-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, BehthV82ovYXQ6OJj1KzB0yZRrNbP4vKEwYT9XCl8ZKeRx7lRaZaEQp5wBjCICzV uoUvZJvK5y2ukOQhWms2Hw== 0000950148-98-000753.txt : 19980401 0000950148-98-000753.hdr.sgml : 19980401 ACCESSION NUMBER: 0000950148-98-000753 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 30 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980331 SROS: AMEX FILER: COMPANY DATA: COMPANY CONFORMED NAME: JALATE LTD INC CENTRAL INDEX KEY: 0000914026 STANDARD INDUSTRIAL CLASSIFICATION: WOMEN'S, MISSES', AND JUNIORS OUTERWEAR [2330] IRS NUMBER: 954121885 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-12868 FILM NUMBER: 98583465 BUSINESS ADDRESS: STREET 1: 1675 SOUTH ALAMEDA STREET CITY: LOS ANGELES STATE: CA ZIP: 90021 BUSINESS PHONE: 2137655000 MAIL ADDRESS: STREET 1: 1675 SOUTH ALAMEDA STREET CITY: LOS ANGELES STATE: CA ZIP: 90021 FORMER COMPANY: FORMER CONFORMED NAME: JALATE LTD DATE OF NAME CHANGE: 19940301 10-K405 1 FORM 10-K405 1 As filed with the Securities and Exchange Commission on March 31, 1998 =============================================================================== UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ____________ TO ___________ COMMISSION FILE NUMBER: 1-12868 JALATE, LTD. (Exact name of registrant as specified in its charter) CALIFORNIA 95-4121885 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER) 1675 SOUTH ALAMEDA STREET LOS ANGELES, CALIFORNIA 90021 (Address of principal executive offices) (Zip Code) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (213) 765-5000 Securities registered pursuant to Section 12(b) of the Act: Common Stock American Stock Exchange (Title of each class) (Name of each exchange on which registered) Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No[ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] As of March 17, 1998, the aggregate market value of the Common Stock held by non-affiliates of the registrant was approximately $4,187,000, based upon the closing price of the Common Stock on that date. Number of shares of Common Stock of the registrant outstanding as of March 17, 1998: 3,403,000. =============================================================================== 2 TABLE OF CONTENTS Page Item 1. BUSINESS....................................................... 3 General........................................................ 3 Market......................................................... 3 Strategy....................................................... 3 1997........................................................... 4 Products....................................................... 4 Product Design................................................. 4 Manufacturing.................................................. 5 Marketing...................................................... 7 Backlog........................................................ 7 Competition.................................................... 7 Employees...................................................... 8 Trademarks..................................................... 8 Item 2. PROPERTIES..................................................... 8 Item 3. LEGAL PROCEEDINGS.............................................. 8 Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............ 8 Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS........................................................ 8 AMEX Listing................................................... 8 Dividends...................................................... 9 Recent Sales of Unregistered Securities......................... 9 Item 6. SELECTED FINANCIAL DATA......................................... 10 Factors That May Affect Future Results.......................... 12 Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS........................................... 12 General......................................................... 12 Results of Operations........................................... 13 Fiscal 1997 Compared to Fiscal 1996............................. 13 Fiscal 1996 Compared to Fiscal 1995............................. 14 Variability of Quarterly Results................................ 15 Liquidity and Capital Resources................................. 16 Year 2000 Issue................................................. 17 Recently Issued Pronouncements.................................. 17 Inflation....................................................... 17 Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA..................... 17 Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE............................................ 17 Item 10. DIRECTORS AND EXECUTIVE OFFICERS................................ 18 Item 11. EXECUTIVE COMPENSATION.......................................... 18 Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.. 18 Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.................. 18 Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. 18 2 3 PART I Item 1. BUSINESS GENERAL Jalate, Ltd. (the "Company") designs, develops and markets moderately priced women's sportswear and dresses primarily in junior, missy and plus sizes. In addition, the Company designs, develops and markets moderately priced kid's wear. The Company's products combine fashionable styling, quality construction and moderate pricing, and are intended to appeal primarily to the fashion-conscious young woman who desires to continually upgrade her wardrobe on a limited clothing allowance. Although the Company regularly alters the styles offered, its products are characterized by basic designs which are less costly to manufacture than more detailed high fashion styles. These cost savings not only permit the Company to aggressively price its products, but allow it to provide higher quality and more fashionable fabric for its sportswear. During the year ended December 31, 1997, the Company's products were sold to over 600 department stores, apparel specialty stores and discount chains, including Federated Department Stores, J. C. Penney, Wet Seal, Petries, Mervyns, and Sears. The Company also provides product development for apparel retailers including Dillard's Department Stores, Victoria's Secret and Limited Express. MARKET The Company believes that the ability to anticipate, gauge and respond to changes in consumer preferences, as well as the ability to meet the demands of the retailer for timely delivery, consistent quality and adaptability to its individual business practices, are necessary to compete successfully in the women's and the kid's apparel industry. Consumer acceptance in general depends principally on fashionable styling, product quality, pricing and brand awareness. The Company believes that the importance of brand awareness in general has diminished and that consumers have come to view value pricing as increasingly important. The Company's products offer a combination of fashionable styling and quality construction for a moderate price. These products are intended to appeal primarily to the fashion-conscious young woman who desires to continually update her wardrobe on a limited clothing allowance. In addition, the Company's products appeal to youthfully figured women of all ages who desire the youthful styling and value pricing of the Company's products. Apparel retailers generally are seeking to obtain both a high degree of consumer acceptance of their products and superior service from their vendors in order to improve their own results of operations. The ability of apparel manufacturers to timely deliver products which are of consistent quality and to adapt to the business practices of the individual retailer is increasingly important to the apparel retailer as it seeks to improve its own operating efficiencies and to reduce the costs and risks of maintaining finished goods inventory, including the risk of fashion obsolescence. Accordingly, retailers are concentrating their purchases among an increasingly small group of dependable vendors who have demonstrated their ability to correctly anticipate changes in consumer preferences and to provide timely delivery, consistent quality and adaptability to the business practices of individual retailers. The continuing consolidation of apparel retailers as a result of weak consumer demand has substantially increased the competition among apparel manufacturers and further emphasized the importance of dependable service. The Company believes that by delivering products which achieve a high degree of retail sell-through at attractive profit margins for both the Company and the retailer, as well as providing a high degree of customer service, will enable it to maintain its competitive position. STRATEGY The Company is committed to offering products which achieve a high degree of consumer acceptance and to meeting the demands of apparel retailers for dependable service. The Company responds to the needs of consumers and retailers by granting substantial design and marketing autonomy to each product division, maintaining an active Product Development effort, closely monitoring the production costs, quality, timely delivery and sell-through of its products, developing alternative manufacturing sources and continually upgrading its operational capabilities. In addition, the Company studies the preferences of each of its principal customers and adapts its own business practices to accommodate its customers. The Company believes that its responsiveness to the needs of consumers and retailers will enable it to maintain its competitive position. 3 4 1997 In response to a continuing decline in retail apparel demand, in 1997 the Company continued a program commenced in 1996 of (i) focusing on its Jalate brand of sportswear, dresses, and kid's clothing which accounted for 59%, 34% and 7%, respectively, of the Company's gross sales in 1997, (ii) reducing its operating expenses and (iii) improving its operational capabilities. PRODUCTS The Company participates primarily in three segments of the apparel market: women's sportswear, women's dresses, and children's clothing which are marketed primarily under the Jalate brand name. In addition, through its Product Development division, the Company designs, develops and manufactures apparel under private label. The Company's sportswear, dresses and product development offerings are each operated as a separate division with substantial design and marketing autonomy. The Company believes that such segmentation enables it to more closely monitor trends in styles, fabrics and colors and in the expectations of individual retailers. The Company's products incorporate current styles, fabrics and colors, designed to appeal to a broad cross-section of young women for casual wear, and are available in sizes tailored for youthfully figured women. The Company's sportswear and dresses divisions each introduce ten product lines per year. Each product line generally contains between three to eight items, each of which may be produced in as many as eight styles, ten fabrics and twelve colors and prints. Although the Company regularly alters the styles offered, its products are characterized by their basic designs which are less costly to manufacture than more detailed high fashion styles. These cost savings not only permit the Company to aggressively price its products, but allow it to provide higher quality and more fashionable fabric for its knit sportswear. Sportswear. The Company's sportswear line currently consists primarily of tops and bottoms, which are sold both as separates and related separates. The Company selects styles, color schemes and fabrics to encourage consumers to coordinate outfits, resulting in multiple product purchases within the line. The Company's sportswear is distinguished by the use of fashion fabrics which, as result of the use of basic designs, gives these products a high perceived value relative to price. Retail prices range from $15.00 to $25.00. Sportswear accounted for approximately 47% of the Company's gross sales for fiscal 1997, down from approximately 50% for fiscal 1996. Dresses. As a result of the use of basic designs and common fabrics, the Company's dresses and rompers compete principally based upon prompt delivery and aggressive pricing. Retail prices range from $30.00 to $40.00. The Company's dresses and rompers accounted for approximately 34% of the Company's gross sales for fiscal 1997, down from approximately 39% for fiscal 1996. Kids Clothing. In 1996, the Company commenced designing, developing, manufacturing and selling clothing under Jalate Kids brand name for both apparel specialty and mass merchandise store chains. The Company's kids clothing line accounted for approximately 7% of its gross sales for fiscal 1997, up from less than 1% for fiscal 1996. Product Development. In 1995, the Company commenced designing, developing and manufacturing apparel under private label for both apparel specialty and mass merchandise store chains. The Company's product development offerings accounted for approximately 12% of its gross sales for fiscal 1997, up from approximately 11% for fiscal 1996. PRODUCT DESIGN Each of the Company's divisions maintains its own merchandising and design staffs which meet weekly to discuss adjustments in product mix, construction, styles, fabrics and colors. The merchandising staff determines market trends by visiting retail stores and trade shows throughout the United States and Europe and consulting with buyers for retail stores and with representatives of textile suppliers and mills. Based upon such research, the division's merchandising staff selects the styles, fabrics and colors for each new product line. The design team then prepares concept boards containing proposed designs and fabric selections which are reviewed both within the Company and, on occasion, with major customers. After a review of such selection by the Company's production staff to determine that each item can be manufactured within the division's established cost structure, working prototypes of each garment are prepared and reviewed and the design and production patterns are finalized. The Company's sales force actively monitors the sell-through of each product to determine changes in consumer preferences. 4 5 MANUFACTURING The Company maintains a flexible manufacturing program consisting of (i) a cutting and sewing joint venture with an affiliate of its largest sewing contractor in Los Angeles, (ii) using independent sewing contractors in the Los Angeles area to supplement the joint venture and (iii) manufacturing products through independent cutting and sewing contractors abroad. In-House Manufacturing. The Company entered into a manufacturing joint venture (the "Joint Venture") with Lebr Associates, Inc. (the "Partner"), an affiliate of the Company's largest sewing contractor in November 1994. The Joint Venture commenced operations in May 1995. The purposes of the Joint Venture are to assist the Company to (i) maintain and enhance the quality of certain products, (ii) enhance the Company's responsiveness to its customers by decreasing the time required for manufacturing certain products, (iii) lower the manufacturing costs of certain products, (iv) comply with the individual manufacturing requirements of certain large customers and (v) provide a safe and productive workplace in conformity with federal and state laws for persons manufacturing the Company's products. The Joint Venture currently cuts all of the Company's domestic products and sews approximately 10% of such products. The Joint Venture is a California limited partnership. The Company and the Partner each are equal limited partners and each hold one-half of the outstanding capital stock of the sole general partner, a California corporation (the "General Partner"). The Company and the Partner each have the right to elect one-half of the directors of the General Partner. Certain actions by the General Partner or the Joint Venture require the approval of all the directors of the General Partner, including, but not limited to, acquiring an interest in real property, expending over $50,000, acquiring or issuing securities, incurring indebtedness, making any distribution, amending organizational documents or disposing of any assets, other than in the ordinary course of business. Larry Brahim, Chairman of the Company, is the President of the Joint Venture, and Brenda Daitch, the daughter of a principal of the Partner, is the Chief Operating Officer of the Joint Venture. The Company and the Partner each are obligated to contribute up to $300,000 to the Joint Venture. As of December 31, 1997, the Company had contributed approximately $198,000 to the Joint Venture. The Joint Venture had income of approximately $576,000 and $976,000 for the fiscal years ended December 31, 1996 and 1997, respectively, of which $288,000 and $488,000 was allocated to the Company under the equity method of accounting for fiscal 1996 and fiscal 1997, respectively. Domestic Sewing Contractors. In fiscal 1997, all of the Company's domestic products were manufactured to its specifications by sewing contractors in the Los Angeles area. The Company believes that its use of domestic contract manufacturers allows it to respond more quickly to the needs of certain customers than would be the case if it relied solely on importing finished goods and enables it to avoid the significant capital expenditures and costs associated with a larger production force which would be incurred if it were to rely solely on in-house manufacturing. The rapid response to a customer's needs permitted by contract manufacturing, as well as the Company's policy of manufacturing products based primarily on orders, enables the Company and its customers to reduce the costs and risks of making early commitments for fabric and piece goods and maintaining finished goods inventory, including the risk of fashion obsolescence. The Company currently uses 12 domestic sewing contractors, the five largest of which account for approximately 81% of the Company's products. Although the Company has no master manufacturing agreements with any of its contractors and competes with other apparel companies for production capacity, the Company believes that its relationships with its contractors are satisfactory and that alternative sources for sewing services are readily available. The principal fabrics used in the Company's domestically manufactured products are solid knits, novelty knits, denim and cotton, which are currently acquired from suppliers and textile mills located in the United States. One source accounted for approximately 14% of the Company's fabric for fiscal 1997, and the five largest accounted for approximately 44% of such fabric. Although the Company has no long-term agreements with any of its domestic fabric suppliers and competes with other apparel companies for fabric, the Company believes that its relationships with its suppliers are satisfactory and that alternative sources of fabric are readily available. The Company's employees currently inspect each of its domestic contractors at least three times each week for compliance with the Company's specifications and patterns and monitor the timely delivery of finished goods to the Company. The Company continues its quality assurance efforts by inspecting the quantity and quality of all fabric received from its fabric suppliers and by inspecting at least 10% of all finished goods received from its domestic sewing contractors. In the event more than five percent of 5 6 the fabric inspected is found to be defective, all such product will be returned to the fabric supplier and reinspected upon its redelivery to the Company. Importing. In July 1994, to attract additional retail customers, the Company commenced foreign sourcing from various points in the Philippines, Hong Kong, and China which offer product at lower price points. Contracting with foreign manufacturers enables the Company to take advantage of lower prevailing labor rates and, accordingly, to produce a garment which can be sold in the moderate price range while maintaining a cost of manufacture lower than that of a domestically manufactured product. The Company's import sales for 1997 were $10,469,000, 19% of total volume compared to $6,385,000 for 1996, 11% of total volume. All foreign manufacturing is performed in accordance with detailed specifications furnished by the Company, and is subject to quality control standards with the right to reject products that do not meet such specifications. As part of its quality control procedure, the Company receives in Los Angeles pre-production samples and, subsequently, in-production samples from each factory for inspection by quality control personnel before accepting shipment of the product to the United States. The Company currently retains an agent in the Philippines to monitor production in order to assure timely delivery and maintain quality control, inspect finished garments and issue inspection certificates before shipment to the United States. The Company pays a commission based upon the contract cost of the product for this service. The Company purchases garments directly through Hong Kong and Taiwanese trading companies for the limited production of garments in the Philippines, China, and Taiwan. The products produced in Hong Kong and China are manufactured by factories with whom management has had previous long standing relationships and favorable prior experiences. The Company also purchases finished fabric from Taiwan. The Company arranges for production of its products with foreign suppliers on a purchase order basis, with each order generally backed by an irrevocable international letter of credit. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources." The Company has not entered into any long term arrangements with foreign manufacturers. This provides the Company with flexibility in the selection of manufacturers for production of goods. The Company believes that the loss of any particular manufacturer in any country could be replaced by another manufacturer in a reasonable time period. However, in the event of the loss of a major manufacturer the Company would experience a temporary interruption in supply of garments and quota. The period of time from placement of a purchase order by the Company through shipment and delivery in the United States ranges from approximately 75 to 150 days. The Company's operations are subject to the customary risks of doing business abroad, including fluctuations in the value of currencies, export duties, quotas, restrictions on the transfer of funds, work stoppages and, in certain parts of the world, political instability. The Company believes that its principal competitors, many of whom also rely on manufacturing sources in the Far East, may experience similar risks. The Company's product costs, pricing structure and profit margins depend, in part, on the currency exchange rates between the United States and the countries in which its products are manufactured. The currencies of these countries have, from time to time, increased in value against the U.S. dollar and may experience further increases in the future as a result of various factors, including the balance of payments, overall economic conditions or government intervention. Although the Company does not believe that such fluctuations in exchange rates have had a material effect on its operations to date, depending upon their extent and duration, such fluctuations could materially increase the Company's cost of goods, resulting in higher product prices or lower profits unless alternative manufacturing arrangements can be implemented. The Company's foreign manufacturing is conducted under the constraints imposed by bilateral textile agreements between the United States and a number of foreign countries, including those from which the Company is currently sourcing products. These agreements impose quotas on the amount and type of goods which can be imported into the United States from these countries. The Company is unable to predict whether legislation which could result in additional U.S. customs duties, quotas or other restrictions on the importation of its products will be enacted in the future. The enactment of such legislation could result in increases in the cost of such products generally and might materially and adversely affect the sales, profitability or financial condition of the Company. However, the trend today is towards lowering tariffs and eliminating textile quotas. The United States, in the Uruguay Round Agreements Act enacted by the Congress to implement the GATT Uruguay Round Agreement, has committed itself to doing both. 6 7 The Company does not contract for quota separately from the garment cost. Quota charges are included in the purchase order cost. For this reason, the Company views its current factories as valuable sources for the quota categories it intends to import. MARKETING During fiscal 1997, the Company's products were sold to over 600 department stores, apparel specialty stores and discount chains, many of which have locations throughout the United States. The Company's customers include Dillard's, Federated Department Stores, J.C. Penney, Wet Seal, Petries, Mervyns, and Sears, which accounted for an aggregate of 37% of the Company's gross sales for fiscal 1997. No single customer accounted for more than 11% of the Company's gross sales for fiscal 1997 (12% for fiscal 1996). Commencing in 1994, the Company has sought to reduce its reliance upon lower volume apparel specialty stores, which generally have higher returns and less secure credit ratings than department stores and discount chains, primarily by hiring more experienced sales personnel with prior relationships with department stores and discount chains. As a result of such efforts and the consolidation of retail stores generally, the number of the Company's customers was reduced from 850 in fiscal 1993 to 670 in fiscal 1994 to 640 in fiscal 1995 to 610 in fiscal 1996 and to 605 in fiscal 1997. The Company sells its products directly through a 10 person sales staff located in showrooms in both Los Angeles and New York. In addition, senior management actively participates in selling to major accounts. The Company's sportswear and dresses are marketed primarily under the Jalate brand name. Approximately 25% of the Company's net sales for fiscal 1997 was attributable to the Company's products sold under the customers' labels. The use of its own label allows a customer to increase its gross profit margin due to the established value of its brand name. The Company provides product development for apparel retailers, including Dillard's Department Stores, Victoria's Secret and Limited Express. In this effort, the Company's employees work in coordination with a customer to develop, design and manufacture goods to be sold under the customer's own label. Approximately 10% of the Company's net sales for fiscal 1997 was attributable to apparel designed by the Company on behalf of customers. The Company believes that its commitment to value pricing, which provides consumers with well-made, fashionable apparel for a moderate price, is generally recognized by apparel retailers and is a principal reason for the success of the Company's product development offerings. BACKLOG The Company's backlog of orders was approximately $8,984,000 at March 18, 1998, compared to approximately $16,906,000 at March 14, 1997, a decrease of 47%. All of the orders included in such backlog require shipment before May 31, 1998. Such orders generally may be canceled only in the event of late delivery or delivery of non-conforming goods. The Company generally has not experienced difficulty in shipping orders by the dates requested by its customers or in material returns of its products. The amount of backlog which is manufactured and shipped during any period is dependent on various factors and, accordingly, the amount of backlog at any date is not necessarily indicative of actual shipments. COMPETITION Each segment of the women's and kids apparel industry in which the Company offers products is highly competitive. The Company competes with numerous apparel manufacturers, including those with their own retail stores, as well as department stores, specialty stores, retail chains and mass merchandisers, including certain of the Company's customers, which sell apparel under their own labels. The Company's principal competitors include Chorus Line, Oshkosh, and California Concepts. Many of the Company's competitors have substantially greater financial, distribution, marketing and other resources, including greater brand awareness, than the Company. The Company competes primarily on the basis of fashion fabrics and moderate pricing in its sportswear and kids line, and timely delivery and aggressive pricing in its dresses and rompers. There can be no assurance that the Company will be able to maintain or increase its revenues or earnings or to correctly anticipate, gauge and respond to changing preferences of consumers and retailers in a timely manner. 7 8 EMPLOYEES At February 28, 1998, the Company had 140 full-time employees (down from 172 at February 28, 1997), of whom three were engaged in corporate management, 16 in administration, 15 in merchandising and design, 29 in pattern and sample making, 31 in production, 16 in sales and customer service, five in management information systems, five in data entry and 20 in warehousing and shipping. The Company's employees are not covered by any collective bargaining agreement, and the Company considers its relations with its employees to be satisfactory. TRADEMARKS The Company has registered certain of its labels and brand names in selected foreign countries and intends to seek registration of its labels and brand names in the United States. The Company believes, however, that the importance of brand awareness in general has diminished and that consumers have come to view value pricing as increasingly important. ITEM 2. PROPERTIES The Company has its executive offices, design and production facilities and warehouse in a single building in Los Angeles, California. These premises contain approximately 61,500 square feet, of which approximately 8,500 square feet are used for administrative offices, 8,500 square feet for design and production and 44,500 square feet for shipping and warehousing, and are leased from an independent third party under a lease which expires on November 14, 1998. The monthly rent on such premises is $24,000. In order to reduce rental expense, the Company anticipates relocating prior to the lease expiration date. On October 11, 1994, the Company entered into a lease with an independent third party for approximately 90,000 square feet located in City of Commerce, of which 10,000 square feet is used for administrative offices, 40,000 square feet is used for additional warehousing and inspection of piece goods and 40,000 square feet is used for manufacturing. The initial term of the lease is five years and two months, commencing on December 1, 1994, and is subject to two options to renew for five years each. The annual rent on such premises is $259,000. The Company has agreed to sublease half of these premises to the Joint Venture on the same terms as set forth in the lease. In addition the Company leases its showrooms in Los Angeles and New York. The Company believes that its facilities are adequate for the foreseeable future. ITEM 3. LEGAL PROCEEDINGS The Company is from time to time involved in litigation incidental to the conduct of its business. The Company does not believe that any currently pending litigation to which it is a party will have a materially adverse effect on its financial statements taken as a whole. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of the Company's shareholders during the fourth quarter of fiscal 1997. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AMEX LISTING The Company's Common Stock currently trades on the American Stock Exchange ("AMEX") under the symbol "JLT." 8 9 The following table sets forth, for the periods indicated, the range of high and low closing prices on AMEX. Low High ----- ----- 1996 First Quarter............ $ 2.50 $ 4.00 Second Quarter........... 3.25 4.625 Third Quarter............ 3.50 4.688 Fourth Quarter........... 2.875 4.50 1997 First Quarter............ 2.8125 3.50 Second Quarter........... 2.25 3.00 Third Quarter............ 1.625 2.375 Fourth Quarter........... 1.625 2.25 On March 17, 1998, the closing price of the Company's Common Stock as reported on AMEX was $1.8125. Shareholders are urged to obtain current market quotations for the Common Stock. As of March 17, 1998, there were approximately 382 shareholders of record of the Company. DIVIDENDS The Company currently intends to retain any future earnings to provide funds for the operation and expansion of its business and does not anticipate paying cash dividends on its Common Stock in the foreseeable future. The Company is prohibited from paying dividends under the terms of its credit facilities. The payment of dividends is within the discretion of the Company's Board of Directors, and will depend upon, among other things, the Company's earnings, financial condition and capital requirements and general business conditions. RECENT SALES OF UNREGISTERED SECURITIES On January 27, 1998, the Company issued subordinated notes payable to certain shareholders of the Company, totaling $950,000. The notes mature January 31, 2000 with quarterly installments commencing on April 30, 1999. The notes are secured by the Company's investment interest in Airshop, Ltd. In connection with the transaction, the Company sold 500,000 stock purchase warrants to the shareholders for $50,000. The warrants are exercisable through January 2003 at an exercise price of $1.625 per share. 9 10 ITEM 6. SELECTED FINANCIAL DATA The following selected financial data are qualified in their entirety by, and should be read in conjunction with, the other information and financial statements, including the notes thereto, appearing elsewhere herein. (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
Year Ended December 31, ------------------------------------------------------------------------------------------------ 1993 1994 1995 1996 1997 -------------------------- -------------------------- ------------ ------------ --------- Pro Pro Actual Forma Actual Forma Actual Actual Actual --------- --------- --------- --------- --------- -------- --------- STATEMENTS OF OPERATIONS DATA Net sales...................$ 38,255 $ 38,255 $ 63,887 $ 63,887 $ 70,800 $ 54,021 $ 51,216 Cost of goods sold........... 27,729 27,729 46,872 46,872 56,211 39,514 40,629 -------- --------- --------- --------- --------- --------- --------- Gross profit................. 10,526 10,526 17,015 17,015 14,589 14,507 10,587 Operating expenses........... 8,291 8,291 14,071 14,071 16,977 14,220 14,792 -------- --------- --------- --------- --------- --------- --------- Earnings (loss) from 2,235 2,235 2,944 2,944 (2,388) 287 (4,205) operations................... Interest expense............. 412(1) 412(1) 359 359 896 548 785 Equity in earnings of unconsolidated subsidiaries.. - - - - (75) (288) (448) -------- --------- --------- --------- ---------- ---------- ---------- Earnings (loss) before 1,823 1,823 2,585 2,585 (3,209) 27 (4,542) income taxes (benefit) Income taxes (benefit): Current period............. 78 744(2) 720 912(2) (313) - - Settlement of tax examination............. 200(1) 200(1) - - - - - --------- --------- --------- --------- --------- --------- --------- Net earnings (loss).........$ 1,545 $ 879 $ 1,865 $ 1,673 $ (2,896) $ 27 $ (4,542) ========= ========= ========= ========= ========= ========= ========== Net earnings (loss) per share (note 3): Basic.....................$ 0.66 $ 0.38 $ 0.59 $ 0.53 $ (.85) $ .01 $ (1.33) ========= ========= ========= ========= ========== ======== ========== Diluted...................$ 0.65 $ 0.37 $ 0.59 $ 0.53 $ (.85) $ .01 $ (1.33) ========= ========= ========= ========= ========== ======== ========== Weighted average shares (note 3): Basic.....................2,343,000 2,343,000 3,138,000 3,138,000 3,390,000 3,402,000 3,403,000 ========= ========= ========= ========= ========= ========= ========= Diluted...................2,393,000 2,393,000 3,149,000 3,149,000 3,390,000 3,488,000 3,403,000 ========= ========= ========= ========= ========= ========= =========
10 11 (1) In July 1993, the Internal Revenue Service completed its examination of the Company's federal income tax returns for October 31, 1989 through December 31, 1991. Statements of Operations Data include as an expense $200,000 of federal and state taxes and $70,000 of interest thereon recorded by the Company in the year ended December 31, 1993 as a result of such examination. Such tax assessments relate primarily to 1989 and prior to the Company's S Corporation election. (2) Effective November 1, 1989, the Company elected to be taxed under Subchapter S of the Internal Revenue Code of 1986, as amended, and comparable California tax laws. As a result, the earnings of the Company have been taxed for federal and California income tax purposes directly to the Company's shareholders rather than to the Company. On the consummation of the Company's initial public offering in 1994, the Company became subject to federal and California income taxes. Pro Forma Statements of Operations Data have been adjusted to reflect the income tax expense that would have been recorded had the Company not been an S Corporation. (3) In 1997, the Company adopted the provisions of Financial Accounting Standards (FAS) No. 128 "Earnings per Share". For information pertaining to the calculation of net earnings (loss) per common share, see Note 1 of Notes to Financial Statements. 11 12 (IN THOUSANDS) December 31, ------- ------- ------- ------- ------- 1993 1994 1995 1996 1997 ------- ------- ------- ------- ------- BALANCE SHEETS DATA Working capital (deficiency) $ 971 $ 7,384 $ 4,108 $ 3,738 $ (769) Total assets ................ 5,229 12,523 9,183 9,173 6,893 Total current liabilities ... 3,712 4,327 3,846 3,809 6,071 Shareholders' equity ........ 1,517 8,196 5,337 5,364 822 FACTORS THAT MAY AFFECT FUTURE RESULTS All forward-looking statements contained in this Item 6 are subject to, in addition to the other matters described in the Report on Form 10-K, a variety of significant risks and uncertainties. The following discussion highlights some of these risks and uncertainties. Further, from time to time, information provided by the Company or statements made by its employees may contain forward-looking information. The Company 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. ITEM 7. 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 7 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 UNDER THE HEADING "FACTORS THAT MAY AFFECT FUTURE RESULTS" AND ELSEWHERE IN THIS REPORT ON FORM 10-K THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE ANTICIPATED BY THE COMPANY'S MANAGEMENT. THE PROVATE SECURITIES LITIGATION REFORM ACT OF 1995 (THE "ACT") PROVIDES CERTAIN "SAFEHARBOR" PROVISIONS FOR FORWARD-LOOKING STATEMENTS. ALL FORWARD-LOOKING STATEMENTS MADE IN THIS YEARLY REPORT ON FORM 10-K ARE MADE PURSUANT TO THE ACT. GENERAL The following discussion is qualified in its entirety by, and should be read in conjunction with, the other information and financial statements, including the notes thereto, appearing elsewhere in this Report. During the last five years, the women's apparel industry has experienced a continuing decline in consumer demand and a continuing trend in consumer preference for value-priced products. The result of such changes has been a continuing consolidation among apparel retailers with an attendant increase in competition among apparel manufacturers. As a result, the Company has experienced, and is likely to continue to experience, substantial fluctuations in the volume, average unit price, gross profit margin and operating expense in each of its product categories as it responds to changes in the demands of apparel retailers, consumer preferences and the general economy. 12 13 In fiscal 1994, the Company (i) commenced foreign manufacturing in response to increased competition by importers for budget-priced products, (ii) commenced development of a manufacturing joint venture with an affiliate of the Company's largest sewing contractor to improve the efficiency, quality and cost of its products, (iii) reduced its reliance upon apparel specialty stores and (iv) expanded its management information systems and computerized marking and grading equipment. In fiscal 1995, the Company commenced a program of (i) replacing its Lajate brand of sportswear and Zanoni brand of dresses with the Jalate name, which accounted for 50% and 27%, respectively, of the Company's gross sales in fiscal 1995, (ii) reducing its operating expenses, (iii) improving its administrative, production, distribution, financial reporting, human resources and MIS capabilities and (iv) expanding its Product Development division which designs, develops and manufactures under private label. In fiscal 1996, the Company commenced a program of (i) starting a Kids clothing line which had a sales backlog of $1,000,000 at December 31, 1996, (ii) implementing improved shipping procedures and managed markdowns which reduced dilution from 9.9% of sales in 1995 to 7.1% in 1996 and (iii) improving gross profit margins from 20.6% in 1995 to 26.9% in 1996. In fiscal 1997, the Company commenced a program of (i) developing the new Kids clothing line, which produced gross sales of $3,900,000, (ii) preparing for installation of an integrated production, shipping and financial information system and (iii) investing in Airshop, Ltd., which designs and sells junior women's apparel through its internet website and catalogs through which the Company will sell its line of apparel. There can be no assurance that such efforts will enable the Company to maintain its competitive position. RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, the percentage which certain items in the statements of operations data bear to net sales and the percentage dollar increase (decrease) of such items from period to period.
