<PAGE> 1
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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 June 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)
1675 South Alameda Street; Los Angeles, CA 90021
Address of Principal Executive Offices) (Zip Code)
(213) 765-5000
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
The number of shares outstanding of the registrant's Common Stock, no par value,
at August 10, 1998 was 3,403,000 shares.
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<PAGE> 2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
JALATE, LTD.
Condensed Balance Sheets
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
December 31, 1997 June 30, 1998
----------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash $ 170 $ 149
Due from factor, net -- 514
Trade and other accounts receivable, less
allowance for doubtful accounts of
$324 in 1997 and $210 in 1998 119 292
Inventories 4,812 3,576
Prepaid expenses and other current assets 201 156
----------------- -------------
Total current assets 5,302 4,687
Property and equipment, at cost, net of
accumulated depreciation of $1,366 in 1997
and $1,627 in 1998 961 1,461
Investment in unconsolidated subsidiaries 551 545
Other assets, at cost, net 79 250
----------------- -------------
$ 6,893 $ 6,943
================= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Note payable to bank $ 1,120 $ 443
Current portion of long term liabilities -- 283
Due to factor 1,315 --
Trade accounts payable 3,092 3,768
Accounts payable to unconsolidated subsidiary 143 212
Accrued expenses 401 325
----------------- -------------
Total current liabilities 6,071 5,031
----------------- -------------
Long term liabilities:
Capitalized lease obligations, less
current portion -- 130
Subordinated notes payable -- 713
----------------- -------------
Total long term liabilities -- 843
----------------- -------------
Shareholders' equity:
Preferred stock, no par value. Authorized
3,000,000 shares; none issued
and outstanding -- --
Common stock, no par value. Authorized
20,000,000 shares; issued and
outstanding 3,403,000 shares 5,311 5,576
Accumulated deficit (4,489) (4,507)
----------------- -------------
Total shareholders' equity 822 1,069
----------------- -------------
$ 6,893 $ 6,943
================= =============
</TABLE>
See accompanying notes to condensed financial statements.
2
<PAGE> 3
JALATE, LTD.
Condensed Statements of Operations
(In thousands except net earnings (loss) per share
and weighted average shares outstanding)
(Unaudited)
<TABLE>
<CAPTION>
Six months ended Three months ended
June 30, June 30,
-------------------- --------------------
1997 1998 1997 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net sales $ 28,565 $ 25,623 $ 14,646 $ 13,381
Cost of goods sold 21,865 19,053 11,774 10,147
--------- --------- --------- ---------
Gross profit 6,700 6,570 2,872 3,234
Operating expenses 8,207 5,964 4,320 3,016
--------- --------- --------- ---------
Earnings (loss) from operations (1,507) 606 (1,448) 218
Other (income) expense:
Interest expense 341 524 210 281
Equity in (income) loss of
unconsolidated subsidiaries (327) 100 (171) (165)
Other (income) -- (1) -- --
--------- --------- --------- ---------
Total other expense 14 623 39 116
--------- --------- --------- ---------
Net earnings (loss) $ (1,521) $ (17) $ (1,487) $ 102
========= ========= ========= =========
Net earnings (loss) per share:
Basic $ (0.45) $ (--) $ (0.44) $ 0.03
Diluted (0.45) (--) (0.44) 0.03
========= ========= ========= =========
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.
3
<PAGE> 4
JALATE, LTD.
Condensed Statements of Cash Flows
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six months ended
June 30,
-------------------
1997 1998
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (1,521) $ (17)
-------- --------
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 215 306
Increase (decrease) in allowance for doubtful
receivables 828 (114)
Equity in net (earnings) loss of unconsolidated
subsidiaries (327) 100
Changes in assets and liabilities:
(Increase) decrease in:
Due from factor, net -- (514)
Trade accounts receivable (369) (59)
Inventories (1,792) 1,236
Refundable income taxes 105 --
Prepaid expenses and other current assets (223) 45
Other assets (11) (1)
Increase (decrease) in:
Accounts payable 1,252 744
Accrued expenses 106 (76)
-------- --------
Total adjustments (216) 1,667
-------- --------
Net cash provided by (used in)
operating activities (1,737) 1,650
-------- --------
Cash flows from investing activities:
Capital expenditures (184) (761)
Investment in unconsolidated subsidiaries -- (314)
Distributions from unconsolidated subsidiaries 186 220
-------- --------
Net cash used in investing activities 2 (855)
-------- --------
Cash flows from financing activities:
Repayment to factor 1,564 (1,315)
Proceeds from issuance (repayment) of note payable to bank 76 (677)
Proceeds from capitalized leases, net -- 176
Proceeds from issuance of long term subordinated debt -- 950
Proceeds from issuance of warrants -- 50
-------- --------
Net cash provided by (used in)
financing activities 1,640 (816)
-------- --------
Net decrease in cash (95) (21)
Cash at beginning of period 97 170
-------- --------
Cash at end of period $ 2 $ 149
======== ========
Supplemental disclosures of cash flow information:
Cash payments (refunds) during the period for -
Interest $ 341 $ 270
Income taxes -- --
======== ========
</TABLE>
See accompanying notes to condensed financial statements.
4
<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>
December 31, 1997 June 30, 1998
----------------- -------------
<S> <C> <C>
Piece goods and trim $ 1,828,000 $ 1,455,000
Work in process 1,657,000 1,343,000
Finished goods 1,327,000 778,000
----------- -----------
$ 4,812,000 $ 3,576,000
=========== ===========
</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, $398,000, and $62,000
as its share of Airshop's loss in 1997, in the first quarter of 1998, and in the
second quarter 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 six months ended June 30, 1997 and 1998, purchases from the Joint
Venture aggregated $2,250,000 and $2,138,000, respectively. The Company had
accounts payable to the Joint Venture for purchases of $115,000, $143,000, and
$212,000 at June 30, 1997, December 31, 1997, and June 30, 1998, respectively.
