed to financial risk from the
inability of the Company's customers, suppliers and other business partners to
remediate their own year 2000 issues. After this review process has been
completed, the Company will be able to prepare contingency plans to prepare for
the most reasonably likely worst case scenarios.
RECENTLY ISSUED PRONOUNCEMENTS
COMPREHENSIVE INCOME. The Company adopted Statement of Financial Accounting
Standards (FAS) No. 130 Reporting Comprehensive Income on January 1, 1998.
There were no differences between net earnings (loss) and comprehensive income
as those terms are defined in FAS 130 for the three and nine month periods
ending September 30, 1998.
SEGMENT REPORTING. In June 1997, the Financial Accounting Standards Board
issued Statement of Accounting Financial Standards Number 131, Disclosure about
Segments of An Enterprise and Related Information (FAS 131). FAS 131 supersedes
previous reporting requirements for reporting on segments of a business
enterprise and is effective for the Company's fiscal year ending December 31,
1998. The Company plans to implement FAS 131 in connection with its 1998 fiscal
year end reporting on Form 10-K. As FAS 131 only requires additional
disclosures, the Company expects there will be no impact on its financial
position or results of operations from the implementation.
START-UP ACTIVITIES. On April 3, 1998, the American Institute of Certified
Public Accountants Accounting Standards Executive Committee issued Statement of
Position 98-5 (SOP 98-5), Reporting on the Costs of Start-up Activities. SOP
98-5 requires that costs of start-up activities, including organization costs,
be expensed as incurred. SOP 98-5 is effective for financial statements for
fiscal years beginning after December 15, 1998. In the fiscal year in which the
SOP is first adopted, the application should be reported as a cumulative effect
of a change in accounting principle. Based on information currently available,
the Company does not expect the adoption of SOP 98-5 to have a significant
impact on its financial position or results of operations.
<PAGE> 17
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. In 1998, the Financial
Accounting Standards Board issued FAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. FAS No. 133 modifies the accounting for
derivative and hedging activities and is effective for fiscal years beginning
after December 15, 1999. The adoption of FAS No. 133 may require the Company to
modify its method for accounting for its interest rate hedging activities. Based
on information currently available, the Company does not expect the adoption of
FAS No. 133 to have a significant impact on its financial position or results of
operations.
COMPUTER SOFTWARE. In 1998, the AICPA issued Statement of Position (SOP) 98-1,
Accounting for the Costs of Computer Software Developed or Obtained for Internal
Use. The Company will adopt SOP 98-1 in 1999. The adoption of SOP 98-1 will
require the Company to modify its method of accounting for software. Based on
information currently available, the Company does not expect the adoption of SOP
98-1 to have a significant impact on its financial position or results of
operations.
FACTORS THAT MAY AFFECT FUTURE RESULTS
All forward-looking statements contained in this Item 2 are subject to, in
addition to the other matters described in this report on Form 10-Q, a variety
of significant risks and uncertainties. The following discussion highlights
some of these risks and uncertainties. Further, from time to time, information
provided by the Company or statements made by its employees may contain forward-
looking information. The Company cautions the reader that there can be no
assurance that actual results or business conditions will not differ materially
from those projected or suggested in such forward-looking statements as a result
of various factors, including those discussed below.
SUBSTANTIAL COMPETITION. The apparel industry is highly competitive. Many of
the Company's competitors have substantially greater financial, distribution,
marketing and other resources, including greater brand awareness, than the
Company. The Company competes with numerous apparel manufacturers, including
those with their own retail stores, as well as department stores, specialty
stores, retail chains and mass merchandisers which sell apparel under their own
labels. From time to time, the Company has lowered prices on certain products
to maintain market share, which has adversely affected the Company's gross
profit margin on such products. There can be no assurance that such price
competition will not recur.
CHANGING FASHION TRENDS. The Company's success depends in substantial part on
its ability to correctly anticipate, gauge and respond to rapidly changing
consumer preferences in a timely manner. If the Company materially misjudges
the market for a particular product or product line, the Company may be faced
with a substantial reduction in sales and excess inventory. There can be no
assurance that the Company will be able to correctly anticipate, gauge and
respond to changing consumer preferences in a timely manner in the future.
ECONOMIC CONDITIONS. The apparel industry historically has been subject to
substantial cyclical variation, and a recession in the general economy or
uncertainties regarding future economic prospects that affect consumer spending
habits have in the past had, and may in the future have, a materially adverse
effect on the Company's results of operations. In addition, certain retailers,
including some of the Company's customers, are experiencing financial
difficulties which increase the risk of extending credit to such retailers. Many
retailers have attempted to improve their own operating efficiencies by
concentrating their purchasing power among an increasingly small group of
vendors. There can be no assurance that the Company will remain a preferred
vendor for its existing customers. A decrease in business from, or loss of, a
major customer could have a material adverse effect on the Company's results of
operations. In addition, there can be no assurance that the Company's factor
will approve the extension of credit to certain retail customers in the future.
If a customer's credit is not approved by the factor, the Company could either
assume the collection risk on sales to such customer itself, or choose not to
make sales to such customer.
VARIABILITY OF QUARTERLY RESULTS. The Company has experienced, and expects to
continue to experience, variability in its net sales and operating results on a
quarterly basis. The Company believes the factors which influence this
variability include (i) the timing of the Company's introduction of new apparel
collections, (ii) the level of consumer acceptance of each new collection, (iii)
general economic and industry conditions that affect consumer spending and
retailer purchasing, (iv) the timing of the placement or cancellation of
customer orders, (v) the timing of expenditures in anticipation of changes in
sales volume and customer delivery requirements, (vi) the weather and (vii)
actions of competitors. In addition, the women's apparel business is highly
seasonal.
<PAGE> 18
RELIANCE ON KEY PERSONNEL. The operations of the Company depend to a great
extent on the efforts of its senior management, including Vinton W. Bacon and
Larry Brahim. The extended loss of the services of one or both of these
individuals could have a materially adverse effect on the Company's operations.
IMPACT OF FOREIGN OPERATIONS. In July 1994, the Company commenced manufacturing
products abroad. As a result, the Company's operations are subject to the
customary risks of doing business abroad, including, but not limited to,
transportation delays, political instability, expropriation, currency
fluctuations and the imposition of tariffs, import and export controls and other
non-tariff barriers (including changes in the allocation of quotas).
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
The Company does not invest in derivative financial instruments, other financial
instruments or derivative commodity instruments. However, significant increases
in interest rates or contractions of credit could have a materially adverse
effect on the Company's operations through its bank borrowings and factor
contracts. Likewise, significant increases in the cost of the Company's labor
or raw materials could have a materially adverse effect on the Company's
operations.
Also see Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Factors That May Affect Future Results.
<PAGE> 19
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
On January 27, 1998, the Company issued subordinated notes payable to certain
shareholders of the Company totaling $950,000. These notes called for interest
(at 10% per annum) to be paid quarterly beginning April 30, 1998 and quarterly
installments of principal commencing April 30, 1999. These notes were to mature
on January 31, 2000 and are secured by the Company's interest in Airshop, Ltd.
In connection with the issuance of these notes, the Company sold 500,000 stock
purchase warrants to the shareholders for $50,000. The warrants are exercisable
at an exercise price of $1.625 per share and expire on January 27, 2003. These
warrants were independently valued at $265,000. The $215,000 discount is being
amortized over the life of the notes, with $9,000 being expensed monthly
beginning February 1998.
On November 1, 1998, these notes were converted to common stock of the Company
at $0.625 per share resulting in the issuance of 1,520,000 shares, the exercise
price of the warrants was reduced to $0.625, and the expiration date of the
warrants was extended to October 31, 2003. The price of the last trade of the
Company's common stock on the AMEX prior to this conversion was $0.1875 per
share.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
The Company has an agreement with its factor, as more completely described in
the Company's annual report on Form 10-K, that provides for advances to the
Company of up to 100% of qualified accounts receivable plus a revolving loan
facility. The Company was in default of certain restrictive covenants under
this agreement from December 31, 1997 through March 31, 1998. On April 1, 1998,
these defaults were waived by the factor, and the agreement was amended by
revising these covenants for 1998. Under this revised agreement, the amount of
the revolving loan available to the Company was increased to allow the Company
to borrow up to $2,200,000 in addition to the advances against the total
qualified receivables. This $2,200,000 amount was scheduled to reduce to
$1,500,000 on July 1, 1998. This agreement was subsequently amended by
extending the revolving loan facility at the $2,200,000 amount through December
31, 1998; the $2,200,000 amount is now scheduled to reduce to $1,500,000 on
January 1, 1999. The Company is in default of certain restrictive covenants
under this agreement as of September 30, 1998. The Company intends to repay its
current factor by utilizing the agreement with its new factor, as described in
the next paragraph.
In November 1998 the Company signed a one-year agreement with GE Capital First
Factors to replace the current factor agreement described above that is
scheduled to expire on December 31, 1998. Under the terms of this new factor
agreement, the Company may borrow up to 90% of eligible trade accounts
receivable, up to 60% of certain eligible inventory balances, and an additional
$1,500,000 on a revolving basis.
In addition, the Company has a term loan payable to a bank. On December 31,
1997, the Company was in default of certain restrictive covenants under the loan
agreement dated June 30, 1997. Subsequently, a new agreement was entered into
effective January 21, 1998. On March 31, 1998, the Company was in default of
certain restrictive covenants under this new agreement. On April 1, 1998, the
bank agreed to waive the Company's compliance with those covenants through June
30, 1998. The revised agreement, which required the loan to be paid off
completely by July 1998, was amended again in July 1998, and now requires that
outstanding balance be paid in monthly installments through August 1999.
Principal payments of $10,000 are due on the last day of each month from July
1998 through January 1999, then $60,000 due on the last day of each month from
February 1999 through July 1999, with a final payment of any remaining unpaid
principal balance due on August 31, 1999. Interest is due monthly in addition
to these principal payments. Under the terms of the amendment, all financial
covenants were eliminated.
<PAGE> 20
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORT ON FORM 8-K.
a .Exhibits - The following is a list of exhibits filed as apart of
this report.
Exhibit
Number Description
- ------- ---------------------------------------------------------------------
3.1 Restated Articles of Incorporation of the Company. [3.1*] (3)
3.2 Amendment to by-laws reducing the number of directors to
seven.[3.2*](3)
3.3 Restated by-laws of the Company. [3.3*](3)
4.1 Form of stock certificate. [4.3*] (1)
4.2 Underwriters' Warrant Agreement dated March 16, 1994, among the
Company,H.J. Meyers & Co., Inc. and Sanders Morris Mundy Inc.
[4.2*](2)
10.1 Subordinated notes payable Conversion agreement
10.2 ARC Manufacture Inc. Assets purchase agreement
10.3 G.E. Capital First Factor Factoring agreement
27. Financial Data Schedule. (Filed as part of the EDGAR (electronic)
version of this report only.)
-----------------------------
* Indicates the exhibit number in the original filing.
(1) Filed as an exhibit to Amendment No. 1 to Registration Statement on
Form S-1 filed with the Securities and Exchange Commission on
March 16, 1994.
(2) Filed as an exhibit to the Company's Annual Report on Form 10-K
for the year ended December 31, 1994.
(3) Filed as an exhibit to the Company's quarterly report on Form 10-Q
for the quarter ended March 31, 1998.
b. Reports on Form 8-K.
None.
<PAGE> 21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized
JALATE, LTD.
November 13, 1998 By: /s/ VINTON W. BACON
--------------------
Vinton W. Bacon
Chief Executive Officer and
Chief Operating Officer
November 13, 1998 By: /s/ JOHN DIESENBRUCH
---------------------
John Diesenbruch
Vice President, Finance and
Chief Financial Officer
<PAGE> 1
EXHIBIT 10.1
SUBORDINATED NOTE PAYABLE CONVERSION AGREEMENT
----------------------------------------------
This Conversion Agreement (the "Agreement") is entered into as of November
1, 1998, by and among Jalate, Ltd., a California corporation (the "Company"),
Katherine U. Sanders, an individual ("Ms. Sanders"), John E. Drury, an
individual ("Mr. Drury"), and William M. DeArman, an individual ("Mr. DeArman")
(Ms. Sanders, Mr. Drury and Mr. DeArman hereinafter are referred to individually
as a "Holder" and collectively as the "Holders"), with reference to the
following facts
A. The Company has executed those certain Subordinated Secured Promissory
Notes all dated as of January 27, 1998, in the amounts and in favor of the
Holders as set forth on Schedule 1 hereto (the "Notes") (a Note in the amount of
$237,500 was originally issued by the Company to Don A. Sanders, an individual,
("Mr. Sanders"), who subsequently assigned such Note to Ms. Sanders).
B. In connection with the execution of the Notes, (i) the Holders entered
into an Agency and Intercreditor Agreement (the "Intercreditor Agreement")
between the Holders and Mr. DeArman as "Secured Party," pursuant to which, among
other things, Secured Party was appointed as "Agent" for the Holders; and (ii)
the Company entered into a Security and Pledge Agreement dated as of January 27,
1998 (the "Security and Pledge Agreement") between the Company and the Secured
Party, pursuant to which the Company conveyed, assigned, transferred, delivered,
pledged and granted to Secured Party a security interest in and to the
Collateral (as defined in the Security and Pledge Agreement).
C. The Company has executed those certain Stock Purchase Warrants all
dated January 27, 1998 with the Holders, each as identified on Schedule 2 hereto
(the "Warrants") (Warrant No. 1 was originally issued to Mr.
Sanders, who subsequently assigned such Warrant to Ms. Sanders).