Percentage Dollar Percent of Net Sales Increase (Decrease) ----------------------------------- ------------------- Year Ended December 31, 1995 1996 ----------------------------------- to to 1995 1996 1997 1996 1997 --------- --------- --------- --------- ------- Net sales............... 100.0% 100.0% 100.0% (23.7) (5.2) Cost of goods sold...... (79.4) (73.1) (79.3) (29.7) 2.8 ---------- ------- ----------- Gross profit............ 20.6 26.9 20.7 (.6) (27.0) Operating expenses...... (24.0) (26.3) (28.9) (16.2) 4.0 ---------- ------- ----------- Earnings (loss) from operations ............. (3.4) .6 (8.2) 112.0 Interest expense........ (1.2) (1.0) (1.5) (38.8) 43.2 Equity in earnings of unconsolidated .1 .5 .9 284.0 55.6 subsidiaries............---------- ---------- ---------- Earnings (loss) before income taxes (benefit).. (4.5) .1 (8.9) 100.8 Income taxes (benefit).. (.4) - - (100.0) - ------- ---------- ---------- Net earnings (loss)..... (4.1) .1 (8.9) 100.9 ======= ========== ===========
FISCAL 1997 COMPARED TO FISCAL 1996 Net Sales. Gross sales decreased from $58,154,000 for fiscal 1996 to $56,300,000 for fiscal 1997, a decrease of 3.2%, due to a decrease in the volume of apparel sold from 5,867,000 units to 5,735,000 units, a decrease of 2.2%, which was amplified by a decrease in the average wholesale price from $9.91 to $9.82, a decrease of 0.9%. The decrease in volume was due primarily to the consolidation of the retail market causing reduced customer demand. Returns and allowances increased from $2,442,000 (4.2% of gross sales) for fiscal 1996 to $3,866,000 (6.9% of gross sales) for fiscal 1997, an increase of 58.3%. This increase was due in part to returns of one line of apparel (shipped during the second fiscal quarter) because of defective design and production problems which were remedied during the third fiscal quarter. 13 14 Discounts decreased from $1,691,000 (2.9% of gross sales) for fiscal 1996 to $1,218,000 (2.2% of gross sales) for fiscal 1997, a decrease of 28.0%. This decrease was due primarily to a reduction in sales to customers requiring term discounts. As a result of the foregoing factors, net sales decreased from $54,021,000 for fiscal 1996 to $51,216,000 for fiscal 1997, a decrease of 5.2%. Gross Profit. Gross profit decreased from $14,507,000 (26.9% of net sales) for fiscal 1996 to $10,587,000 (20.7% of net sales) for fiscal 1997, a decrease of 27.0%. The decrease in gross profit as a percentage of net sales was due primarily to losses incurred on the sale of returned goods and inventory markdowns. Operating Expenses. Operating expenses increased from $14,220,000 (26.3% of net sales) for fiscal 1996 to $14,792,000 (28.9% of net sales) for fiscal 1997, an increase of 4.0%. This increase was due primarily to non-recurring expenses totaling approximately $1,000,000 related primarily to employee severance expenses and the closing of the unprofitable Missy division. Interest Expense. Interest expense increased from $548,000 (1.0% of net sales) for fiscal 1996 to $785,000 (1.5% of net sales) for fiscal 1997, an increase of 43.2%. The increase in interest expense was due primarily to increased borrowing from the factor and the bank to provide working capital to fund the Company's operations. Equity in Earnings of Unconsolidated Subsidiaries. The Company is a partner in a manufacturing joint venture with an affiliate of its largest sewing contractor. The Company accounts for its investment in the joint venture under the equity method of accounting. The Company's share of equity in earnings in the joint venture increased from $288,000 (0.5% of net sales) in fiscal 1996 to $488,000 (1.0% of net sales) in fiscal 1997. See Note 5 to the Financial Statements appearing elsewhere in the Form 10-K. In October 1997, the Company entered into an agreement to invest $500,000 for a 40% equity share in Airshop, Ltd. ("Airshop"). Airshop designs and sells junior women's apparel through its internet website and catalogs. Airshop is currently in the start-up phase of its existence and lost approximately $296,000 for fiscal 1997. The Company, which accounts for its investment in Airshop under the equity method of accounting, recorded $40,000 as its share of the loss. This represents Jalate's share of the loss of Airshop from the date of the Company's investment through December 31, 1997. Income Taxes. The Company did not record any income tax expense or benefit in fiscal 1996 or fiscal 1997 as its effective tax rate was zero due to changes in the valuation allowance resulting from the generation and reversal of certain temporary differences and the 1997 loss from operations. As of December 31, 1996 and 1997, the Company recorded a valuation allowance of $750,000 and $2,660,000 related to deferred tax assets of $750,000 and $2,660,000, respectively. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the projected future taxable income and tax planning strategies in making this assessment. Based upon the level of historical taxable income (loss) and projections for future taxable income over the periods in which the deferred tax assets are deductible, management believes it is more likely than not the Company will not realize the benefits of these deductible differences. See Note 7 to the Financial Statements appearing elsewhere in this Form 10-K. FISCAL 1996 COMPARED TO FISCAL 1995 Net Sales. Gross sales decreased from $78,539,000 in fiscal 1995 to $58,154,000 in fiscal 1996, a decrease of 26.0%, due to a decrease in the volume of apparel sold from 8,729,000 units to 5,867,000 units, a decrease of 32.8%, which was offset in part by an increase in the average wholesale price from $9.00 to $9.91, an increase of 10.1%. The decrease in volume was due primarily from discontinuing the Pottery and Missy divisions and the Company's policy to be more selective in its customer base in order to maintain adequate profitability levels. Returns and allowances decreased from $5,564,000 (7.1% of gross sales) for fiscal 1995 to $2,442,000 (4.2% of gross sales) for fiscal 1996, a decrease of 56.1%. This was due to the decrease in gross sales and the Company's implementation of improved procedures to manage quality control in the preproduction, production and distribution operations. 14 15 Discounts decreased from $2,175,000 (2.8% of gross sales) for fiscal 1995 to $1,691,000 (2.9% of gross sales) for fiscal 1996, a decrease of 22.3%. This decrease is due primarily to the decrease in gross sales. As a result of the foregoing factors, net sales decreased from $70,800,000 for fiscal 1995 to $54,021,000 for fiscal 1996, a decrease of 23.7%. Gross Profit. Gross profit decreased from $14,589,000 (20.6% of net sales) for fiscal 1995 to $14,507,000 (26.9% of net sales) for fiscal 1996, a decrease of 0.6%. The increase in gross profit as a percentage of net sales was due primarily to the decrease in discounts, returns and allowances and to the Company's policy of selecting customers that provide acceptable gross profit margins. Operating Expenses. Operating expenses decreased from $16,977,000 (24.1% of net sales) for fiscal 1995 to $14,220,000 (26.3% of net sales) for fiscal 1996, a decrease of 16.2%. This decrease was due primarily to the decrease in sales. While the dollar amount of operating expenses decreased, the percentage of operating expenses to net sales increased 2.3%. The increase in percentages was attributable partially to the Company's preproduction and production expenses that increased from $1,828,000 (2.6% of net sales) to $2,757,000 (5.1% of net sales). The main reason for this was the implementation of the Company's procedures to improve the performance of these departments, which resulted in an increase in the experience level and number of personnel. The results of these improvements had a direct impact on reducing the amount of returns and allowances, which resulted in the Company's obtaining a significant improvement in its gross profit. This was partially offset by a decrease in shipping costs from $2,326,000 (3.3% of net sales) to $1,134,000 (2.1% of net sales). The decrease in shipping costs as percentage of net sales was due to the Company's restructuring of its distribution center which among other items resulted in minimizing air shipments. All of the other categories remained consistent or changed only slightly as a percentage of sales. Interest Expense. Interest expense primarily reflects interest payable on advances from the factor. Interest expense decreased from $896,000 for fiscal 1995 to $548,000 for fiscal 1996, a decrease of 38.8%. This was primarily due to the improvements the Company made in managing the level of its inventories and the related debt to finance inventories. Equity in Earnings of Unconsolidated Subsidiaries. The Company is a partner in a manufacturing joint venture with an affiliate of its largest sewing contractor. The Company accounts for its investment in the joint venture under the equity method of accounting. The Company's share of equity in earnings in the joint venture increased from $75,000 in 1995 to $288,000 in 1996. See Note 5 to the Financial Statements appearing elsewhere in the Form 10-K. Income Taxes. The Company did not record any income tax expense or benefit in 1996 as its effective tax rate was zero due to a reduction in the valuation allowance resulting from a reversal of certain temporary differences. The Company recorded an income tax benefit in 1995 in the amount of $313,000, representing an effective income tax benefit of 9.8%. The benefit was the result of carrying back certain losses. As of December 31, 1996, the Company recorded a valuation allowance of $750,000 related to deferred tax assets of $750,000. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the projected future taxable income and tax planning strategies in making this assessment. Based upon the level of historical taxable income (loss) and projections for future taxable income over the periods in which the deferred tax assets are deductible, management believes it is more likely than not the Company will not realize the benefits of these deductible differences. See Note 7 to the Financial Statements appearing elsewhere in this Form 10-K. VARIABILITY OF QUARTERLY RESULTS The Company has experienced, and expects to continue to experience, variability in its net sales and operating results on a quarterly basis. The Company believes the factors which influence this variability include (i) the timing of the Company's introduction of new apparel collections, (ii) the level of consumer acceptance of each new collection, (iii) general economic and industry conditions that affect consumer spending and retailer purchasing, (iv) the timing of the placement or cancellation of customer orders and (v) the timing of expenditures in anticipation of increased sales and customer delivery requirements. In addition, the women's apparel business is seasonal. Historically, sales by apparel manufacturers to retailers have been lower in the fourth calendar quarter than in the other three quarters as a result of reduced purchases by retailers for delivery in the month of December. 15 16 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. However, the Company has suffered substantial losses from operations resulting in a large accumulated deficit and has a working capital deficiency as of December 31, 1997 and cash generated from operations has been insufficient to fund expenditures. Management has developed and begun a cost reduction plan that includes reducing the number of employees and related compensation expense. Management is also currently seeking additional financing from outside sources to fund future operations. However, there is no assurance that the cost reduction plan or additional financing, if obtained, will be sufficient to sustain operations. Should management be unsuccessful, the Company may be required to restructure or curtail operations. Net cash used in operating activities for fiscal 1997 was $1,697,000 compared to net cash used in operating activities for fiscal 1996 of $77,000. At December 31, 1997, the Company had a working capital deficiency of $769,000, a decrease of $4,507,000 as compared to working capital of $3,738,000 at December 31, 1996. Inventory increased from $3,572,000 at December 31, 1996 to $4,812,000 at December 31, 1997. The Company has an agreement, as amended, with a factor whereby the factor purchases most of the trade accounts receivable and assumes all credit risks with respect to such accounts for a factoring charge, as defined. The Company can draw advances from the factor based on all accounts receivable sold. Advances on receivables sold in excess of credit limits established for each account are subject to recourse in the event of nonpayment by the customer. The Company is contingently liable to the factor for merchandise disputes, customer claims, and the like, on receivables sold to the factor. Additionally, the Company could borrow up to $2.1 million in excess of the sold receivables under a revolving loan agreement with the factor as of December 31, 1997. This amount reduces to $1.5 million on April 1, 1998. Any advances from the factor are secured by all receivables and general intangibles. The Company may also issue letters of credit which are secured by a security interest in the Company's inventory. At December 31, 1997, the Company had $699,000 available for borrowings under the amended agreement. At December 31, 1997, the Company was contingently liable for outstanding letters of credit of approximately $552,000. The agreement with the factor contains certain restrictive financial covenants. At December 31, 1997, the Company was not in compliance with certain financial covenants, including restrictions on tangible net worth, current ratio and working capital. The Company is negotiating with the factor to obtain waivers in the near term. If the Company fails to receive these waivers it may experience reductions in available credit which could have a material adverse effect on the Company's financial condition, results of operations and cash flows, and may compel the Company to restructure or curtail operations. A summary of the amount due from (to) the factor follows: December 31, ----------------------------------- 1996 1997 ------------- -------------- Receivables held by factor ....... $5,234,000 $ 5,448,000 Less advances from factor ........ 2,214,000 6,389,000 Less open credit memos 253,000 374,000 ========== ========== Due from (to) factor ............. $2,767,000 $(1,315,000) ========== ========== The Company has a $1,120,000 term loan with a bank. Principal is due in weekly installments ranging from $25,000 to $50,000, with the remaining principal due in July 1998. The loan is secured by a first priority security interest in inventory, a second priority security interest in accounts receivable and an intercreditor agreement with the factor. Under this term loan agreement, the Company is subject to certain restrictive financial covenants. At December 31, 1997, the Company was not in compliance with certain financial covenants, including restrictions on tangible net worth, current ratio and working capital. The Company has received a waiver from the Bank effective December 31, 1997. The Company is currently in default and is negotiating with the Bank to receive extensions of the waivers in the near term. If the Company fails to receive the extensions of the waivers, the Bank may call for immediate payment of the balance of the term loan, which would have material negative effect on the Company's financial condition, results of operations and cash flows, and may compel the Company to restructure or curtail operations. In November 1994, the Company entered into a manufacturing joint venture (the "Joint Venture") with Lebr Associates, Inc., an affiliate of the Company's largest sewing contractor. For a description of the Joint Venture, see "Item 1. Business Manufacturing - In-house Manufacturing." During 1995, the Joint Venture purchased certain sewing machines and ancillary equipment. In connection with the purchase of such equipment, the Joint Venture borrowed an aggregate of $544,800 from General Electric Capital Corporation ("GECC"). Such indebtedness (i) is secured by the equipment, (ii) is payable in sixty (60) equal consecutive monthly installments and (iii) bears interest at the annual rate of 3.42% over 16 17 the one-month commercial paper rate as stated from time to time in the Federal Reserve Statistical Release (5.7% at December 31, 1997). See Note 5 to the Financial Statements appearing elsewhere in Form 10-K. On January 27, 1998, the Company issued subordinated notes payable to certain shareholders of the Company, totaling $950,000. The notes mature January 31, 2000 with quarterly installments commencing on April 30, 1999. The notes are secured by the Company's investment interest in Airshop, Ltd. In connection with the transaction, the Company sold 500,000 stock purchase warrants to the shareholders for $50,000. The warrants are exercisable through January 2003 at an exercise price of $1.625 per share. 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. RECENTLY ISSUED PRONOUNCEMENTS The Financial Accounting Standards Board has issued Statement of Financial Accounting Standards (FAS) No. 130, "Reporting Comprehensive Income" and FAS No. 131, "Disclosure about Segments of an Enterprise and Related Information." FAS No. 130 establishes standards for reporting and display of comprehensive income and its components. FAS No. 131 supersedes previous reporting requirements for reporting on segments of a business enterprise. FAS No. 130 and FAS No. 131 are effective for periods beginning after December 15, 1997. Accordingly, the Company plans to implement these two standards during 1998. INFLATION The Company believes that the relatively moderate rates of inflation in recent years have not had a significant effect on its net sales or its profitability. Historically, the Company has been able to offset any inflationary effect by either increasing prices or improving cost efficiencies. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA See "Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K" for the Company's financial statements, and the notes thereto, and the financial statement schedules filed as part of this report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 17 18 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS The information concerning the directors and executive officers of the Company is incorporated herein by reference from the section entitled "Proposal 1 - Election of Directors" contained in the definitive Proxy Statement of the Company to be filed pursuant to Regulation 14A within 120 days after the end of the Company's last fiscal year (the "Proxy Statement"). ITEM 11. EXECUTIVE COMPENSATION The information concerning executive compensation is incorporated herein by reference from the section entitled "Proposal 1 Election of Directors" contained in the Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information concerning the security ownership of certain beneficial owners and management is incorporated herein by reference from the sections entitled "General Information - Security Ownership of Principal Shareholders and Management" and "Proposal 1 - Election of Directors" contained in the Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information concerning certain relationships and related transactions is incorporated herein by reference from the section entitled "Proposal 1 - Election of Directors - Certain Relationships and Related Transactions" contained in the Proxy Statement. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) Financial Statements and Schedules. Reference is made to the Index to Financial Statements and Financial Statement Schedule on page F-1 for a list of financial statements and financial statement schedules filed as part of this report. All other schedules are omitted because they are not applicable or the required information is shown in the Company's financial statements or the related notes thereto. (b) Reports on Form 8-K. The Company filed no reports on Form 8-K during the fourth quarter of fiscal 1997. (c) Exhibits. The following is a list of exhibits filed as a part of this report. EXHIBIT NUMBER DESCRIPTION - -------- ----------- 3.1 Restated Articles of Incorporation of the Company [3.1*] (1) 3.2 Bylaws of the Company [3.2*] (1) 4.1 Form of stock certificate [4.3*] (2) 4.2 Underwriters' Warrant Agreement dated March 16, 1994, among the Company, H.J. Meyers & Co., Inc. and Sanders Morris Mundy Inc. [4.2*] (6) 10.01 Employment Agreement dated December 1, 1995, between the Company and Vinton W. Bacon. [10.43*](8) 10.02 Indemnification Agreement dated January 1, 1996, between the Company and Vinton W. Bacon. [10.46*] (8) 10.03 Indemnification Agreement dated as of October 21, 1993, between the Company and Larry Brahim [10.6*] (1) 10.04 Employment Agreement dated January 30, 1996, between the Company and Theodore B. Cooper [10.44*] (8) 18 19 EXHIBIT NUMBER DESCRIPTION - -------- ----------- 10.05 Indemnification Agreement dated March 26, 1994, between the Company and Allan E. Dalshaug. [10.47*] (8) 10.06 Employment Agreement dated May 6, 1996, between the Company and Frederick A. Findley. [10.51*](9) 10.07 Indemnification Agreement dated January 1, 1996, between the Company and Frederick A. Findley.[10.52*] (9) 10.08 Employment Agreement dated January 30, 1996, between the Company and Jeffrey L. Friedman. [10.45*] (8) 10.09 Indemnification Agreement dated as of October 21, 1993, between the Company and Jeffrey L. Friedman. [10.8*] (1) 10.10 Indemnification Agreement dated August 21, 1995, between the Company and I. Jay Goldfarb.[10.48*] (8) 10.11 Indemnification Agreement dated January 1, 1996, between the Company and Phillip C. Levin.[10.50*] (8) 10.12 Indemnification Agreement dated August 1, 1996, between the Company and Victor K. Nichols. [10.59*] (10) 10.13 Indemnification Agreement dated August 1, 1996, between the Company and William Soady. [10.60*] (10) 10.14 Jalate, Ltd. 1993 Employee Stock Incentive Plan, together with forms of stock option and restricted stock agreements. [10.10*] (1) 10.15 Subordinated Secured Promissory Note dated January 27, 1998 by and between the Company and William M. De Arman for $475,000. 10.16 Stock Purchase Warrant, Series A, issued January 27, 1998 to William M. De Arman for 250,000 shares. 10.17 Subordinated Secured Promissory Note dated January 27, 1998 by and between the Company and John E. Drury for $95,000. 10.18 Stock Purchase Warrant, Series A, issued January 27, 1998 to John E. Drury for 50,000 shares. 10.19 Subordinated Secured Promissory Note dated January 27, 1998 by and between the Company and Don A. Sanders for $237,500. 10.20 Stock Purchase Warrant, Series A, issued January 27, 1998 to Don A. Sanders for 125,000 shares. 10.21 Subordinated Secured Promissory Note dated January 27, 1998 by and between the Company and Katherine U. Sanders for $142,500. 10.22 Stock Purchase Warrant, Series A, issued January 27, 1998 to Katherine U. Sanders for 75,000 shares. 10.23 Security and Pledge Agreement dated January 27, 1998 between the Company and William M. De Arman. 10.24 Articles of Incorporation of Linroz Manufacturing, Inc. [10.21*] (5) 10.25 Bylaws of Linroz Manufacturing, Inc. [10.22*] (5) 10.26 Agreement of Limited Partnership of Linroz Manufacturing Company, L.P. [10.23*] (5) 10.27 Stock Purchase Agreement dated November 4, 1994 among the Company, Linroz Manufacturing, Inc., and Lebr Associates, Inc. [10.24*](5) 10.28 Promissory Note dated May 5, 1995 in the principal amount of $306,247.99 payable by Linroz Manufacturing Company, L.P. (the "Joint Venture") to General Electric Capital Corporation ("GECC") [10.31*] (7) 19 20 EXHIBIT NUMBER DESCRIPTION - -------- ----------- 10.29 Master Security Agreement dated March 24, 1995, between GECC, as secured party, and the Joint Venture, as debtor [10.32*] (7) 10.30 First Amendment to Commercial Credit Agreement dated as of February 29, 1996, between the Company and Wells Fargo HSBC Trade Bank, N.A. (formerly, The Hongkong and Shanghai Banking Corporation Limited). [10.51*] (8) 10.31 Continuing Credit Agreement dated June 1, 1996, between the Company and the Wells Fargo HSBC Trade Bank, N.A. (Formerly, The Hong Kong and Shanghai Banking Corporation Limited.). [10.53*] (9) 10.32 First Amendment to Agreement dated November 30, 1996 between the Company and Wells Fargo HSBC Trade Bank, N.A. [10.54*] (9) 10.33 Second Amendment to Agreement dated March 17, 1997, between the Company and Wells Fargo HSBC Trade Bank, N.A. [10.57*] (9) 10.34 Letter Agreement dated as of October 23, 1997 by and between the Company and Wells Fargo HSBC Trade Bank, N.A. amending the Credit Agreement dated as of May 31, 1997 by and between the Company and Wells Fargo HSBC Trade Bank, N.A. [10.1*] (11) 10.35 Credit Agreement by and between the Company and Wells Fargo HSBC Trade Bank, N.A. dated as of January 21, 1998. 10.36 Term Note for $1,092,945 dated January 21, 1998 between the Company and Wells Fargo HSBC Trade Bank, N.A. 10.37 Letter of Consent and Waiver issued on January 22, 1998 by Wells Fargo HSBC Trade Bank, N.A. regarding Credit Agreement dated January 21, 1998 in respect to borrowing from four lenders. 10.38 Letter agreement dated February 16, 1996, between the Company and Congress Talcott Corporation (Western). [10.52*] (8) 10.39 Letter Agreement dated July 25, 1996, between the Company and Congress Talcott Corporation (Western). [10.55*] (9) 10.40 Letter Agreement dated March 4, 1997, between the Company and Congress Talcott Corporation (Western). [10.56*] (9) 10.41 Revolving Loan Agreement by and between the Company and Heller Financial, Inc. dated June 30, 1997. 10.42 First Amendment, dated August 27, 1997, to Revolving Loan Agreement by and between the Company and Heller Financial, Inc. 10.43 Second Amendment, dated December 22, 1997, to Revolving Loan Agreement by and between the Company and Heller Financial, Inc. 10.44 Collection Date Factoring Agreement by and between the Company and Heller Financial, Inc. dated June 30, 1997. 10.45 Letter Amendment, dated November 18, 1997, to Collection Date Factoring Agreement by and between the Company and Heller Financial, Inc. 10.46 Letter of Consent and Waiver issued on January 22, 1998 by Heller Financial, Inc. regarding Collection Date Factoring Agreement and Revolving Loan Agreement, both dated June 30, 1997, in respect to borrowing from four lenders 20 21 EXHIBIT NUMBER DESCRIPTION - -------- ----------- 10.47 Letter of Credit/Guaranty Agreement dated November 1997 between the Company and Heller Financial, Inc. 10.48 Letter Agreement to Issue Supplier and/or Factor Guaranties dated November 1997 from Heller Financial, Inc. 10.49 Inventory Security Agreement dated December 2, 1997 by and between the Company and Heller Financial, Inc. 10.50 Lease dated November 7, 1989, between California Mart, as lessor, and the Company, as lessee [10.13*] (1) 10.51 Standard Industrial Lease - Multi-Tenant dated August 21, 1992, between Eugene J. Mulholland and Leonor Mulholland, D/B/A Contract Associates, as lessor, and the Company, as lessee [10.14*] (1) 10.52 Standard Industrial/Commercial Single-Tenant Lease-Gross dated September 8, 1993, between Swede Sportswear Co., Inc., as lessor, and the Company, as lessee [10.11*] (1) 10.53 Lease dated March 15, 1994, between the Company and Gettinger Associates [10.16*] (3) 10.54 Standard Industrial/Commercial Single Tenant Lease - Gross dated October 11, 1994, by the Company, as lessee, and George Familian Testamentary Trust, as lessor, as amended [10.25*] (5) 10.55 Master Equipment Lease dated July 5, 1994, between the Company and XL/Datacomp, Inc. [10.20*](4) 10.56 Letter agreement dated January 24, 1996, between the Company and I.S.K., Inc. [10.41*] (8) 10.57 Credit Agreement dated May 31, 1997 by and between the Company and Wells Fargo HSBC Trade Bank, NA. 21.1 Subsidiaries of the Registrant. Linroz Manufacturing, Inc., a California corporation Linroz Manufacturing Company, L.P., a California limited partnership Both these entities do business under their own names. 23.1 Consents of KPMG Peat Marwick LLP * Indicates the exhibit number of the document in the original filing. 1. Filed as an exhibit to the Company's Registration Statement on Form S-1 filed with the Securities and Exchange Commission on February 24, 1994 (File No. 33-75694). 2. Filed as an exhibit to Amendment No. 1 to Registration Statement on Form S-1 filed with the Securities and Exchange Commission on March 16, 1994. 3. Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1994. 4. Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1994. 5. Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1994. 6. Filed as a exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 1994. 7. Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1995. 8. Filed as an exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 1995. 9. Filed as an exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 1996. 10. Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1997. 11. Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997. 21 22 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on March 31, 1998. JALATE, LTD. By: /s/ FREDERICK A. FINDLEY --------------------------------- Frederick A. Findley Vice President - Finance, Chief Financial Officer and Secretary Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Company and in the capacities and on the dates indicated. Signature Title Date /s/ VINTON W. BACON Chief Executive Officer, Chief Operating March 31, 1998 - ------------------------------------------------ Officer and Director Vinton W. Bacon /s/ LARRY BRAHIM Chairman of the Board, Executive Vice March 31, 1998 - ------------------------------------------------ President and Director Larry Brahim /s/ FREDERICK A. FINDLEY Vice President - Finance, March 31, 1998 - ------------------------------------------------ Chief Financial Officer and Secretary Frederick A. Findley /s/ ALLAN E. DALSHAUG Director March 31, 1998 - ------------------------------------------------ Allan E. Dalshaug /s/ JOSEPH S. DAVIS Director March 31, 1998 - ------------------------------------------------ Joseph S. Davis /s/ I. JAY GOLDFARB Director March 31, 1998 - ------------------------------------------------ I. Jay Goldfarb /s/ VICTOR NICHOLS Director March 31, 1998 - ------------------------------------------------ Victor Nichols /s/ WILLIAM SOADY Director March 31, 1998 - ------------------------------------------------ William Soady