5
<PAGE> 6
The tables below contain unaudited summarized financial information for the
Joint Venture:
<TABLE>
<CAPTION>
Six months ended June 30,
-------------------------
1997 1998
----------- -----------
(Unaudited)
<S> <C> <C>
Net sales $ 2,284,000 $ 2,165,000
Gross profit 852,000 892,000
Operating expenses 180,000 157,000
Net earnings 653,000 721,000
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
December 31, 1997 June 30, 1998
----------------- -------------
(Unaudited)
<S> <C> <C>
Current assets $ 405,000 $ 716,000
Non current assets 811,000 698,000
------------- -------------
Total assets $ 1,216,000 $ 1,414,000
============= =============
Current liabilities $ 205,000 $ 183,000
Long-term debt 201,000 141,000
------------- -------------
Total liabilities 406,000 324,000
Partners' capital 810,000 1,090,000
------------- -------------
$ 1,216,000 $ 1,414,000
============= =============
</TABLE>
4. NOTE PAYABLE TO BANK
The Company has a term loan with its bank. The principal balance of this loan
was $1,120,000 on December 31, 1997. The agreement with the bank provided for
weekly payments beginning February 6, 1998 resulting in the loan being paid down
to $170,000 at June 30, 1998 with the balance to be paid off completely by July
17, 1998. The Company made its weekly payments through May 15, which reduced the
principal balance outstanding to $443,000. As of July 17, 1998 the loan
agreement was amended and now provides that the $443,000 outstanding balance be
paid in monthly installments through August 31, 1999. These installment 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.
5. FACTOR AGREEMENT
The Company has an agreement with its factor that provides for advances to the
Company of up to 100% of qualified accounts receivable. 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.
6. CAPITALIZED LEASES
The Company leases various pieces of equipment, primarily computers, under long
term leases and has the option to purchase the equipment for a nominal amount at
the termination of the lease. At June 30, 1998, future minimum lease payments
for these assets aggregate $196,000 ($45,000 per year) through September 2002,
of which $23,000 represents interest.
7. SUBORDINATED NOTES PAYABLE AND WARRANTS
On January 27, 1998, the Company issued subordinated notes payable to certain
shareholders of the Company, totaling $950,000. These notes call for interest
(at 10% per annum) to be paid quarterly beginning April 30, 1998 and quarterly
installments of principal commencing April 30, 1999. These notes mature on
January 31, 2000 and are secured by the Company's interest in Airshop, Ltd.
Interest payments of $25,000 and $24,000 were made on April 30, 1998 and July
31, 1998, respectively.
6
<PAGE> 7
In connection with these transactions, the Company sold 500,000 stock purchase
warrants to the shareholders for $50,000. The warrants are exercisable at an
exercise price of $1.625 per share and expire on January 27, 2003. These
warrants were independently valued at $265,000. The $215,000 discount 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.
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 June 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 fiscal quarters and six month periods ended
June 30, 1997 and June 30, 1998, 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. 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 six month
periods ending June 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.
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 will 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.
7
<PAGE> 8
LINROZ MANUFACTURING COMPANY, L.P.
Condensed Balance Sheets
(Unaudited)
<TABLE>
<CAPTION>
December 31, 1997 June 30, 1998
----------------- -------------
<S> <C> <C>
ASSETS
Current Assets:
Cash $ 237,000 $ 478,000
Accounts receivable from Jalate, Ltd. 143,000 212,000
Prepaid expenses and other current assets 25,000 26,000
------------- -------------
Total current assets 405,000 716,000
Property and equipment, at cost, net of
accumulated depreciation of $570,000 in 1997
and $701,000 in 1998 791,000 678,000
Other assets, at cost 20,000 20,000
------------- -------------
$ 1,216,000 $ 1,414,000
============= =============
LIABILITIES AND PARTNERS' CAPITAL
Current Liabilities:
Current maturities of long term debt $ 120,000 $ 120,000
Trade accounts payable 34,000 12,000
Accrued expenses and other liabilities 51,000 51,000
------------- -------------
Total current liabilities 205,000 183,000
Long-term debt, less current maturities 201,000 141,000
Partners' capital 810,000 1,090,000
------------- -------------
$ 1,216,000 $ 1,414,000
============= =============
</TABLE>
See accompanying notes to condensed financial statements.
8
<PAGE> 9
LINROZ MANUFACTURING COMPANY, L.P.
Condensed Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Six months ended June 30, Three months ended June 30,
------------------------- ---------------------------
1997 1998 1997 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales $ 2,284,000 $ 2,165,000 $ 1,175,000 $ 1,175,000
Cost of sales 1,432,000 1,273,000 734,000 638,000
----------- ----------- ----------- -----------
Gross profit 852,000 892,000 441,000 537,000
Operating expenses 180,000 157,000 92,000 75,000
----------- ----------- ----------- -----------
Earnings from operations 672,000 735,000 349,000 462,000
Interest expense, net 19,000 14,000 9,000 7,000
----------- ----------- ----------- -----------
Net earnings 653,000 721,000 340,000 455,000
=========== =========== =========== ===========
</TABLE>
See accompanying notes to condensed financial statements.
9
<PAGE> 10
LINROZ MANUFACTURING COMPANY, L.P.
Condensed Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Six months ended June 30,
-------------------------
1997 1998
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 653,000 $ 721,000
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization of
property and equipment 117,000 131,000
Changes in assets and liabilities:
(Increase) decrease in:
Accounts receivable from Jalate, Ltd. (20,000) (69,000)
Prepaid expenses and other current assets 31,000 (1,000)
Increase (decrease) in:
Trade accounts payable 7,000 (22,000)
Accrued expenses and other
current liabilities (20,000) --
---------- ----------
Net cash provided by operating activities 768,000 760,000
---------- ----------
Cash flows from investing activities:
Cash used in capital expenditures (71,000) (19,000)
---------- ----------
Cash flows from financing activities:
Principal payments on long-term debt (59,000) (60,000)
Distributions to partners (380,000) (440,000)
---------- ----------
Net cash used in financing activities (439,000) (500,000)
---------- ----------
Net increase in cash 258,000 241,000
Cash at beginning of period 421,000 237,000
---------- ----------
Cash at end of period $ 679,000 $ 478,000
========== ==========
Supplemental disclosures of cash flow information:
Cash paid during the period for interest $ 19,000 $ 14,000
========== ==========
</TABLE>
See accompanying notes to condensed financial statements.