D. The Company wishes to convert (the "Conversion") the outstanding
principal amounts of the Notes into shares of common stock, no par value, of the
Company ("Common Stock") at a conversion rate of $0.625 per share of Common
Stock, and each of the Holders wishes to receive such shares of Common Stock in
full satisfaction of the principal amounts owed to them under the Notes.
E. As a condition to the willingness of the Holders to effect the
Conversion, the Company has agreed to reduce the exercise prices of the Warrants
and extend the expiration dates under the Warrants as described herein.
NOW, THEREFORE, based on the above premises and in consideration of the
mutual covenants and agreements contained herein and other good and valuable
consideration, the receipt and sufficiency of which is hereby acknowledged, the
parties agree as follows:
1. Conversion of Notes into Common Stock. The parties hereby agree that
the outstanding principal amount of the Notes shall be converted into shares of
Common Stock at a conversion rate of $0.625 per share of Common Stock. The
number of shares of Common Stock to be received by each Holder in connection
with the Conversion is shown in Schedule 1 attached hereto ("Conversion
Shares"). Each of the Holders hereby agrees that receipt of the Conversion
Shares by each of them pursuant to this Section 1 shall be in full satisfaction
and discharge of the principal amounts owed to them by the Company under their
respective Notes.
<PAGE> 2
1.1 Delivery of Stock Certificates and Cancelled Notes; Listing
Application. Concurrently herewith the Company is issuing to the Holders
certificates evidencing their respective Conversion Shares in the names of such
Holders, and the accrued and unpaid interest due on each of the Notes as
indicated on Schedule 1 attached hereto, and the Holders are delivering the
original Notes to the Company marked "CANCELLED." The Company will file an
application to list the Conversion Shares on the American Stock Exchange in
connection with the earlier of (i) the registration of the Conversion Shares
pursuant to the registration rights granted under Section 3 hereof, (ii) such
date as the Conversion Shares may be sold pursuant to Rule 144 promulgated under
the Securities Act of 1933, as amended (the "Act"), or (iii) any other listing
application filed by the Company with the American Stock Exchange with respect
to which it would be cost-effective (as determined by the Company) to also list
the Conversion Shares; provided, however, that in any event the Company will
file the listing application with the American Stock Exchange by November 1,
1999.
1.2 Termination of Security and Pledge Agreement. The Company and
Secured Party hereby agree that the Security and Pledge Agreement is hereby
terminated and of no further force and effect and concurrently herewith the
Secured Party is returning the Collateral to the Company.
1.3 Restrictions on Transfer. The Holders hereby acknowledge that (i)
the Conversion Shares have not been registered under the Act, and are
"restricted securities" within the meaning of Rule 144 under the Act; and (ii)
the Conversion Shares may not be sold, transferred or pledged by such Holders
unless the Company shall have been supplied with reasonably satisfactory
evidence that such transfer is not in violation of the Act and any applicable
state securities laws. The Company may place a legend to that effect on each
certificate representing shares issuable to the Holders pursuant to this Section
1.3.
2. Amendments to Warrants. The parties agree that each of the Warrants is
hereby amended as follows (capitalized terms used herein and not otherwise
defined shall have the meanings set forth in the Warrant Agreements):
(a) The Purchase Price set forth in the introductory
paragraph is hereby changed from "$1.625" to "$0.625."
(b) The Expiration Date is hereby changed from
"January 27, 2003" to "November 1, 2003."
(c) Section 1.1 is hereby deleted and replaced with the
following: "This Warrant may be exercised in whole or in part at any time, and
from time to time, during the period commencing on the date of this Warrant and
expiring on November 1, 2003."
3. Registration Rights. The Conversion Shares will be entitled to the
registration rights set forth in Exhibit A attached hereto.
4. Voting Agreement. As an inducement to the Holders to enter into this
Agreement and effect the Conversion, simultaneously with the execution and
delivery of this Agreement, Larry Brahim and Vinton W. Bacon have each executed
and delivered a voting agreement substantially in the form set forth in Exhibit
B attached hereto.
<PAGE> 3
5. Appointment of Director. Simultaneously with the execution and delivery
of this Agreement, the Company appoints Mr. DeArman to serve as a director of
the Company and Mr. DeArman accepts such appointment.
6. Representations of Holders. As a material inducement to the Company to
enter into this Agreement, each of the Holders individually represents and
warrants to the Company as follows:
6.1. Sole Ownership of Notes; No Encumbrances. Holder is the sole
owner of his or her Note, in the outstanding principal amount, plus accrued and
unpaid interest thereon, as set forth on such Schedule 1, free and clear of all
liens, claims, security interests or any other encumbrances whatsoever. Holder
has not transferred any of its interests in his or her Note.
6.2 Authorization. Holder has full right, power, capacity and
authority to execute and deliver this Agreement and to perform its obligations
hereunder. This Agreement has been duly executed and delivered by Holder, and
constitutes the legal, valid and binding obligation of Holder, enforceable
against Holder in accordance with its terms.
6.3 Investment. Holder is an "accredited investor" within the
meaning of Regulation D promulgated under the Act. Holder is acquiring the
Conversion Shares for its own account for investment and not with a view to a
distribution thereof in violation of the Securities Act.
7. Representations of Company. As a material inducement to the Holders to
enter into this Agreement, the Company represents and warrants to each of the
Holders as follows:
7.1 Organization and Good Standing; Authorization; Absence of
Conflicts. The Company is a corporation duly organized, validly existing
and in good standing under the laws of the State of California and is duly
qualified to transact business as a foreign corporation in each jurisdiction
where the nature of its business or its ownership of property requires such
qualification, except where the failure to be so qualified would not be
reasonably likely to have a material adverse effect on the Company's financial
condition or results of operation (a "Material Adverse Effect"). The Company has
full right, power, capacity and authority to execute and deliver this Agreement
and to perform its obligations hereunder. This Agreement has been duly executed
and delivered by the Company, and constitutes the legal, valid and binding
obligation of the Company, enforceable against the Company in accordance with
its terms. The execution, delivery and performance of this Agreement by the
Company do not violate or conflict with or constitute a default under the
Company's articles of incorporation or bylaws or any agreement or contract to
which the Company is a party, except where such violation, conflict or default
would not be reasonably likely to have a Material Adverse Effect.
7.2 Issuance of Shares. The issuance and delivery of the Conversion
Shares has been duly authorized by all necessary corporate action on the part of
the Company. The Conversion Shares when issued in accordance with the provisions
of this Agreement will be duly and validly issued, fully paid and
non-assessable.
7.3 Conversion Rate. As of the approval of this Agreement by the
Company's Board of Directors, the conversion rate of $0.625 per share was higher
than the greater of book or market value of the Common Stock.
<PAGE> 4
8. Indemnification. The Company, on one hand, and the Holders, on the
other hand, hereby agree to defend, indemnify and hold harmless the other and
their respective affiliates, officers, directors, controlling persons, agents,
representatives and employees from and against all liabilities, damages, losses,
costs and expenses (including reasonable attorneys' fees and other
professionals' fees) which they may incur by reason of any breach of the
representations, warranties and covenants made by the Company or such Holder
herein.
9. Miscellaneous.
9.1 Amendments. This Agreement may be amended or supplemented at any
time by the mutual written consent of the parties.
9.2 Entire Agreement. This Agreement, its exhibits and the documents
executed in connection herewith, constitute the entire agreement between the
parties hereto with respect to the subject matter hereof and supersede all prior
agreements and understandings, oral and written, between the parties hereto with
respect to the subject matter hereof.
9.3 Binding Effect, Benefits. This Agreement shall inure to the
benefit of and be binding upon the parties hereto and their respective
successors and assigns. Notwithstanding anything contained in this Agreement to
the contrary, nothing in this Agreement, expressed or implied, is intended to
confer on any person other than the parties hereto or their respective
successors and assigns, any rights, remedies, obligations or liabilities under
or by reason of this Agreement, except Section 8 hereof which shall inure to the
benefit of and be enforceable by indemnified parties.
9.4 Assignability. Neither this Agreement nor any of the parties'
rights hereunder shall be assignable by a party without the prior written
consent of the other parties; provided, however, that a Holder may assign the
registration rights set forth in Exhibit A hereto to any transferee of the
Conversion Shares so long as (i) the Holder provides written notice to the
Company of such assignment within thirty (30) days of the transfer and (ii) the
transferee agrees in writing to be bound by all of the terms of Exhibit A; and
provided further that in no event may the registration rights set forth in
Exhibit A be assigned in such a manner that more than ten persons are entitled
to the benefits thereof.
9.5 Notices. All notices under this Agreement will be in writing and
will be delivered by personal service, facsimile transmission or telegram,
telecopy, certified mail (if such service is not available, then by first class
mail), postage prepaid, to such address as may be designated from time to time
by the relevant party, and which will initially be as set forth in each party's
signature block set forth below. Any notice sent by certified mail will be
deemed to have been given three (3) days after the date on which it is mailed.
All other notices will be deemed given when received. No objection may be made
to the manner of delivery of any notice actually received in writing by an
authorized agent of a party.
9.6 Governing Law. This Agreement shall be governed by and construed
in accordance with the internal laws of the State of California, without regard
to any applicable conflicts of law principles thereof, including all matters of
construction, validity and performance.
<PAGE> 5
9.7 Fees and Expenses. Each party shall bear and be responsible for
all of the fees and expenses incurred by it in connection with the transactions
contemplated by this Agreement; provided, however, that the Company will pay the
fees and expenses (up to $1,500) of one attorney for the Holders selected by Mr.
DeArman.
9.8 The validity, legality or enforceability of the remainder of
this Agreement will not be affected even if one or more of the provisions of
this Agreement will be held to be invalid, illegal or unenforceable in any
respect.
9.9 Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original, but all of which
shall be one and the same document.
[signatures on following page]
<PAGE> 6
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly
executed, as of the day and year first above written.
"Company" "Secured Party"
JALATE, LTD.,
a California corporation
/s/ William M. DeArman
----------------------------------
William M. DeArman, an individual
By: /s/ John Diesenbruch Address: 5420 Huckleberry Lane
------------------------------ Houston, Texas 77056
John Diesenbruch Fax: (713) 552-1505
Vice President and
Chief Financial Officer
Address: 2085 South Garfield Street "Holders"
City of Commerce, CA 90040
Fax: (213) 728-3752
/s/ Katherine U. Sanders
-----------------------------------
Katherine U. Sanders, an individual
Address: 4014 Inverness
Houston, Texas 77109
Fax: (713) 250-4298
Attn: Don A. Sanders
/s/ John E. Drury
-----------------------------------
John E. Drury, an individual
Address: c/o USA Waste Services,
Inc.
First City Tower,
Suite 4000
Houston, Texas 77002
Fax: (713) 512-6323
/s/ William M. DeArman
-----------------------------------
William M. DeArman, an individual
Address: 5420 Huckleberry Lane
Houston, Texas 77056
Fax: (713) 552-1505
<PAGE> 7
SCHEDULE 1
NOTES AND HOLDERS
<TABLE>
<CAPTION>
Number of Accrued and
Conversion Unpaid
Holder Amount Shares Interest
------ -------- ---------- -----------
<S> <C> <C> <C>
Katherine U. Sanders <F1> $ 237,500 380,000 $ 2,045.14
Katherine U. Sanders $ 142,500 228,000 $ 1,227.08
John E. Drury $ 95,000 152,000 $ 818.06
William M. DeArman $ 475,000 760,000 $ 4,090.28
--------- --------- ----------
Total $ 950,000 1,520,000 $ 8,180.56
========= ========= ==========
</TABLE>
<F1> By assignment from Don A. Sanders.
<PAGE> 8
SCHEDULE 2
WARRANTS
Series A Warrant No. 1, Stock Purchase Warrant issued by the Company to Don A.
Sanders on January 27, 1998, covering right to purchase up to 125,000 shares of
Common Stock at an exercise price of $1.625 per share, and subsequently assigned
by Don A. Sanders to Katherine U. Sanders Series A Warrant No. 2, Stock Purchase
Warrant issued by the Company to Katherine U. Sanders on January 27, 1998,
covering right to purchase up to 75,000 shares of Common Stock at an exercise
price of $1.625 per share.
Series A Warrant No. 3, Stock Purchase Warrant issued by the Company to John E.
Drury on January 27, 1998, covering right to purchase up to 50,000 shares of
Common Stock at an exercise price of $1.625 per share.
Series A Warrant No. 4, Stock Purchase Warrant issued by the Company to William
M. DeArman on January 27, 1998, covering right to purchase up to 250,000 shares
of Common Stock at an exercise price of $1.625 per share.
<PAGE> 9
EXHIBIT A
---------
Registration Rights
1. "Piggyback" Registration. If at any time the Company proposes to file a
registration statement under the Act with respect to an offering of its Common
Stock (other than a registration statement on Form S-4 or Form S-8 or any
successor or similar forms), whether or not for sale for its own account, then
the Company each such time shall give the Holder ten (10) business days written
notice before the filing thereof, which such notice shall offer the Holder the
opportunity to register all of such Holder's Conversion Shares which do not
qualify for an exemption from such registration under Rule 144 under the
Securities Act of 1933, as amended (the "Act") or a comparable or successor
exemption from registration ("Registrable Shares"). The Company shall include in
such registration statement all of the Holder's Registrable Shares with respect
to which the Company has received written request for inclusion within ten (10)
business days after notice has been duly given by the Company. Notwithstanding
the foregoing, the Company shall not be required to include the Holder's
Registrable Shares if the managing underwriter or underwriters of such offering
determine and advise the Company that inclusion of the Registrable Shares and
any other shares having "piggyback" registration rights (the "Other Shares")
would likely adversely affect such offering. If the managing underwriter or
underwriters determine that a portion of the Registrable Shares and Other Shares
may be included in the offering, the Registrable Shares and the Other Shares
shall be included in the registration on a pro rata basis (in relation to the
number of such Registrable Shares and Other Shares so requested to be included
in the offering).