22 23 Exhibit 23.1 INDEPENDENT AUDITORS' CONSENT The Board of Directors Jalate, Ltd.: We consent to incorporation by reference in the registration statement on Form S-8 of Jalate, Ltd. of our report dated March 6, 1998, relating to the balance sheets of Jalate, Ltd. as of December 31, 1997, and 1996, and the related statements of operations, shareholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1997, and the related schedule, which report appears in the December 31, 1997 annual report on Form 10-K of Jalate, Ltd. Our report dated March 6, 1998, contains an explanatory paragraph that states that the Company has suffered substantial losses from operations resulting in a large accumulated deficit and has a working capital deficiency as of December 31, 1997, which raise substantial doubt about its ability to continue as a going concern. The financial statements and financial statement schedule do not include any adjustments that might result from the outcome of this uncertainty. KPMG PEAT MARWICK LLP Los Angeles, California March 31, 1998 24 Exhibit 23.1 INDEPENDENT AUDITORS' CONSENT The Board of Directors Jalate, Ltd.: We consent to incorporation by reference in the registration statement on Form S-8 of Jalate, Ltd. of our report dated March 6, 1998, relating to the balance sheets of Linroz Manufacturing Company, L.P. as of December 31, 1997, and 1996, and the related statements of operations, partners' capital, and cash flows for the years then ended, which report appears in the December 31, 1997 annual report on Form 10-K of Jalate, Ltd. Our report dated March 6, 1998, contains an explanatory paragraph that states that to date all of the Company's sales have been to Jalate, Ltd., a 50% owner of the Company. As of December 31, 1997, Jalate had a working capital deficiency and an accumulated deficit resulting from substantial losses from operations. Due to the Company's dependency on Jalate, should Jalate be unable to continue as a going concern or be required to restructure or curtail operations, the effect could have an adverse impact on the Company's financial position and results of operations. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. KPMG PEAT MARWICK LLP Los Angeles, California March 31, 1998 25 JALATE, LTD. Index to Financial Statements and Financial Statement Schedule
Page ---- Jalate, Ltd.: Independent Auditors' Report F-2 Financial Statements of Jalate, Ltd.: Balance Sheets - December 31, 1996 and 1997 F-3 Statements of Operations - Years ended December 31, 1995, 1996 and 1997 F-4 Statements of Shareholders' Equity - Years ended December 31, 1995, 1996 and 1997 F-5 Statements of Cash Flows - Years ended December 31, 1995, 1996 and 1997 F-6 Notes to Financial Statements F-8 Financial Statement Schedule: Schedule II - Valuation and Qualifying Accounts F-19 Linroz Manufacturing Company, L.P.: Independent Auditors' Report F-20 Financial Statements of Linroz Manufacturing Company, L.P.: Balance Sheets - December 31, 1996 and 1997 F-21 Statements of Operations - Years ended December 31, 1995, 1996 and 1997 (1995 unaudited) F-22 Statements of Partners' Capital - Years ended December 31, 1995, 1996 and 1997 (1995 unaudited) F-23 Statements of Cash Flows - Years ended December 31, 1995, 1996 and 1997 (1995 unaudited) F-24 Notes to Financial Statements F-25
All other schedules are omitted because they are not applicable or the required information is shown in the Company's financial statements or the related notes thereto. F-1 26 INDEPENDENT AUDITORS' REPORT The Board of Directors and Shareholders Jalate, Ltd.: We have audited the accompanying financial statements of Jalate, Ltd. as listed in the accompanying index. In connection with our audits of the financial statements, we have also audited the financial statement schedule as listed in the accompanying index. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Jalate, Ltd. as of December 31, 1996 and 1997 and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 1997 in conformity with generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. The accompanying financial statements and financial statement schedule have been prepared assuming that the Company will continue as a going concern. As discussed in note 1 to the financial statements, the Company has suffered substantial losses from operations resulting in a large accumulated deficit and has a working capital deficiency as of December 31, 1997 and is in default under certain loan agreements due to violations of certain covenants. These matters raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in note 1. The financial statements and financial statement schedule do not include any adjustments that might result from the outcome of this uncertainty. KPMG PEAT MARWICK LLP Los Angeles, California March 6, 1998 F-2 27 JALATE, LTD. Balance Sheets December 31, 1996 and 1997
ASSETS 1996 1997 ---------- ---------- Current assets: Cash $ 97,000 170,000 Due from factor, net (note 2) 2,767,000 -- Trade accounts receivable, less allowance for doubtful receivables of $358,000 in 1996 and $324,000 in 1997 821,000 119,000 Inventories (note 3) 3,572,000 4,812,000 Refundable income taxes (note 7) 120,000 -- Prepaid expenses and other current assets 170,000 201,000 ---------- ---------- Total current assets 7,547,000 5,302,000 Property and equipment, at cost, net (note 4) 1,050,000 961,000 Investment in unconsolidated subsidiaries (note 5) 482,000 551,000 Other assets, at cost 94,000 79,000 ---------- ---------- $9,173,000 6,893,000 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Note payable to bank (note 6) $ 684,000 1,120,000 Due to factor (note 2) -- 1,315,000 Trade accounts payable 2,776,000 3,092,000 Accrued expenses 254,000 401,000 Accounts payable to unconsolidated subsidiary (note 5) 95,000 143,000 ---------- ---------- Total current liabilities 3,809,000 6,071,000 ---------- ---------- Shareholders' equity (notes 10 and 11): Preferred stock, no par value. Authorized 3,000,000 shares; none issued and outstanding -- -- Common stock, no par value. Authorized 20,000,000 shares; 3,403,000 shares issued and outstanding 5,311,000 5,311,000 Retained earnings (accumulated deficit) 53,000 (4,489,000) ---------- ---------- Total shareholders' equity 5,364,000 822,000 Commitments, contingencies and subsequent event (notes 2, 5, 8 and 11) ---------- ---------- $9,173,000 6,893,000 ========== ==========
See accompanying notes to financial statements. F-3 28 JALATE, LTD. Statements of Operations Three-year period ended December 31, 1997
1995 1996 1997 ------------ ----------- ----------- Gross sales (note 9) $ 78,539,000 58,154,000 56,300,000 Less sales returns, allowances and discounts 7,739,000 4,133,000 5,084,000 ------------ ----------- ----------- Net sales 70,800,000 54,021,000 51,216,000 Cost of goods sold 56,211,000 39,514,000 40,629,000 ------------ ----------- ----------- Gross profit 14,589,000 14,507,000 10,587,000 Operating expenses 16,977,000 14,220,000 14,792,000 ------------ ----------- ----------- Earnings (loss) from operations (2,388,000) 287,000 (4,205,000) ------------ ----------- ----------- Other (income) expense: Interest 896,000 548,000 785,000 Equity in net earnings of unconsolidated subsidiaries (note 5) (75,000) (288,000) (448,000) ------------ ----------- ----------- Total other expense 821,000 260,000 337,000 ------------ ----------- ----------- Earnings (loss) before income taxes (3,209,000) 27,000 (4,542,000) Income tax benefit (note 7) 313,000 -- -- ------------ ----------- ----------- Net earnings (loss) $ (2,896,000) 27,000 (4,542,000) ============ =========== =========== Net earnings (loss) per share (note 1): Basic $ (.85) .01 (1.33) Diluted (.85) .01 (1.33) ============ =========== =========== Weighted average shares (note 1): Basic 3,390,000 3,402,000 3,403,000 Diluted 3,390,000 3,488,000 3,403,000 ============ =========== ===========
See accompanying notes to financial statements. F-4 29 JALATE, LTD. Statements of Shareholders' Equity Three-year period ended December 31, 1997
RETAINED COMMON STOCK EARNINGS TOTAL -------------------------- (ACCUMULATED SHAREHOLDERS' SHARES AMOUNT DEFICIT) EQUITY --------- ---------- ------------ ------------- Balance at December 31, 1994 3,378,000 $5,274,000 2,922,000 8,196,000 Exercise of stock options 12,500 -- -- -- Compensation expense recognized in connection with the vesting of certain stock options -- 37,000 -- 37,000 Net loss -- -- (2,896,000) (2,896,000) --------- ---------- ---------- ---------- Balance at December 31, 1995 3,390,500 5,311,000 26,000 5,337,000 Exercise of stock options 12,500 -- -- -- Net earnings -- -- 27,000 27,000 --------- ---------- ---------- ---------- Balance at December 31, 1996 3,403,000 5,311,000 53,000 5,364,000 Net loss -- -- (4,542,000) (4,542,000) --------- ---------- ---------- ---------- Balance at December 31, 1997 3,403,000 $5,311,000 (4,489,000) 822,000 ========= ========== ========== ==========
See accompanying notes to financial statements. F-5 30 JALATE, LTD. Statements of Cash Flows Three-year period ended December 31, 1997
1995 1996 1997 ----------- ---------- ---------- Cash flows from operating activities: Net earnings (loss) $(2,896,000) 27,000 (4,542,000) ----------- ---------- ---------- Adjustments to reconcile net earnings (loss) to net cash provided by (used in) operating activities: Depreciation and amortization of property and equipment 292,000 405,000 449,000 Compensation expense recognized in connection with the vesting of certain stock options 37,000 -- -- Increase (decrease) in allowance for doubtful receivables 169,000 (311,000) (34,000) Equity in net earnings of unconsolidated subsidiaries (75,000) (288,000) (448,000) Changes in assets and liabilities: (Increase) decrease in: Due from factor, net 3,349,000 (2,312,000) 2,767,000 Trade accounts receivable 399,000 479,000 736,000 Inventories 670,000 860,000 (1,240,000) Refundable income taxes (1,567,000) 1,447,000 120,000 Prepaid expenses and other current assets 376,000 143,000 (31,000) Due from officers (106,000) 106,000 -- Other assets 43,000 (2,000) 15,000 Increase (decrease) in: Accounts payable (434,000) (317,000) 364,000 Accrued expenses 240,000 (314,000) 147,000 ----------- ---------- ---------- Total adjustments 3,393,000 (104,000) 2,845,000 ----------- ---------- ---------- Net cash provided by (used in) operating activities 497,000 (77,000) (1,697,000) ----------- ---------- ---------- Cash flows from investing activities: Capital expenditures (532,000) (587,000) (360,000) Investment in unconsolidated subsidiaries (145,000) -- (186,000) ----------- ---------- ---------- Net cash used in investing activities (677,000) (587,000) (546,000) ----------- ---------- ----------
(Continued) F-6 31 JALATE, LTD. Statements of Cash Flows, Continued
1995 1996 1997 --------- ---------- ---------- Cash flows from financing activities: Proceeds from note payable to bank $ 90,000 594,000 436,000 Net proceeds from factor advance -- -- 1,315,000 Distributions from unconsolidated subsidiaries -- 75,000 565,000 --------- ---------- ---------- Net cash provided by financing activities 90,000 669,000 2,316,000 --------- ---------- ---------- Net increase (decrease) in cash (90,000) 5,000 73,000 Cash at beginning of year 182,000 92,000 97,000 --------- ---------- ---------- Cash at end of year $ 92,000 97,000 170,000 ========= ========== ========== Supplemental disclosures of cash flow information: Cash payments (refunds) during the year for: Interest $ 896,000 548,000 760,000 Income taxes 724,000 (1,454,000) (120,000) ========= ========== ==========
See accompanying notes to financial statements. F-7 32 JALATE, LTD. Notes to Financial Statements December 31, 1996 and 1997 and the three-year period ended December 31, 1997 (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES DESCRIPTION OF BUSINESS Jalate, Ltd. (the Company) manufactures women's and children's apparel for sale to retailers under the Jalate, Zanoni, Lajate and Jalate Kids labels. The Company also manufactures women's apparel for certain retailers under their private labels. LIQUIDITY AND GOING CONCERN The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. The Company has suffered substantial losses from operations resulting in a large accumulated deficit and has a working capital deficiency as of December 31, 1997. These matters raise substantial doubt about the Company's ability to continue as a going concern. Management has developed and begun a cost reduction plan, that includes reducing the number of employees and the related compensation expense. Management is also currently seeking additional financing from outside sources to fund future operations. See note 11. However, there is no assurance that the cost reduction plan or additional financing, if obtained, will be sufficient to sustain operations. INVENTORIES Inventories are stated at the lower of cost, determined on the first-in, first-out basis, or market. DEPRECIATION AND AMORTIZATION Depreciation on property and equipment is calculated using various accelerated methods over the estimated useful lives of the assets. Leasehold improvements are amortized on the straight-line method over the shorter of the lease term or estimated useful life of the asset. REVENUE RECOGNITION Revenue is recognized upon shipment of the merchandise. Allowances for estimated sales returns, allowances and discounts are provided when related revenue is recorded. LONG-LIVED ASSETS It is the Company's policy to account for long-lived assets at amortized cost. As part of an ongoing review of the valuation and amortization of long-lived assets, management assesses the carrying value of such assets if facts and circumstances suggest that they may be impaired. As a result, the Company has determined that its long-lived assets are not impaired as of December 31, 1996 and 1997. F-8 33 JALATE, LTD. Notes to Financial Statements, Continued INVESTMENT IN UNCONSOLIDATED SUBSIDIARIES Investment in unconsolidated subsidiaries are accounted for under the equity method, under which the Company's share of earnings (loss) of the investees is reflected in income as earned and distributions are credited against the investments when received. INCOME TAXES The Company accounts for income taxes under the asset and liability method of accounting for income taxes, whereby deferred income taxes are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. FAIR VALUE OF FINANCIAL INSTRUMENTS The fair values of the Company's cash, due from (to) factor, trade accounts receivable, note payable to bank, trade accounts payable and accrued expenses approximate the carrying values because of the short maturities of these instruments. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from these estimates. STOCK COMPENSATION The Company has adopted Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (FAS 123), effective January 1, 1996, and has elected to continue to measure compensation cost under APBO No. 25 and comply with the pro forma disclosure requirements. The adoption of FAS 123 has had no impact on the Company's financial position or results of operations. EARNINGS PER SHARE In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (FAS) No. 128, "Earnings per Share." FAS 128 specifies the computation, presentation and disclosure requirements for earnings per share (EPS) and became effective for both interim and annual periods ending after December 15, 1997. All prior period EPS have been restated to conform with the provisions of FAS 128. The adoption of FAS 128 did not have a material impact on the Company's earnings per share calculations. F-9 34 JALATE, LTD. Notes to Financial Statements, Continued The reconciliations of basic to diluted weighted average shares are as follows:
1995 1996 1997 ----------- --------- ---------- Net earnings (loss) used for basic and diluted earnings per share $(2,896,000) 27,000 (4,542,000) =========== ========= ========== Weighted average shares used for basic computation 3,390,000 3,402,000 3,403,000 Dilutive stock options -- 86,000 -- ----------- --------- ---------- Weighted average shares used for diluted computation 3,390,000 3,488,000 3,403,000 =========== ========= ==========
For the years ended December 31, 1995, 1996 and 1997, options to purchase 465,000, 503,000 and 576,000 shares of common stock, respectively, at prices ranging from $0.01 to $10.00 were outstanding during the years but were not included in the computation of diluted EPS because the options would have an antidilutive effect on net earnings (loss) per share. RECLASSIFICATIONS Certain reclassifications have been made to the prior years' financial statements to conform with the 1997 presentation. (2) DUE FROM (TO) FACTOR The Company has an agreement, as amended, with a factor, whereby the factor purchases most of the trade accounts receivable and assumes all credit risks with respect to such accounts for a factoring charge, as defined. The Company can draw advances from the factor based on all accounts receivable sold. Advances on receivables sold in excess of credit limits established for each account are subject to recourse in the event of nonpayment by the customer. The Company is contingently liable to the factor for merchandise disputes, customer claims and the like, on receivables sold to the factor. Additionally, the Company can borrow up to $2.1 million in excess of the sold receivables under a revolving loan with the factor. The facility increases to $2.2 million in excess of the sold receivables on January 30, 1998 and decreases to $1.5 million in excess of the sold receivables on March 31, 1998 for the remainder of the agreement which expires June 1998. Any advances from the factor are secured by all receivables and general intangibles. Advances bear interest at the LIBOR (4.7% at December 31, 1997) plus 3.5%. The Company may also issue letters of credit which are secured by a security interest in the Company's inventory. As of December 31, 1997, the Company had $699,000 available for borrowings under the amended agreement. At December 31, 1997, the Company was contingently liable for outstanding letters of credit of approximately $552,000. The agreement with the factor contains certain restrictive financial covenants. At December 31, 1997, the Company was not in compliance with certain financial covenants, including maintenance of certain levels of tangible net worth and working capital and the current ratio provision. F-10 35 JALATE, LTD. Notes to Financial Statements, Continued A summary of due from (to) factor follows:
DECEMBER 31 ----------------------------- 1996 1997 ----------- ---------- Receivables held by factor $ 5,234,000 5,448,000 Less advances from factor 2,214,000 6,389,000 Less open credit memos 253,000 374,000 ----------- ---------- $ 2,767,000 (1,315,000) =========== ==========
(3) INVENTORIES A summary of inventories is as follows:
DECEMBER 31 ---------------------------- 1996 1997 ---------- --------- Piece goods and trim $1,379,000 1,828,000 Work in process 809,000 1,657,000 Finished goods 1,384,000 1,327,000 ---------- --------- $3,572,000 4,812,000 ========== =========
(4) PROPERTY AND EQUIPMENT A summary of property and equipment is as follows:
DECEMBER 31 ----------------------- 1996 1997 USEFUL LIVES ---------- --------- ------------------------ Equipment $1,269,000 1,422,000 5 to 7 years Furniture and fixtures 137,000 137,000 7 years Computer software 128,000 317,000 3 years Leasehold improvements 433,000 451,000 Shorter of estimated ---------- --------- useful lives or lease 1,967,000 2,327,000 terms Less accumulated depreciation and amortization 917,000 1,366,000 ---------- --------- $1,050,000 961,000 ========== =========
F-11 36 JALATE, LTD. Notes to Financial Statements, Continued (5) INVESTMENT IN UNCONSOLIDATED SUBSIDIARIES In November 1994, the Company entered into a manufacturing joint venture (Joint Venture) with an affiliate of its largest sewing contractor (the Partner) to improve the efficiency, quality and cost of its products. The Joint Venture is a California limited partnership. The Company and the Partner each are equal limited partners and each hold one-half of the outstanding capital stock of the sole general partner, a California corporation. The Joint Venture commenced operations in May 1995. For the years ended December 31, 1995, 1996 and 1997, purchases from the Joint Venture aggregated $1,939,000, $3,457,000 and $3,970,000, respectively. The Company had accounts payable to the Joint Venture for inventory purchases of $95,000 and $143,000 at December 31, 1996 and 1997, respectively. The tables below contain the summarized financial information of the Joint Venture:
YEAR ENDED DECEMBER 31 ---------------------------------------- 1995 1996 1997 ----------- --------- --------- (Unaudited) Net sales $1,939,000 3,457,000 3,970,000 Gross profit 393,000 917,000 1,259,000 Operating expenses 218,000 297,000 251,000 Net earnings 150,000 576,000 976,000 ========== ========= =========
DECEMBER 31 -------------------------- 1996 1997 ---------- --------- Current assets $ 553,000 405,000 Noncurrent assets 935,000 811,000 ---------- --------- Total assets $1,488,000 1,216,000 ========== ========= Current liabilities $ 203,000 205,000 Long-term debt 321,000 201,000 ---------- --------- Total liabilities 524,000 406,000 Partners' capital 964,000 810,000 ---------- --------- $1,488,000 1,216,000 ========== =========
The Company is contingently liable for guarantees on certain indebtedness of the Joint Venture with an aggregate outstanding balance of $313,000 as of December 31, 1997. F-12 37 JALATE, LTD. Notes to Financial Statements, Continued In October 1997, the Company entered into an agreement to purchase 40% of Airshop Ltd.'s outstanding common stock and 100% of Airshop's outstanding convertible preferred stock for $500,000, of which $186,000 was paid in 1997. In January 1998, the Company paid $314,000 related to its investment in Airshop. The Company also has an option, through December 31, 2000, to purchase additional common stock which would result in 51% ownership of the outstanding common stock of Airshop. Airshop sells women's apparel through mail order catalogs, which are requested primarily through the internet. Airshop was incorporated in 1996 and began operations during 1997. The results of its operations are immaterial to the accompanying financial statements. (6) NOTE PAYABLE TO BANK The Company has a $1,120,000 term loan with a bank. The loan bears interest at the bank's prime rate (8.5% at December 31, 1997) plus 5%. Interest is payable monthly. Principal is due in weekly installments ranging from $25,000 to $50,000, with the remaining principal due in July 1998. The loan is secured by a first priority security interest in inventory, a second priority security interest in accounts receivable and an intercreditor agreement with the factor. Under the credit facility, the Company is subject to certain restrictive financial covenants. At December 31, 1997, the Company was not in compliance with certain financial covenants, including maintenance of certain levels of tangible net worth and working capital and the current ratio provision. (7) INCOME TAXES The provision for income tax (benefit) for the year ended December 31, 1995 consists of the following: Federal: Current $(828,000) Deferred 386,000 --------- Total Federal (442,000) State - deferred 129,000 --------- Total income tax (benefit) $(313,000) =========
F-13 38 JALATE, LTD. Notes to Financial Statements, Continued Actual income taxes (benefit) differs from the statutory tax rate of 34% as applied to earnings (loss) before income taxes (benefit) as follows:
1995 1996 1997 ----------- ------ ---------- Expected income taxes (benefit) $(1,091,000) 9,000 (1,544,000) State income taxes, net of Federal benefit (290,000) -- (265,000) Change in valuation allowance 1,084,000 -- 1,910,000 Other (16,000) (9,000) (101,000) ----------- ------ ---------- $ (313,000) -- -- =========== ====== ==========
Deferred income tax expense results from temporary differences in the recognition of income and expense for income tax and financial reporting purposes. The tax-effected differences that give rise to significant portions of the deferred tax assets are as follows:
1996 1997 --------- ---------- Deferred tax assets: Net operating loss carryforwards $ 378,000 2,033,000 Allowance for doubtful accounts receivable 195,000 171,000 Uniform capitalization of inventories 177,000 371,000 Depreciation and amortization -- 80,000 Other -- 5,000 --------- ---------- Total deferred tax assets 750,000 2,660,000 Less valuation allowance (750,000) (2,660,000) --------- ---------- Net deferred tax assets $ -- -- ========= ==========
The valuation allowance as of December 31, 1996 was increased by $1,910,000 in 1997 to reserve for certain temporary differences and net operating loss carryforwards generated in 1997. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the historical taxable income and projected taxable income and tax planning strategies in making this assessment. Based upon those factors, management believes it is more likely than not the Company will not realize the benefits of these deductible differences. Accordingly, the Company has recorded a valuation allowance related to these deferred tax assets. As of December 31, 1997, the Company has net operating loss carryforwards for Federal income tax purposes of approximately $4,754,000 and for California franchise tax purposes of approximately $6,344,000, which expire through 2013. Refundable income taxes at December 31, 1996 result from the recovery of estimated tax payments. F-14 39 JALATE, LTD. Notes to Financial Statements, Continued (8) COMMITMENTS AND CONTINGENCIES The Company has several noncancelable operating leases for its office, warehouse and showroom space that expire through May 2000. The Company has an option to purchase its Los Angeles warehouse throughout the lease term, which commenced November 1993. The purchase price is $5,203,000. The Company intends not to exercise the option. The Company has subleased a portion of its office and warehouse space to an unconsolidated subsidiary through January 2000 for an annual rent of $130,000. Rental expense for operating leases approximated $653,000, $696,000 and $690,000 during the years ended December 31, 1995, 1996 and 1997, respectively, net of sublease income of $109,000, $119,000 and $122,000 in 1995, 1996 and 1997, respectively. Future minimum lease payments under noncancelable operating leases are as follows:
Year ending December 31: 1998 $ 783,000 1999 436,000 2000 55,000 ---------- 1,274,000 Less sublease income 270,000 ---------- $1,004,000 ==========