10
<PAGE> 11
LINROZ MANUFACTURING COMPANY L.P.
Notes to Condensed Financial Statements
(Unaudited)
1. GENERAL
The unaudited condensed financial statements have been prepared on the same
basis as the audited financial statements of Linroz Manufacturing Company, L.P.
(the Company) 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.
11
<PAGE> 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED HEREIN, THE MATTERS ADDRESSED IN
THIS ITEM 2 CONSTITUTE "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF
SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE
SECURITIES EXCHANGE ACT OF 1934 AS AMENDED. SUCH FORWARD-LOOKING STATEMENTS ARE
SUBJECT TO A VARIETY OF RISKS AND UNCERTAINTIES, INCLUDING THOSE DISCUSSED BELOW
UNDER THE HEADING "FACTORS THAT MAY AFFECT FUTURE RESULTS" AND ELSEWHERE IN THIS
REPORT ON FORM 10-Q THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM
THOSE ANTICIPATED BY THE COMPANY'S MANAGEMENT. THE PRIVATE SECURITIES LITIGATION
REFORM ACT OF 1995 (THE "ACT") PROVIDES CERTAIN "SAFE HARBOR" PROVISIONS FOR
FORWARD-LOOKING STATEMENTS. ALL FORWARD-LOOKING STATEMENTS MADE IN THIS
QUARTERLY REPORT ON FORM 10-Q ARE MADE PURSUANT TO THE ACT.
As contemplated by the Securities and Exchange Commission under Instructions 2
and 3 to Item 303 (b) of Regulation S-K, this discussion and analysis has been
prepared assuming that the user has read or has access to Management's
Discussion and Analysis for the fiscal year ended December 31, 1997. 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
-------------------- --------------------
Six months ended Three months ended
June 30, June 30,
--------------------Increase -------------------- Increase
1997 1998 (Decrease) 1997 1998 (Decrease)
------ ------ -------- ------ ------ --------
<S> <C> <C> <C> <C> <C> <C>
Net sales 100.0% 100.0% (10.3)% 100.0% 100.0% (8.6)%
Cost of goods sold (76.5) (74.4) (12.9) (80.4) (75.8) (13.8)
----- ----- ----- -----
Gross profit 23.5 25.6 (1.9) 19.6 24.2 12.6
Operating expenses (28.7) (23.3) (27.3) (29.5) (22.5) (30.2)
----- ----- ----- -----
Earnings (loss) from
operations (5.2) 2.3 * (9.9) 1.7 *
Interest expense (1.2) (2.0) 53.7 (1.4) (2.1) 33.8
Equity in earnings (loss)
of unconsolidated
subsidiaries 1.1 (0.4) * 1.1 1.2 *
----- ----- ----- -----
Net earnings (loss) (5.3) (0.1) (98.9) (10.2) 0.8 *
===== ===== ===== =====
</TABLE>
* This percent change is not meaningful.
GROSS SALES decreased from $16,101,000 for the three months ended June 30, 1997
to $14,344,000 for the comparable period of fiscal 1998, a decrease of 10.9%,
and decreased from $31,149,000 for the six months ended June 30, 1997 to
$27,674,000, for the comparable period of fiscal 1998, a decrease of 11.2%. The
decrease in gross sales for the three month period was primarily due to a
decrease in the volume of apparel sold from 1,775,000 to 1,535,000 units, a
decrease of 13.5%. The decrease in gross sales for the six month period was
primarily due to a decrease in the volume of apparel sold from 3,417,000 to
2,934,000 units, a decrease of 14.1%. These decreases in the volume of apparel
sold were partially offset by increases in the average unit price of items sold.
In its continuing efforts to increase sales, the Company recently appointed a
new Executive Vice President of Sales and Marketing who has significant sales
and management experience in the apparel industry.
12
<PAGE> 13
RETURNS AND ALLOWANCES AND DISCOUNTS decreased from $1,455,000 (9.0% of gross
sales) for the three months ended June 30, 1997 to $963,000 (6.7% of gross
sales) for the comparable period of fiscal 1998, a decrease of 33.8% and from
$2,584,000 (8.3% of gross sales) for the six months ended June 30, 1997 to
$2,051,000 (7.4% of gross sales) for the comparable period of fiscal 1998, a
decrease of 20.6%. 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, various other causes of the high
level of returns and allowances experienced during 1997 have been identified and
improved.
GROSS PROFIT increased from $2,872,000 (19.6% of net sales) for the three months
ended June 30, 1997 to $3,234,000 (24.2% of net sales) for the comparable period
of fiscal 1998, an increase of 12.6%, and decreased from $6,700,000 (23.5% of
net sales) for the six months ended June 30, 1997 to $6,570,000 (25.6% of net
sales) for the comparable period of fiscal 1998, a decrease of 1.9%. The
increase in gross profit as a percent of net sales for both the three month
period and six month period from fiscal 1997 to fiscal 1998 was primarily due to
the combined effect of management's cost improvement initiatives and the
correction of the 1997 defective design and production problems. These factors
were partially offset by a $175,000 loss at the gross margin level which
occurred during the second quarter of 1998 as a result of the sale of some
off-season imported goods at reduced selling prices.
OPERATING EXPENSES decreased from $4,320,000 (29.5% of net sales) for the three
months ended June 30, 1997 to $3,016,000 (22.5% of net sales) for the comparable
period of fiscal 1998, a decrease of 30.2%, and decreased from $8,207,000 (28.7%
of net sales) for the six months ended June 30, 1997 to $5,964,000 (23.3% of net
sales) for the comparable period of fiscal 1998, a decrease of 27.3%, primarily
due to management's cost control initiatives implemented during the last year.
INTEREST EXPENSE primarily reflects interest payable on advances from the
factor, on the subordinated notes payable, and on the term loan with the bank.