The Holders acknowledge that nothing contained herein shall require or obligate
the Company to cause any registration statement pursuant to which the Holder has
exercised its "piggyback" registration rights pursuant to this Exhibit A to
become effective or, if declared effective, to maintain the effectiveness of
such registration statement.
2. Registration Expenses. Except as otherwise required by state securities laws
or the rules and regulations promulgated thereunder, all expenses, disbursements
and fees incurred by the Company in connection with carrying out its obligations
under this Exhibit A shall be borne by the Company; provided, however, that the
Holder shall pay (i) all costs and expenses of counsel, accounting or financing
professionals retained by such Holder, (ii) all underwriting discounts,
commissions, fees and expenses and all transfer taxes with respect to the shares
sold by such Holder, and (iii) all other expenses incurred by such Holder and
incidental to the sale and delivery of the shares to be sold by such Holder.
3. Conditions to Holder's Rights. It shall be a condition of the Holder's rights
under this Exhibit A that:
3.1 Cooperation. Such Holder shall cooperate with the Company by supplying
information and executing documents relating to such Holder or the securities of
the Company owned by such Holder in connection with such registration which are
customary for offerings of this type or is required by applicable laws or
regulations (including agreeing to sell such Holder's Registrable Securities on
the basis provided in any underwriting arrangements containing customary terms
reasonably satisfactory to such Holder); and
<PAGE> 10
3.2 Undertakings. Such Holder shall enter into any undertakings and take
such other action relating to the conduct of the proposed offering which the
Company or the underwriters may reasonably request as being necessary to insure
compliance with federal and state securities laws and the rules or other
requirements of the National Association of Securities Dealers, Inc. or the
American Stock Exchange, or which the Company or the underwriters may reasonably
request to otherwise effectuate the offering.
4. Discontinuation of Use of Prospectus. The Holder agrees that upon receipt of
any written notice from the Company that the prospectus included in the
registration statement, as then in effect, includes an untrue statement of a
material fact or omits to state any material fact required to be stated therein
or necessary to make the statements therein not misleading, in the light of the
circumstances under which they were made, the Holder will forthwith discontinue
its disposition of Registrable Shares pursuant to the registration statement
relating to such Registrable Shares until the Holder's receipt of the copies of
the supplemented or amended prospectus and, if so directed by the Company, will
deliver to the Company (at the Company's expense) all copies, other than
permanent file copies, then in the Holder's possession, of the prospectus
relating to such Registrable Shares current at the time of receipt of such
notice.
5. Indemnification.
5.1. Indemnification by the Company. In the event of any registration of
any Registrable Shares under the Act, the Company will, and it hereby does,
indemnify and hold harmless, to the full extent permitted by law, each Holder,
its directors, officers, partners, heirs, personal representatives, agents and
affiliates and each other person, if any, who controls such Holder within the
meaning of the Act, against any and all losses, claims, damages or liabilities
(or actions or proceedings, whether commenced or threatened, in respect thereof)
which arise out of or are based upon any untrue statement or alleged untrue
statement of any material fact contained in any registration statement under
which such securities were registered under the Act, any preliminary prospectus,
final prospectus or summary prospectus contained therein, or any amendment or
supplement thereto, or any omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein in light of the circumstances in which they were made not misleading,
and the Company will reimburse each Holder and each such director, officer,
partner, heir, personal representative, agent or affiliate, and controlling
person for any legal or any other expenses reasonably incurred by them in
connection with investigating or defending any such loss, claim, liability,
action or proceeding; provided, however, that the Company shall not be liable in
any such case to the extent that any such loss, claim, damage, liability (or
action or proceeding in respect thereof) or expense arises out of or is based
upon an untrue statement or alleged untrue statement or omission or alleged
omission made in such registration statement, any such preliminary prospectus,
final prospectus, summary prospectus, amendment or supplement (i) in reliance
upon and in conformity with written information furnished to the Company through
an instrument duly executed by or on behalf of such Holder, specifically stating
that it is for use in the preparation thereof or (ii) which is corrected in an
amendment or supplement or final prospectus (or amendment or supplement thereto)
provided to the indemnified person and such amended, supplemented or final
prospectus (or amendment or supplement thereto) was not given by or on behalf of
such indemnified person to the person who purchased the Registrable Securities,
if such is required by law at or prior to the written confirmation of the sale
of the Registrable Securities to such person; and provided, further, that the
Company shall not be liable to any person to the extent that any such loss,
claim, damage, liability (or action or proceeding in respect thereof) or expense
arises out of or is based upon any violation by such person of the Act or the
Securities Exchange Act of 1934, as amended. Such indemnity shall remain in full
force regardless of any investigation made by or on behalf of such Holder or any
such director, officer, partner, heir, personal representative, agent or
affiliate or controlling person and shall survive the transfer of such
securities by such Holder.
<PAGE> 11
5.2 Indemnification by the Holders. As a condition to including any
Registrable Shares of a Holder in any registration statement, the Company shall
have received an undertaking reasonably satisfactory to it from such Holder, to
indemnify and hold harmless (in the same manner and to the same extent as set
forth in Section 5.1 of this Exhibit A) the Company, its directors, officers,
agents and affiliates and each other person, if any, who controls the Company
within the meaning of the Act, with respect to any statement or alleged
statement in or omission or alleged omission from such registration statement,
any preliminary prospectus, final prospectus or summary prospectus contained
therein, or any amendment or supplement thereto, if such statement or alleged
statement or omission or alleged omission (i) was made in reliance upon and in
conformity with written information furnished to the Company through an
instrument duly executed by such Holder specifically stating that it is for the
use in the preparation of such registration statement, preliminary prospectus,
final prospectus, summary prospectus, amendment or supplement or (ii) is
corrected in an amendment or supplement or final prospectus (or amendment or
supplement thereto) provided to the indemnifying person and such amended,
supplemented or final prospectus (or amendment or supplement thereto) was not
given by or on behalf of such indemnifying person to the person who purchased
the Registrable Securities, if such is required by law at or prior to the
written confirmation of the sale of the Registrable Securities to such person;
provided, however, that the liability of such indemnifying party under this
Section 5.2 of Exhibit A shall be limited to the amount of proceeds received by
such Holder in the offering giving rise to such liability. Such indemnity shall
remain in full force and effect, regardless of any investigation made by or on
behalf of the Company or any such director, officer or controlling person and
shall survive the transfer of such securities by such Holder.
5.3 Notices of Claims, etc. Promptly after receipt by an indemnified party
hereunder of written notice of the commencement of any action or proceeding
involving a claim referred to in the preceding subsections of this Section 5 of
Exhibit A, such indemnified party will, if a claim in respect thereof is to be
made against an indemnifying party, give written notice to the latter of the
commencement of such action; provided, however, that the failure of any
indemnified party to give notice as provided herein shall not relieve the
indemnifying party of its obligations under the preceding subsections of this
Section 5 of Exhibit A, except to the extent that the indemnifying party is
actually prejudiced by such failure to give notice. In case any such claim or
action is brought against an indemnified party, the indemnifying party shall be
entitled to participate in and, unless representation of such indemnified party
and any such indemnifying party by the same counsel would be inappropriate under
applicable standards of professional conduct (whether or not such representation
by the same counsel has been proposed) due to actual or potential differing
interests between them, to assume the defense thereof, jointly with any other
indemnifying party similarly notified to the extent that it may wish, with
counsel reasonably satisfactory to such indemnified party, and after notice from
the indemnifying party to such indemnified party of its election so to assume
the defense thereof, the indemnifying party shall not be liable to such
indemnified party for any legal or other expenses subsequently incurred by the
latter in connection with the defense thereof other than reasonable costs of
investigation. No indemnifying party shall be liable for any settlement of any
action or proceeding effected without its written consent. No indemnifying party
shall, without the consent of the indemnified party, consent to entry of any
judgment or enter into any settlement which does not include as an unconditional
term thereof the giving by the claimant or plaintiff to such indemnified party
of a release from all liability in respect to such claim or litigation. An
indemnifying party who is not entitled to, or elects not to, assume the defense
of a claim will not be obligated to pay the fees and expenses of more than one
counsel for all parties indemnified by an indemnifying party with respect to
such claim, unless representation of such indemnified parties by the same
counsel would be inappropriate under applicable standards of professional
conduct (whether or not such representation by the same counsel has been
proposed) due to actual or potential differing interests between them with
respect to such claim, in which event the indemnifying party shall be obligated
to pay the fees and expenses of such additional counsel or counsels.
<PAGE> 12
5.4. Contribution. If the indemnification provided for in this Section 5
of Exhibit A shall for any reason be held by a court to be unavailable to an
indemnified party under Section 5.1 or 5.2 of Exhibit A hereof in respect of any
loss, claim, damage or liability, or any action in respect thereof, then, in
lieu of the amount paid or payable under Section 5.1 or 5.2 of Exhibit A hereof,
the indemnified party and the indemnifying party under Section 5.1 or 5.2 of
Exhibit A hereof shall contribute to the aggregate losses, claims, damages and
liabilities (including legal or other expenses reasonably incurred in connection
with investigation of the same), (a) in such proportion as is appropriate to
reflect the relative fault of the Company and the Holder with respect to the
acts, statements or omissions which resulted in such loss, claim, damage or
liability, or action in respect thereof, as well as any other relevant equitable
considerations or (b) if the allocation provided by clause (a) above is not
permitted by applicable law, in such proportion as shall be appropriate to
reflect the relative benefits received by the Company and the Holder from the
offering of the securities covered by such registration statement. No person
guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of
the Act) shall be entitled to contribution from any person who was not guilty of
such fraudulent misrepresentation. In addition, no person shall be obligated to
contribute hereunder any amounts in payment for any settlement of any action or
claim effected without such person's consent, which consent shall not be
unreasonably withheld.
5.5. Other Indemnification. Indemnification and contribution similar to
that specified in the preceding subdivisions of this Section 5 of Exhibit A
(with appropriate modifications) shall be given by the Company and the Holder
with respect to any required registration or other qualification of securities
under any federal or state law or regulation of any governmental authority other
than the Act.
5.6. Indemnification Payments. The indemnification and contribution
required by this Section 5 of Exhibit A shall be made by periodic payments of
the amount thereof during the course of the investigation or defense, as and
when bills are received or expense, loss, damage or liability is incurred.
<PAGE> 1
EXHIBIT 10.2
ARC MANUFACTURING INC.
ASSET PURCHASE AGREEMENT
This ASSET PURCHASE AGREEMENT (the "Agreement") is made and entered into
as of October 26, 1998, by and among JALATE, LTD., a California corporation (the
"Buyer") and ARC MANUFACTURING, INC., a Florida corporation (the "Seller"), JOHN
PAUL ARCIA, an individual ("Arcia") and DENNIS McCONKEY, an individual
("McConkey", and collectively with Seller and Arcia, the "Selling Parties").
RECITALS:
---------
WHEREAS, Seller is engaged in the design, manufacturing, importation, and
retail distribution and sale of jeans, denim and other clothing throughout the
United States (the "Business").
WHEREAS, Seller owns and maintains equipment, merchandise, inventory,
intellectual property, proprietary information and miscellaneous assets used in
connection with the operation of the Business.
WHEREAS, Seller desires to sell certain of such assets used in the
Business to Buyer and Buyer desires to acquire certain of such assets used,
useful or intended to be used in the operation of the Business (the
"Transactions").
WHEREAS, as an inducement to Buyer to engage in the Transactions, the
Selling Parties currently herewith have (i) caused ARC Merchandising, Inc., a
Florida corporation (ARC Merchandising"), to enter into an agreement with Buyer
to provide ongoing warehousing and distribution services on behalf of Buyer
within the state of Florida and (ii) caused ARC International Ltd., a Colombian
corporation ("ARC Colombia"), to enter into an agreement with Buyer to continue
to provide certain manufacturing services to ARC Merchandising for the benefit
of Buyer.
WHEREAS, in connection with the Transactions, Buyer will enter into
employment agreements (the "Employment Agreements") with each of Arcia and
McConkey.
NOW, THEREFORE, in consideration of the foregoing and the mutual covenants
hereinafter set forth, it is mutually agreed by and between the parties as
follows:
ARTICLE I
PURCHASE AND SALE OF ASSETS
1.1 Assets Purchased. Upon the terms and conditions and at the times set
forth in this Agreement, Seller will sell, assign, transfer and
<PAGE> 2
deliver to Buyer, and Buyer will purchase and acquire from Seller, all of
Seller's right, title and interest in and to the following assets (the
"Assets"), free and clear of any liens, claims, security interests or other
encumbrances of any kind or nature whatsoever:
1.11 All inventory, including without limitation, fabric, trim, work
in process, finished apparel, clothing, garments, accessories, samples and any
related items of Seller that is sold in the Business, and that is physically
located at 7150 NW 36th Avenue, Miami, Florida 33147 or in transit as of the
opening of business on the Closing Date (as defined below) and all documents of
title or other documents representing the foregoing (collectively, "Inventory").
1.12 All rights under purchase orders or contracts for the
acquisition of Inventory (collectively, "Purchase Orders").
1.13 All rights under sales orders or contracts for the sale of
finished goods constituting Seller's backlog (collectively, "Sales Orders").