The Company has three employment contracts with officers requiring, among other things, an aggregate annual base salary of $635,000 plus incentives through December 31, 1998. The Company is from time to time involved in litigation incidental to the conduct of its business. The Company does not believe that any currently pending litigation to which it is a party will have a materially adverse effect on the financial statements taken as a whole. (9) CONCENTRATION OF RISKS The Company sells its products principally to customers throughout the United States. The Company has an agreement with a factor whereby the factor purchases most of the trade accounts receivable and assumes all credit risks with respect to such accounts for a factoring charge, as defined (see note 2). Management performs regular evaluations concerning the ability of its customers to satisfy their obligations. The Company had sales to a significant customer constituting approximately 11% and 12% of net sales in 1996 and 1997, respectively. F-15 40 JALATE, LTD. Notes to Financial Statements, Continued The Company sources certain products from various points in the Philippines, Hong Kong and China. The Company's operations are subject to the customary risks of doing business abroad, including, but not limited to, currency fluctuations, customs duties and related fees, various import controls and other nontariff barriers (e.g., quotas), restrictions on the transfer of funds, labor unrest and strikes and, in certain parts of the world, political instability. The Company believes that it has acted to reduce these risks by diversifying manufacturing among various countries and among various factories within those countries. To date, these factors have not had a material adverse impact on the Company's operations. (10) SHAREHOLDERS' EQUITY In October 1993, the Board of Directors of the Company adopted the 1993 Employee Stock Incentive Plan (the Plan), pursuant to which officers, directors, employees and independent contractors of the Company will be eligible to receive shares of the common stock of the Company or other securities or benefits with a value derived from the value of the common stock of the Company. The maximum number of shares of common stock that may be issued pursuant to the Plan is 754,941. Incentive stock options have a term determined by the Compensation Committee of the Board (Committee), but not in excess of ten years. An option becomes exercisable at such times and in such installments as set by the Committee. Options generally become exercisable over a three to four year period. Shares subject to option under the Plan were as follows:
WEIGHTED AVERAGE SHARES EXERCISE PRICE ------ -------------- Outstanding at December 31, 1994 455,800 $6.05 Granted 222,500 3.71 Exercised (12,500) .01 Canceled (200,400) 5.59 -------- Outstanding at December 31, 1995 465,400 5.29 Granted 615,700 2.89 Exercised (12,500) .01 Canceled (479,800) 5.21 -------- Outstanding at December 31, 1996 588,800 2.96 Granted 35,000 2.00 Exercised -- -- Canceled (48,250) 3.22 -------- Outstanding at December 31, 1997 575,550 2.84 ========
F-16 41 JALATE, LTD. Notes to Financial Statements, Continued The following table summarizes information about stock options outstanding at December 31, 1997:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE -------------------------------------------------- ------------------------------------- NUMBER WEIGHTED AVERAGE OUTSTANDING AT REMAINING WEIGHTED NUMBER WEIGHTED RANGE OF EXERCISE DECEMBER 31, CONTRACTUAL AVERAGE EXERCISABLE AT AVERAGE PRICES 1997 LIFE EXERCISE PRICE DECEMBER 31, 1997 EXERCISE PRICE - ----------------- -------------- ---------------- -------------- ----------------- -------------- $2.00 to 3.50 571,950 7.7 years $2.81 368,524 $2.83 6.50 to 7.38 3,600 6.2 years 6.74 2,700 6.74 ------- ------- 2.00 to 7.38 575,550 7.7 years 2.84 371,224 2.86 ======= =======
At December 31, 1995 and 1996, there were 118,000 and 258,679 options excercisable at a weighted average exercise price of $6.94 and $2.88, respectively. The per share weighted average fair value of stock options granted during 1995, 1996 and 1997 was $2.55, $2.04 and $1.71, respectively, on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions: 1995, 1996 and 1997 - expected dividend yield 0%, 1995, 1996 and 1997 - expected volatility of 51%, 51% and 82%, 1995 - risk-free interest rate of 5.75%, an expected life of 10 years; 1996 - risk-free interest rate of 6.36%, and an expected life of 10 years; 1997 - risk-free interest rate of 6.11% and an expected life of 10 years. The Company applies APBO No. 25 in accounting for its plans and, accordingly, has recognized compensation cost under APBO No. 25 for its stock options in the accompanying financial statements. Had the Company determined compensation cost based on the fair value at the grant date for its stock options under FAS 123, the Company's pro forma net loss and loss per share would be as follows:
1995 1996 1997 ------------- -------- ---------- Pro forma net loss $ (2,961,000) (460,000) (4,801,000) Pro forma net loss per share: Basic (.87) (.14) (1.41) Diluted (.87) (.14) (1.41) ============= ======== ==========
Pro forma net loss and loss per share reflect only options granted in 1995, 1996 and 1997. Therefore, the full impact of calculating compensation cost for stock options under FAS No. 123 is not reflected in the pro forma net loss and loss per share amounts presented above because compensation cost is reflected over the options' vesting period of up to five years and compensation cost for options granted prior to January 1, 1995 is not considered. F-17 42 JALATE, LTD. Notes to Financial Statements, Continued (11) SUBSEQUENT EVENT On January 27, 1998, the Company issued subordinated notes payable to certain shareholders of the Company, totaling $950,000. The notes mature January 31, 2000 with quarterly installments commencing on April 30, 1999. The notes are secured by the Company's investment interest in Airshop, Ltd. In connection with the transaction, the Company sold 500,000 stock purchase warrants to the shareholders for $50,000. The warrants are exercisable through January 2003 at an exercise price of $1.625 per share. (12) FOURTH QUARTER INFORMATION During the fourth quarter of 1995, the Company wrote down inventories to reflect lower of cost or market revisions by approximately $916,000 and recorded bad debt expense of approximately $537,000. F-18 43 Schedule II JALATE, LTD. Valuation and Qualifying Accounts Years ended December 31, 1995, 1996 and 1997
ALLOWANCE FOR DOUBTFUL ACCOUNTS RECEIVABLE ----------------- Balance at December 31, 1994 $ 500,000 Additions charged to operations 1,055,000 Deductions (886,000) ----------- Balance at December 31, 1995 669,000 Additions charged to operations 533,000 Deductions (844,000) ----------- Balance at December 31, 1996 358,000 Additions charged to operations 1,363,000 Deductions (1,397,000) ----------- Outstanding at December 31, 1997 $ 324,000 ===========
F-19 44 INDEPENDENT AUDITORS' REPORT The Partners Linroz Manufacturing Company, L.P.: We have audited the accompanying balance sheets of Linroz Manufacturing Company, L.P. as of December 31, 1996 and 1997 and the related statements of operations, partners' capital and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Linroz Manufacturing Company, L.P. as of December 31, 1996 and 1997 and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in note 4 to the financial statements, to date all of the Company's sales have been to Jalate, Ltd., a 50% owner of the Company. As of December 31, 1997, Jalate had a working capital deficiency and an accumulated deficit resulting from substantial losses from operations and is in default under certain loan agreements due to violations of certain covenants. Due to the Company's dependency on Jalate, should Jalate be unable to continue as a going concern or be required to restructure or curtail operations, the effect could have an adverse impact on the Company's financial position and results of operations. Management's plan in regard to this matter is also disclosed in note 4. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. KPMG PEAT MARWICK LLP Los Angeles, California March 6, 1998 F-20 45 LINROZ MANUFACTURING COMPANY, L.P. Balance Sheets December 31, 1996 and 1997
ASSETS 1996 1997 ---------- --------- Current assets: Cash $ 421,000 237,000 Accounts receivable from Jalate, Ltd. (note 4) 95,000 143,000 Prepaid expenses and other current assets 37,000 25,000 ---------- --------- Total current assets 553,000 405,000 Property and equipment, at cost, net (notes 2, 3 and 4) 915,000 791,000 Other assets, at cost 20,000 20,000 ---------- --------- $1,488,000 1,216,000 ========== ========= LIABILITIES AND PARTNERS' CAPITAL Current liabilities: Current maturities of long-term debt (note 3) $ 111,000 120,000 Trade accounts payable 35,000 34,000 Accounts payable to related party (note 4) 15,000 -- Accrued expenses 42,000 51,000 ---------- --------- Total current liabilities 203,000 205,000 Long-term debt, less current maturities (note 3) 321,000 201,000 Partners' capital 964,000 810,000 Commitments and contingencies (note 5) ---------- --------- $1,488,000 1,216,000 ========== =========
See accompanying notes to financial statements. F-21 46 LINROZ MANUFACTURING COMPANY, L.P. Statements of Operations Three-year period ended December 31, 1997
1995 1996 1997 ----------- --------- --------- (Unaudited) Net sales (note 4) $1,939,000 3,457,000 3,970,000 Cost of sales 1,546,000 2,540,000 2,711,000 ---------- --------- --------- Gross profit 393,000 917,000 1,259,000 Operating expenses 218,000 297,000 251,000 ---------- --------- --------- Earnings from operations 175,000 620,000 1,008,000 Interest expense, net 25,000 44,000 32,000 ---------- --------- --------- Net earnings $ 150,000 576,000 976,000 ========== ========= =========
See accompanying notes to financial statements. F-22 47 LINROZ MANUFACTURING COMPANY, L.P. Statements of Partners' Capital Three-year period ended December 31, 1997 Partners' capital at December 31, 1994 (unaudited) $ 98,000 Net earnings (unaudited) 150,000 Partners' contributions (unaudited) 290,000 ----------- Partners' capital at December 31, 1995 (unaudited) 538,000 Net earnings 576,000 Distribution to partners (150,000) ----------- Partners' capital at December 31, 1996 964,000 Net earnings 976,000 Distribution to partners (1,130,000) ----------- Partners' capital at December 31, 1997 $ 810,000 ===========
See accompanying notes to financial statements. F-23 48 LINROZ MANUFACTURING COMPANY, L.P. Statements of Cash Flows Three-year period ended December 31, 1997
1995 1996 1997 ----------- -------- ---------- (Unaudited) Cash flows from operating activities: Net earnings $ 150,000 576,000 976,000 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization of property and equipment 101,000 218,000 251,000 Changes in assets and liabilities: Decrease (increase) in: Accounts receivable from Jalate, Ltd. (41,000) (54,000) (48,000) Prepaid expenses and other assets (4,000) (11,000) 12,000 Increase (decrease) in: Trade accounts payable 90,000 (55,000) (1,000) Accounts payable to related party -- 15,000 (15,000) Accrued expenses 25,000 18,000 9,000 ----------- -------- ---------- Net cash provided by operating activities 321,000 707,000 1,184,000 ----------- -------- ---------- Cash flows from investing activities - capital expenditures (1,076,000) (157,000) (127,000) ----------- -------- ---------- Cash flows from financing activities: Proceeds from issuance of long-term debt 569,000 -- -- Principal payments on long-term debt (37,000) (100,000) (111,000) Distributions to partners -- (150,000) (1,130,000) Partners' contributions 290,000 -- -- ----------- -------- ---------- Net cash provided by (used in) financing activities 822,000 (250,000) (1,241,000) ----------- -------- ---------- Net increase (decrease) in cash 67,000 300,000 (184,000) Cash at beginning of year 54,000 121,000 421,000 ----------- -------- ---------- Cash at end of year $ 121,000 421,000 237,000 =========== ======== ========== Supplemental disclosures of cash flow information - cash paid during the year for interest $ 24,000 46,000 35,000 =========== ======== ==========
See accompanying notes to financial statements. F-24 49 LINROZ MANUFACTURING COMPANY, L.P. Notes to Financial Statements Three-year period ended December 31, 1997 (1995 information is unaudited) (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES DESCRIPTION OF BUSINESS AND LIQUIDITY Linroz Manufacturing Company, L.P., a California limited partnership (the Company), was formed on November 2, 1994 and commenced operations in May 1995. The general partner is Linroz Manufacturing, Inc., which holds a 1% interest in the Company and is owned equally by Jalate, Ltd. (Jalate) and Lebr Associates, Inc. (Lebr). Jalate and Lebr each own 49.5% limited partnership interests in the Company. Profits and losses and distributions are allocated to the partners based on their respective ownership percentage of the partnership. The partnership agreement expires on December 31, 2018. The Company performs cutting and sewing of women's apparel solely for Jalate, Ltd. (see note 4). DEPRECIATION AND AMORTIZATION Depreciation on property and equipment is calculated on the straight-line method over the estimated useful lives of the assets (five years). Leasehold improvements are amortized on the straight-line method over the shorter of the lease term or estimated useful life of the asset. REVENUE RECOGNITION Revenue is recognized upon shipment of the merchandise. LONG-LIVED ASSETS It is the Company's policy to account for long-lived assets at amortized cost. As part of an ongoing review of the valuation and amortization of long-lived assets, management assesses the carrying value of such assets if facts and circumstances suggest that it may be impaired. As a result, the Company has determined that its long-lived assets are not impaired as of December 31, 1996 and 1997. INCOME TAXES The Company is a limited partnership and is not directly subject to income taxes. Any liability for income taxes is that of the partners. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from these estimates. F-25 50 LINROZ MANUFACTURING COMPANY, L.P. Notes to Financial Statements, Continued (2) PROPERTY AND EQUIPMENT A summary of property and equipment is as follows:
DECEMBER 31 ---------------------- 1996 1997 ---------- --------- Machinery and equipment $ 906,000 995,000 Office equipment 54,000 65,000 Equipment under capital lease 24,000 24,000 Leasehold improvements 250,000 277,000 ---------- --------- 1,234,000 1,361,000 Less accumulated depreciation and amortization 319,000 570,000 ---------- --------- $ 915,000 791,000 ========== =========
(3) LONG-TERM DEBT Long-term debt consists of the following:
DECEMBER 31 ------------------ 1996 1997 -------- ------- Note payable, secured by equipment and guaranteed by Jalate, due in monthly installments of $6,345 including interest at the commercial paper rate (5.7% at December 31, 1997) plus 3.42%, maturing November 2000 $224,000 165,000 Note payable, secured by equipment and guaranteed by Jalate, due in monthly installments of $4,942 including interest at the commercial paper rate plus 3.42%, maturing June 2000 192,000 148,000 Capital lease obligation, secured by the underlying equipment and guaranteed by Contractor Associates, a company owned by the shareholders of Lebr, due in monthly installments of $877 including interest at 19.5%, maturing October 1998 16,000 8,000 -------- ------- 432,000 321,000 Less current maturities 111,000 120,000 -------- ------- $321,000 201,000 ======== =======
Annual maturities of long-term debt as of December 31, 1997 are as follows: 1998 $120,000 1999 122,000 2000 79,000 -------- $321,000 ========
F-26 51 LINROZ MANUFACTURING COMPANY, L.P. Notes to Financial Statements, Continued (4) RELATED PARTY TRANSACTIONS The Company had sales to Jalate, its sole customer, of $1,939,000, $3,457,000 and $3,970,000 in 1995, 1996 and 1997, respectively. Accounts receivable from Jalate aggregated $95,000 and $143,000 at December 31, 1996 and 1997, respectively. As of December 31, 1997, Jalate had a working capital deficiency and an accumulated deficit resulting from substantial losses from operations. These matters raise substantial doubt about Jalate's ability to continue as a going concern. Due to the Company's dependency on Jalate, should Jalate be unable to continue as a going concern or be required to restructure or curtail operations, the effect could have an adverse impact on the Company's financial position and results of operations. Accordingly, management is currently seeking new customers to mitigate its dependency on Jalate. However, there is no assurance that the Company will be successful. During 1996, the Company purchased machinery from Contractor Associates, a company owned by the shareholders of Lebr, for $49,000. A balance of $15,000 was outstanding related to the machinery purchase and is included in accounts payable to related party at December 31, 1996. The balance was paid in full as of December 31, 1997. Accounts receivable from Jalate and accounts payable to related party are unsecured and non-interest bearing. See related party leasing transaction in note 5. (5) COMMITMENTS AND CONTINGENCIES The Company subleases it manufacturing and office facility from Jalate under an operating lease through January 2000. Future minimum lease payments under the arrangements as of December 31, 1997 are as follows:
Year ending December 31: 1998 $130,000 1999 130,000 2000 10,000 -------- $270,000 ========
Rent expense was $109,000, $119,000 and $122,000 in 1995, 1996 and 1997, respectively. The Company is from time to time involved in litigation incidental to the conduct of its business. The Company does not believe that any currently pending litigation to which it is a party will have a materially adverse effect on the financial statements taken as a whole. F-27 EX-10.15 2 EXHIBIT 10.15 1 EXHIBIT 10.15 SUBORDINATED SECURED PROMISSORY NOTE $475,000 January 27, 1998 FOR VALUE RECEIVED, JALATE, LTD., a California corporation (herein, "MAKER"), hereby promises to pay to William M. DeArman (herein, "HOLDER") or to order the principal sum of Four Hundred Seventy Five Thousand Dollars ($475,000), with interest on the unpaid principal balance outstanding from time to time, computed at a per annum rate of ten percent (10%), commencing as from the date hereof until January 31, 2000 ("MATURITY DATE"), when all amounts then remaining unpaid, together with all accrued and unpaid interest thereon, shall be due and payable. Interest accrued hereon shall be paid on the last business day of January, April, July and October, commencing April 30, 1998. The principal amount hereof shall be repaid in four (4) equal quarterly installments, commencing as from April 30, 1999, and continuing until the Maturity Date when all other amounts then remaining unpaid (principal, interest and other) shall become due and payable. All payments are to be made in lawful money of the United States of America to Holder at 3100 Texas Commerce Tower, Houston, Texas 77002 (c/o Sanders Morris Mundy Inc., Attn: Chris Hoeller) or at such other place as Holder shall designate in writing to Maker. Upon Maker's failure to pay any amount owing hereon as and when due, such amount due hereunder together with the accrued interest thereon shall to the extent not in violation of any applicable laws, bear interest at five percent (5%) per annum in excess of the rate otherwise applicable thereto ("DEFAULT RATE") until such amount is paid, it being acknowledged and agreed that the imposition of a higher rate of interest as herein 2 provided for failure to pay an amount owing hereunder shall not preclude Holder from accelerating the entire amount due hereunder as a result of such non-payment, and upon any such acceleration, the amount so accelerated shall, to the extent not in violation of any applicable laws, bear interest at the Default Rate until full payment of all such accelerated amounts. By acceptance of this Note as evidence of Maker's obligation to repay to Holder the amounts evidenced hereby, Holder acknowledges and agrees that all amounts owing hereunder (principal, interest and other) shall be subordinated and be junior in right of payment to all of Maker's obligations to Heller Financial, Inc. ("HELLER") and/or Wells Fargo HSBC Trade Bank N.A. ("WELLS FARGO") relating to present or future loans or other credit accommodations made to Maker. If an event of default under Maker's loan agreements with either Heller or Wells Fargo has occurred and is continuing, then Holder shall not be entitled to and shall not accept any payment from Maker with respect to this Note unless and until (i) all of Maker's obligations to Heller and/or Wells Fargo, as applicable, under such agreements have been satisfied in full or (ii) Heller and/or Wells Fargo, as applicable, consents in writing thereto; provided, however, that nothing contained herein shall be deemed to prohibit the Secured Party (defined below) from exercising its rights under the Security and Pledge Agreement referred to below (including, without limitation, foreclosing upon any or all of the collateral provided for therein). Further, by acceptance hereof, Holder hereby waives any and all rights, defenses or protections that may otherwise be available to him as a surety under applicable law, including, without limitation, any right, defense or protection available to sureties by reason of the Texas Civil Code. -2- 3 All persons or corporations now or at any time liable for payment of the indebtedness evidenced hereby for themselves, their heirs, legal representatives, successors and assigns, respectively, expressly waive presentment for payment, demand, notice of dishonor, protest, notice of protest and diligence in collection, and consent that the time of said payments may be extended by Holder without in any way modifying, altering, releasing, affecting, or limiting their respective liability for the indebtedness evidenced hereby. If this Note is not paid when due (whether at scheduled maturity, by acceleration or otherwise), Maker promises to pay all costs of collection including, without limitation, reasonable attorneys' fees, incurred by Holder, whether or not suit is filed hereon. This Note may be prepaid by Maker, in whole at any time or in part from time to time, without payment of any premium or penalty on fifteen (15) days prior notice to Holder of such election to prepay. In addition, Maker agrees to use the net proceeds of any equity offering to prepay this Note. Maker also agrees to use a portion of the proceeds of this Note to satisfy in full its current financial obligations to Air Shop Ltd., a New York corporation ("AIR Shop"), pursuant to that certain letter agreement between Maker and Air Shop dated October 17, 1997, with regard to the acquisition of certain shares of the capital stock of Air Shop by Maker. Maker further agrees to reimburse Holder for his reasonable and documented out-of-pocket expenses (not to exceed $5,000) incurred in connection with the negotiation of this Note and the transactions related thereto. -3- 4 Maker's obligations under this Note are secured by a Security and Pledge Agreement between Maker and Secured Party (as therein defined) dated as of even date herewith. The due date of the Note may be accelerated in accordance with the terms of such Security and Pledge Agreement. HOLDER'S RIGHTS UNDER THIS NOTE ARE ALSO SUBJECT TO AN INTERCREDITOR AGREEMENT DATED AS OF EVEN DATE HEREWITH AND MAY ONLY BE EXERCISED IN ACCORDANCE THEREWITH. No provision of this Note is intended to or shall require or permit Holder, directly or indirectly, to take, collect or receive in money, goods or any other form, any interest (including amounts deemed by law to be interest) in excess of the maximum rate of interest permitted by applicable law. If any amount due from or paid by Maker shall be determined by a court of competent jurisdiction to be interest in excess of such maximum rate, Maker shall not be obligated to pay such excess and, if paid, such excess shall be applied against the unpaid principal balance of this Note or, if and to the extent that this Note has been paid in full, such excess shall be remitted by Holder to Maker. Holder may pursue any rights and remedies as the holder of this Note or under any security agreement, pledge, guaranty or other collateral documents, including, without limitation, the Security and Pledge Agreement, independently or concurrently; provided, however, that only Secured Party may exercise the rights granted to Secured Party under the Security Agreement; and provided further that Holder's rights hereunder must be exercised in accordance with and subject to the conditions set forth in the Intercreditor Agreement. All rights, remedies or powers herein conferred upon Holder or conferred by the Security and Pledge Agreement or any other collateral document -4- 5 shall, to the extent not prohibited by law, be deemed cumulative and not exclusive of any others thereof, or any other rights, remedies or powers available to Holder. No delay or omission of Holder to exercise any right, remedy or power shall impair the same or be construed to be a waiver of any default or an acquiescence thereto. No waiver of any default shall extend to or affect any subsequent default or impair any rights, remedies or powers available to Holder. No single or partial exercise of any right, remedy or power shall preclude other or future exercise thereof by Holder. This Note has been negotiated in substantial part in the State of Texas and all questions with respect to the Note and the rights and liabilities of the parties will be governed by the laws of Texas in all respects, including matters of construction, validity, enforcement and performance, regardless of the choice of law provisions of Texas or any other jurisdiction. Any and all disputes between the parties which may arise pursuant to this Note not resolved by them will be heard and determined before an appropriate federal or state court located in Houston, Texas. The parties hereto acknowledge that such courts have the jurisdiction to interpret and enforce the provisions of this Note and the parties waive any and all objections that they may have as to personal jurisdiction or venue in any of the above courts. JALATE,LTD., a California corporation By: /s/ FREDERICK A. FINDLEY ________________________________ Frederick A. Findley, Vice President and Chief Financial Officer Accepted: __________________________________ William M. DeArman -5- 6 This Note has been negotiated in substantial part in the State of Texas and all questions with respect to the Note and the rights and liabilities of the parties will be governed by the laws of Texas in all respects, including matters of construction, validity, enforcement and performance, regardless of the choice of law provisions of Texas or any other jurisdiction. Any and all disputes between the parties which may arise pursuant to this Note not resolved by them will be heard and determined before an appropriate federal or state court located in Houston, Texas. The parties hereto acknowledge that such courts have the jurisdiction to interpret and enforce the provisions of this Note and the parties waive any and all objections that they may have as to personal jurisdiction or venue in any of the above courts. JALATE, LTD. a California corporation By:_____________________________________ Frederick A. Findley Vice President and Chief Financial Officer Accepted: /s/ WILLIAM M. DEARMAN - ---------------------------------------- William M. DeArman -5- EX-10.16 3 EXHIBIT 10.16 1 EXHIBIT 10.16 JALATE,LTD. STOCK PURCHASE WARRANT THE WARRANTS EVIDENCED HEREBY AND THE SHARES OF STOCK ISSUABLE UPON EXERCISE THEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE OFFERED OR SOLD WITHOUT REGISTRATION UNLESS AN EXEMPTION FROM REGISTRATION IS AVAILABLE UNDER SUCH ACT OR THE RULES OR REGULATIONS PROMULGATED THEREUNDER WARRANT TO PURCHASE 250,000 SHARES OF COMMON STOCK AS DESCRIBED HEREIN Issue Date: January 27, 1998. Series A Warrant No. 4 Expiration Date: January 27, 2003. Sale Price: $.10 per Number of Shares. This certifies that, for value received, William M. DeArman, his permitted successors and assigns ("HOLDER"), is entitled to purchase from Jalate, Ltd., a California corporation (the "COMPANY"), up to and including 250,000 fully paid and nonassessable shares (the "NUMBER OF SHARES") of the Common Stock, no par value, of the Company (the "COMMON STOCK") on the terms set forth herein at an exercise price of $1.625 per share (the "PURCHASE PRICE"). The Number of Shares and the Purchase Price may be adjusted from time to time as described in this Warrant. 1. EXERCISE. 1.1 TIME FOR EXERCISE. 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 January 27, 2003 (the "EXERCISE PERIOD"). 