Interest expense increased from $210,000 for the three months ended June 30,
1997 to $281,000 for the comparable period of fiscal 1998, an increase of 33.8%,
and from $341,000 for the six months ended June 30, 1997 to $524,000 for the
comparable period of fiscal 1998, an increase of 53.7% 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 from $171,000 for the three months
ended June 30, 1997 to $227,000 for the comparable period of fiscal 1998, an
increase of 32.7%, and increased from $327,000 for the six months ended June 30,
1997 to $360,000 for the comparable period of fiscal 1998, an increase of 10.1%.
The increases are mostly 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 $62,000 for the three months ended June 30, 1998 and
$460,000 for the six months ended June 30, 1998. After recognizing this loss,
the Company's investment in Airshop has been reduced to zero. Even though
Airshop, Ltd.'s total loss for the quarter and for the six months ended June 30,
1998 were significantly in excess of the amounts recognized by the Company,
generally accepted accounting principles limit the loss that the Company
recognized to the Company's total investment because 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 March 31, 1998 and June 30, 1998,
management's estimate of the 1998 effective tax rate is zero.
13
<PAGE> 14
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 and proceeds from its initial public offering
in 1994. At December 31, 1997, the Company had a working capital deficiency of
$769,000 compared to a working capital deficiency of $344,000 at June 30, 1998.
Cash used in operating activities aggregated $1,737,000 for the six months ended
June 30, 1997 compared with cash provided by operating activities aggregating
$1,650,000 for the comparable period of 1998, an improvement of $3,387,000 over
the prior period.
Inventory at December 31, 1997 was $4,812,000 and was reduced to $3,576,000 at
June 30, 1998. Inventory at June 30, 1997 was $5,364,000. This reduction in
inventory was achieved by management's efforts to reduce inventory costs.
Management does not believe this reduced inventory level will adversely effect
the Company's sales volume.
At June 30, 1998 the net amount due from the factor consisted of the:
<TABLE>
<CAPTION>
<S> <C>
Receivables held by factor $ 9,710,000
Advances from factor (8,805,000)
Open credit memos (391,000)
------------
$ 514,000
============
</TABLE>
The Company has an agreement with 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.
The Company has a term loan with its bank. The principal balance of this loan
was $1,120,000 on December 31, 1997. The agreement with the bank provided for
weekly payments beginning February 6, 1998 resulting in the loan being paid down
to $170,000 at June 30, 1998 with the balance to be paid off completely by July
17, 1998. The Company made its weekly payments through May 15, which reduced the
principal balance outstanding to $443,000. As of July 17, 1998 the loan
agreement was amended and now provides that the $443,000 outstanding balance be
paid in monthly installments through August 31, 1999. These installment 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.
On January 27, 1998, the Company obtained $1,000,000 in additional funds from
four shareholders, consisting of $950,000 in subordinated notes payable plus
$50,000 in payment for warrants to purchase 500,000 shares of the Company's
common stock. These notes call for interest (at 10% per annum) to be paid
quarterly beginning April 30, 1998 and quarterly installments of principal
commencing April 30, 1999. These notes mature on January 31, 2000 and are
secured by the Company's investment in Airshop, Ltd. These warrants, which are
exercisable at a price of $1.625 per share, expire on January 27, 2003. These
warrants were independently valued at $265,000. The $215,000 discount is being
amortized over the life of the notes with $9,000 being expensed monthly
beginning February 1998.
The Company is actively pursuing various options of providing for its long term
liquidity needs and assuring its long term vitality including additional debt
financing, new equity investments, and possible merger or other business
combinations. 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.
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.
14
<PAGE> 15
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.
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.
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 will 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.
15
<PAGE> 16
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 increased
sales and customer delivery requirements, (vi) the weather and (vii) actions of
competitors. In addition, women's apparel business is highly seasonal.
RELIANCE ON KEY PERSONNEL. The operations of the Company depend to a great
extent on the efforts of its senior management, including Vinton W. Bacon 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).
LIQUIDITY. The Company is actively pursuing various options of providing for its
long term liquidity needs and assuring its long term vitality including
additional debt financing, new equity investments, and possible merger or other
business combinations. 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
The Company does not invest in derivative financial instruments, other financial
instruments or derivative commodity instruments. However, significant increases
in interest rates could have a materially adverse effect on the Company's
operations through its bank borrowings and factor contracts. Likewise,
significant increases in the cost of the Company's labor or raw materials could
have a materially adverse effect on the Company's operations.
Also see "Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Factors That May Affect Future Results."
16
<PAGE> 17
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS. On January 27, 1998, the
Company issued subordinated notes payable to certain shareholders of the Company
totaling $950,000. These notes provide for interest (at 10% per annum) to be
paid quarterly beginning April 30, 1998 and quarterly installments of principal
commencing April 30, 1999. These notes mature on January 31, 2000 and are
secured by the Company's investment in Airshop, Ltd.
In connection with 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.
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. The Company currently is in compliance with those
amended covenants. 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.
In addition, the Company has a term loan with its 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 principal balance of this loan was $1,120,000 on December 31,
1997. The amended agreement with the bank called for weekly payments beginning
February 6, 1998 resulting in the loan being paid down to $170,000 at June 30,
1998 and being paid off completely by July 17, 1998. The Company made its weekly
payments through May 15, which reduced the principal balance outstanding to
$443,000. The revised loan agreement was amended again as of July 17, 1998 and
now provides that the $443,000 outstanding balance be paid in monthly
installments through August 31, 1999. These installment payments of the
principal balance are scheduled for $10,000 on the last day of each month from
July 1998 through January 1999, then $60,000 on the last day of each month from
February 1999 through July 1999, with a final payment of any remaining unpaid
principal balance on August 31, 1999. Interest is due monthly in addition to
these principal payments. Under the terms of this latest amendment, all
financial covenants were eliminated.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company held its 1998 annual meeting of shareholders (the "Meeting") on May
12, 1998. At the Meeting, the Company's shareholders considered and voted upon
the following matters:
1. Election of Directors. For all nominees listed below:
<TABLE>
<CAPTION>
For Withheld
--------- --------
<S> <C> <C>
Vinton W. Bacon 2,198,224 435
Larry Brahim 2,198,359 300
Allan E. Dalshaug 2,198,359 300
Joseph S. Davis 2,198,359 300
I. Jay Goldfarb 2,198,359 300
Victor K. Nichols 2,198,359 300
William S. Soady 2,198,359 300
</TABLE>
17
<PAGE> 18
2. Ratification of the Appointment of Independent Auditors. To ratify
the appointment of KPMG Peat Marwick LLP as the Company's independent auditors
for the fiscal year ending December 31, 1998:
For: 2,198,524 Against: 135 Abstain: 0
ITEM 5. OTHER INFORMATION.