1.14 All files, documents, papers, customer lists, supplier lists,
inventory records, sales data, distribution records, permits, licenses,
approvals and agreements pertaining to the foregoing or otherwise related to the
Business that are material to the ownership or sale of the Assets (wherever such
files, documents papers, customer lists, supplier lists, inventory records,
sales data, distribution records, permits, licenses, approvals and agreements
may be located and whether in tangible or electronic form); provided, however,
that Seller may keep those records that are necessary for it to comply with
requirements of the Internal Revenue System and shall make copies of those
records available to Buyer upon request.
1.15 All of Seller's rights under that certain Merchandise License
Agreement between Anita Industries, Inc. ("Licensor") and Seller effective as of
September 1, 1998 (the "License Agreement").
1.2 Assumption of Liabilities. Buyer is not assuming, and shall not be
deemed to have assumed or be liable for, any liabilities or obligations of
Seller of any kind or nature whatsoever (including without limitation Seller's
continuing operational liabilities, expenses and leases), other than Seller's
obligations under (i) the Seller's obligations under the Sales Orders set forth
on Schedule 4.8(b) attached hereto, (ii) Seller's obligations under the License
Agreement arising from and after the Closing Date to the extent that such
obligations relate to Buyer's sale of finished goods, and (iii) Seller's
obligation to pay royalties under the License Agreement for sales of finished
goods by Seller from October 1, 1998 through the Closing Date (not to exceed
$9,500). Buyer expressly assumes and agrees to pay the obligations under items
(i) through (iii), inclusive.
<PAGE> 3
ARTICLE II
PURCHASE PRICE AND RELATED MATTERS
2.1 Purchase Price. In consideration for the sale and purchase of the
Assets upon the terms and subject to the conditions contained in this Agreement,
Buyer shall pay to Seller the sum of (x) $1,018,884 (representing (i) $919,994
(the book value of the Inventory as shown on Schedule 4.7 hereto) minus (ii)
$9,500 (the maximum amount of royalty obligations to be assumed by Buyer
pursuant to Section 1.2(iii) hereof) plus (iii) $108,390 (the dollar amount of
the Purchase Orders as shown on Schedule 4.8(a) hereto), plus (y) the costs
(representing sewing, cutting and other labor costs and freight and duty
charges) (the "Conversion Costs") incurred by or on behalf of Seller in the
ordinary course of business consistent with past practice and Section 4.8 from
the date of this Agreement through and including the Closing Date (as defined
below) in connection with the manufacturing and delivery of finished goods
inventory utilizing the "Breaker Jeans" trademark being acquired by Buyer
pursuant to this Agreement (the sum of (x) and (y) being the "Purchase Price").
The Purchase Price shall be paid as follows: (a) $25,000 of the Purchase Price
shall be paid at Closing and (b) the balance of the Purchase Price shall be paid
after the sale of the Inventory as finished goods under the trademark "Breaker
Jeans" by Buyer, with Buyer to pay thirty five percent (35%) of its sales price
for the finished goods until such time as the balance of the Purchase Price has
been paid in full. Buyer shall make payments to Seller of the balance of the
Purchase Price with respect to each shipment by overnight courier on the Friday
of the week following the week in which the Inventory is shipped as finished
goods by Buyer to its customers (e.g., if Buyer shipped finished goods inventory
to its customers on a Thursday, Buyer would make payments to Seller on Friday of
the following week); provided, however, that until Seller has delivered to Buyer
the clarification to the UCC-1 financing statement as required by Section 6.7
hereof, no payments shall be required by Buyer to Seller pursuant to this
sentence. Notwithstanding the foregoing, payments by Buyer for the sale of
portions of the Inventory which constitute finished goods (as indicated on the
inventory report dated October 28, 1998) (the "Finished Goods Inventory") and
which are shipped between October 29, 1998 and the Closing Date shall be made as
follows: Seller shall ship and invoice all Finished Goods Inventory from time to
time with respect to the applicable sales order in its name but on behalf, at
the direction, and for the benefit of Buyer and shall apply one hundred percent
(100%) of the gross selling price (net of customary freight allowances) as
indicated on the invoice to the payment of the balance of the Purchase Price.
Seller shall be responsible for the factoring or collection of the accounts
receivable generated by the sale of the Finished Goods Inventory and Seller's
inability to collect any portion of the selling price of such Finished Goods
Inventory shall not affect the application of the invoiced selling price to the
balance of the Purchase Price.
2.2 Sales Taxes. All sales, use, documentary and transfer taxes arising
out of the sale of the Assets hereunder, if any, shall be paid by the Seller.
Seller shall pay all costs and fees imposed by parties to Purchase Orders
assigned to Buyer hereunder which may arise by reason of the Transactions.
2.3 Tax Allocation. Buyer and the Selling Parties will agree on a
valuation solely for tax purposes of the aggregate consideration paid for
transfer of the Assets. Buyer shall then, subject to the approval of
<PAGE> 4
Selling Parties, which shall not unreasonably be withheld, determine an
allocation of such consideration to broad categories constituting components of
the Assets and shall determine the information to be included on the Form 8594
to be filed with respect to the Transactions. Each of the parties will report
the purchase and sale of the Assets in accordance with the agreed upon valuation
and allocation among such broad categories for all federal, state and local tax
purposes.
2.4 Determination of Conversion Costs. Buyer and the Selling Parties
acknowledge that the Conversion Costs cannot be determined at the time of the
Closing Date. The Seller shall provide Buyer with its good faith determination
(the "Seller's Determination") of the Conversion Costs within fifteen days after
the Closing. The Seller shall include with the Seller's Determination a
reasonably detailed statement showing how Seller arrived at the Seller's
Determination. The Seller shall provide Buyer with reasonable access to its
books and records to enable Buyer to determine whether it agrees with the
Seller's Determination and shall provide such documentation to support its
calculations as Buyer may reasonably request. If Buyer disagrees with Seller's
Determination, Buyer shall inform the Seller of the reasons therefor and Buyer
and the Seller shall meet to attempt in good faith to resolve any such
disagreement within forty-five days of the Closing. If Buyer and Seller are
unable to reach agreement on the final determination of the Conversion Costs
within forty five days after the Closing, then Buyer and Seller shall either (i)
agree to extend the period of time to reach such a final determination by mutual
agreement or (ii) agree on an alternative method to reach such a final
determination (e.g., by submitting such matter to a mutually-agreeable
accounting firm). Until such time as the Conversion Costs are finally
determined, the Conversion Costs for purposes of calculating the Purchase Price
under Section 2.1 hereof shall be assumed to be $100,000.
ARTICLE III
CLOSING
3.1 Closing. The closing (the "Closing") of the Transactions contemplated
by this Agreement are taking place at the offices of Irell & Manella LLP, 1800
Avenue of the Stars, Suite 900, Los Angeles, California 90067. The date of the
Closing (the "Closing Date") is November 16, 1998.
3.2 Selling Parties Deliveries. At the Closing, the Selling Parties are
delivering to the Buyer the following:
3.2.1 Bill of Sale. An executed general assignment, assumption and
bill of sale with respect to the Assets in the form attached hereto as Exhibit
A.
3.2.2 Warehouse Letter Agreement. An executed letter agreement (the
"Warehouse Letter Agreement") from ARC Merchandising in the form attached hereto
as Exhibit B.
3.2.3 Manufacture Letter Agreement. An executed letter agreement
(the "Manufacture Letter Agreement") from ARC Colombia in the form attached
hereto as Exhibit C.
<PAGE> 5
3.2.4 Employment Agreements. Executed Employment Agreements with
Buyer from each of Arcia and McConkey in the form attached hereto as Exhibit D.
3.2.5 Consent to Assignment. A consent from the Licensor to
assignment of the License Agreement by Seller to Buyer in the form attached
hereto as Exhibit E.
3.2 6 UCC-1 Financing Statement Clarification. An executed
clarification with respect to the UCC-1 Financing Statement in favor of The CIT
Group/Commercial Services, Inc. (filing number 970000124056) in the form
attached hereto as Exhibit F.
3.3 Buyer Deliveries. At the Closing, the Buyer is delivering to Arcia and
McConkey executed copies of their respective Employment Agreements with Buyer in
the form attached hereto as Exhibit D.
3.4 Transfer of Title; Risk of Loss; Rescission. The parties acknowledge
that the sale and transfer of title of the Inventory from Seller to Buyer shall
occur from time to time when Seller ships such Inventory on behalf of Buyer as
finished goods to Buyer's customers; provided, however, that transfer of title
to the Finished Goods Inventory shall occur at the Closing. Seller shall bear
all risk of loss, damage, impairment, destruction, confiscation or condemnation
of or to the Inventory, or any portion thereof, prior to transfer of title. The
Purchase Price shall be reduced on a dollar-for-dollar basis if, prior to
transfer of title, the Inventory is lost, damaged, impaired, destroyed,
confiscated or condemned (measured by dollar amount as shown on Exhibit 4.7
hereto); provided, however, that if more than fifty percent (50%) of the
Inventory (measured by dollar amount as shown on Exhibit 4.7 hereto) is lost,
damaged, impaired, destroyed, confiscated or condemned, then Buyer shall have
the option of terminating the Transactions and all related matters, including
the Employment Agreements and the option grants provided for therein. If Buyer
exercises its termination right, the License Agreement shall revert to Seller
automatically and without any further action by Buyer and Seller may thereafter
exercise its rights pursuant to the License Agreement as if Agreement had never
been executed. Such rescission shall not relieve Buyer from its payment
obligations for any Inventory already sold to Buyer.
3.5 Default in Payments. If Buyer fails to make any payments to Seller or
ARC Merchandising when due pursuant to Section 2.1 or Section 6.4 hereunder, and
such failure continues for five (5) business days after written notice thereof:
(i) Seller may upon written notice to Buyer (the "Election Notice") elect not to
deliver any remaining Inventory and may sell such Inventory for its own account,
to the third party buyer under an applicable Sales Order; and (ii) the
assignment of the License Agreement shall, upon delivery of the Election Notice
to Buyer, revert to Seller. Notwithstanding the foregoing, Seller may not elect
the remedies described in clauses (i) and (ii) of the previous sentence (x) if
such payment default is less than ten percent (10%) of the amount due at that
time to Seller or ARC Merchandising, as applicable, (y) if Buyer cures such
payment default prior to Seller's delivery of the Election Notice, or (z) at any
time after Buyer has paid at least ninety percent (90%) of the Purchase Price.
If Seller elects to deliver an Election Notice, Buyer may
<PAGE> 6
elect upon written notice to Seller to terminate this Agreement and the
Employment Agreements (including rescission of the option grants provided
thereby), in which case none of the parties will have any further obligations
thereunder.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE SELLING PARTIES
The Selling Parties jointly and severally represent and warrant to Buyer
that each of the following statements is true and correct as of the date of this
Agreement and as of the Closing Date:
4.1 Organization, Corporate Power and Authority. Seller is a corporation
duly organized, validly existing and in good standing under the laws of the
State of Florida and is duly qualified to transact business as a foreign
corporation in all jurisdictions in which Seller conducts the Business, except
where the failure so to qualify will not have a material adverse effect on the
Assets or the Business. Seller has all requisite corporate power and authority
to own, operate and lease the Assets, to conduct the Business, to execute and
deliver this Agreement, and to perform its obligations hereunder.
4.2 Authorization of Agreements. The execution, delivery and performance
by Seller of this Agreement and the consummation of the Transactions
contemplated herein have been duly authorized by all necessary corporate action
by Seller (including without limitation by the requisite vote of Seller's
shareholders). This Agreement has been duly executed and delivered by each of
the Selling Parties and constitutes the legal, valid and binding obligation of
each of the Selling Parties, enforceable against each of the Selling Parties in
accordance with its terms except as may be limited by bankruptcy, insolvency,
reorganization, moratorium, and other similar laws and equitable principles
relating to or limiting creditors' rights generally.
4.3 No Violation or Conflict. The execution, delivery and performance of
this Agreement by each of Selling Parties do not (i) violate any provision of
the Articles of Incorporation or Bylaws of Seller; (ii) contravene any law,
rule, or regulation of any State or of the United States, or any order, writ,
judgment, injunction, decree, determination or award currently in effect that
affects or binds any of the Selling Parties; or (iii) result in any manner
whatsoever in the violation or breach of, or constitute a default (or give rise
to any right of termination, cancellation, or acceleration) under, any of the
terms, conditions, or provisions of any license, permit, note, bond, mortgage,
indenture, lease, contract, agreement or other instrument or obligation to which
any of the Selling Parties is a party or by which any of the Selling Parties or
any of their properties or assets may be bound, or result in the creation or
imposition of any lien, charge or encumbrance upon any property or assets of any
of Selling Parties.
4.4 No Existing Defaults. None of the Selling Parties is in default under
any license, permit, note, bond, mortgage, indenture, lease, contract, agreement
or other instrument or obligation, whether written or oral, to which any of the
Selling Parties is a party or by which any of the Assets are bound, and there
exists no condition or event which, after
<PAGE> 7
notice or lapse of time or both, would constitute a default in connection
with any of the foregoing, except to the extent any of the foregoing would not
have a material adverse effect on the Business or the Assets.
4.5 Approvals. No approval, authorization, consent, order or action of or
filing with any court, administrative agency or other governmental authority, or
any other third party (other than the consent of the Licensor under the License
Agreement, which such consent has been obtained), is required to be obtained by
any of the Selling Parties for the execution and delivery by the Selling Parties
of this Agreement or the consummation of the Transactions contemplated herein.
4.6 Title to Assets. Seller holds good, valid and marketable
title to the Assets, free and clear of restrictions on or condition to transfer
or assignment and free and clear of all mortgages, liens, pledges, charges,
security interests or other encumbrances of any kind or nature whatsoever.