1.2 MANNER OF EXERCISE. This Warrant shall be exercised by delivering it to the Company with the exercise form duly completed and signed, specifying (i) the number of shares as to which the Warrant is being exercised at that time (the "EXERCISE NUMBER"), and (ii) whether the exercise is being made by "purchase" or "exchange". 1.2.1 PURCHASE. If the Holder elects the purchase option, the Holder shall simultaneously therewith deliver to the Company cash or a certified check in an amount equal to the Exercise Number multiplied by the Purchase Price, and the Holder shall be entitled to receive the full Exercise Number of shares of Common Stock. 1.2.2 EXCHANGE. If the Holder elects the exchange option, the Holder shall be entitled (without cash payment) to receive that number of shares of Common Stock having an aggregate Market Value on the date of exercise equal to the difference 2 between the Market Value of the Exercise Number of shares and the aggregate Purchase Price thereof. "MARKET VALUE" for any security on any given date means (i) the average closing price for the prior ten trading days for such security on the principal stock exchange on which such security is traded or (ii) if not so traded, the closing (or, if no closing price is available, the average of the bid and asked prices) for such period on The Nasdaq Stock Market if such security is quoted thereon or (iii) if not listed on any exchange or quoted on The Nasdaq Stock Market, such value, determined without regard to the minority shareholder position of the Holder, as may be determined in good faith by an independent appraiser selected by the Company and the Holder, which determination shall be conclusively binding on the parties. The costs of the independent appraiser shall be divided equally between the Company and the Holders. 1.3 EFFECT OF EXERCISE. Promptly (but in any case within five business days) after any exercise, the Company shall deliver to the Holder (i) duly executed certificates in the name or names specified in the exercise notice representing the aggregate number of shares issuable upon such exercise, and (ii) if this Warrant is exercised only in part, a new Warrant of like tenor representing the balance of the Number of Shares. Such certificates shall be deemed to have been issued, and the person receiving them shall be deemed to be a holder of record of such shares, as of the close of business on the date the actions required in Section 1.2 shall have been completed or, if on that date the stock transfer books of the Company are closed, as of the next business day on which the stock transfer books of the Company are open. 2. TRANSFER OF WARRANTS AND STOCK. 2.1 TRANSFER RESTRICTIONS. Neither this Warrant nor the securities issuable upon its exercise may be sold, transferred or pledged unless the Company shall have been supplied with reasonably satisfactory evidence that such transfer is not in violation of the Securities Act of 1933, as amended (the "ACT"), and any applicable state securities laws. The Company may place a legend to that effect on this Warrant, any replacement Warrant and each certificate representing shares issuable upon exercise of this Warrant. 2.2 MANNER OF TRANSFER. Upon delivery of this Warrant to the Company with the assignment form duly completed and signed, the Company will promptly (but in any case within five business days) execute and deliver to each transferee and, if applicable, the Holder, Warrants of like tenor evidencing the rights (i) of the transferee(s) to purchase the Number of Shares specified for each in the assignment forms, and (ii) of the Holder to purchase any untransferred portion, which in the aggregate shall equal the Number of Shares of the original Warrant. If this Warrant is properly assigned in compliance with this Section 2, it may be exercised by an assignee without having a new Warrant issued. 2.3 LOSS, DESTRUCTION OR MUTILATION OF WARRANT CERTIFICATES. Upon receipt of (i) evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of any Warrant and (ii) except in the case of mutilation, an indemnity or security reasonably satisfactory to the Company, the Company will promptly (but in any -2- 3 case within five business days) execute and deliver a replacement Warrant of like tenor representing the right to purchase the same Number of Shares. 3. COST OF ISSUANCES. The Company shall pay all expenses, transfer taxes and other charges payable in connection with the preparation, issuance and delivery of stock certificates or replacement Warrants, except for any transfer tax or other charge imposed as a result of (a) any issuance of certificates in any name other than the name of the Holder, or (b) any transfer of the Warrant. The Company shall not be required to issue or deliver any stock certificate or Warrant until it receives reasonably satisfactory evidence that any such tax or other charge has been paid by the Holder. 4. ANTI-DILUTION PROVISIONS. If any of the following events occur at any time hereafter during the life of the Warrant, then the Warrant immediately prior to such event shall be changed as described in order to prevent dilution: 4.1 If at any time (i) the outstanding shares of Common Stock are subdivided into a greater number of shares, then the Purchase Price will be reduced proportionately and the Number of Shares will be increased proportionately; conversely, (ii) if the outstanding shares of Common Stock are consolidated into a smaller number of shares, then the Purchase Price will be increased proportionately and the Number of Shares will be reduced proportionately. 4.2 Upon (i) any reorganization or reclassification of the Common Stock, (ii) the dissolution or liquidation of the Company, (iii) a reorganization, merger or consolidation of the Company with one or more corporations as a result of which the Company is not the surviving corporation or entity or becomes a subsidiary of another corporation or entity, or (iv) the sale of substantially all the property or more than fifty percent (50%) of the then outstanding stock of the Company to another corporation or entity (any such occurrence shall be an "Event"), in which holders of Common Stock are entitled to receive securities and/or assets as a result of their Common Stock ownership, then upon exercise of this Warrant the Holder will have the right to receive the shares of stock, securities or assets which it would have received if the Warrant had been fully exercised as of the record date for such Event. The Company will not effect any Event unless prior to or simultaneously with its consummation the successor corporation or entity resulting from the consolidation or merger (if other than the Company) or the Company's new ultimate parent corporation or entity (if the Company becomes a subsidiary), or the corporation purchasing the Company's assets or stock, assumes the performance of the Company's obligations under this Warrant (as appropriately adjusted to reflect such consolidation, merger or sale such that the Holder's rights under this Warrant remain, as nearly as practicable, unchanged) by a binding written instrument. 4.3 If at any time the Company declares a dividend on the Common Stock payable in shares of Common Stock or securities convertible into shares of Common Stock, the Number of Shares shall be increased, as of the record date for determining which holders of Common Stock shall be entitled to receive such dividend, -3 - 4 in proportion to the increase in the number of outstanding shares of Common Stock as a result of such dividend. In the event any such securities convertible into shares of Common Stock are not so converted by the time any such conversion right expires, the Number of Shares shall be proportionately decreased, as of such expiration date. 4.4 Upon each computation of an adjustment under this Section 4, the Purchase Price shall be computed to the nearest tenth of a cent and the Number of Shares shall be calculated to the nearest whole share. However, the fractional amount shall be used in calculating any future adjustments. No fractional shares of stock shall be issued in connection with the exercise of this Warrant, but the Company shall, in the case of the final exercise under this Warrant, make a cash payment for any fractional shares based on the Market Value of a share of Common Stock on the date of exercise (as defined in Section 1.2.2). 4.5 Officer's Certificate. Whenever the Number of Shares or the Purchase Price shall be adjusted as required by the provisions of this Section 4, the Company forthwith shall file in the custody of its secretary or an assistant secretary, at its principal office, a certificate of the chief financial officer of the Company showing the adjusted Number of Shares and the adjusted Purchase Price and setting forth in reasonable detail the circumstances requiring the adjustment. Each such officer's certificate shall be made available at all reasonable times during reasonable hours for inspection by the Holder. Notwithstanding any changes in the Purchase Price or the Number of Shares, this Warrant may continue to state the initial Purchase Price and the initial Number of Shares. Alternatively, the Company may elect to issue a new Warrant or Warrants of like tenor for the additional shares of Common Stock or, upon surrender of the existing Warrant, to issue a replacement Warrant evidencing all the Warrant Shares to which the Holder is entitled after such adjustments. 5. COVENANTS. The Company agrees that: 5.1 RESERVATION OF STOCK. During the period in which this Warrant may be exercised, the Company will reserve sufficient authorized but unissued securities (and, if applicable, property) to enable it to satisfy its obligations on exercise of this Warrant. If at any time the Company's authorized securities shall not be sufficient to allow the exercise of this Warrant, the Company shall take such corporate action as may be necessary to increase its authorized but unissued securities to be sufficient for such purpose. 5.2 NO LIENS, ETC. All securities that may be issued upon exercise of this Warrant will, upon issuance, be validly issued, fully paid, nonassessable and free from all taxes, liens and charges with respect to the issue thereof, and shall be listed on any exchanges on which that class of securities is listed. 5.3 NO DIMINUTION OF VALUE. The Company will not take any action to terminate this Warrant or to diminish it in value. - 4 - 5 5.4 FURNISH INFORMATION. The Company will promptly deliver to the Holder copies of all financial statements, reports and proxy statements which the Company shall have sent to its stockholders generally. 5.5 STOCK AND WARRANT TRANSFER BOOKS. Except upon dissolution, liquidation or winding up or for ordinary holidays and weekends, the Company will not at any time close its stock or warrant transfer books so as to result in preventing or delaying the exercise or transfer of this Warrant. 6. STATUS OF HOLDER. 6.1 NOT SHAREHOLDER. Unless the Holder exercises this Warrant in writing, the Holder shall not be entitled to any rights (i) as a stockholder of the Company with respect to the shares as to which the Warrant is exercisable including, without limitation, the right to vote or receive dividends or other distributions, or (ii) to receive any notice of any proceedings of the Company except as otherwise provided in this Warrant. 6.2 LIMITATION OF LIABILITY. Unless the Holder exercises this Warrant in writing, the Holder's rights and privileges hereunder shall not give rise to any liability for the Purchase Price or as a stockholder of the Company, whether to the Company or its creditors. 7. REGISTRATION RIGHTS. 7.1 DEMAND REGISTRATION. This Warrant is one in a series of warrants having the same terms and identified as "Series A" (the "SERIES A WARRANTS"). Upon the request of the holders of a majority of the shares issuable upon exercise of the Series A Warrants made anytime during the Exercise Period, the Company will use all reasonable efforts on one occasion to register for resale in accordance with the Act, all shares of Common Stock issuable upon exercise of the Warrant which do not qualify for an exemption from such registration under Rule 144 under the Act or a comparable or successor exemption from registration ("REGISTRABLE SHARES"); provided that such registration must cover at least one-half of the Number of Shares covered by the original Series A Warrants. The Holder agrees to cooperate with the Company in all reasonable ways to effect such registration. The Company will use all reasonable efforts to keep such registration effective for one hundred eighty days or, if shorter, until all Registrable Shares included in the registration statement have been disposed of. The effectiveness period of the registration statement shall be subject to customary and reasonable "black-out" periods in the event of any significant corporate transactions (including material financings); provided, however, that the one hundred eighty day effectiveness period shall be extended on a day-for-day basis in connection with any such "black-out." The Purchase Price shall be decreased by $.10 per share (subject to adjustment pursuant to Section 4.1 hereof) if the Company does not file the registration statement with the Securities and Exchange Commission (the "COMMISSION") within 90 days following the making of the demand and by an additional $.10 per share (subject to - 5 - 6 adjustment pursuant to Section 4.1 hereof) for each subsequent 90-day period in which the registration statement is not filed. 7.2 "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 such Holder's 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). 7.3 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 Section 7 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. 7.4 CONDITIONS TO HOLDER'S RIGHTS. It shall be a condition of the Holder's rights under this Section 7 that: 7.4.1 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 7.4.2 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 - 6 - 7 compliance with federal and state securities laws and the rules or other requirements of the National Association of Securities Dealers, Inc., The Nasdaq Stock Market or which the Company or the underwriters may reasonably request to otherwise effectuate the offering. 7.5 Registration Procedures. If and whenever the Company is required to use its reasonable efforts to effect the registration of any Registrable Shares under the Act as provided in this Section 7, the Company will, as expeditiously as practicable: (i) notify the Holder of the Commission's requests for amending or supplementing of the registration statement and the prospectus, and prepare and file with the Commission such amendments and supplements to such registration statement and the prospectus used in connection therewith as may be necessary to keep such registration statement effective and to comply with the provisions of the Act with respect to the disposition of all Registrable Shares covered by such registration statement; (ii) furnish to the Holder such number of conformed copies of such registration statement and of each such amendment and supplement thereto (in each case including all exhibits), such number of copies of the prospectus contained in such registration statement (including each preliminary prospectus and any summary prospectus) and any other prospectus filed under Rule 424 under the Act, in conformity with the requirements of the Act, and such other documents, as the Holder may reasonably request; (iii) use its reasonable efforts (x) to register or qualify all Registrable Shares covered by such registration statement under such other securities or blue sky laws of such States of the United States of America where an exemption is not available and as the Holder shall reasonably request, (y) to keep such registration or qualification in effect for so long as such registration statement remains in effect, and (z) to take any other action which may be reasonably necessary or advisable to enable the Holder to consummate the disposition in such jurisdictions of the Registrable Shares to be sold by the Holder, except that the Company shall not for any such purpose be required to qualify generally to do business as a foreign corporation in any jurisdiction wherein it would not but for the requirements of this subdivision (iii) be obligated to be so qualified or to consent to general service of process or become subject to general taxation in any such jurisdiction; (iv) use its reasonable efforts to cause all Registrable Shares covered by such registration statement to be registered with or approved by such other federal or state governmental agencies or authorities as may be necessary in the opinion of counsel to the Company and counsel to the Holder to consummate the disposition of such Registrable Shares; (v) furnish to the Holder a signed counterpart of - 7 - 8 (x) an opinion of counsel for the Company, and (y) a "comfort" letter signed by the independent public accountants who have certified the Company's financial statements included or incorporated by reference in such registration statement, covering substantially the same matters with respect to such registration statement (and the prospectus included therein) and, in the case of the accountant's comfort letter, with respect to events subsequent to the date of such financial statements, as are customarily covered in opinions of issuer's counsel and in accountants' comfort letters delivered to the underwriters in underwritten public offerings of securities (and dated the dates such opinions and comfort letters are customarily dated) and, in the case of the accountant's comfort letter, such other financial matters, and in the case of the legal opinion, such other legal matters, as the Holder or the underwriters may reasonably request; (vi) notify the Holder at any time when a prospectus relating thereto is required to be delivered under the Act, upon discovery that, or upon the happening of any event as a result of which, the prospectus included in such 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, and at the request of the Holder promptly prepare and furnish to him a reasonable number of copies of a supplement to or an amendment of such prospectus as may be necessary so that, as thereafter delivered to the purchasers of such securities, such prospectus shall not include an untrue statement of a material fact or omit to state a 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; and (vii) otherwise use its reasonable efforts to comply with all applicable rules and regulations of the Commission. The Holder agrees by acquisition of such Registrable Shares that upon receipt of any written notice from the Company of the happening of any event of the kind described in subdivision (vi) of this Section 7.5 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 contemplated by subdivision (vi) of this Section 7.5 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. Nothing contained in this Section 7.5 shall require or obligate the Company to cause any registration statement pursuant to which the Holder has exercised its - 8 - 9 "piggyback" registration rights pursuant to Section 7.2 hereof to become effective or, if declared effective, to maintain the effectiveness of such registration statement. 7.6 Indemnification. (a) 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, the Holder, its directors, officers, partners, heirs, personal representatives, agents and affiliates and each other person, if any, who controls the 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 the 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 the 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 the 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 the Holder. (b) Indemnification by the Holder. As a condition to including any Registrable Shares in any registration statement, the Company shall have received an undertaking reasonably satisfactory to it from each Holder, to indemnify and hold -9- 10 harmless (in the same manner and to the same extent as set forth in subdivision (a) of this Section 7.6) 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 the 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 7.6(b) shall be limited to the amount of proceeds received by the 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 the Holder. (c) 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 subdivisions of this Section 7.6, 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 subdivisions of this Section 7.6, 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 -10- 11 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. (d) Contribution. If the indemnification provided for in this Section 7.6 shall for any reason be held by a court to be unavailable to an indemnified party under subparagraph (a) or (b) 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 subparagraph (a) or (b) hereof, the indemnified party and the indemnifying party under subparagraph (a) or (b) 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), (i) 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 (ii) if the allocation provided by clause (i) 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. (e) Other Indemnification. Indemnification and contribution similar to that specified in the preceding subdivisions of this Section 7.6 (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. (f) Indemnification Payments. The indemnification and contribution required by this Section 7.6 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. 8. GENERAL PROVISIONS. 8.1 COMPLETE AGREEMENT; MODIFICATIONS. This Warrant and any documents referred to herein or executed contemporaneously herewith constitute the parties' entire agreement with respect to the subject matter hereof and supersede all agreements, -11- 12 representations, warranties, statements, promises and understandings, whether oral or written, with respect to the subject matter hereof. This Warrant may not be amended, altered or modified except by a writing signed by the parties. 8.2 ADDITIONAL DOCUMENTS. Each party hereto agrees to execute any and all further documents and writings and to perform such other actions which may be or become necessary or expedient to effectuate and carry out this Warrant. 8.3 NOTICES. All notices under this Warrant shall be in writing and shall be delivered by personal service or telecopy or certified mail, postage prepaid, to such address as may be designated from time to time by the relevant party, and which shall initially be: Jalate, Ltd. 6557 Flotilla Street City of Commerce, California 90040 Fax: (213) 728-3752 Attn: Frederick A. Findley Vice President-Finance and Chief Financial Officer William M. DeArman 5420 Huckleberry Lane Houston, Texas 77056 Fax: (713) 552-1505 Any notice sent by certified mail shall be deemed to have been given five (5) business days after the date on which it is mailed. All other notices shall 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. 8.4 NO THIRD-PARTY BENEFITS; SUCCESSORS AND ASSIGNS. None of the provisions of this Warrant shall be for the benefit of, or enforceable by, any third-party beneficiary. Except as provided herein to the contrary, this Warrant shall be binding up-on and inure to the benefit of the parties, their respective successors and permitted assigns. 8.5 DISPUTES. 8.5.1 GOVERNING LAW; JURISDICTION. This Warrant concerns a California business and all questions with respect to the Warrant and the rights and liabilities of the parties will be governed by the laws of California in all respects, including matters of construction, validity, enforcement and performance, regardless of the choice of law provisions of California or any other jurisdiction. Any and all disputes between the parties which may arise pursuant to this Warrant and not resolved by them will be heard and determined before an appropriate federal or state court located in Houston, Texas. - 12 - 13 The parties hereto acknowledge that such courts have the jurisdiction to interpret and enforce the provisions of this Warrant and the parties waive any and all objections that they may have as to personal jurisdiction or venue in any of the above courts. 8.5.2 ATTORNEYS' FEES. Should any litigation be commenced (including any proceedings in a bankruptcy court) between the parties hereto or their representatives concerning any provisions of this Warrant or the rights and duties of any person or entity hereunder, the party or parties prevailing in such proceeding shall be entitled, in addition to such other relief as may be granted, to the reasonable attorneys' fees and court costs incurred by reason of such litigation. 8.6 WAIVERS STRICTLY CONSTRUED. With regard to any power, remedy or right provided herein or otherwise available to any party hereunder (i) no waiver or extension of time shall be effective unless expressly contained in a writing signed by the waiving party; and (ii) no alteration, modification or impairment shall be implied by reason of any previous waiver, extension of time, delay or omission in exercise, or other indulgence. 8.7 RULES OF CONSTRUCTION. 8.7.1 HEADINGS. The Article and Section headings in this Warrant are inserted only as a matter of convenience, and in no way define, limit, or extend or interpret the scope of this Warrant or of any particular Article or Section. 8.7.2 TENSE AND CASE. Throughout this Warrant, as the context may require, references to any word used in one tense or case shall include all other appropriate tenses or cases. 8.7.3 SEVERABILITY. The validity, legality or enforceability of the remainder of this Warrant will not be affected even if one or more of the provisions of this Warrant are held to be invalid, illegal or unenforceable in any respect. 