Frederick A. Findley resigned his positions as Vice President-Finance,
Chief Financial Officer, and Secretary of the Company on July 27, 1998.
Mr. John Diesenbruch was appointed as Vice President-Finance, Chief
Financial Officer, and Secretary of the Company by the Board of
Directors at its meeting on August 11, 1998.
ITEM 6. EXHIBITS AND REPORT ON FORM 8-K.
a. Exhibits - The following is a list of exhibits filed as a part of
this report.
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- ----------------------------------------------------------------------
<S> <C>
3.1 Restated Articles of Incorporation of the Company. (3.1*)(3)
3.2 By-laws amendment 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 First Amendment to Credit Agreement as of July 17, 1998 by and between
the Company and Wells Fargo HSBC Trade Bank, NA amending the term loan
by extending the payment deadline.
10.2 Fourth Amendment, as of August 1, 1998, to Revolving Loan Agreement,
dated June 30, 1997, by and between the Company and Heller Financial,
Inc.
27 Financial Data Schedule. (Filed as part of the EDGAR (electronic)
version of this report only.)
</TABLE>
------------------------
* 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-K for the quarter ended March 31, 1998.
b. Reports on Form 8-K.
None.
18
<PAGE> 19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
JALATE, LTD.
August 18, 1998 By: /s/ VINTON W. BACON
--------------------------------
Vinton W. Bacon
Chief Executive Officer and
Chief Operating Officer
August 14, 1998 By: /s/ JOHN DIESENBRUCH
--------------------------------
John Diesenbruch
Vice President, Finance and
Chief Financial Officer
19
<PAGE> 1
EXHIBIT 10.1
FIRST AMENDMENT TO CREDIT AGREEMENT
-----------------------------------
THIS FIRST AMENDMENT TO CREDIT AGREEMENT (this "Amendment"), is entered
into as of July 17, 1998, by and between JALATE, LTD. ("Borrower"), and WELLS
FARGO HSBC TRADE BANK, N. A. ("Bank").
RECITALS
--------
WHEREAS, Borrower is currently indebted to Bank pursuant to the terms and
conditions of certain Credit Agreement dated as of January 21, 1998 (the
"Agreement").
WHEREAS, Bank and Borrower have agreed to certain changes in the terms and
conditions set forth in the Agreement and have agreed to amend the Agreement to
reflect said changes.
NOW THEREFORE, for valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the parties hereto agree that the Agreement shall
be amended as follows:
I. Section 1.2, Credit Extension Limit, shall be amended by deleting "One
Million One Hundred Twenty-Seven Thousand Six Hundred Thirteen Dollars
($1,127,613)" as the "Overall Credit Limit", and by substituting, "Four Hundred
Forty-Two Thousand Nine Hundred Forty-Five Dollars ($442,945)", therefor.
II. Section 1.3, Repayment; Interest and Fees, shall be amended by deleting the
last sentence in this paragraph, and by substituting the following therefor:
"Any overdue payments of principal (and interest to the extent permitted by law)
shall bear interest at a per annum floating rate equal to the Prime Rate plus
10.0%."
III. EXHIBIT A, ADDENDUM TO CREDIT AGREEMENT, shall be amended by deleting the
section "FINANCIAL COVENANTS" in its entirety, without substitution.
IV. EXHIBIT B, SIGHT COMMERCIAL LETTERS OF CREDIT SUPPLEMENT, shall be deleted
in its entirety, without substitution.
V. EXHIBIT B, TERM LOAN SUPPLEMENT, shall be deleted in its entirety, and the
attached, EXHIBIT B, TERM LOAN SUPPLEMENT, substituted therefor.
Except as specifically provided herein, all terms and conditions of the
Agreement remain in full force and effect, without waiver or modification. All
terms defined in the Agreement shall have the same meaning when used in this
Amendment. This Amendment and the Agreement shall be read together as one
document.
1
<PAGE> 2
Borrower hereby remakes all representations and warranties contained in the
Agreement and reaffirms all covenants set forth therein. Borrower further
certifies that as of the date of this Amendment there exists no Event of Default
as defined in the Agreement, nor any condition, act or event which with the
giving of notice or the passage of time or both would constitute any such Event
of Default.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed as of the day and year first written above.
JALATE, LTD. WELLS FARGO HSBC TRADE BANK, N.A.
By: /S/VINTON BACON By: /S/GREG RICHARDSON
--------------------------- -----------------------------
Vinton Bacon Greg Richardson
Title: CEO/President Title: Vice President
2
<PAGE> 3
EXHIBIT B
WELLS FARGO HSBC TRADE BANK TERM LOAN SUPPLEMENT
- --------------------------------------------------------------------------------
THIS SUPPLEMENT SUPERSEDES AND REPLACES ANY PRIOR TERM LOAN SUPPLEMENT AND IS AN
INTEGRAL PART OF THE CREDIT AGREEMENT DATED JANUARY 21, 1998, AS AMENDED,
BETWEEN WELLS FARGO HSBC TRADE BANK AND THE FOLLOWING BORROWER:
NAME OF BORROWER: Jalate, Ltd.
FACILITY TERMINATION DATE: August 31, 1999
CREDIT LIMIT FOR THIS TERM LOAN FACILITY AND SUBLIMITS: Credit Limit: $442,945
<TABLE>
<CAPTION>
Credit Sublimits
----------------
<S> <C>
- - Supported by Accounts Receivable, Inventory or Other Collateral $442,945
</TABLE>
FACILITY DESCRIPTION: Trade Bank will make a Term Loan or Term Loans to Borrower
for the purpose or purposes stated below. Subject to the credit sublimits
specified above, the Term Loan or Term Loans may be supported by (i) a standby
letter of credit in favor of Trade Bank, (ii) a guarantee or (iii) accounts
receivable, inventory or other collateral. A Term Loan cannot be used to repay
an outstanding Term Loan or Revolving Credit Loan that has matured or to repay
amounts due under any other Facilities provided to Borrower.