Except as set forth on Schedule 4.6, the Assets are in the sole possession of
Seller. The delivery to Buyer of this Agreement and any other instruments of
transfer of ownership contemplated by this Agreement will vest good and
marketable title to the Assets in Buyer, free and clear of all mortgages, liens,
pledges, charges, security interests or other encumbrances of any kind or nature
whatsoever, at the times set forth in Section 3.4. Without limiting the
generality of the foregoing, the Assets are not subject to any lien for federal,
state or local taxes or assessments, whether or not perfected.
4.7 Inventory. Schedule 4.7 attached hereto sets forth a true and correct
list of all of the Inventory, including the book value thereof (determined in
accordance with generally accepted accounting principles applicable in the
United States ("GAAP"), consistently applied, as of the date hereof. The
Inventory is of good and merchantable quality and is free of any defects, latent
or patent, and is useable or saleable, as applicable, in the ordinary course of
the operations of the Business. None of the Inventory constitutes returned or
repossessed goods.
4.8 Purchase Orders, Sales Orders and Manufacturing Costs. Schedule 4.8(a)
attached hereto sets forth a true and correct list of all of the Purchase
Orders, including the vendor, the dollar amount of the Purchase Order and the
items ordered. Schedule 4.8(b) attached hereto sets forth a true and correct
list of all of the Sales Orders, including the customer, the items ordered and
the dollar amount of the order. The Purchase Orders have been placed in the
ordinary course of business, consistent with past practice (including in terms
of dollar amount and items ordered). True and correct copies of the Purchase
Orders and the Sales Orders have been made available by the Selling Parties to
the Buyer. Seller has provided to Buyer true and correct documentation regarding
the full and entire cost of manufacturing and delivering to Miami, Florida the
products which are to be sold and delivered pursuant to the Sales Orders.
4.9 License Agreement. The License Agreement is in full force and effect
and Seller and the Licensor are in full compliance with all of the terms
thereof. No circumstances exist which, with notice or the passage of time or
both, would constitute a default under the License Agreement or otherwise permit
the Licensor to terminate or cancel the license granted by the License
Agreement. Seller's use of the trademark "Breaker Jeans"
<PAGE> 8
and any other rights granted under the License Agreement to the best
knowledge of the Selling Parties do not infringe or violate the intellectual
property rights of any third party. Seller and its predecessor-in-interest have
not received notice from any third party that the trademark "Breaker Jeans" or
any other rights granted under the License Agreement violate or infringe the
intellectual property rights of such third party. Seller has provided a true and
correct copy of the License Agreement to Buyer. Except as set forth in the
License Agreement, Seller is not required to pay any royalty, license fee or
similar compensation in connection with any such intellectual property.
4.10 Labor Matters. Seller has no collective bargaining agreements or
employment or consulting agreements of any kind or nature (other than employment
arrangements terminable at will without liability on the part of the employer or
upon payment of no more than the applicable statutory or regulatory severance or
termination benefits). The Selling Parties are not aware of any labor dispute or
labor trouble involving employees of Seller nor has there been any such disputes
or trouble during the two years preceding the date of this Agreement.
4.11 Claims and Litigation. There are no claims, causes of action,
actions, suits or proceedings relating to any of the Selling Parties pending or,
to the knowledge of the Selling Parties, threatened against any of the Selling
Parties at law or in equity, or before or by any federal, state or other
governmental agency or instrumentality that might result in a material adverse
effect on the Assets or the Business. To the knowledge of the Selling Parties,
there are no orders, judgments or decrees of any court or governmental agency,
that apply to any of the Selling Parties, the Business or any of the Assets.
4.12 Compliance with Laws. The Business has been and is being conducted in
compliance in all respects with all applicable federal, state and local laws and
required approvals, orders, licenses and permits.
4.13 Brokers and Finders. Except for the fee to Barry Ludlim of $.05 per
garment sold by Buyer during the three-year period ending on the third
anniversary of the Closing Date which utilizes the "Breaker Jeans" trademark (or
any substitute trademark utilized by Buyer for the products currently sold by
Seller), which Buyer assumes and agrees to pay, none of the Selling Parties nor
any of their directors, officers, employees or agents has employed, or incurred
any liability to, any broker, finder or agent for any brokerage fees, finder's
fees, commissions or other amounts with respect to the sale of Assets, this
Agreement or the Transactions contemplated herein.
4.14 True Copies. All documents furnished to Buyer by any of the Selling
Parties pursuant to this Agreement are true and correct copies, and there are no
amendments or modifications thereto except as set forth in such documents.
4.15 No Material Adverse Change; Operations in Ordinary Course. Since
September 30, 1998, (i) there has been no material adverse change in the
Business and no material adverse change affecting the Assets or the Business,
and (ii) Seller has operated the Business only in the ordinary course,
consistent with past practice.
<PAGE> 9
4.16 Transfer. The transfer of the Assets contemplated herein will not
leave Seller unable to meet its obligations to its creditors as they become due
and the value of all of Seller's assets upon completion of the transfer
contemplated herein will exceed the amount of its liabilities.
4.17 Accuracy of Representations and Warranties. No representation or
warranty made by the Selling Parties in this Agreement or any disclosure
schedule or certificate or other agreement delivered hereunder contains or will
contain any untrue statement of a material fact or omits any material fact
necessary to make the statements contained herein or therein not misleading.
None of the Selling Parties knows of any fact which has resulted or which in the
reasonable judgment of any of the Selling Parties, will result in a material
change in the Business or the Assets which have not been set forth in this
Agreement or otherwise disclosed in writing to Buyer.
ARTICLE V
BUYER'S REPRESENTATIONS AND WARRANTIES
Buyer represents and warrants to the Selling Parties that each of the
following statements is true and correct as of the date of this Agreement and as
of the Closing Date:
5.1 Organization, Corporate Power and Authority. Buyer is a corporation
duly organized, validly existing and in good standing under the laws of the
State of California and is duly qualified to transact business as a foreign
corporation in all jurisdictions in which Buyer conducts its business, except
where the failure so to qualify will not have a material adverse effect on
Buyer's ability to perform its obligations under this Agreement. Buyer has all
requisite corporate power and authority to execute and deliver this Agreement
and to perform its obligations hereunder.
5.2 Authorization of Agreements. The execution, delivery and performance
by Buyer of this Agreement and the consummation of the Transactions contemplated
herein have been duly authorized by all necessary corporate action by Buyer.
This Agreement has been duly executed and delivered by Buyer and constitutes the
legal, valid and binding obligation of Buyer, enforceable against Buyer in
accordance with its terms except as may be limited by bankruptcy, insolvency,
reorganization, moratorium, and other similar laws and equitable principles
relating to or limiting creditors' rights generally.
5.3 No Violation or Conflict. The execution, delivery and performance of
this Agreement by Buyer do not (i) violate any provision of the Articles of
Incorporation or Bylaws of Buyer; (ii) contravene any law, rule, or regulation
of any State or of the United States, or any order, writ, judgment, injunction,
decree, determination or award currently in effect that affects or binds Buyer;
or (iii) result in any manner whatsoever in the violation or breach of, or
constitute a default (or give rise to any right of termination, cancellation, or
acceleration) under, any of the terms, conditions, or provisions of any license,
permit, note, bond, mortgage, indenture, lease, contract, agreement or other
<PAGE> 10
instrument or obligation to which Buyer is a party or by which Buyer or any of
its properties or assets may be bound, or result in the creation or imposition
of any lien, charge or encumbrance upon any property or assets of Buyer.
5.4 Financial Statements. Buyer has provided to Seller its unaudited
balance sheet as of September 30, 1998 and its statements of operations for the
three-month and nine-month periods ending September 30, 1998 (the "Financial
Statements"). The Financial Statements have been prepared in accordance with
GAAP, and in accordance with Buyer's usual practices, principles and procedures,
except as set forth in the footnotes, if any, to such financial statements.
Seller agrees to keep such Financial Statements strictly confidential.
5.5 Brokers and Finders. Except for the fee to Barry Ludlim of $.05 per
garment sold by Buyer during the three-year period ending on the third
anniversary of the Closing Date which utilizes the "Breaker Jeans" trademark (or
any substitute trademark utilized by Buyer for the products currently sold by
Seller), which Buyer assumes and agrees to pay, none of Buyer or any of its
directors, officers, employees or agents has employed, or incurred any liability
to, any broker, finder or agent for any brokerage fees, finder's fees,
commissions or other amounts with respect to the sale of Assets, this Agreement
or the Transactions contemplated herein.
5.6 Accuracy of Representations and Warranties. No representation or
warranty made by Buyer in this Agreement or any disclosure schedule or
certificate or other agreement delivered hereunder contains or will contain any
untrue statement of a material fact or omits any material fact necessary to make
the statements contained herein or therein not misleading.
ARTICLE VI
CONVENIENCE
6.1 Seller's Existence. After the Closing, Seller shall maintain its
corporate existence for so long as shall be necessary for Seller to perform its
obligations under this Agreement.
6.2 Letter Agreements. Seller and Arcia shall cause ARC Merchandising and
ARC Colombia to comply with their obligations under the Warehouse Letter
Agreement and the Manufacture Letter Agreement, respectively; provided, however,
that the foregoing shall not require the Selling Parties to make any capital
investments in ARC Merchandising or ARC Colombia.
6.3 Additional Transfer Documents. After the Closing, the Selling Parties
shall from time to time, at Buyer's request and without further cost and expense
to Buyer, execute and deliver to Buyer such other instruments of conveyance and
transfer (including, without limitation, additional assignments suitable for
filing or recording with respect to the Assets) and take such other action as
Buyer may reasonably request so as more effectively to sell, assign, and
transfer to Buyer title to and possession of the Assets as provided in this
Agreement or otherwise to consummate the Transactions contemplated herein.
<PAGE> 11
6.4 Manufacturing Services. Until the Purchase Price is paid in full,
Buyer agrees to utilize ARC Merchandising (through its association with ARC
Colombia) for manufacturing services (cutting, sewing, etc.) necessary to
manufacture the Inventory into finished goods. The Selling Parties will cause
ARC Merchandising to provide such services to Buyer on the same terms and
conditions as ARC Merchandising currently provides to Seller. The Selling
Parties and Buyer acknowledge that ARC Merchandising shall invoice Buyer for
such services at the time of delivery of finished goods to Buyer (f.o.b. Miami)
and Buyer will pay for such services on the Friday of the following week. No
payments will be required for any services provided by ARC Merchandising if the
Inventory being utilized or the finished goods are lost, damaged, impaired,
destroyed, confiscated or condemned prior to delivery by ARC Merchandising to
Buyer.
6.5 Noncompetition. The Selling Parties agree that, for a period of
eighteen (18) months from the Closing Date or, if earlier, until the Employment
Agreements are terminated by Buyer or are not renewed by Buyer in accordance
with their terms when Arcia and McConkey are willing to renew, the Selling
Parties will not, directly or indirectly, engage in, own, manage, operate, join,
control or participate in the ownership, management, operation or control of any
business engaged in the wholesale or retail sale or distribution of products
that are the same as or similar to the finished goods sold or distributed by the
Seller in the junior's market with a wholesale price point of between $12.00 and
$15.00 per garment; provided, however, that the Selling Parties may own less
than five percent (5%) of the shares of a public company engaged in such
business. The foregoing covenant is a material part of the consideration for the
purchase of the Assets..
6.6 Purchase Orders. The parties acknowledge that a portion of the
Purchase Price reflects payment to Seller for the Purchase Orders which are
being acquired by Buyer. Seller agrees to segregate a portion of the Purchase
Price necessary to pay the invoices for such Purchase Orders and agrees that it
will pay such invoices when due. Seller shall deliver to Buyer (or at its
direction) the materials received pursuant to the Purchase Orders.
ARTICLE VII
INDEMNIFICATION
7.1 Survival of Representations and Warranties. All representations and
warranties made in this Agreement shall survive the closing of this Agreement.
Any party learning of a misrepresentation or breach of any of its
representations and warranties under this Agreement shall immediately give
written notice thereof to all other parties to this Agreement. The
representations and warranties of this Agreement shall terminate one year from
the Closing Date and such representations and warranties shall thereafter be
without force or effect except for any claim as to which notice has been given
to the party to be charged prior to such expiration date; provided that the
representations and warranties contained in Sections 4.2, 4.6, 4.9 and 5.2
hereof shall survive indefinitely.
<PAGE> 12
7.2 Indemnification by the Selling Parties.
The Selling Parties hereby jointly and severally agree to indemnify,
defend and hold Buyer and its affiliates, directors, officers, employees,
representatives, successors and assigns, harmless from and against any and all
losses, liabilities, obligations, actions, suits, judgments, settlements,
damages, costs and expenses, including but not limited to interest, penalties
and actual attorneys' fees and expenses ("Losses") suffered by such parties and
arising out of or due to:
A. A breach of any representation, warranty or covenant of the
Selling Parties contained in this Agreement or other writing delivered pursuant
hereto.
B. Any liability or obligation of the Selling Parties not
expressly assumed by Buyer pursuant to Section 1.2 of this Agreement, including,
but not limited to, any liability or obligation of the Business.
C. Any liability or obligation for any taxes with respect to
the Assets or the Transactions.
7.3 Buyer's Indemnification. Buyer agrees to indemnify, defend, and hold
the Selling Parties and their affiliates, directors, officers, employees,
representatives, successors and assigns, harmless from and against from and
against any and all Losses suffered by such parties and arising out of or due
to:
A. A breach of any representation, warranty or covenant of the
Buyer contained in this Agreement or other writing delivered pursuant hereto.
B. The non-payment of any liability or obligation of Seller
expressly assumed by Buyer pursuant to Section 1.2 of this Agreement.