8.7.4 WARRANT NEGOTIATED. The parties hereto are sophisticated and have been represented throughout this transaction by lawyers who have carefully negotiated the provisions hereof. As a consequence, the parties do not believe that the presumptions of any laws or rules relating to the interpretation of contracts against the drafter of any particular clause should be applied in this case and therefore waive their effects. - 13 - 14 IN WITNESS WHEREOF, the Company has caused this Warrant to be duly executed effective as of January 27, 1998. JALATE, LTD., a California corporation By: /s/ FREDERICK A. FINLEY --------------------------------- Frederick A. Finley Vice President and Chief Financial Officer -14- 15 ASSIGNMENT FORM FOR VALUE RECEIVED,______________________________________ hereby sells, assigns and transfers to the transferee named below [the rights to purchase ______________ of the Number of Shares under] this Warrant, together with all rights, title and interest therein. [The rights to purchase the remaining Number of Shares shall remain the property of the undersigned.] This includes a transfer of the registration rights in the Warrant; provided, however, that in the case of a partial assignment of this Warrant, both the Holder and the transferee shall have the registration rights set forth in Section 7 of the Warrant. Dated:____________________ [NAME OF HOLDER] By______________________________________ Signature Name:___________________________________ (Please Print) Address:________________________________ ________________________________ ________________________________ Employer Identification Number, Social Security Number or other identifying number:_____________________ TRANSFEREE: Name:______________________________ (Please Print) Address:___________________________ ___________________________ ___________________________ Employer Identification Number, Social Security Number or other identifying number:________________ -15- 16 EXERCISE FORM To Be Executed Upon Exercise of Warrant The undersigned hereby exercises the Warrant with regard to _____________ shares of Common Stock and herewith [makes payment of the purchase price in full] [or requests that the Company exchange the Warrant as provided in Section 1.2.2 of the Warrant]. The undersigned requests that certificate(s) for such shares [and the Warrant for the unexercised portion of this Warrant] be issued [to the Holder] [in the name set forth below]. Dated:_____________________ [NAME OF HOLDER] By______________________________________ Signature Name:___________________________________ (Please Print) Address:________________________________ ________________________________ ________________________________ Employer Identification Number, Social Security Number or other identifying number:_____________________ [TRANSFEREE: Name:______________________________ (Please Print) Address:___________________________ ___________________________ ___________________________ Employer Identification Number, Social Security Number or other identifying number:________________] -16- EX-10.17 4 EXHIBIT 10.17 1 EXHIBIT 10.17 SUBORDINATED SECURED PROMISSORY NOTE $95,000 January 27, 1998 FOR VALUE RECEIVED, JALATE, LTD., a California corporation (herein, "MAKER"), hereby promises to pay to John E. Drury (herein, "HOLDER") or to order the principal sum of Ninety Five Thousand Dollars ($95,000), with interest on the unpaid principal balance outstanding from time to time, computed at a per annum rate of ten percent (10%), commencing as from the date hereof until January 31, 2000 ("MATURITY DATE"), when all amounts then remaining unpaid, together with all accrued and unpaid interest thereon, shall be due and payable. Interest accrued hereon shall be paid on the last business day of January, April, July and October, commencing April 30, 1998. The principal amount hereof shall be repaid in four (4) equal quarterly installments, commencing as from April 30, 1999, and continuing until the Maturity Date when all other amounts then remaining unpaid (principal, interest and other) shall become due and payable. All payments are to be made in lawful money of the United States of America to Holder at 3100 Texas Commerce Tower, Houston, Texas 77002 (c/o Sanders Morris Mundy Inc., Attn: Chris Hoeller) or at such other place as Holder shall designate in writing to Maker. Upon Maker's failure to pay any amount owing hereon as and when due, such amount due hereunder together with the accrued interest thereon shall to the extent not in violation of any applicable laws, bear interest at five percent (5%) per annum in excess of the rate otherwise applicable thereto ("DEFAULT RATE") until such amount is paid, it 2 being acknowledged and agreed that the imposition of a higher rate of interest as herein provided for failure to pay an amount owing hereunder shall not preclude Holder from accelerating the entire amount due hereunder as a result of such non-payment, and upon any such acceleration, the amount so accelerated shall, to the extent not in violation of any applicable laws, bear interest at the Default Rate until full payment of all such accelerated amounts. By acceptance of this Note as evidence of Maker's obligation to repay to Holder the amounts evidenced hereby, Holder acknowledges and agrees that all amounts owing hereunder (principal, interest and other) shall be subordinated and be junior in right of payment to all of Maker's obligations to Heller Financial, Inc. ("HELLER") and/or Wells Fargo HSBC Trade Bank N.A. ("WELLS FARGO") relating to present or future loans or other credit accommodations made to Maker. If an event of default under Maker's loan agreements with either Heller or Wells Fargo has occurred and is continuing, then Holder shall not be entitled to and shall not accept any payment from Maker with respect to this Note unless and until (i) all of Maker's obligations to Heller and/or Wells Fargo, as applicable, under such agreements have been satisfied in full or (ii) Heller and/or Wells Fargo, as applicable, consents in writing thereto; provided, however, that nothing contained herein shall be deemed to prohibit the Secured Party (defined below) from exercising its rights under the Security and Pledge Agreement referred to below (including, without limitation, foreclosing upon any or all of the collateral provided for therein). Further, by acceptance hereof, Holder hereby waives any and all rights, defenses or protections that may otherwise be available to him as a surety under -2- 3 applicable law, including, without limitation, any right, defense or protection available to sureties by reason of the Texas Civil Code. All persons or corporations now or at any time liable for payment of the indebtedness evidenced hereby for themselves, their heirs, legal representatives, successors and assigns, respectively, expressly waive presentment for payment, demand, notice of dishonor, protest, notice of protest and diligence in collection, and consent that the time of said payments may be extended by Holder without in any way modifying, altering, releasing, affecting, or limiting their respective liability for the indebtedness evidenced hereby. If this Note is not paid when due (whether at scheduled maturity, by acceleration or otherwise), Maker promises to pay all costs of collection including, without limitation, reasonable attorneys' fees, incurred by Holder, whether or not suit is filed hereon. This Note may be prepaid by Maker, in whole at any time or in part from time to time, without payment of any premium or penalty on fifteen (15) days prior notice to Holder of such election to prepay. In addition, Maker agrees to use the net proceeds of any equity offering to prepay this Note. Maker also agrees to use a portion of the proceeds of this Note to satisfy in fall its current financial obligations to Air Shop Ltd., a New York corporation ("AIR SHOP"), pursuant to that certain letter agreement between Maker and Air Shop dated October 17, 1997, with regard to the acquisition of certain shares of the capital stock of Air Shop by Maker. Maker's obligations under this Note are secured by a Security and Pledge Agreement between Maker and Secured Party (as therein defined) dated as of even date -3- 4 herewith. The due date of the Note may be accelerated in accordance with the terms of such Security and Pledge Agreement. HOLDER'S RIGHTS UNDER THIS NOTE ARE ALSO SUBJECT TO AN INTERCREDITOR AGREEMENT DATED AS OF EVEN DATE HEREWITH AND MAY ONLY BE EXERCISED IN ACCORDANCE THEREWITH. No provision of this Note is intended to or shall require or permit Holder, directly or indirectly, to take, collect or receive in money, goods or any other form, any interest (including amounts deemed by law to be interest) in excess of the maximum rate of interest permitted by applicable law. If any amount due from or paid by Maker shall be determined by a court of competent jurisdiction to be interest in excess of such maximum rate, Maker shall not be obligated to pay such excess and, if paid, such excess shall be applied against the unpaid principal balance of this Note or, if and to the extent that this Note has been paid in full, such excess shall be remitted by Holder to Maker. Holder may pursue any rights and remedies as the holder of this Note or under any security agreement, pledge, guaranty or other collateral documents, including, without limitation, the Security and Pledge Agreement, independently or concurrently; provided, however, that only Secured Party may exercise the rights granted to Secured Party under the Security Agreement; and provided further that Holder's rights hereunder must be exercised in accordance with and subject to the conditions set forth in the Intercreditor Agreement. All rights, remedies or powers herein conferred upon Holder or conferred by the Security and Pledge Agreement or any other collateral document shall, to the extent not prohibited by law, be deemed cumulative and not exclusive of any others thereof, or any other rights, remedies or powers available to Holder. No -4- 5 delay or omission of Holder to exercise any right, remedy or power shall impair the same or be construed to be a waiver of any default or an acquiescence thereto. No waiver of any default shall extend to or affect any subsequent default or impair any rights, remedies or powers available to Holder. No single or partial exercise of any right, remedy or power shall preclude other or future exercise thereof by Holder. This Note has been negotiated in substantial part in the State of Texas and all questions with respect to the Note and the rights and liabilities of the parties will be governed by the laws of Texas in all respects, including matters of construction, validity, enforcement and performance, regardless of the choice of law provisions of Texas or any other jurisdiction. Any and all disputes between the parties which may arise pursuant to this Note not resolved by them will be heard and determined before an appropriate federal or state court located in Houston, Texas. The parties hereto acknowledge that such courts have the jurisdiction to interpret and enforce the provisions of this Note and the parties waive any and all objections that they may have as to personal jurisdiction or venue in any of the above courts. JALATE,LTD., a California corporation By: /s/ FREDERICK A. FINDLEY ------------------------------------- Frederick A. Findley Vice President and Chief Financial Officer Accepted: _____________________________ John E. Drury -5- 6 all objections that they may have as to personal jurisdictions or venue in any of the above courts. JALATE, LTD., a California corporation By:_____________________________________ Frederick A. Findley Vice President and Chief Financial Officer Accepted: /s/ JOHN E. DRURY - ------------------------ John E. Drury -5- EX-10.18 5 EXHIBIT 10.18 1 EXHIBIT 10.18 JALATE,LTD. STOCK PURCHASE WARRANT THE WARRANTS EVIDENCED HEREBY AND THE SHARES OF STOCK ISSUABLE UPON EXERCISE THEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE OFFERED OR SOLD WITHOUT REGISTRATION UNLESS AN EXEMPTION FROM REGISTRATION IS AVAILABLE UNDER SUCH ACT OR THE RULES OR REGULATIONS PROMULGATED THEREUNDER WARRANT TO PURCHASE 50,000 SHARES OF COMMON STOCK AS DESCRIBED HEREIN Issue Date: January 27, 1998. Series A Warrant No. 3 Expiration Date: January 27, 2003. Sale Price: $.10 per Number of Shares. This certifies that, for value received, John E. Drury, his permitted successors and assigns ("HOLDER"), is entitled to purchase from Jalate, Ltd., a California corporation (the "COMPANY"), up to and including 50,000 fully paid and nonassessable shares (the "NUMBER OF SHARES") of the Common Stock, no par value, of the Company (the "COMMON STOCK") on the terms set forth herein at an exercise price of $1.625 per share (the "PURCHASE PRICE"). The Number of Shares and the Purchase Price may be adjusted from time to time as described in this Warrant. 1. EXERCISE. 1.1 TIME FOR EXERCISE. 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 January 27, 2003 (the "EXERCISE PERIOD"). 1.2 MANNER OF EXERCISE. This Warrant shall be exercised by delivering it to the Company with the exercise form duly completed and signed, specifying (i) the number of shares as to which the Warrant is being exercised at that time (the "EXERCISE NUMBER"), and (ii) whether the exercise is being made by "purchase" or "exchange". 1.2.1 PURCHASE. If the Holder elects the purchase option, the Holder shall simultaneously therewith deliver to the Company cash or a certified check in an amount equal to the Exercise Number multiplied by the Purchase Price, and the Holder shall be entitled to receive the full Exercise Number of shares of Common Stock. 1.2.2 EXCHANGE. If the Holder elects the exchange option, the Holder shall be entitled (without cash payment) to receive that number of shares of Common Stock having an aggregate Market Value on the date of exercise equal to the difference 2 between the Market Value of the Exercise Number of shares and the aggregate Purchase Price thereof. "MARKET VALUE" for any security on any given date means (i) the average closing price for the prior ten trading days for such security on the principal stock exchange on which such security is traded or (ii) if not so traded, the closing (or, if no closing price is available, the average of the bid and asked prices) for such period on The Nasdaq Stock Market if such security is quoted thereon or (iii) if not listed on any exchange or quoted on The Nasdaq Stock Market, such value, determined without regard to the minority shareholder position of the Holder, as may be determined in good faith by an independent appraiser selected by the Company and the Holder, which determination shall be conclusively binding on the parties. The costs of the independent appraiser shall be divided equally between the Company and the Holders. 1.3 EFFECT OF EXERCISE. Promptly (but in any case within five business days) after any exercise, the Company shall deliver to the Holder (i) duly executed certificates in the name or names specified in the exercise notice representing the aggregate number of shares issuable upon such exercise, and (ii) if this Warrant is exercised only in part, a new Warrant of like tenor representing the balance of the Number of Shares. Such certificates shall be deemed to have been issued, and the person receiving them shall be deemed to be a holder of record of such shares, as of the close of business on the date the actions required in Section 1.2 shall have been completed or, if on that date the stock transfer books of the Company are closed, as of the next business day on which the stock transfer books of the Company are open. 2. TRANSFER OF WARRANTS AND STOCK. 2.1 TRANSFER RESTRICTIONS. Neither this Warrant nor the securities issuable upon its exercise may be sold, transferred or pledged unless the Company shall have been supplied with reasonably satisfactory evidence that such transfer is not in violation of the Securities Act of 1933, as amended (the "ACT"), and any applicable state securities laws. The Company may place a legend to that effect on this Warrant, any replacement Warrant and each certificate representing shares issuable upon exercise of this Warrant. 2.2 MANNER OF TRANSFER. Upon delivery of this Warrant to the Company with the assignment form duly completed and signed, the Company will promptly (but in any case within five business days) execute and deliver to each transferee and, if applicable, the Holder, Warrants of like tenor evidencing the rights (i) of the transferee(s) to purchase the Number of Shares specified for each in the assignment forms, and (ii) of the Holder to purchase any untransferred portion, which in the aggregate shall equal the Number of Shares of the original Warrant. If this Warrant is properly assigned in compliance with this Section 2, it may be exercised by an assignee without having a new Warrant issued. 2.3 LOSS, DESTRUCTION OR MUTILATION OF WARRANT CERTIFICATES. Upon receipt of (i) evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of any Warrant and (ii) except in the case of mutilation, an indemnity or security reasonably satisfactory to the Company, the Company will promptly (but in any -2- 3 case within five business days) execute and deliver a replacement Warrant of like tenor representing the right to purchase the same Number of Shares. 3. COST OF ISSUANCES. The Company shall pay all expenses, transfer taxes and other charges payable in connection with the preparation, issuance and delivery of stock certificates or replacement Warrants, except for any transfer tax or other charge imposed as a result of (a) any issuance of certificates in any name other than the name of the Holder, or (b) any transfer of the Warrant. The Company shall not be required to issue or deliver any stock certificate or Warrant until it receives reasonably satisfactory evidence that any such tax or other charge has been paid by the Holder. 4. ANTI-DILUTION PROVISIONS. If any of the following events occur at any time hereafter during the life of the Warrant, then the Warrant immediately prior to such event shall be changed as described in order to prevent dilution: 4.1 If at any time (i) the outstanding shares of Common Stock are subdivided into a greater number of shares, then the Purchase Price will be reduced proportionately and the Number of Shares will be increased proportionately; conversely, (ii) if the outstanding shares of Common Stock are consolidated into a smaller number of shares, then the Purchase Price will be increased proportionately and the Number of Shares will be reduced proportionately. 4.2 Upon (i) any reorganization or reclassification of the Common Stock, (ii) the dissolution or liquidation of the Company, (iii) a reorganization, merger or consolidation of the Company with one or more corporations as a result of which the Company is not the surviving corporation or entity or becomes a subsidiary of another corporation or entity, or (iv) the sale of substantially all the property or more than fifty percent (50%) of the then outstanding stock of the Company to another corporation or entity (any such occurrence shall be an 'Event"), in which holders of Common Stock are entitled to receive securities and/or assets as a result of their Common Stock ownership, then upon exercise of this Warrant the Holder will have the right to receive the shares of stock, securities or assets which it would have received if the Warrant had been fully exercised as of the record date for such Event. The Company will not effect any Event unless prior to or simultaneously with its consummation the successor corporation or entity resulting from the consolidation or merger (if other than the Company) or the Company's new ultimate parent corporation or entity (if the Company becomes a subsidiary), or the corporation purchasing the Company's assets or stock, assumes the performance of the Company's obligations under this Warrant (as appropriately adjusted to reflect such consolidation, merger or sale such that the Holder's rights under this Warrant remain, as nearly as practicable, unchanged) by a binding written instrument. 4.3 If at any time the Company declares a dividend on the Common Stock payable in shares of Common Stock or securities convertible into shares of Common Stock, the Number of Shares shall be increased, as of the record date for determining which holders of Common Stock shall be entitled to receive such dividend, -3- 4 in proportion to the increase in the number of outstanding shares of Common Stock as a result of such dividend. In the event any such securities convertible into shares of Common Stock are not so converted by the time any such conversion right expires, the Number of Shares shall be proportionately decreased, as of such expiration date. 4.4 Upon each computation of an adjustment under this Section 4, the Purchase Price shall be computed to the nearest tenth of a cent and the Number of Shares shall be calculated to the nearest whole share. However, the fractional amount shall be used in calculating any future adjustments. No fractional shares of stock shall be issued in connection with the exercise of this Warrant, but the Company shall, in the case of the final exercise under this Warrant, make a cash payment for any fractional shares based on the Market Value of a share of Common Stock on the date of exercise (as defined in Section 1.2.2). 4.5 Officer's Certificate. Whenever the Number of Shares or the Purchase Price shall be adjusted as required by the provisions of this Section 4, the Company forthwith shall file in the custody of its secretary or an assistant secretary, at its principal office, a certificate of the chief financial officer of the Company showing the adjusted Number of Shares and the adjusted Purchase Price and setting forth in reasonable detail the circumstances requiring the adjustment. Each such officer's certificate shall be made available at all reasonable times during reasonable hours for inspection by the Holder. Notwithstanding any changes in the Purchase Price or the Number of Shares, this Warrant may continue to state the initial Purchase Price and the initial Number of Shares. Alternatively, the Company may elect to issue a new Warrant or Warrants of like tenor for the additional shares of Common Stock or, upon surrender of the existing Warrant, to issue a replacement Warrant evidencing all the Warrant Shares to which the Holder is entitled after such adjustments. 5. COVENANTS. The Company agrees that: 5.1 RESERVATION OF STOCK. During the period in which this Warrant may be exercised, the Company will reserve sufficient authorized but unissued securities (and, if applicable, property) to enable it to satisfy its obligations on exercise of this Warrant. If at any time the Company's authorized securities shall not be sufficient to allow the exercise of this Warrant, the Company shall take such corporate action as may be necessary to increase its authorized but unissued securities to be sufficient for such purpose. 5.2 NO LIENS, ETC. All securities that may be issued upon exercise of this Warrant will, upon issuance, be validly issued, fully paid, nonassessable and free from all taxes, liens and charges with respect to the issue thereof, and shall be listed on any exchanges on which that class of securities is listed. 5.3 NO DIMINUTION OF VALUE. The Company will not take any action to terminate this Warrant or to diminish it in value. -4- 5 5.4 FURNISH INFORMATION. The Company will promptly deliver to the Holder copies of all financial statements, reports and proxy statements which the Company shall have sent to its stockholders generally. 5.5 STOCK AND WARRANT TRANSFER Books. Except upon dissolution, liquidation or winding up or for ordinary holidays and weekends, the Company will not at any time close its stock or warrant transfer books so as to result in preventing or delaying the exercise or transfer of this Warrant. 6. STATUS OF HOLDER. 6.1 NOT SHAREHOLDER. Unless the Holder exercises this Warrant in writing, the Holder shall not be entitled to any rights (i) as a stockholder of the Company with respect to the shares as to which the Warrant is exercisable including, without limitation, the right to vote or receive dividends or other distributions, or (ii) to receive any notice of any proceedings of the Company except as otherwise provided in this Warrant. 6.2 LIMITATION OF LIABILITY. Unless the Holder exercises this Warrant in writing, the Holder's rights and privileges hereunder shall not give rise to any liability for the Purchase Price or as a stockholder of the Company, whether to the Company or its creditors. 7. REGISTRATION RIGHTS. 7.1 DEMAND REGISTRATION. This Warrant is one in a series of warrants having the same terms and identified as "Series A" (the "SERIES A WARRANTS"). Upon the request of the holders of a majority of the shares issuable upon exercise of the Series A Warrants made anytime during the Exercise Period, the Company will use all reasonable efforts on one occasion to register for resale in accordance with the Act, all shares of Common Stock issuable upon exercise of the Warrant which do not qualify for an exemption from such registration under Rule 144 under the Act or a comparable or successor exemption from registration ("REGISTRABLE SHARES"); provided that such registration must cover at least one-half of the Number of Shares covered by the original Series A Warrants. The Holder agrees to cooperate with the Company in all reasonable ways to effect such registration. The Company will use all reasonable efforts to keep such registration effective for one hundred eighty days or, if shorter, until all Registrable Shares included in the registration statement have been disposed of. The effectiveness period of the registration statement shall be subject to customary and reasonable "black-out" periods in the event of any significant corporate transactions (including material financings); provided, however, that the one hundred eighty day effectiveness period shall be extended on a day-for-day basis in connection with any such "black-out." The Purchase Price shall be decreased by $.10 per share (subject to adjustment pursuant to Section 4.1 hereof) if the Company does not file the registration statement with the Securities and Exchange Commission (the "COMMISSION") within 90 days following the making of the demand and by an additional $.10 per share (subject to - 5 - 6 adjustment pursuant to Section 4.1 hereof) for each subsequent 90-day period in which the registration statement is not filed. 7.2 "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 such Holder's 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). 7.3 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 Section 7 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. 7.4 CONDITIONS TO HOLDER'S RIGHTS. It shall be a condition of the Holder's rights under this Section 7 that: 7.4.1 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 7.4.2 Undertakings. Such Holder shall enter into any undertaking 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 -6- 7 compliance with federal and state securities laws and the rules or other requirements of the National Association of Securities Dealers, Inc., The Nasdaq Stock Market or which the Company or the underwriters may reasonably request to otherwise effectuate the offering. 7.5 Registration Procedures. If and whenever the Company is required to use its reasonable efforts to effect the registration of any Registrable Shares under the Act as provided in this Section 7, the Company will, as expeditiously as practicable: (i) notify the Holder of the Commission's requests for amending or supplementing of the registration statement and the prospectus, and prepare and file with the Commission such amendments and supplements to such registration statement and the prospectus used in connection therewith as may be necessary to keep such registration statement effective and to comply with the provisions of the Act with respect to the disposition of all Registrable Shares covered by such registration statement; (ii) furnish to the Holder such number of conformed copies of such registration statement and of each such amendment and supplement thereto (in each case including all exhibits), such number of copies of the prospectus contained in such registration statement (including each preliminary prospectus and any summary prospectus) and any other prospectus filed under Rule 424 under the Act, in conformity with the requirements of the Act, and such other documents, as the Holder may reasonably request; (iii) use its reasonable efforts (x) to register or qualify all Registrable Shares covered by such registration statement under such other securities or blue sky laws of such States of the United States of America where an exemption is not available and as the Holder shall reasonably request, (y) to keep such registration or qualification in effect for so long as such registration statement remains in effect, and (z) to take any other action which may be reasonably necessary or advisable to enable the Holder to consummate the disposition in such jurisdictions of the Registrable Shares to be sold by the Holder, except that the Company shall not for any such purpose be required to qualify generally to do business as a foreign corporation in any jurisdiction wherein it would not but for the requirements of this subdivision (iii) be obligated to be so qualified or to consent to general service of process or become subject to general taxation in any such jurisdiction; (iv) use its reasonable efforts to cause all Registrable Shares covered by such registration statement to be registered with or approved by such other federal or state governmental agencies or authorities as may be necessary in the opinion of counsel to the Company and counsel to the Holder to consummate the disposition of such Registrable Shares; (v) furnish to the Holder a signed counterpart of -7- 8 (x) an opinion of counsel for the Company, and (y) a "comfort" letter signed by the independent public accountants who have certified the Company's financial statements included or incorporated by reference in such registration statement, covering substantially the same matters with respect to such registration statement (and the prospectus included therein) and, in the case of the accountant's comfort letter, with respect to events subsequent to the date of such financial statements, as are customarily covered in opinions of issuer's counsel and in accountants' comfort letters delivered to the underwriters in underwritten public offerings of securities (and dated the dates such opinions and comfort letters are customarily dated) and, in the case of the accountant's comfort letter, such other financial matters, and in the case of the legal opinion, such other legal matters, as the Holder or the underwriters may reasonably request; (vi) notify the Holder at any time when a prospectus relating thereto is required to be delivered under the Act, upon discovery that, or upon the happening of any event as a result of which, the prospectus included in such 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, and at the request of the Holder promptly prepare and furnish to him a reasonable number of copies of a supplement to or an amendment of such prospectus as may be necessary so that, as thereafter delivered to the purchasers of such securities, such prospectus shall not include an untrue statement of a material fact or omit to state a 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; and (vii) otherwise use its reasonable efforts to comply with all applicable rules and regulations of the Commission. The Holder agrees by acquisition of such Registrable Shares that upon receipt of any written notice from the Company of the happening of any event of the kind described in subdivision (vi) of this Section 7.5 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 contemplated by subdivision (vi) of this Section 7.5 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. Nothing contained in this Section 7.5 shall require or obligate the Company to cause any registration statement pursuant to which the Holder has exercised its -8- 9 "piggyback" registration rights pursuant to Section 7.2 hereof to become effective or, if declared effective, to maintain the effectiveness of such registration statement. 