FACILITY PURPOSE: The Term Loan or Term Loans may only be used for the following
purpose(s): Term out existing debt.
FACILITY DOCUMENT: Term Note
SubFacility Documents:
- - Supported by Accounts Receivable, Inventory or Other Collateral: See Exhibit
C - Collateral/Credit Support Document.
TERM: Term Loan will mature on August 31, 1999.
INTEREST RATE: Term Loan will bear interest at the following rate:
- - Prime Rate: The Prime Rate plus 5.0% per annum.
Interest Payment Dates: Interest on the outstanding Term Loan will be paid at
least once each month on the last day of the month.
REPAYMENT: Outstanding principal balance of the Term Loan shall be repaid in
seven (7) equal monthly installments of $10,000 commencing July 31, 1998 and
continuing up to and including January 31, 1999; and six (6) equal monthly
installments of $60,000 commencing February 28, 1999 and continuing up to and
including July 31, 1999, with the entire remaining principal outstanding due and
payable in full on August 31, 1999.
PREPAYMENTS: Prepayments of the outstanding Term Loan or Term Loans are
permitted in any amounts.
COLLATERAL/CREDIT SUPPORT DOCUMENTS: See Exhibit C - Collateral/Credit Support
Document.
BY INITIALING HERE BORROWER AGREES TO ALL THE TERMS OF THIS SUPPLEMENT:/S/VB
---------
Page 1 of 1
<PAGE> 4
WELLS FARGO HSBC TRADE BANK TERM NOTE
- --------------------------------------------------------------------------------
$442,945 Los Angeles, California
July 17, 1998
FOR VALUE RECEIVED, the undersigned JALATE, LTD., a California corporation
("Borrower") promises to pay tot he order of WELLS FARGO HSBC TRADE BANK,
NATIONAL ASSOCIATION ("Trade Bank") at its office at 333 South Grand Avenue, 8th
Floor, Los Angeles, CA 90071, or at such other place as the holder hereof may
designate, in lawful money of the United States of America and in immediately
available funds, the principal sum of Four Hundred Forty-Two Thousand Nine
Hundred Forty-Five Dollars ($442,945), or so much thereof as may be advanced and
be outstanding, with interest thereon, to be computed on each advance from the
date of its disbursement at a rate per annum (computed on the basis of a 360-day
year, actual days elapsed) five percent (5.0%) above the Prime Rate in effect
from time to time. The "Prime Rate" is a base rate that WELLS FARGO BANK,
NATIONAL ASSOCIATION ("Bank") from time to time establishes and which serves as
the basis upon which effective rates of interest are calculated for those loans
making reference thereto. Each change in the rate of interest hereunder shall
become effective on the date each Prime Rate change is announced within Bank.
Borrower may from time to time from the date of this Note up to and including
August 31, 1999, borrow and partially or wholly repay its outstanding
borrowings, subject to all of the limitations, terms and conditions of this Note
and of any document executed in connection with or governing this Note; provided
however, that amounts repaid may not be reborrowed; and provided further, that
the total borrowings under this Note shall not exceed the principal amount
stated above. The unpaid principal balance of this obligation at any time shall
be the total amounts advanced hereunder by the holder hereof less the amount of
principal payments made hereon by or for any Borrower, which balance may be
endorsed hereon from time to time by the holder.
Advances hereunder, to the total amount of the principal sum stated above and up
to and including the date set forth in the preceding paragraph, may be made by
the holder at the oral or written request of (a) John Diesenbruch or Vinton
Bacon, any one acting alone, who are authorized to request advances and direct
the disposition of any advances until written notice of the revocation of such
authority is received by the holder at the office designated above, or (b) any
person, with respect to advances deposited to the credit of any account of any
Borrower with the holder, which advances, when so deposited, shall be
conclusively presumed to have been made to or for the benefit of each Borrower
regardless of the fact that persons other than those authorized to request
advances may have authority to draw against such account. The holder shall have
no obligation to determine whether any person requesting an advance is or has
been authorized by any Borrower.
Interest accrued on this Note shall be payable on the last day of each month,
commencing July 31, 1998.
Principal shall be payable in thirteen (13) installments as follows:
<TABLE>
<CAPTION>
Installments Payment Amount Due Date
------------ -------------- ------------------
<S> <C> <C> <C>
1 through 7 $10,000 commencing 7/31/98
8 through 13 $60,000 commencing 2/28/99
</TABLE>
with a final installment consisting of all remaining unpaid principal due and
payable in full on August 31, 1999.
This Note is made pursuant to and is subject to the terms and conditions of that
certain Amended and Restated Credit Agreement between Borrower and Trade Bank
dated as of January 21, 1998, as amended from time to time ("Credit Agreement").
Any default in the payment or performance of any obligation under this Note, or
any defined event of default under the Credit Agreement, shall constitute an
"Event of Default" under this Note.
Upon the occurrence of any Event of Default, the holder of this Note, at the
holder's option, may declare all sums of principal and interest outstanding
hereunder to be immediately due and payable without presentment, demand, protest
or notice of dishonor, all of which are expressly waived by each Borrower, and
the obligation, if any, of the holder to extend any further credit hereunder
shall immediately cease and terminate. Each Borrower shall pay to the holder
immediately upon demand the full amount of all payments, advances, charges,
costs and expenses, including reasonable attorneys' fees (to include outside
counsel fees and all allocated costs of the holder's in-house counsel), incurred
by the holder in connection with the enforcement of the holder's rights and/or
the collection of any amounts which become due to the holder under this Note,
and the prosecution or defense of any action in any way related to this Note,
including without limitation, any action for declaratory relief, and including
any of the foregoing incurred in connection with any bankruptcy proceeding
relating to any Borrower.
Page 1 of 4
<PAGE> 5
Should more than one person or entity sign this Note as a Borrower, the
obligations of each such Borrower shall be joint and several.