7.4 Notice to Indemnifying Party. If any party (the "Indemnified Party")
receives notice of any claim or other commencement of any action or proceeding
with respect to which any other party is obligated to provide indemnification
(the "Indemnifying Party") pursuant to Section 7.2 or Section 7.3, the
Indemnified Party shall promptly give the Indemnifying Party written notice
thereof, which notice shall specify, if known, the amount or an estimate of the
amount of the liability arising therefrom; provided that the failure to give
such notice shall not affect the Indemnifying Party's obligations hereunder
except (and then only to the extent) that it is materially prejudiced thereby.
The Indemnified Party shall not settle or compromise any claim by a third party
for which it is entitled to indemnification hereunder, without the prior written
consent of the Indemnifying Party (which shall not be unreasonably withheld)
unless suit shall have been instituted against it and the Indemnifying Party
shall not have taken control of such suit after notification thereof as provided
in Section 7.5 of this Agreement.
7.5 Defense by Indemnifying Party. In connection with any claim giving
rise to indemnity hereunder resulting from or arising out of any claim or legal
proceeding by a person who is not a party to this Agreement, the Indemnifying
Party at its sole cost and expense may, upon written notice to the Indemnified
Party, assume the defense of any such claim or legal proceeding, and the
Indemnifying Party shall advise the Indemnified Party in writing of any element
<PAGE> 13
of the claim which the Indemnified Party believes is not covered by this
indemnity. The Indemnified Party shall be entitled to participate in the defense
of any such action, on any element of the claim not covered with its counsel and
at its own expense. If the Indemnifying Party does not assume the defense of any
such claim or litigation resulting therefrom, (a) the Indemnified Party may
defend against and/or settle such claim or litigation, after giving notice of
the same to the Indemnifying Party, on such terms as the Indemnified Party may
deem appropriate, and (b) the Indemnifying Party shall be entitled to
participate in (but not control) the defense of such action, with its counsel
and at its own expense. The Indemnifying Party will not settle any claim or
litigation which does not include as a term an unconditional release of the
Indemnified Parties.
ARTICLE VIII
MISCELLANEOUS
8.1 Exhibits. All exhibits, schedules and lists attached to this Agreement
or delivered pursuant to this Agreement, shall be deemed a part of this
Agreement and incorporated herein as if fully set forth herein.
8.2 Expenses. Except as provided herein to the contrary, each party will
bear its own fees and expenses in connection with the negotiation, preparation,
execution of this Agreement and the Transactions.
8.3 Attorneys' Fees. In the event of any litigation between the parties to
declare or enforce any provisions of this Agreement, the prevailing party or
parties shall be entitled to recover from the losing party or parties, in
addition to any other recovery and costs, reasonable attorneys' fees incurred in
such litigation in both the trial and the appellate courts.
8.4 Integration. This Agreement, its exhibits and schedules, any other
documents incorporated by reference herein or executed in connection herewith,
constitute the entire Agreement of the parties hereto, and there are no
promises, terms, conditions or obligations other than those contained herein or
therein. This Agreement supercedes all prior communications, representations or
agreements, verbal or written between the parties hereto and shall not be
amended except in writing subscribed to by the parties hereto.
8.5 Cooperation. Each party hereto agrees, both before and after the
Closing Date, to execute any and all further documents and writings and perform
such other reasonable actions which may be or become necessary or expedient to
effectuate and carry out the Transactions contemplated by this Agreement.
8.6 Remedies Not Exclusive. No remedy conferred by any of the specific
provisions of this Agreement is intended to be exclusive of any other remedy,
and each and every remedy will be cumulative and will be in addition to every
other remedy given hereunder or now or hereafter existing at law or in equity or
by statute or otherwise. The election of any one or more remedies will not
constitute a waiver of the right to pursue other available remedies.
<PAGE> 14
8.7 Waivers. With regard to any power, remedy or right provided herein or
otherwise available to any party hereunder, (i) no waiver or extension of time
will be effective unless expressly contained in a writing signed by the waiving
party, and (ii) no alteration, modification or impairment will be implied by
reason of any previous waiver, extension of time, or delay or omission in
exercise of rights or other indulgence.
8.8 Notices. All notices under this Agreement will be in writing and will
be delivered by personal service, facsimile, telegram, telecopy or certified
mail (postage prepaid) to such address as may be designated from time to time by
the relevant party, and which will initially be as set forth below. Any notice
sent by certified mail will be deemed to have been given three (3) days after
the date on which it is mailed. All other notices will be deemed given when
received. No objection may be made to the manner of delivery of any notice
actually received in writing by an authorized agent of a party. Notices will be
addressed as follows or to such other address as the party to whom the same is
directed will have specified in conformity with the foregoing:
(i) If to any of the Selling Parties:
ARC Manufacturing, Inc.
7100 N. W. 36th Avenue
Miami, Florida 33147
Attn: Paul Arcia
With a copy to:
Thomas L. David, P.A.
1428 Brickell Avenue, Eighth Floor
Miami, Florida 33131
(ii) If to Buyer:
Jalate, Ltd.
2085 South Garfield Street
Commerce, California 90040
Attn: President
8.9 Third-Party Benefits. Except as expressly provided herein, none of the
provisions of this Agreement will be for the benefit of, or enforceable by, any
third-party beneficiary.
8.10 Governing Law. All questions with respect to the Agreement and the
rights and liabilities of the parties will be governed by the laws of the State
of California, regardless of the choice of laws provisions of that state or any
other jurisdiction.
8.11 Successors and Assigns; Assignment. This Agreement will be binding
upon and inure to the benefit of the parties, their respective successors and
permitted assigns. Neither this Agreement nor any of the parties' rights
hereunder shall be assignable by either party without the prior written consent
of the other party; provided Buyer may, without the consent of the Selling
Parties, assign its rights under this Agreement to any of Buyer's affiliates.
<PAGE> 15
8.12 Rules of Construction.
8.12.1 Headings. The Article and Section headings in this Agreement
are inserted only as a matter of convenience, and in no way define, limit,
extend or interpret the scope of this Agreement or of any particular Article or
Section.
8.12.2 Number and Gender. Throughout this Agreement, as the context
may require: (a) the masculine gender includes the feminine and neuter; and the
neuter gender includes the masculine and feminine; (b) the singular tense and
number includes the plural, and the plural tense and number includes the
singular; and (c) the past tense includes the present, and the present tense
includes the past.
8.12.3 Severability. The validity, legality or enforceability of the
remainder of this Agreement will not be affected even if one or more of the
provisions of this Agreement will be held to be invalid, illegal or
unenforceable in any respect.
8.13 Agreement Negotiated. The parties hereto are sophisticated and have
been represented by lawyers throughout the Transactions who have carefully
negotiated the provisions hereof. As a consequence, the parties do not believe
the presumption of the laws or rules of any jurisdiction relating to the
interpretation of contracts against the drafter of any particular clause should
be applied in this case and therefore waive its effects.
8.14 Counterparts. This Agreement may be executed in counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one and the same instrument.
[Remainder of Page Intentionally Left Blank]
<PAGE> 16
IN WITNESS WHEREOF, THIS AGREEMENT has been executed as of the day and
year first herein above written.
Jalate, Ltd.,
A California corporation
By: /s/ Vint Bacon
----------------------
Vint Bacon
President
ARC Manufacturing, Inc.,
A Florida corporation
By: /s/ John Paul Arcia
----------------------
John Paul Arcia
Co-President
By: /s/ Dennis McConkey
---------------------
Denis McConkey
Co-President
/s/ John Paul Arcia
---------------------
John Paul Arcia
/s/ Dennis McConkey
---------------------
Dennis McConkey
<PAGE> 1
EXHIBIT 10.3
G.E. CAPITAL FIRST FACTORS
FACTORING AGREEMENT
THIS FACTORING AGREEMENT (this "Agreement"), made and executed this
10th day of November, 1998, by and between JALATE, LTD. (the Client); and GE
CAPITAL FIRST FACTORS CORPORATION (the "Factor").
1. Appointment. Client appoints Factor as its sole factor with respect to
all sales of its merchandise or rendition of services to customers and hereby
offers to sell and assign only to Factor, as absolute owner, all Accounts
Receivables arising out of such sales or services, including all such sales or
services arising under any trade names or through any division or selling agent.
"Accounts Receivable" shall mean and include accounts, contract rights,
instruments, chattel paper, general intangibles, returned or repossessed goods
arising out of or relating to the sale or other disposition of goods at any time
or from time to time, all proceeds thereof and merchandise represented thereby.
The assignment of Accounts Receivable to Factor shall vest in Factor all of
Client's rights, securities, guaranties and liens with respect to each Account
Receivable, including all rights of stoppage in transit, replevin, reclamation,
and all claims of lien filed by Client or held by Client on personal property,
and all rights and interest in the merchandise sold, and all of Client's
defenses and rights of offset with respect to any payments received by Factor on
Accounts Receivable, but Factor shall not be obligated to, and shall not be
liable for, exercising or refusing to exercise any rights granted to Factor
hereby.
2. Purchase of Accounts Receivable. Factor agrees to purchase from Client
at the office of Factor all Accounts Receivable first approved by Factor in
writing as to credit risk and terms of sale (each such approved Account
Receivable being herein called a "Factor Risk Account Receivable"). All orders
from customers including the amount and terms of each proposed sale or service
to such customers shall be submitted in advance of purchase or rendition of
service to Factor for prior written approval, which may be granted or withheld
at Factor's sole discretion. Factor's approval is subject to withdrawal either
orally or in writing at any time prior to delivery of merchandise or rendition
of services, and shall be deemed no longer effective in any event if Client's
delivery of merchandise or rendition of services is made more than thirty (30)
days beyond the date specified for such delivery or rendition in the terms of
sales submitted to Factor for its approval; or more than thirty (30) days from
the date of Factor's approval if no delivery or rendition date has been
specified. If more than 35% of the aggregate amount of Factor Risk Accounts
Receivable outstanding at any time shall be due and payable from one customer,
then to the extent that such percentage amount exceeds 35%, the excess shall be
deemed to be Client Risk Accounts Receivable. Submission of orders for Factor's
prior written approval shall not be required with regard to a sale made by
Client in compliance with any customer credit line which may from time to time
<PAGE> 2
be issued Client by Factor in its sole discretion, provided that shipments are
made prior to the expiration date of the credit line approval. Any customer
credit line issued by Factor may be amended or withdrawn by Factor in whole or
in part at any time and for any reason without advance notice. The amount of all
Accounts Receivable of each customer as to which Factor shall have approved a
customer credit line shall, in the order in which they have arisen, be treated
as Factor Risk Accounts Receivable up to the limit of the customer credit line
in effect from time to time. Upon the receipt of payment from or issuance of
credit to a customer with respect to a Factor Risk Account Receivable, the
Accounts Receivable of such customer in excess of the customer credit line
shall, to the extent of such payment or credit and in the order in which they
have arisen, be treated as Factor Risk Accounts Receivable, unless prior to such
payment or credit Factor shall have withdrawn the credit line approval. Factor's
withholding or withdrawing of a customer order approval or credit line approval
shall at all times be in Factor's sole discretion, and Factor's actions with
regard thereto shall not render Factor liable to Client in any respect for
damages or otherwise. Subject to Client's warranties and representation herein
contained, Factor will assume the credit loss on each Factor Risk Account
Receivable if the customer, after receiving and accepting delivery of goods or
services, fails to pay in full the Factor Risk Account Receivable on its longest
maturity solely because of its financial inability to pay. If, however, such
failure to pay is due in whole or in part to any other cause, Factor shall not
be responsible and shall have full recourse to Client. Factor at its option may
purchase Accounts Receivable not approved as to credit risk or terms of sale
(each such Account Receivable not approved by Factor being herein called a
"Client Risk Account Receivable"), but each purchase of a Client Risk Account
Receivable shall be with full recourse to Client and Client agrees to pay Factor
on demand for each Client Risk Account Receivable.
3. Purchase Price. The purchase price of each Account Receivable (the
"Purchase Price") is the gross amount of the Account Receivable, less any
discounts made available or extended to the customer (which shall be computed on
the shortest terms where optional terms are given), returns and allowances of
any nature, and Factor's commission. After purchase of an Account Receivable by
Factor, a discount, credit, unidentifiable payment or allowance may be claimed
solely by the customer, and if not so claimed, such discount, credit, payment or
allowance shall be the property of Factor.
4. Client Reserve Account. Factor shall establish on its books in Client's
name a reserve account (the "Reserve Account") which Factor shall credit with
the gross amount of all Accounts Receivable purchased by Factor from Client and
which Factor shall debit with all advances made to Client or on its behalf, as
well as all credits, discounts available to Client's customers, anticipations
earned by Client's customers, factoring charges, interest and any other amounts
chargeable to Client under this Agreement or any supplement hereto or any other
agreement between Client and Factor. Factor shall furnish Client with advices of
all credits and debits to the Reserve Account. Factor shall furnish Client with
a monthly statement of its Reserve Account, and, unless exception is taken to
this statement in writing mailed to Factor within thirty (30) days after receipt
by Client, the monthly statement shall be deemed correct and conclusively
binding upon Client.