7.6 Indemnification. (a) 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, the Holder, its directors, officers, partners, heirs, personal representatives, agents and affiliates and each other person, if any, who controls the 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 the 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 the 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 the 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 the Holder. (b) Indemnification by the Holder. As a condition to including any Registrable Shares in any registration statement, the Company shall have received an undertaking reasonably satisfactory to it from each Holder, to indemnify and hold -9- 10 harmless (in the same manner and to the same extent as set forth in subdivision (a) of this Section 7.6) 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 the 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 7.6(b) shall be limited to the amount of proceeds received by the 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 the Holder. (c) 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 subdivisions of this Section 7.6, 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 subdivisions of this Section 7.6, 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 -10- 11 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. (d) Contribution. If the indemnification provided for in this Section 7.6 shall for any reason be held by a court to be unavailable to an indemnified party under subparagraph (a) or (b) 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 subparagraph (a) or (b) hereof, the indemnified party and the indemnifying party under subparagraph (a) or (b) 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), (i) 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 (ii) if the allocation provided by clause (i) 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. (e) Other Indemnification. Indemnification and contribution similar to that specified in the Preceding subdivisions of this Section 7.6 (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. (f) Indemnification Payments. The indemnification and contribution required by this Section 7.6 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. 8. GENERAL PROVISIONS. 8.1 COMPLETE AGREEMENT; MODIFICATIONS. This Warrant and any documents referred to herein or executed contemporaneously herewith constitute the parties' entire agreement with respect to the subject matter hereof and supersede all agreements, -11- 12 representations, warranties, statements, promises and understandings, whether oral or written, with respect to the subject matter hereof. This Warrant may not be amended, altered or modified except by a writing signed by the parties. 8.2 ADDITIONAL DOCUMENTS. Each party hereto agrees to execute any and all further documents and writings and to perform such other actions which may be or become necessary or expedient to effectuate and carry out this Warrant. 8.3 NOTICES. All notices under this Warrant shall be in writing and shall be delivered by personal service or telecopy or certified mail, postage prepaid, to such address as may be designated from time to time by the relevant party, and which shall initially be: Jalate, Ltd. 6557 Flotilla Street City of Commerce, California 90040 Fax: (213) 728-3752 Attn: Frederick A. Findley Vice President-Finance and Chief Financial Officer John E. Drury c/o USA Waste Services, Inc. First City Tower , Suite 4000 Houston, Texas 77002 Fax: (713) 512-6323 Any notice sent by certified mail shall be deemed to have been given five (5) business days after the date on which it is mailed. All other notices shall 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. 8.4 NO THIRD-PARTY BENEFITS; SUCCESSORS AND ASSIGNS. None of the provisions of this Warrant shall be for the benefit of, or enforceable by, any third-party beneficiary. Except as provided herein to the contrary, this Warrant shall be binding upon and inure to the benefit of the parties, their respective successors and permitted assigns. 8.5 DISPUTES. 8.5.1 GOVERNING LAW; JURISDICTION. This Warrant concerns a California business and all questions with respect to the Warrant and the rights and liabilities of the parties will be governed by the laws of California in all respects, including matters of construction, validity, enforcement and performance, regardless of the choice of law provisions of California or any other jurisdiction. Any and all disputes between the parties which may arise pursuant to this Warrant and not resolved by them will be heard -12- 13 and determined before an appropriate federal or state court located in Houston, Texas. The parties hereto acknowledge that such courts have the jurisdiction to interpret and enforce the provisions of this Warrant and the parties waive any and all objections that they may have as to personal jurisdiction or venue in any of the above courts. 8.5.2 ATTORNEYS' FEES. Should any litigation be commenced (including any proceedings in a bankruptcy court) between the parties hereto or their representatives concerning any provisions of this Warrant or the rights and duties of any person or entity hereunder, the party or parties prevailing in such proceeding shall be entitled, in addition to such other relief as may be granted, to the reasonable attorneys' fees and court costs incurred by reason of such litigation. 8.6 WAIVERS STRICTLY CONSTRUED. With regard to any power, remedy or right provided herein or otherwise available to any party hereunder (i) no waiver or extension of time shall be effective unless expressly contained in a writing signed by the waiving party; and (ii) no alteration, modification or impairment shall be implied by reason of any previous waiver, extension of time, delay or omission in exercise, or other indulgence. 8.7 RULES OF CONSTRUCTION. 8.7.1 HEADINGS. The Article and Section headings in this Warrant are inserted only as a matter of convenience, and in no way define, limit, or extend or interpret the scope of this Warrant or of any particular Article or Section. 8.7.2 TENSE AND CASE. Throughout this Warrant, as the context may require, references to any word used in one tense or case shall include all other appropriate tenses or cases. 8.7.3 SEVERABILITY. The validity, legality or enforceability of the remainder of this Warrant will not be affected even if one or more of the provisions of this Warrant are held to be invalid, illegal or unenforceable in any respect. 8.7.4 WARRANT NEGOTIATED. The parties hereto are sophisticated and have been represented throughout this transaction by lawyers who have carefully negotiated the provisions hereof. As a consequence, the parties do not believe that the presumptions of any laws or rules relating to the interpretation of contracts against the drafter of any particular clause should be applied in this case and therefore waive their effects. -13- 14 IN WITNESS WHEREOF, the Company has caused this Warrant to be duly executed effective as of January 27, 1998. JALATE, LTD., a California corporation By: /s/ FREDERICK A. FINDLEY ------------------------------------- Frederick A. Findley Vice President and Chief Financial Officer -14- 15 ASSIGNMENT FORM FOR VALUE RECEIVED,____________________________________ hereby sells, assigns and transfers to the transferee named below [the rights to purchase __________ of the Number of Shares under] this Warrant, together with all rights, title and interest therein. [The rights to purchase the remaining Number of Shares shall remain the property of the undersigned.] This includes a transfer of the registration rights in the Warrant; provided, however, that in the case of a partial assignment of this Warrant, both the Holder and the transferee shall have the registration rights set forth in Section 7 of the Warrant. Dated:_________________________ [NAME OF HOLDER] By______________________________________ Signature Name:___________________________________ (Please Print) Address:________________________________ ________________________________ ________________________________ Employer Identification Number, Social Security Number or other identifying number:_____________________ TRANSFEREE: Name:_______________________________ (Please Print) Address:____________________________ ____________________________ ____________________________ Employer Identification Number, Social Security Number or other identifying number:_________________ -15- 16 EXERCISE FORM To Be Executed Upon Exercise of Warrant The undersigned hereby exercises the Warrant with regard to _____________ shares of Common Stock and herewith [makes payment of the purchase price in full] [or requests that the Company exchange the Warrant as provided in Section 1.2.2 of the Warrant]. The undersigned requests that certificate(s) for such shares [and the Warrant for the unexercised portion of this Warrant] be issued (to the Holder] [in the name set forth below]. Dated:_________________________ [NAME OF HOLDER] By______________________________________ Signature Name:___________________________________ (Please Print) Address:________________________________ ________________________________ ________________________________ Employer Identification Number, Social Security Number or other identifying number:_____________________ TRANSFEREE: Name:_______________________________ (Please Print) Address:____________________________ ____________________________ ____________________________ Employer Identification Number, Social Security Number or other identifying number:_________________ -16- EX-10.19 6 EXHIBIT 10.19 1 EXHIBIT 10.19 SUBORDINATED SECURED PROMISSORY NOTE $237,500 January 27, 1998 FOR VALUE RECEIVED, JALATE, LTD., a California corporation (herein, "MAKER"), hereby promises to pay to Don A. Sanders (herein, "HOLDER") or to order the principal sum of Two Hundred Thirty Seven Thousand Five Hundred Dollars ($237,500), with interest on the unpaid principal balance outstanding from time to time, computed at a per annum rate of ten percent (10%), commencing as from the date hereof until January 31, 2000 ("MATURITY DATE"), when all amounts then remaining unpaid, together with all accrued and unpaid interest thereon, shall be due and payable. Interest accrued hereon shall be paid on the last business day of January, April, July and October, commencing April 30, 1998. The principal amount hereof shall be repaid in four (4) equal quarterly installments, commencing as from April 30, 1999, and continuing until the Maturity Date when all other amounts then remaining unpaid (principal, interest and other) shall become due and payable. All payments are to be made in lawful money of the United States of America to Holder at 3100 Texas Commerce Tower, Houston, Texas 77002 (c/o Sanders Morris Mundy Inc., Attn: Chris Hoeller) or at such other place as Holder shall designate in writing to Maker. Upon Maker's failure to pay any amount owing hereon as and when due, such amount due hereunder together with the accrued interest thereon shall to the extent not in violation of any applicable laws, bear interest at five percent (5%) per annum in excess of the rate otherwise applicable thereto ("DEFAULT RATE") until such amount is paid, it 2 being acknowledged and agreed that the imposition of a higher rate of interest as herein provided for failure to pay an amount owing hereunder shall not preclude Holder from accelerating the entire amount due hereunder as a result of such non-payment, and upon any such acceleration, the amount so accelerated shall, to the extent not in violation of any applicable laws, bear interest at the Default Rate until full payment of all such accelerated amounts. By acceptance of this Note as evidence of Maker's obligation to repay to Holder the amounts evidenced hereby, Holder acknowledges and agrees that all amounts owing hereunder (principal, interest and other) shall be subordinated and be junior in right of payment to all of Maker's obligations to Heller Financial, Inc. ("HELLER") and/or Wells Fargo HSBC Trade Bank N.A. ("WELLS FARGO") relating to present or future loans or other credit accommodations made to Maker. If an event of default under Maker's loan agreements with either Heller or Wells Fargo has occurred and is continuing, then Holder shall not be entitled to and shall not accept any payment from Maker with respect to this Note unless and until (i) all of Maker's obligations to Heller and/or Wells Fargo, as applicable, under such agreements have been satisfied in full or (ii) Heller and/or Wells Fargo, as applicable, consents in writing thereto; provided, however, that nothing contained herein shall be deemed to prohibit the Secured Party (defined below) from exercising its rights under the Security and Pledge Agreement referred to below (including, without limitation, foreclosing upon any or all of the collateral provided for therein). Further, by acceptance hereof, Holder hereby waives any and all rights, defenses or protections that may otherwise be available to him as a surety under -2- 3 applicable law, including, without limitation, any right, defense or protection available to sureties by reason of the Texas Civil Code. All persons or corporations now or at any time liable for payment of the indebtedness evidenced hereby for themselves, their heirs, legal representatives, successors and assigns, respectively, expressly waive presentment for payment, demand, notice of dishonor, protest, notice of protest and diligence in collection, and consent that the time of said payments may be extended by Holder without in any way modifying, altering, releasing, affecting, or limiting their respective liability for the indebtedness evidenced hereby. If this Note is not paid when due (whether at scheduled maturity, by acceleration or otherwise), Maker promises to pay all costs of collection including, without limitation, reasonable attorneys' fees, incurred by Holder, whether or not suit is filed hereon. This Note may be prepaid by Maker, in whole at any time or in part from time to time, without payment of any premium or penalty on fifteen (15) days prior notice to Holder of such election to prepay. In addition, Maker agrees to use the net proceeds of any equity offering to prepay this Note. Maker also agrees to use a portion of the proceeds of this Note to satisfy in full its current financial obligations to Air Shop Ltd., a New York corporation ("AIR SHOP"), pursuant to that certain letter agreement between Maker and Air Shop dated October 17, 1997, with regard to the acquisition of certain shares of the capital stock of Air Shop by Maker. Maker's obligations under this Note are secured by a Security and Pledge Agreement between Maker and Secured Party (as therein defined) dated as of even date -3- 4 herewith. The due date of the Note may be accelerated in accordance with the terms of such Security and Pledge Agreement. HOLDER'S RIGHTS UNDER THIS NOTE ARE ALSO SUBJECT TO AN INTERCREDITOR AGREEMENT DATED AS OF EVEN DATE HEREWITH AND MAY ONLY BE EXERCISED IN ACCORDANCE THEREWITH. No provision of this Note is intended to or shall require or permit Holder, directly or indirectly, to take, collect or receive in money, goods or any other form, any interest (including amounts deemed by law to be interest) in excess of the maximum rate of interest permitted by applicable law. If any amount due from or paid by Maker shall be determined by a court of competent jurisdiction to be interest in excess of such maximum rate, Maker shall not be obligated to pay such excess and, if paid, such excess shall be applied against the unpaid principal balance of this Note or, if and to the extent that this Note has been paid in full, such excess shall be remitted by Holder to Maker. Holder may pursue any rights and remedies as the holder of this Note or under any security agreement, pledge, guaranty or other collateral documents, including, without limitation, the Security and Pledge Agreement, independently or concurrently; provided, however, that only Secured Party may exercise the rights granted to Secured Party under the Security Agreement, and provided further that Holder's rights hereunder must be exercised in accordance with and subject to the conditions set forth in the Intercreditor Agreement. All rights, remedies or powers herein conferred upon Holder or conferred by the Security and Pledge Agreement or any other collateral document shall, to the extent not prohibited by law, be deemed cumulative and not exclusive of any others thereof, or any other rights, remedies or powers available to Holder. No -4- 5 delay or omission of Holder to exercise any right, remedy or power shall impair the same or be construed to be a waiver of any default or an acquiescence thereto. No waiver of any default shall extend to or affect any subsequent default or impair any rights, remedies or powers available to Holder. No single or partial exercise of any right, remedy or power shall preclude other or future exercise thereof by Holder. This Note has been negotiated in substantial part in the State of Texas and all questions with respect to the Note and the rights and liabilities of the parties will be governed by the laws of Texas in all respects, including matters of construction, validity, enforcement and performance, regardless of the choice of law provisions of Texas or any other jurisdiction. Any and all disputes between the parties which may arise pursuant to this Note not resolved by them will be heard and determined before an appropriate federal or state court located in Houston, Texas. The parties hereto acknowledge that such courts have the jurisdiction to interpret and enforce the provisions of this Note and the parties waive any and all objections that they may have as to personal jurisdiction or venue in any of the above courts. JALATE,LTD., a California corporation By: /s/ FREDERICK A. FINDLEY ----------------------------------- Frederick A. Findley Vice President and Chief Financial Officer Accepted: - --------------------------------- Don A. Sanders -5- 6 all objections that they may have as to personal jurisdiction or venue in any of the above courts. JALATE, LTD. a California corporation By: ----------------------------------- Frederick A. Findley Vice President and Chief Financial Officer Accepted: - ----------------------------------- Don A. Sanders -5- EX-10.20 7 EXHIBIT 10.20 1 EXHIBIT 10.20 JALATE,LTD. STOCK PURCHASE WARRANT THE WARRANTS EVIDENCED HEREBY AND THE SHARES OF STOCK ISSUABLE UPON EXERCISE THEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE OFFERED OR SOLD WITHOUT REGISTRATION UNLESS AN EXEMPTION FROM REGISTRATION IS AVAILABLE UNDER SUCH ACT OR THE RULES OR REGULATIONS PROMULGATED THEREUNDER WARRANT TO PURCHASE 125,000 SHARES OF COMMON STOCK AS DESCRIBED HEREIN Issue Date: January 27, 1998. Series A Warrant No. 1 Expiration Date: January 27, 2003. Sale Price: $.10 per Number of Shares. This certifies that, for value received, Don A. Sanders, his permitted successors and assigns ("HOLDER"), is entitled to purchase from Jalate, Ltd., a California corporation (the "COMPANY"), up to and including 125,000 fully paid and Nonassessable shares (the "NUMBER OF SHARES") of the Common Stock, no par value, of the Company (the "COMMON STOCK") on the terms set forth herein at an exercise price of $1.625 per share (the "PURCHASE PRICE"). The Number of Shares and the Purchase Price may be adjusted from time to time as described in this Warrant. 1 . EXERCISE. 1.1 TIME FOR EXERCISE. 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 January 27, 2003 (the "Exercise Period"). 1.2 MANNER OF EXERCISE. This Warrant shall be exercised by delivering it to the Company with the exercise form duly completed and signed, specifying (i) the number of shares as to which the Warrant is being exercised at that time (the "Exercise Number"), and (ii) whether the exercise is being made by "purchase" or "exchange". 1.2.1 PURCHASE. If the Holder elects the purchase option, the Holder shall simultaneously therewith deliver to the Company cash or a certified check in an amount equal to the Exercise Number multiplied by the Purchase Price, and the Holder shall be entitled to receive the full Exercise Number of shares of Common Stock. 1.2.2 EXCHANGE. If the Holder elects the exchange option, the Holder shall be entitled (without cash payment) to receive that number of shares of Common Stock having an aggregate Market Value on the date of exercise equal to the difference 2 between the Market Value of the Exercise Number of shares and the aggregate Purchase Price thereof. "MARKET VALUE" for any security on any given date means (i) the average closing price for the prior ten trading days for such security on the principal stock exchange on which such security is traded or (ii) if not so traded, the closing (or, if no closing price is available, the average of the bid and asked prices) for such period on The Nasdaq Stock Market if such security is quoted thereon or (iii) if not listed on any exchange or quoted on The Nasdaq Stock Market, such value, determined without regard to the minority shareholder position of the Holder, as may be determined in good faith by an independent appraiser selected by the Company and the Holder, which determination shall be conclusively binding on the parties. The costs of the independent appraiser shall be divided equally between the Company and the Holders. 1.3 EFFECT OF EXERCISE. Promptly (but in any case within five business days) after any exercise, the Company shall deliver to the Holder (i) duly executed certificates in the name or names specified in the exercise notice representing the aggregate number of shares issuable upon such exercise, and (ii) if this Warrant is exercised only in part, a new Warrant of like tenor representing the balance of the Number of Shares. Such certificates shall be deemed to have been issued, and the person receiving them shall be deemed to be a holder of record of such shares, as of the close of business on the date the actions required in Section 1.2 shall have been completed or, if on that date the stock transfer books of the Company are closed, as of the next business day on which the stock transfer books of the Company are open. 2. TRANSFER OF WARRANTS AND STOCK. 2.1 TRANSFER RESTRICTIONS. Neither this Warrant nor the securities issuable upon its exercise may be sold, transferred or pledged unless the Company shall have been supplied with reasonably satisfactory evidence that such transfer is not in violation of the Securities Act of 1933, as amended (the "ACT"), and any applicable state securities laws. The Company may place a legend to that effect on this Warrant, any replacement Warrant and each certificate representing shares issuable upon exercise of this Warrant. 2.2 MANNER OF TRANSFER. Upon delivery of this Warrant to the Company with the assignment form duly completed and signed, the Company will promptly (but in any case within five business days) execute and deliver to each transferee and, if applicable, the Holder, Warrants of like tenor evidencing the rights (i) of the transferees) to purchase the Number of Shares specified for each in the assignment forms, and (ii) of the Holder to purchase any untransferred portion, which in the aggregate shall equal the Number of Shares of the original Warrant. If this Warrant is properly assigned in compliance with this Section 2, it may be exercised by an assignee without having a new Warrant issued. 2.3 LOSS, DESTRUCTION OR MUTILATION OF WARRANT CERTIFICATES. Upon receipt of (i) evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of any Warrant and (ii) except in the case of mutilation, an indemnity or security reasonably satisfactory to the Company, the Company will promptly (but in any -2- 3 case within five business days) execute and deliver a replacement Warrant of like tenor representing the right to purchase the same Number of Shares. 3. COST OF ISSUANCES. The Company shall pay all expenses, transfer taxes and other charges payable in connection with the preparation, issuance and delivery of stock certificates or replacement Warrants, except for any transfer tax or other charge imposed as a result of (a) any issuance of certificates in any name other than the name of the Holder, or (b) any transfer of the Warrant. The Company shall not be required to issue or deliver any stock certificate or Warrant until it receives reasonably satisfactory evidence that any such tax or other charge has been paid by the Holder. 4. ANTI-DILUTION PROVISIONS. If any of the following events occur at any time hereafter during the life of the Warrant, then the Warrant immediately prior to such event shall be changed as described in order to prevent dilution: 4.1 If at any time (i) the outstanding shares of Common Stock are subdivided into a greater number of shares, then the Purchase Price will be reduced proportionately and the Number of Shares will be increased proportionately; conversely, (ii) if the outstanding shares of Common Stock are consolidated into a smaller number of shares, then the Purchase Price will be increased proportionately and the Number of Shares will be reduced proportionately. 4.2 Upon (i) any reorganization or reclassification of the Common Stock, (ii) the dissolution or liquidation of the Company, (iii) a reorganization, merger or consolidation of the Company with one or more corporations as a result of which the Company is not the surviving corporation or entity or becomes a subsidiary of another corporation or entity, or (iv) the sale of substantially all the property or more than fifty percent (50%) of the then outstanding stock of the Company to another corporation or entity (any such occurrence shall be an "Event"), in which holders of Common Stock are entitled to receive securities and/or assets as a result of their Common Stock ownership, then upon exercise of this Warrant the Holder will have the right to receive the shares of stock, securities or assets which it would have received if the Warrant had been fully exercised as of the record date for such Event. The Company will not effect any Event unless prior to or simultaneously with its consummation the successor corporation or entity resulting from the consolidation or merger (if other than the Company) or the Company's new ultimate parent corporation or entity (if the Company becomes a subsidiary), or the corporation purchasing the Company's assets or stock, assumes the performance of the Company's obligations under this Warrant (as appropriately adjusted to reflect such consolidation, merger or sale such that the Holder's rights under this Warrant remain, as nearly as practicable, unchanged) by a binding written instrument. 4.3 If at any time the Company declares a dividend on the Common Stock payable in shares of Common Stock or securities convertible into shares of Common Stock, the Number of Shares shall be increased, as of the record date for determining which holders of Common Stock shall be entitled to receive such dividend, -3- 4 in proportion to the increase in the number of outstanding shares of Common Stock as a result of such dividend. In the event any such securities convertible into shares of Common Stock are not so converted by the time any such conversion right expires, the Number of Shares shall be proportionately decreased, as of such expiration date. 4.4 Upon each computation of an adjustment under this Section 4, the Purchase Price shall be computed to the nearest tenth of a cent and the Number of Shares shall be calculated to the nearest whole share. However, the fractional amount shall be used in calculating any future adjustments. No fractional shares of stock shall be issued in connection with the exercise of this Warrant, but the Company shall, in the case of the final exercise under this Warrant, make a cash payment for any fractional shares based on the Market Value of a share of Common Stock on the date of exercise (as defined in Section 1.2.2). 