This Note shall be governed by and construed in accordance with the laws of the
State of California, except to the extent Trade Bank has greater rights or
remedies under Federal law, whether as a national bank or otherwise, in which
case such choice of California law shall not be deemed to deprive Trade Bank of
any such rights and remedies as may be available under Federal law.
This Note supersedes and replaces that certain Term Note dated January 21, 1998.
"BORROWER"
JALATE, LTD.
By: /S/VINTON BACON
-----------------------------
Vinton Bacon
Title: CEO/President
Borrower's Address:
6557 Flotilla
City of Commerce, CA. 90040
Page 2 of 4
<PAGE> 6
ADDENDUM TO PROMISSORY NOTE
THIS ADDENDUM is attached to and made a part if that certain promissory
note executed by JALATE, LTD., a California corporation ("Borrower") and payable
to WELLS FARGO HSBC TRADE BANK, NATIONAL ASSOCIATION, or order, dated as of July
17, 1998 in the principal amount of Four Hundred Forty-Two Thousand Nine Hundred
Forty-Five Dollars ($442,945)(the "Note").
The following arbitration provision is hereby incorporated into the Note:
ARBITRATION:
(a) Arbitration. Upon demand of any party, any Dispute shall be resolved by
binding arbitration (except as set forth in (e) below) in accordance with the
terms of this Note. A "Dispute" shall mean any action, dispute, claim or
controversy of any kind, whether in contract or tort, statutory or common law,
legal or equitable, now existing or hereafter arising under or in connection
with, or in any way pertaining to, this Note and each other document, contract
and instrument required hereby or now or hereafter delivered to Bank in
connection herewith (collectively, the "Documents"), or any past, present or
future extensions of credit and other activities, transactions or obligations of
any kind related directly or indirectly to any of the Documents, including
without limitation, any of the foregoing arising in connection with the exercise
of any self-help, ancillary or other remedies pursuant to any of the Documents.
Any party may by summary proceedings bring an action in court to compel
arbitration of a Dispute. Any party who fails or refuses to submit to
arbitration following a lawful demand by any other party shall bear all costs
and expenses incurred by such other party in compelling arbitration of any
Dispute.
(b) Governing Rules. Arbitration proceedings shall be administered by the
American Arbitration Association ("AAA") or such other administrator as the
parties shall mutually agree upon in accordance with the AAA Commercial
Arbitration Rules. All Disputes submitted to arbitration shall be resolved in
accordance with the Federal Arbitration Act (Title 9 of the United States Code),
notwithstanding any conflicting choice of law provision in any of the Documents.
The arbitration shall be conducted at a location in California selected by the
AAA or other administrator. If there is any inconsistency between the terms
hereof and any such rules, the terms and procedures set forth herein shall
control. All statutes of limitation applicable to any Dispute shall apply to any
arbitration proceeding. All discovery activities shall be expressly limited to
matters directly relevant to the Dispute being arbitrated. Judgment upon any
award rendered in an arbitration may be entered in any court having
jurisdiction; provided however, that nothing contained herein shall be deemed to
be a waiver by any party that is a bank of the protections afforded to it under
12 U.S.C. Section 91 or any similar applicable state law.
(c) No Waiver; Provisional Remedies, Self-Help and Foreclosure. No
provision hereof shall limit the right of any party to exercise self-help
remedies such as setoff, foreclosure against or sale of any real or personal
property collateral or security, or to obtain provisional or ancillary remedies,
including without limitation injunctive relief, sequestration, attachment,
garnishment or the appointment of a receiver, from a court of competent
jurisdiction before, after or during the pendency of any arbitration or other
proceeding. The exercise of any such remedy shall not waive the right of any
party to compel arbitration or reference hereunder.
(d) Arbitrator Qualifications and Powers; Awards. Arbitrators must be
active members of the California State Bar or retired judges of the state or
federal judiciary of California, with expertise in the substantive law
applicable to the subject matter of the Dispute. Arbitrators are empowered to
resolve Disputes by summary rulings in response to motions filed prior to the
final arbitration hearing. Arbitrators (i) shall resolve all Disputes in
accordance with the substantive law of the state of California, (ii) may grant
any remedy or relief that a court of the state of California could order or
grant within the scope hereof and such ancillary relief as is necessary to make
effective any award, and (iii) shall have the power to award recovery of all
costs and fees, to impose sanctions and to take such other actions as they deem
necessary to the same extent a judge could pursuant to the Federal Rules of
Civil Procedure, the California Rules of Civil Procedure or other applicable
law. Any Dispute in which the amount in controversy is $5,000,000 or less shall
be decided by a single arbitrator who shall not render an award of greater than
$5,000,000 (including damages, costs, fees and expenses). By submission to a
single arbitrator, each party expressly waives any right or claim to recover
more than $5,000,000. Any Dispute in which the amount in controversy exceeds
$5,000,000 shall be decided by majority vote of a panel of three arbitrators;
provided however, that all three arbitrators must actively participate in all
hearings and deliberations.
(e) Judicial Review. Notwithstanding anything herein to the contrary, in
any arbitration in which the amount in controversy exceeds $25,000,000, the
arbitrators shall be required to make specific, written findings of fact and
conclusions of law. In such arbitrations (A) the arbitrators shall not have the
power to make any award which is not supported by substantial evidence or which
is based on legal error, (B) an award shall not be binding upon the parties
unless the findings of fact are supported by substantial evidence and the
conclusions of law are not erroneous under substantive law of the state of
California, and (C) the parties shall have in addition to the grounds referred
to in the Federal Arbitration Act for vacating, modifying or correcting an award
the right to judicial review of (1) whether the findings of fact rendered by the
arbitrators are supported by substantial evidence, and (2) whether the
conclusions of law are erroneous under the substantive law of the state of
California. Judgment confirming an award in such a proceeding may be entered
only if a court determines the award is supported by substantial evidence and
not based on legal error under the substantive law of the state of California.