<PAGE> 3
5. Remittance of Funds to Client. As goods are shipped and Accounts
Receivable, evidenced by invoices and shipping documents, are submitted to
Factor with duly executed assignment schedules, Factor may, in its sole
discretion, from time to time at Client's request make advances to Client
against the Purchase Price of Accounts Receivable purchased by Factor hereunder,
less a reserve equal to ten percent (10%) of all such unpaid Accounts
Receivable. Factor retains the right to increase such reserve from time to time
if, in Factor's discretion, the prospect of collection of the outstanding
advances or any other indebtedness owing by Client to Factor, including any
indebtedness with respect to unpaid Client Risk Accounts Receivable, or the
ability of Client to pay or perform its obligations under this Agreement or any
other agreement with Factor, becomes doubtful or insecure, or additional
reserves are necessary to protect Factor against returns, claims or defenses of
Client's customers with respect to Factor Risk Accounts Receivables or any other
contingencies. All advances and other Obligations (as defined below) owing to
Factor, including any debit balance in the Reserve Account and any amounts owing
by Client to Factor for merchandise purchased from any other concern factored or
financed by Factor or otherwise, are repayable by Client on demand and may be
charged to the Reserve Account when due.
6. Warranties and Representations. Client warrants and represents that
each Account Receivable sold and assigned to Factor hereunder: (a) shall be
genuine and valid and shall represent a completed delivery or performance in
fulfillment in every respect of the terms, conditions and specifications of a
bona fide, uncancelled and unexpired sale or service in the ordinary course of
business to a customer which is not affiliated with Client in full compliance
with the specifications of such customer; (b) Client shall be at the time of
delivery or performance the absolute owner of all merchandise and other property
involved; (c ) except for Factor's interest therein, there are no security
interests, liens or encumbrances thereon; (d) is enforceable for the full amount
thereof and will be subject to no dispute or claim by the customer in whole or
in part as to price, terms, quality, quantity, delay in shipment, offsets,
counterclaims, contra accounts or any other defense of any other kind and
character, real or claimed; (e) will be subject to no discounts, deductions,
allowances, offsets, counterclaims or other contra items or to no special terms
of payment which are not shown on the face of the invoice thereof; (f) will not
represent a delivery of merchandise upon "consignment," "guaranteed sale," "sale
or return," "payment on reorder" or similar terms; (g) is payable in United
States Dollars and has been invoiced to the customer by an invoice that bears
notice of the sale and assignment to Factor in compliance with the terms of this
Agreement; and (h) will not represent a "pack, bill and hold" transaction unless
Client furnishes Factor with a copy of the customer's purchase order and has
obtained customer's agreement to grant Factor a security interest in the
merchandise and to pay for the merchandise at the maturity date of the invoice
irrespective of whether or not Client has received instructions to deliver the
same.
7. Collateral. As security for all obligations, liabilities and indebtedness of
Client to Factor, now existing or hereafter incurred, direct or indirect,
absolute or contingent, whether created under this Agreement, any supplement
hereto or any other agreement between Client and Factor or otherwise, including
<PAGE> 4
without limitation, obligations owed by Client to others which Factor obtains by
assignment (all of the foregoing being herein called the "Obligations"), Client
grants Factor a security interest in all of Client's present and future
accounts, contract rights, instruments, documents, chattel paper, general
intangibles, returned or repossessed goods arising out of or relating to the
sale or other disposition of goods at any time or from time to time, all books
and records relating thereto, all proceeds thereof and merchandise represented
thereby, and in all sums standing to the credit of Client and in any property of
Client in Factor's possession. Recourse to security shall not at any time be
required and Client shall at all times remain liable for the repayment upon
demand of all Obligations at any time owing by Client to Factor. During the term
of this Agreement, Client shall not sell or assign, negotiate, pledge or grant
any security interest in its Accounts Receivable, inventory and proceeds thereof
to anyone other than Factor, without Factor's prior written consent, except for
sales of inventory in the ordinary course of business.
8. Invoicing. All invoices for merchandise sold or services rendered shall
be prepared by Client and shall bear a notice that they have been assigned to,
are owned by and are payable directly and only to Factor. Upon Factor's request,
Client shall furnish Factor with copies of all invoices, accompanied by duly
executed assignment schedules, original shipping or delivery receipts, and such
other information or documents as Factor in its discretion may request from time
to time. If Client fails to provide Factor with copies of such invoices (or the
equivalent) or such proof of shipment or delivery when requested by Factor for
any Factor Risk Account Receivable, such Factor Risk Account Receivable shall
automatically become a Client Risk Account Receivable and Factor shall have no
liability with respect thereto. Each invoice shall bear the terms of sale and no
change from the original terms of sale shall be made without Factor's prior
written consent. Factor reserves the right to mail original invoices to Client's
customers at Client's expense; however, mailing, sending or delivery by Factor
of a bill or invoice shall not be deemed to be any representation by Factor with
respect thereto.
9. Payment of Accounts Receivable. All payments of Accounts Receivable and
other payments on behalf of Client received by Factor shall be credited to
Client's account on the day of receipt by Factor. No check, draft or other
instrument received by Factor shall constitute final payment unless and until
such check, draft or other instrument shall have been actually collected. The
amount of the Purchase Price of any Factor Risk Account Receivable which remains
unpaid will be deemed collected and will be credited to Client's account as of
the earlier of the following dates: (a) the date of the Account Receivable's
longest maturity if any proceeding or petition is instituted or filed by or
against the customer for relief under any federal or state bankruptcy or
insolvency law, code or act, or if a receiver or trustee is appointed for the
customer; or (b) as of the last day of the fourth month following its longest
maturity date if such Credit Risk Purchased Account remains unpaid as of such
date without the happening of any of the events specified in the preceding
clause (a). If any Factor Risk Account Receivable credited to Client's account
is not paid for any reason other than the customer's financial inability to pay,
Factor shall reverse the credit and charge Client's account accordingly and such
Account Receivable shall then be deemed a Client Risk Account Receivable, and
Client shall pay interest thereon as provided for herein.
<PAGE> 5
10. Remittances. Without limiting the obligations of Client under Section
8 hereof, all remittances received by Client with respect to all of its Accounts
Receivable purchased by Factor shall be held in trust for Factor, and Client
shall immediately deliver to Factor the identical checks, drafts, monies or
other forms of payment received, and Factor shall have the right to endorse
Client's name on any check, draft or other form of remittance received, where
such endorsement is required to effect collection. Client hereby appoints Factor
or such person as Factor may name as its attorney-in-fact to execute all
necessary documents in Client's name and do all things necessary to carry out
this Agreement. Client ratifies and approves all acts of the attorney and agrees
that neither Factor nor the attorney shall be liable for any acts of commission
or omission nor for any error of judgement or mistake of fact or law. This power
being coupled with an interest is irrevocable as long as Client is indebted to
Factor in any manner.
11. Customer Disputes and Claims. Client agrees to notify Factor
immediately of all returns and allowances and of all disputes with and claims
made by customers and to adjust all such claims and disputes at its own expense,
issuing credit memoranda promptly, but subject to Factor's approval. It is
Factor's practice to allow a reasonable time for the settlement of disputes
between Client and Client's customers without waiving Factor's right at any time
to adjust any claims and disputes on a Factor Risk Account Receivable directly
with the customer and to charge back to the Reserve Account at any time the full
amount of the Account Receivable involved. Factor may at any time charge the
Reserve Account the full amount of : (a) any customer deduction of not more than
one hundred dollars; (b) any Factor Risk Account which is not paid in full when
due for any reason other than the customer's financial inability to pay; (c) any
Account for which there is a breach of any of Client's warranties or
representations set forth herein; (d) any anticipation deducted by a customer on
any Account; and (e) any Client Risk Account Receivable which is not paid in
full when due. Any such charge back shall not be deemed to constitute a
reassignment of the Account Receivable, and Factor shall retain a security
interest therein as security for all Obligations owing to Factor.
12. Collection of Accounts; Returned Goods. As owner of the Accounts
Receivable, Factor shall have the right to (a) bring suit, or otherwise enforce
collection, of the Account Receivable in the name of Client or Factor, (b)
modify the terms of payment, settle, compromise or release, in whole or in part,
any amounts owing, on terms Factor may deem advisable, and (c) issue credits in
the name of Client or Factor. Should any goods be returned or rejected by
Client's customers or otherwise recovered by Client, Client shall segregate and
hold such goods in trust for Factor, but at Client's sole risk and expense.
Client shall also promptly notify Factor and, at Factor's request, will deliver
such goods to Factor, pay Factor the invoice price thereof, or sell such goods
at Client's expense for the purpose of paying Client's obligations to Factor.
Once Client has granted or issued a discount, credit or allowance to a customer
on any Account Receivable, Client shall have no further interest therein. Any
remittances received by Client on account of any of the Accounts Receivable
<PAGE> 6
shall be held by Client as trustee of an express trust for Factor's benefit,
separate from its own property, and Client shall immediately deliver the same in
kind properly endorsed to Factor. Factor may endorse Client's name on any check,
instrument, draft or other document in payment of an Account Receivable. Any
payments received from or for the account of a customer obligated on both Factor
Risk Accounts Receivable and Client Risk Accounts Receivable shall be applied
first to the Factor Risk Accounts Receivable irrespective of instructions of the
customer.
13. Commissions. Client agrees to pay Factor a commission equal to
forty-five one-hundredths percent (0.45%) of the gross amount of Accounts
Receivable assigned to Factor hereunder up to the aggregate sum of
$50,000,000.00 and thereafter, factoring commissions shall be reduced to four
tenths of one percent (.40%) on the aggregate amount of all Accounts Receivable
assigned to Factor in excess of the sum of $50,000,000.00 in any contract year.
In any event, however, shall the commission payable to Factor be less than $2.50
for each invoice. All commissions payable hereunder shall be charged to the
Reserve Account as of the date of receipt by Factor of the assignment schedules
of the Accounts Receivable. The foregoing commission is based upon Client's
maximum selling terms of no longer than sixty (60) days. On sales for which
extended or additional terms are granted, the commission shall be increased by
one-fourth of one percent (0.25%) for each thirty (30) days, or portion thereof,
by which Client's selling terms are extended. Client shall pay Factor an
administrative set up fee of $750.00 on November 30, 1998, which may be charged
to Client's Reserve Account.
14. Interest. Client shall pay interest upon the average daily Funds
Employed at the close of business each day at a rate equal to one-fourth of one
percent (0.25%) per annum over the Prime Rate. Funds Employed shall mean gross
Accounts Receivable outstanding on Factor's books less any balance outstanding
in the Reserve Account to the credit of Client. If the Reserve Account should
show a debit balance, such debit balance shall be added to gross Accounts
Receivable outstanding in determining Funds Employed. The Prime Rate shall be
defined as the interest rate announced from time to time by First Union National
Bank as its prime or base lending interest rate which may not necessarily be its
best lending rate. Interest will be calculated on a daily basis (computed on the
actual number of days elapsed over a year of three hundred sixty (360) days) and
shall be charged to the Reserve Account as of the last day of each month. If
average daily Funds Employed reflect a credit balance, Factor shall credit the
Reserve Account, as of the last day of the month, with interest on such average
daily credit balance at a rate equal to three percent below the Prime Rate. The
applicable Prime Rate for the month hereof shall be the Prime Rate in effect on
the last day of the month preceding the date of this Agreement and the
applicable Prime Rate for each month thereafter shall the Prime Rate in effect
on the last day of the preceding calendar month. In computing interest payable
by Client under this Agreement and any supplement hereto, all customer checks
and other payments received by Factor shall be subject to bank clearance of two
business days from the date of deposit.
15. Financial Statements and Information; Inspections. Client shall
furnish Factor with annual financial statements audited by an independent
accountant acceptable to Factor and also furnish on a timely basis interim
<PAGE> 7
financial statements and other financial information upon Factor's request,
including, but not limited to, monthly internal financial statements, all
financial information furnished to the Securities Exchange Commission and
Client's regular projections of cash flow and income. Client shall permit any
representative of Factor to visit and inspect any of the properties of Client,
to examine all books of accounts, records, reports and other papers, to make
copies and extracts therefrom, and to discuss the affairs, finances and accounts
of Client with its officers, employees, independent public accountants,
creditors and depository institutions all at such reasonable times and as often
as may be reasonably requested.
16. Financial Condition. Client warrants that it is solvent and shall
remain solvent during the term of this Agreement; that any financial statements
delivered to Factor accurately and fairly state Client's financial condition;
that there has been no material adverse change in Client's financial condition
as reflected in the statements since the date thereof nor do the statements fail
to disclose any fact or facts which might materially adversely affect Client's
financial condition; and there is no litigation pending or threatened, which
taken in the aggregate if adversely determined, can reasonably be expected to
have a material adverse affect on Client's financial condition.
17. Term of Agreement; Termination. This Agreement shall take effect on
the date of acceptance by Factor and shall remain in full force and effect until
terminated: (a) by Factor or Client as of its Anniversary Date or at any time
thereafter upon the giving of not less than sixty (60) days prior written notice
of termination to Factor or (b) by Factor at any time and without notice (unless
otherwise specifically provided for) if any of the following events (each, an
"Event of Default") shall occur: (i) On five calendar days notice if Client
shall default in the payment of any of the Obligations on the due date thereof
(whether due at stated maturity, on demand, upon acceleration or otherwise);
(ii) any representation or warranty made in this Agreement or any supplement
hereto, or in any other document executed in connection herewith, or any
instrument, certification or financial statement furnished in compliance with or
in reference hereto or thereto, or in any other agreement between Client and
Factor, shall prove incorrect or misleading in any material respect when made or
furnished; (iii) On 30 days notice if Client shall fail or neglect to perform,
keep or observe any covenant or agreement contained in this Agreement or any
supplement hereto or any other agreement between Client and Factor; (iv) Client
or any guarantor of the Obligations shall file a petition, answer or consent
seeking relief under Title 11 of the United States Bankruptcy Code, as now
constituted or hereafter amended, or any other applicable Federal or state
bankruptcy law or other similar law, or a receiver, liquidator, assignee,
trustee, custodian, sequestrator or similar official shall be appointed for
Client or any guarantor of the Obligations or any substantial part of its or his
property, or on 30 days notice if Client or any guarantor shall have filed
against it any such petition seeking relief under the Bankruptcy Code; (v) the
occurrence of any event or condition which, alone or when taken together with
all other events or conditions occurring or existing concurrently therewith,
Factor determines (1) has or may be reasonably expected to have a material
adverse effect upon Client's business, operations, properties, condition
(financial or otherwise); (2) has or may be reasonably expected to have any
<PAGE> 8
material adverse effect whatsoever upon the validity or enforceability of this
Agreement or any other agreement between Client and Factor; (3) has or may be
reasonably expected to have any material adverse effect upon any security for
the Obligations, Factor's liens therein or the priority of such liens; or (4)
materially impairs the ability of Client to perform its obligations under this
Agreement or any other agreement between Client and Factor, or the ability of
Factor to enforce and collect the Obligations or realize upon any of the
security for the Obligations in accordance with the terms of this Agreement or
any other agreement between Client and Factor or applicable law; (vi) Client
becomes unable to meet its debts as they mature, fails, closes, suspends, or
goes out of business; or (vii) there is a change (by death or otherwise) in
Client's principal stockholders or owners. "Anniversary Date" means the last day
of the twelfth (12th) month following the date of this Agreement.
18. Effect of Termination. Upon the effective date of termination, all
Obligations of Client to Factor shall become immediately due and payable without
further notice or demand irrespective of any maturity dates established prior
thereto. However, no such termination shall release or abrogate any security
interest held by Factor in any collateral of Client until all of Client's
Obligations to Factor, including commissions and interest and all costs,
expenses and attorney fees as herein provided, are paid in full. In the event
that Factor shall cease to act as factor for Client, Client agrees to furnish
Factor with indemnity satisfactory to Factor that will protect Factor against
possible charges to Client under the terms of this Agreement and with a release
satisfactory to Factor of all claims Client may have against Factor and until
Client does so, Factor may hold any balance remaining to Client's credit in the
Reserve Account as security for all Obligations of Client to Factor. Client
shall pay Factor upon demand all costs and expenses, including reasonable
attorney fees, incurred by Factor to obtain or enforce payment of any
Obligations due from Client to Factor or in the prosecution or successful
defense of any action or proceeding concerning any matter arising out of or
related to this Agreement, the factoring of the Client's Accounts Receivable by
Factor, or any Obligations owing by Client to Factor.
19. Lien Perfection. Client agrees to execute and deliver to Factor all
financing statements provided for by the Uniform Commercial Code and all other
documents or instruments which may be required by law or which Factor may
request to perfect its first priority security interest hereunder and to
cooperate with Factor in the filing, recording or renewal thereof, and to pay
all filing and recording fees and expenses related thereto, and Client
authorizes Factor and any person whom Factor designates as Client's attorney
with power to sign Client's name thereon. This power being coupled with an
interest is irrevocable as long as Client is indebted to Factor in any manner.
Client shall execute, acknowledge and/or deliver such other instruments as
assurances as may reasonably be requested to effectuate the purposes of this
Agreement. At Factor's option, this Agreement may be filed as a financing
statement.
20. Preferences. Client shall indemnify and hold Factor harmless from any
loss, damage or expense (including attorneys' fees) incurred by Factor as a
result of a claim made at any time against Factor for the repayment or recovery
of any amount received by Factor in payment of any Client Risk Account
<PAGE> 9
Receivable by the payor or legal representative thereof (including a trustee in
bankruptcy or assignee for the benefit of creditors) on the grounds of
preference under the provisions of the Bankruptcy Code or any other federal or
state insolvency law. If such claim is ever made against Factor, in addition to
all of Factor's other rights under this Agreement, Client shall pay to Factor on
demand the full net face amount of any such Client Risk Account Receivable, or
if Factor so elects, Factor shall have the right to charge against the Reserve
Account the full net face amount of any such Client Risk Account Receivable, but
such charge back shall not be deemed a reassignment thereof. The provisions of
this Section 17 shall survive the termination of this Agreement and the payment
in full of the Obligations.
21. Notices. Any notices, demands, consents, or other writings or
communications permitted or required by this Agreement shall be given by
facsimile transmitter, overnight air courier or certified mail, return receipt
requested, addressed to the party to be notified as follows:
(a) If to Factor: GE Capital First Factors
Corporation
777 South Figueroa
Suite 3850
Los Angeles, California 90017
Facsimile No.
----------------
(b) If to Client: Jalate, Ltd.
2085 Garfield Avenue
City of Commerce, California 90040
Facsimile No. 323-728-0269
or to such other address as each party may designate for itself by notice given
in accordance with this Section 21. Any written notice or demand that is not
sent in conformity with the provisions hereof shall nevertheless be effective on
the date that such notice is actually received by the noticed party.
22. Miscellaneous. This Agreement, together with any supplement hereto,
contains the entire agreement between the parties, and cannot be modified,
altered, changed or amended orally. This Agreement is intended solely for the
benefit of Factor and Client, and no other person or party (including any
guarantor), is intended to be benefited hereby in any way. The captions in this
Agreement are for convenience of reference only and shall not define or limit
any of the terms or provisions hereof. Failure of Factor to exercise any rights
granted to it hereunder upon any breach or default by Client shall not be deemed
a waiver thereof in the event of further breaches or defaults. The remedies of
Factor hereunder shall be deemed to be cumulative and not exclusive. This
Agreement shall be binding upon, and inure to the benefit of, the parties hereto
and their respective successors and assigns and shall become effective only from
the date of Factor's written acceptance. This Agreement is made and accepted and
shall be construed, interpreted and enforced in accordance with the laws of the
State of California, without regard to conflict of law principles, and Client
irrevocably consents and submits to the jurisdiction of state courts of, and
federal courts in, the state of California, for the purpose of any suit, action
or proceeding relating hereto.
<PAGE> 10
23. WAIVER OF JURY TRIAL. TO THE FULLEST EXTENT PERMITTED BY APPLICABLE
LAW, FACTOR AND CLIENT HEREBY WAIVE, IRREVOCABLY AND UNCONDITIONALLY, TRIAL BY
JURY IN ANY ACTION BROUGHT ON, UNDER OR BY VIRTUE OF OR RELATING IN ANY WAY TO
THIS AGREEMENT OR ANY SUPPLEMENT HERETO OR ANY OF THE OTHER DOCUMENTS EXECUTED
IN CONNECTION HEREWITH, OR ANY CLAIM, DEFENSE, RIGHT OF SETOFF OR OTHER ACTION
PERTAINING HERETO, OR TO ANY OF THE FOREGOING.
24. Special Covenants. For so long as any of the Obligations are
outstanding, Client covenants that, unless otherwise consented to by Factor in
writing, it shall comply with the covenants set forth in Schedule A attached
hereto.
IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement
on the day and year first above written.
JALATE, LTD.
By: /s/ John Diesenbruch
-------------------------------------------
Title: Vice President Finance and
Chief Financial Officer
--------------------------------------
Accepted in Los Angeles, California:
GE CAPITAL FIRST FACTORS CORPORATION
By: /s/ Dave Reza
---------------------------------
Title: Senior Vice President
---------------------------
Date: November 10, 1998
----
<PAGE> 11
SCHEDULE A
TO
FACTORING AGREEMENT
Special Covenants of Client
----------------------------
For the purposes of this Schedule A to the Factoring Agreement, the
following terms shall have the following meanings:
Affiliate as to of its Subsidiaries, any other person (other than a
Subsidiary): (i) which directly or indirectly through one or more intermediaries
controls, or is controlled by, or is under common control with, Client or any of
its Subsidiaries; (ii) which beneficially owns or holds 5% or more of any class
of the stock of Client or any of its Subsidiaries; or (iii) 5% or more of the
stock (or in the case of a person which is not a corporation, 5% or more of the
equity interest) of which is beneficially owned or held by Client or any of its
Subsidiaries.
"Consolidated" the consolidation in accordance with GAAP of the accounts
or other items as to which such term applies.
"Consolidated Adjusted Tangible Assets" all assets of Client and its
Subsidiaries which would in accordance with GAAP be classified as assets on
their Consolidated balance sheet except: (i) any surplus resulting from any
write up of assets subsequent to the date of the Agreement; (ii) deferred
assets, other than prepaid insurance and prepaid taxes; (iii) patents,
copyrights, trademarks, trade names, non compete agreements, franchises and
other similar intangibles; (iv) goodwill, including any amounts, however
designated on such Consolidated balance sheet, representing the excess of the
purchase price paid for assets or stock over the value assigned thereto on the
books of Client and its Subsidiaries; (v) unamortized debt discount and expense;
and (vi) Accounts Receivable, notes and other receivables due from Affiliates,
officers or employees.
"Consolidated Adjusted Tangible Net Worth" at any date means a sum
equal to:
(i) the net book value (after deducting related depreciation,
obsolescence, amortization, valuation, and other proper reserves) at which the
Consolidated Adjusted Tangible Assets of Client and its Subsidiaries would be
shown on a Consolidated balance sheet at such date in accordance with GAAP,
minus
(ii) the amount at which the liabilities of Client and its
Subsidiaries (other than capital stock and surplus) would be shown on such
Consolidated balance sheet in accordance with GAAP.
"Consolidated Current Assets" at any date means the amount at which all of
the current assets of Client and its Subsidiaries would be properly classified
as Consolidated current assets shown on a Consolidated balance sheet at such
date in accordance with GAAP except that amounts due from Affiliates and
investments in Affiliates shall be excluded therefrom.
"Consolidated Current Liabilities" at any date means the amount at which
all of the Consolidated current liabilities of Client and its Subsidiaries would
be properly classified as Consolidated current liabilities on a Consolidated
balance sheet at such date in accordance with GAAP.
<PAGE> 12
"Consolidated Working Capital" at any date the excess of Consolidated
Current Assets at such date over Consolidated Current Liabilities at such date.
"GAAP" generally accepted accounting principles in the United States of
America in effect from time to time.
"Subsidiary" any corporation of which Client owns, directly or indirectly
through one or more intermediaries, more than fifty percent (50%) of the stock
at the time of determination.
For so long as the Agreement is in effect, and thereafter for so long as
there are any Obligations to Factor, Client covenants that, unless otherwise
consented to by Factor in writing, it shall comply with the following financial
covenants:
(a) Consolidated Adjusted Tangible Net Worth. Client and its Subsidiaries
shall maintain at all times a Consolidated Adjusted Tangible Net Worth of not
less than the amount shown below for the period corresponding thereto:
Consolidated Adjusted
Period Tangible Net Worth
------ ---------------------
SEE ATTACHED EXHIBIT
(b) Consolidated Working Capital. Client and its Subsidiaries shall
achieve maintain at all times Consolidated Working Capital of not less than the
amount shown below for the period corresponding thereto:
Period Consolidated Working Capital
------ ----------------------------
SEE ATTACHED EXHIBIT
<PAGE> 13
SCHEDULE A
EXHIBIT 1
<TABLE>
<CAPTION>
Nov-98 Dec-98 Jan-99 Feb-99 Mar-99 Apr-99
<S> <C> <C> <C> <C> <C> <C>
Tangible Net Worth:
Projected $ 1,204 $ 1,070 $ 1,062 $ 1,221 $ 1,748 $1,942
Covenant 750 750 850 1,000 1,500 1,500
Working Capital:
Projected $ (999) $ (1,195) $ (1,178) $ (942) $ (438) $ (118)
Covenant (1,250) (1,500) (1,500) (1,500) (1,000) (750)
</TABLE>
<TABLE>
<CAPTION>
May-99 Jun-99 Jul-99 Aug-99 Sep-99 Oct-99
<S> <C> <C> <C> <C> <C> <C>
Tangible Net Worth:
Projected $ 2,242 $ 2,606 $ 2,819 $ 2,938 $ 2,994 $ 3,456
Covenant 1,750 1,750 2,000 2,000 2,000 2,500
Working Capital:
Projected $ 142 $ 649 $ 847 $ 1,083 $ 1,163 $ 1,704
Covenant (500) 0 250 500 500 1,000
</TABLE>
<TABLE>
<CAPTION>
Nov-99 Dec-99
<S> <C> <C>
Tangible Net Worth:
Projected $ 3,319 $ 3,109
Covenant 2,500 2,500
Working Capital:
Projected $ 1,596 $ 1,416
Covenant 1,000 1,000
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM JALATE, LTD.
CONDENSED BALANCE SHEET AS OF SEPTEMBER 30, 1998 AND CONDENSED STATEMENT OF
OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH STATEMENTS FILED IN JALATE, LTD.'S QUARTERLY
REPORT FILED ON FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1998.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 64
<SECURITIES> 0
<RECEIVABLES> 569
<ALLOWANCES> 231
<INVENTORY> 3,680
<CURRENT-ASSETS> 4,249
<PP&E> 3,359
<DEPRECIATION> 1,819
<TOTAL-ASSETS> 6,517
<CURRENT-LIABILITIES> 4,764
<BONDS> 88
0
0
<COMMON> 5,576
<OTHER-SE> (4,386)
<TOTAL-LIABILITY-AND-EQUITY> 6,517
<SALES> 36,222
<TOTAL-REVENUES> 36,222
<CGS> 26,575
<TOTAL-COSTS> 26,575
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 245
<INTEREST-EXPENSE> 766
<INCOME-PRETAX> 104
<INCOME-TAX> 0
<INCOME-CONTINUING> 104
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 104
<EPS-PRIMARY> 0.03
<EPS-DILUTED> 0.03
</TABLE>