Page 3 of 4
<PAGE> 7
(f) Miscellaneous. To the maximum extent practicable, the AAA, the
arbitrators and the parties shall take all action required to conclude any
arbitration proceeding within 180 days of the filing of the Dispute with the
AAA. No arbitrator or other party to an arbitration proceeding may disclose the
existence, content or results thereof, except for disclosures of information by
a party required in the ordinary course of its business, by applicable law or
regulation, or to the extent necessary to exercise any judicial review rights
set forth herein. If more than one agreement for arbitration by or between the
parties potentially applies to a Dispute, the arbitration provision most
directly related to the Documents or the subject matter of the Dispute shall
control. This Note may be amended or modified only in writing signed by
Borrower. If any provision of this Note shall be held to be prohibited by or
invalid under applicable law, such provision shall be ineffective only to the
extent of such prohibition or invalidity, without invalidating the remainder of
such provision or any remaining provisions of this Note. This arbitration
provision shall survive termination, amendment or expiration of any of the
Documents or any relationship between the parties.
IN WITNESS WHEREOF, this Addendum has been executed as of the same date as
the Note.
"BORROWER"
JALATE, LTD.
By: /S/VINTON BACON
---------------------------
Vinton Bacon
Title: CEO/President
Page 4 of 4
<PAGE> 1
Exhibit 10.2
FOURTH AMENDMENT TO
REVOLVING LOAN AGREEMENT
This Fourth Amendment to that certain Revolving Loan Agreement
("Amendment") is made and entered into effective as of August 1, 1998, by and
between Jalate, Ltd. ("Client") and Heller Financial, Inc. ("Heller").
WHEREAS, Heller and Client are parties to a certain Revolving Loan
Agreement dated June 30, 1997, and all amendments thereto (the "Agreement"); and
WHEREAS, the parties desire to amend the Agreement as hereinafter set
forth;
NOW THEREFORE, in consideration of the mutual conditions and agreements set
forth in the Agreement and this Amendment, and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties hereto hereby agree as follows:
1. Definitions. Capitalized terms used in this Amendment, unless otherwise
defined herein, shall have the meaning ascribed to such term in the Agreement.
2. Amendments. The second paragraph on page one of the Agreement is amended
by deleting the table in the second paragraph and inserting the following table
in lieu thereof:
<TABLE>
<CAPTION>
PERIOD MAXIMUM REVOLVING LOAN
-------------------- --------------------------------------------------
<S> <C>
July 1, 1998 through $2,200,000 in excess of the amount equal to
December 31, 1998. 100% of the Purchase Price of outstanding
Accounts purchased by Heller pursuant to the
Factoring Agreement; subject, however, to a limit
on the "Due From Factor" balance of Client under
the Factoring Agreement of <$1,000,000>.
January 1, 1999 $1,500,000 in excess of the amount equal to
and thereafter. 100% of the Purchase Price of outstanding
Accounts purchased by Heller pursuant to the
Factoring Agreement; subject, however, to a limit
on the "Due From Factor" balance of Client under
the Factoring Agreement of <$750,000>.
</TABLE>
3. Conditions. The effectiveness of this Amendment is subject to the
following conditions precedent (unless specifically waived in writing by
Heller):
(a) There shall have occurred no material adverse change in the
business, operations, financial condition, profits or prospects of Client, or in
the Collateral;
(b) Client shall have executed and delivered such other documents and
instruments as Heller may require;
(c) All proceedings taken in connection with the transactions
contemplated by this Amendment and all documents, instruments and other legal
matters incident thereto shall be satisfactory to Heller and its legal counsel;
and
(d) No Default or Event of Default under the Agreement as amended
hereby shall have occurred and be continuing.
<PAGE> 2
4. Corporate Action. The execution, delivery, and performance of this
Amendment has been duly authorized by all requisite corporate action on the part
of Client and this Amendment has been duly executed and delivered by Client.
5. Severability. Any provision of this Amendment held by a court of
competent jurisdiction to be invalid or unenforceable shall not impair or
invalidate the remainder of this Amendment and the effect thereof shall be
confined to the provision so held to be invalid or unenforceable.
6. References. Any reference to the Agreement contained in any notice,
request, certificate, or other document executed concurrently with or after the
execution and delivery of this Amendment shall be deemed to include this
Amendment unless the context shall otherwise require.
7. Counterparts. This Amendment may be executed in one or more
counterparts, each of which shall constitute an original, but all of which taken
together shall be one and the same instrument.
8. Ratification. The terms and provisions set forth in this Amendment shall
modify and supersede all inconsistent terms and provisions of the Agreement and,
except as expressly modified and superseded by this Amendment, the terms and
provisions of the Agreement are ratified and confirmed and shall continue in
full force and effect.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed under seal and delivered by their respective duly authorized
officers on the date first written above.
HELLER FINANCIAL, INC. JALATE, LTD.
By: /S/JOHN NOONEY By: /S/VINTON BACON
-------------- ---------------
John Nooney Vinton Bacon
Title: V. P. Title: President
ATTEST:
/S/JOHN DIESENBRUCH
-------------------
John Diesenbruch
Secretary
/CORPORATE SEAL/
2
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM JALATE, LTD.
CONDENSED BALANCE SHEET AS OF JUNE 30, 1998 AND CONDENSED STATEMENT OF
OPERATIONS FOR THE SIX MONTHS ENDED JUNE 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 JUNE 30, 1998.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 149
<SECURITIES> 0
<RECEIVABLES> 502
<ALLOWANCES> 210
<INVENTORY> 3,576
<CURRENT-ASSETS> 4,687
<PP&E> 3,088
<DEPRECIATION> 1,627
<TOTAL-ASSETS> 6,943
<CURRENT-LIABILITIES> 5,031
<BONDS> 130
0
0
<COMMON> 5,576
<OTHER-SE> (4,507)
<TOTAL-LIABILITY-AND-EQUITY> 6,943
<SALES> 25,623
<TOTAL-REVENUES> 25,623
<CGS> 19,053
<TOTAL-COSTS> 19,053
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 161
<INTEREST-EXPENSE> 524
<INCOME-PRETAX> (17)
<INCOME-TAX> 0
<INCOME-CONTINUING> (17)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (17)
<EPS-PRIMARY> (0.00)
<EPS-DILUTED> (0.00)
</TABLE>