4.5 OFFICER'S CERTIFICATE. Whenever the Number of Shares or the Purchase Price shall be adjusted as required by the provisions of this Section 4, the Company forthwith shall file in the custody of its secretary or an assistant secretary, at its principal office, a certificate of the chief financial officer of the Company showing the adjusted Number of Shares and the adjusted Purchase Price and setting forth in reasonable detail the circumstances requiring the adjustment. Each such officer's certificate shall be made available at all reasonable times during reasonable hours for inspection by the Holder. Notwithstanding any changes in the Purchase Price or the Number of Shares, this Warrant may continue to state the initial Purchase Price and the initial Number of Shares. Alternatively, the Company may elect to issue a new Warrant or Warrants of like tenor for the additional shares of Common Stock or, upon surrender of the existing Warrant, to issue a replacement Warrant evidencing all the Warrant Shares to which the Holder is entitled after such adjustments. 5. COVENANTS. The Company agrees that: 5.1 RESERVATION OF STOCK. During the period in which this Warrant may be exercised. the Company will reserve sufficient authorized but unissued securities (and, if applicable, property) to enable it to satisfy its obligations on exercise of this Warrant. If at any time the Company's authorized securities shall not be sufficient to allow the exercise of this Warrant, the Company shall take such corporate action as may be necessary to increase its authorized but unissued securities to be sufficient for such purpose. 5.2 NO LIENS, ETC. All securities that may be issued upon exercise of this Warrant will, upon issuance, be validly issued, fully paid, nonassessable and free from all taxes, liens and charges with respect to the issue thereof, and shall be listed on any exchanges on which that class of securities is listed. 5.3 NO DIMINUTION OF VALUE. The Company will not take any action to terminate this Warrant or to diminish it in value. -4- 5 5.4 FURNISH INFORMATION. The Company will promptly deliver to the Holder copies of all financial statements, reports and proxy statements which the Company shall have sent to its stockholders generally. 5.5 STOCK AND WARRANT TRANSFER BOOKS. Except upon dissolution, liquidation or winding up or for ordinary holidays and weekends, the Company will not at any time close its stock or warrant transfer books so as to result in preventing or delaying the exercise or transfer of this Warrant. 6. STATUS OF HOLDER. 6.1 NOT SHAREHOLDER. Unless the Holder exercises this Warrant in writing, the Holder shall not be entitled to any rights (i) as a stockholder of the Company with respect to the shares as to which the Warrant is exercisable including, without limitation, the right to vote or receive dividends or other distributions, or (ii) to receive any notice of any proceedings of the Company except as otherwise provided in this Warrant. 6.2 LIMITATION OF LIABILITY. Unless the Holder exercises this Warrant in writing, the Holder's rights and privileges hereunder shall not give rise to any liability for the Purchase Price or as a stockholder of the Company, whether to the Company or its creditors. 7. REGISTRATION RIGHTS. 7.1 DEMAND REGISTRATION. This Warrant is one in a series of warrants having the same terms and identified as "Series A" (the "SERIES A WARRANTS"). Upon the request of the holders of a majority of the shares issuable upon exercise of the Series A Warrants made anytime during the Exercise Period, the Company will use all reasonable efforts on one occasion to register for resale in accordance with the Act, all shares of Common Stock issuable upon exercise of the Warrant which do not qualify for an exemption from such registration under Rule 144 under the Act or a comparable or successor exemption from registration ("REGISTRABLE SHARES"); provided that such registration must cover at least one-half of the Number of Shares covered by the original Series A Warrants. The Holder agrees to cooperate with the Company in all reasonable ways to effect such registration. The Company will use all reasonable efforts to keep such registration effective for one hundred eighty days or, if shorter, until all Registrable Shares included in the registration statement have been disposed of. The effectiveness period of the registration statement shall be subject to customary and reasonable "blackout" periods in the event of any significant corporate transactions (including material financings); provided, however, that the one hundred eighty day effectiveness period shall be extended on a day-for-day basis in connection with any such "black-out." The Purchase Price shall be decreased by $.10 per share (subject to adjustment pursuant to Section 4.1 hereof) if the Company does not file the registration statement with the Securities and Exchange Commission (the "COMMISSION") within 90 days following the making of the demand and by an additional $.10 per share (subject to -5- 6 adjustment pursuant to Section 4.1 hereof) for each subsequent 90-day period in which the registration statement is not filed. 7.2 "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 such Holder's 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). 7.3 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 Section 7 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. 7.4 CONDITIONS TO HOLDER'S RIGHTS. It shall be a condition of the Holder's rights under this Section 7 that: 7.4.1 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 7.4.2 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 -6- 7 compliance with federal and state securities laws and the rules or other requirements of the National Association of Securities Dealers, Inc., The Nasdaq Stock Market or which the Company or the underwriters may reasonably request to otherwise effectuate the offering. 7.5 Registration Procedures. If and whenever the Company is required to use its reasonable efforts to effect the registration of any Registrable Shares under the Act as provided in this Section 7, the Company will, as expeditiously as practicable: (i) notify the Holder of the Commission's requests for amending or supplementing of the registration statement and the prospectus, and prepare and file with the Commission such amendments and supplements to such registration statement and the prospectus used in connection therewith as may be necessary to keep such registration statement effective and to comply with the provisions of the Act with respect to the disposition of all Registrable Shares covered by such registration statement; (ii) furnish to the Holder such number of conformed copies of such registration statement and of each such amendment and supplement thereto (in each case including all exhibits), such number of copies of the prospectus contained in such registration statement (including each preliminary prospectus and any summary prospectus) and any other prospectus filed under Rule 424 under the Act, in conformity with the requirements of the Act, and such other documents, as the Holder may reasonably request; (iii) use its reasonable efforts (x) to register or qualify all Registrable Shares covered by such registration statement under such other securities or blue sky laws of such States of the United States of America where an exemption is not available and as the Holder shall reasonably request, (y) to keep such registration or qualification in effect for so long as such registration statement remains in effect, and (z) to take any other action which may be reasonably necessary or advisable to enable the Holder to consummate the disposition in such jurisdictions of the Registrable Shares to be sold by the Holder, except that the Company shall not for any such purpose be required to qualify generally to do business as a foreign corporation in any jurisdiction wherein it would not but for the requirements of this subdivision (iii) be obligated to be so qualified or to consent to general service of process or become subject to general taxation in any such jurisdiction; (iv) use its reasonable efforts to cause all Registrable Shares covered by such registration statement to be registered with or approved by such other federal or state governmental agencies or authorities as may be necessary in the opinion of counsel to the Company and counsel to the Holder to consummate the disposition of such Registrable Shares; (v) furnish to the Holder a signed counterpart of -7- 8 (x) an opinion of counsel for the Company, and (y) a "comfort" letter signed by the independent public accountants who have certified the Company's financial statements included or incorporated by reference in such registration statement, covering substantially the same matters with respect to such registration statement (and the prospectus included therein) and, in the case of the accountant's comfort letter, with respect to events subsequent to the date of such financial statements, as are customarily covered in opinions of issuer's counsel and in accountants' comfort letters delivered to the underwriters in underwritten public offerings of securities (and dated the dates such opinions and comfort letters are customarily dated) and, in the case of the accountant's comfort letter, such other financial matters, and in the case of the legal opinion, such other legal matters, as the Holder or the underwriters may reasonably request; (vi) notify the Holder at any time when a prospectus relating thereto is required to be delivered under the Act, upon discovery that, or upon the happening of any event as a result of which, the prospectus included in such 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, and at the request of the Holder promptly prepare and furnish to him a reasonable number of copies of a supplement to or an amendment of such prospectus as may be necessary so that, as thereafter delivered to the purchasers of such securities, such prospectus shall not include an untrue statement of a material fact or omit to state a 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; and (vii) otherwise use its reasonable efforts to comply with all applicable rules and regulations of the Commission. The Holder agrees by acquisition of such Registrable Shares that upon receipt of any written notice from the Company of the happening of any event of the kind described in subdivision (vi) of this Section 7.5 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 contemplated by subdivision (vi) of this Section 7.5 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. Nothing contained in this Section 7.5 shall require or obligate the Company to cause any registration statement pursuant to which the Holder has exercised its -8- 9 "piggyback" registration rights pursuant to Section 7.2 hereof to become effective or, if declared effective, to maintain the effectiveness of such registration statement. 7.6 Indemnification. (a) 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, the Holder, its directors, officers, partners, heirs, personal representatives, agents and affiliates and each other person, if any, who controls the 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 the 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 the 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 the 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 the Holder. (b) Indemnification by the Holder. As a condition to including any Registrable Shares in any registration statement, the Company shall have received an undertaking reasonably satisfactory to it from each Holder, to indemnify and hold -9- 10 harmless (in the same manner and to the same extent as set forth in subdivision (a) of this Section 7.6) 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 the 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 7.6(b) shall be limited to the amount of proceeds received by the 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 the Holder. (c) 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 subdivisions of this Section 7.6, 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 subdivisions of this Section 7.6, 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 -10- 11 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. (d) CONTRIBUTION. If the indemnification provided for in this Section 7.6 shall for any reason be held by a court to be unavailable to an indemnified party under subparagraph (a) or (b) 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 subparagraph (a) or (b) hereof, the indemnified party and the indemnifying party under subparagraph (a) or (b) 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), (i) 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 (ii) if the allocation provided by clause (i) 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. (e) OTHER INDEMNIFICATION. Indemnification and contribution similar to that specified in the preceding subdivisions of this Section 7.6 (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. (f) INDEMNIFICATION PAYMENTS. The indemnification and contribution required by this Section 7.6 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, darnage or liability is incurred. 8. GENERAL PROVISIONS. 8.1 COMPLETE AGREEMENT; MODIFICATIONS. This Warrant and any documents referred to herein or executed contemporaneously herewith constitute the parties' entire agreement with respect to the subject matter hereof and supersede all agreements, -11- 12 representations, warranties, statements, promises and understandings, whether oral or written, with respect to the subject matter hereof. This Warrant may not be amended, altered or modified except by a writing signed by the parties. 8.2 ADDITIONAL DOCUMENTS. Each party hereto agrees to execute any and all further documents and writings and to perform such other actions which may be or become necessary or expedient to effectuate and carry out this Warrant. 8.3 NOTICES. All notices under this Warrant shall be in writing and shall be delivered by personal service or telecopy or certified mail, postage prepaid, to such address as may be designated from time to time by the relevant party, and which shall initially be: Jalate, Ltd. 6557 Flotilla Street City of Commerce, California 90040 Fax: (213) 728-3752 Attn: Frederick A. Findley Vice President-Finance and Chief Financial Officer Don A. Sanders c/o Sanders Morris Mundy Inc. 3100 Texas Commerce Tower Houston, Texas 77002 Fax: (713) 250-4298 Any notice sent by certified mail shall be deemed to have been given five (5) business days after the date on which it is mailed. All other notices shall 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. 8.4 NO THIRD-PARTY BENEFITS. Successors and Assigns. None of the provisions of this Warrant shall be for the benefit of, or enforceable by, any third-party beneficiary. Except as provided herein to the contrary, this Warrant shall be binding upon and inure to the benefit of the parties, their respective successors and permitted assigns. 8.5 DISPUTES. 8.5.1 GOVERNING LAW; JURISDICTION. This Warrant concerns a California business and all questions with respect to the Warrant and the rights and liabilities of the parties will be governed by the laws of California in all respects, including matters of construction, validity, enforcement and performance, regardless of the choice of law provisions of California or any other jurisdiction. Any and all disputes between the -12- 13 parties which may arise pursuant to this Warrant and not resolved by them will be heard and determined before an appropriate federal or state court located in Houston, Texas. The parties hereto acknowledge that such courts have the jurisdiction to interpret and enforce the provisions of this Warrant and the parties waive any and all objections that they may have as to personal jurisdiction or venue in any of the above courts. 8.5.2 ATTORNEYS' FEES. Should any litigation be commenced (including any proceedings in a bankruptcy court) between the parties hereto or their representatives concerning any provisions of this Warrant or the rights and duties of any person or entity hereunder, the party or parties prevailing in such proceeding shall be entitled, in addition to such other relief as may be granted, to the reasonable attorneys' fees and court costs incurred by reason of such litigation. 8.6 WAIVERS STRICTLY CONSTRUED. With regard to any power, remedy or right provided herein or otherwise available to any party hereunder (i) no waiver or extension of time shall be effective unless expressly contained in a writing signed by the waiving party; and (ii) no alteration, modification or impairment shall be implied by reason of any previous waiver, extension of time, delay or omission in exercise, or other indulgence. 8.7 RULES OF CONSTRUCTION. 8.7.1 HEADINGS. The Article and Section headings in this Warrant are inserted only as a matter of convenience, and in no way define, limit, or extend or interpret the scope of this Warrant or of any particular Article or Section. 8.7.2 TENSE AND CASE. Throughout this Warrant, as the context may require, references to any word used in one tense or case shall include all other appropriate tenses or cases. 8.7.3 SEVERABILITY. The validity, legality or enforceability of the remainder of this Warrant will not be affected even if one or more of the provisions of this Warrant are held to be invalid, illegal or unenforceable in any respect. 8.7.4 WARRANT NEGOTIATED. The parties hereto are sophisticated and have been represented throughout this transaction by lawyers who have carefully negotiated the provisions hereof. As a consequence, the parties do not believe that the presumptions of any laws or rules relating to the interpretation of contracts against the drafter of any particular clause should be applied in this case and therefore waive their effects. -13- 14 IN WITNESS WHEREOF, the Company has caused this Warrant to be duly executed effective as of January 27, 1998. JALATE, LTD., a California corporation By: /s/ FREDERICK A. FINDLEY --------------------------- Frederick A. Findley Vice President and Chief Financial Officer -14- 15 ASSIGNMENT FORM FOR VALUE RECEIVED, _________________________________hereby sells, assigns and transfers to the transferee named below [the rights to purchase __________________________ of the Number of Shares under] this Warrant, together with all rights, title and interest therein. [The rights to purchase the remaining Number of Shares shall remain the property of the undersigned.] This includes a transfer of the registration rights in the Warrant; provided, however, that in the case of a partial assignment of this Warrant, both the Holder and the transferee shall have the registration rights set forth in Section 7 of the Warrant. Dated: ________________ [NAME OF HOLDER] By ------------------------------------ Signature Name: ---------------------------------- (Please Print) Address: ------------------------------- ------------------------------- ------------------------------- Employer Identification Number, Social Security Number or other identifying number: _______________ TRANSFEREE: Name: ------------------------------ (Please Print) Address: -------------------------- -------------------------- -------------------------- Employer Identification Number, Social Security Number or other identifying number: ______________ -15- 16 EXERCISE FORM To Be Executed Upon Exercise of Warrant The undersigned hereby exercises the Warrant with regard to ____________ shares of Common Stock and herewith [makes payment of the purchase price in full] [or requests that the Company exchange the Warrant as provided in Section 1.2.2 of the Warrant]. The undersigned requests that certificate(s) for such shares [and the Warrant for the unexercised portion of this Warrant] be issued [to the Holder] [in the name set forth below]. Dated: ________________ [NAME OF HOLDER] By ------------------------------------ Signature Name: ---------------------------------- (Please Print) Address: ------------------------------- ------------------------------- ------------------------------- Employer Identification Number, Social Security Number or other identifying number: _______________ [TRANSFEREE: Name: ------------------------------ (Please Print) Address: -------------------------- -------------------------- -------------------------- Employer Identification Number, Social Security Number or other identifying number: ______________] -16- EX-10.21 8 EXHIBIT 10.21 1 EXHIBIT 10.21 SUBORDINATED SECURED PROMISSORY NOTE $142,500 January 27, 1998 FOR VALUE RECEIVED, JALATE, LTD., a California corporation (herein, "MAKER"), hereby promises to pay to Katherine U. Sanders (herein, "HOLDER") or to order the principal sum of One Hundred Forty Two Thousand Five Hundred Dollars ($142,500), with interest on the unpaid principal balance outstanding from time to time, computed at a per annum rate of ten percent (10%), commencing as from the date hereof until January 31, 2000 ("MATURITY DATE"), when all amounts then remaining unpaid, together with all accrued and unpaid interest thereon, shall be due and payable. Interest accrued hereon shall be paid on the last business day of January, April, July and October, commencing April 30, 1998. The principal amount hereof shall be repaid in four (4) equal quarterly installments, commencing as from April 30, 1999, and continuing until the Maturity Date when all other amounts then remaining unpaid (principal, interest and other) shall become due and payable. All payments are to be made in lawful money of the United States of America to Holder at 3100 Texas Commerce Tower, Houston, Texas 77002 (c/o Sanders Morris Mundy Inc., Attn: Chris Hoeller) or at such other place as Holder shall designate in writing to Maker. Upon Maker's failure to pay any amount owing hereon as and when due, such amount due hereunder together with the accrued interest thereon shall to the extent not in violation of any applicable laws, bear interest at five percent (5%) per annum in excess of the rate otherwise applicable thereto ("DEFAULT RATE") until such amount is paid, it 2 being acknowledged and agreed that the imposition of a higher rate of interest as herein provided for failure to pay an amount owing hereunder shall not preclude Holder from accelerating the entire amount due hereunder as a result of such non-payment, and upon any such acceleration, the amount so accelerated shall, to the extent not in violation of any applicable laws, bear interest at the Default Rate until full payment of all such accelerated amounts. By acceptance of this Note as evidence of Maker's obligation to repay to Holder the amounts evidenced hereby, Holder acknowledges and agrees that all amounts owing hereunder (principal, interest and other) shall be subordinated and be junior in right of payment to all of Maker's obligations to Heller Financial, Inc. ("HELLER") and/or Wells Fargo HSBC Trade Bank N.A. ("WELLS FARGO") relating to present or future loans or other credit accommodations made to Maker. If an event of default under Maker's loan agreements with either Heller or Wells Fargo has occurred and is continuing, then Holder shall not be entitled to and shall not accept any payment from Maker with respect to this Note unless and until (i) all of Maker's obligations to Heller and/or Wells Fargo, as applicable, under such agreements have been satisfied in full or (ii) Heller and/or Wells Fargo, as applicable, consents in writing thereto; provided, however, that nothing contained herein shall be deemed to prohibit the Secured Party (defined below) from exercising its rights under the Security and Pledge Agreement referred to below (including, without limitation, foreclosing upon any or all of the collateral provided for therein). Further, by acceptance hereof, Holder hereby waives any and all rights, defenses or protections that may otherwise be available to him as a surety under -2- 3 applicable law, including, without limitation, any right, defense or protection available to sureties by reason of the Texas Civil Code. All persons or corporations now or at any time liable for payment of the indebtedness evidenced hereby for themselves, their heirs, legal representatives, successors and assigns, respectively, expressly waive presentment for payment, demand, notice of dishonor, protest, notice of protest and diligence in collection, and consent that the time of said payments may be extended by Holder without in any way modifying, altering, releasing, affecting, or limiting their respective liability for the indebtedness evidenced hereby. If this Note is not paid when due (whether at scheduled maturity, by acceleration or otherwise), Maker promises to pay all costs of collection including, without limitation, reasonable attorneys' fees, incurred by Holder, whether or not suit is filed hereon. This Note may be prepaid by Maker, in whole at any time or in part from time to time, without payment of any premium or penalty on fifteen (15) days prior notice to Holder of such election to prepay. In addition, Maker agrees to use the net proceeds of any equity offering to prepay this Note. Maker also agrees to use a portion of the proceeds of this Note to satisfy in full its current financial obligations to Air Shop Ltd., a New York corporation ("AIR SHOP"), pursuant to that certain letter agreement between Maker and Air Shop dated October 17, 1997, with regard to the acquisition of certain shares of the capital stock of Air Shop by Maker. Maker's obligations under this Note are secured by a Security and Pledge Agreement between Maker and Secured Party (as therein defined) dated as of even date -3- 4 herewith. The due date of the Note may be accelerated in accordance with the terms of such Security and Pledge Agreement. HOLDER'S RIGHTS UNDER THIS NOTE ARE ALSO SUBJECT TO AN INTERCREDITOR AGREEMENT DATED AS OF EVEN DATE HEREWITH AND MAY ONLY BE EXERCISED IN ACCORDANCE THEREWITH. No provision of this NOTE is intended to or shall require or permit Holder, directly or indirectly, to take, collect or receive in money, goods or any other form, any interest (including amounts deemed by law to be interest) in excess of the maximum rate of interest permitted by applicable law. If any amount due from or paid by Maker shall be determined by a court of competent jurisdiction to be interest in excess of such maximum rate, Maker shall not be obligated to pay such excess and, if paid, such excess shall be applied against the unpaid principal balance of this Note or, if and to the extent that this Note has been paid in full, such excess shall be remitted by Holder to Maker. Holder may pursue any rights and remedies as the holder of this Note or under any security agreement, pledge, guaranty or other collateral documents, including, without limitation, the Security and Pledge Agreement, independently or concurrently; provided, however, that only Secured Party may exercise the rights granted to Secured Party under the Security Agreement; and provided further that Holder's rights hereunder must be exercised in accordance with and subject to the conditions set forth in the Intercreditor Agreement. All rights, remedies or powers herein conferred upon Holder or conferred by the Security and Pledge Agreement or any other collateral document shall, to the extent not prohibited by law, be deemed cumulative and not exclusive of any others thereof, or any other rights, remedies or powers available to Holder. No -4- 5 delay or omission of Holder to exercise any right, remedy or power shall impair the same or be construed to be a waiver of any default or an acquiescence thereto. No waiver of any default shall extend to or affect any subsequent default or impair any rights, remedies or powers available to Holder. No single or partial exercise of any right, remedy or power shall preclude other or future exercise thereof by Holder. This Note has been negotiated in substantial part in the State of Texas and all questions with respect to the Note and the rights and liabilities of the parties will be governed by the laws of Texas in all respects, including matters of construction, validity, enforcement and performance, regardless of the choice of law provisions of Texas or any other jurisdiction. Any and all disputes between the parties which may arise pursuant to this Note not resolved by them will be heard and determined before an appropriate federal or state court located in Houston, Texas. The parties hereto acknowledge that such courts have the jurisdiction to interpret and enforce the provisions of this Note and the parties waive any and all objections that they may have as to personal jurisdiction or venue in any of the above courts. JALATE, LTD., a California corporation By: /s/ FREDERICK A. FINDLEY ------------------------------------ Frederick A. Findley Vice President and Chief Financial Officer Accepted: ________________________ Katherine U. Sanders -5- 6 all objections that they may have as to personal jurisdiction or venue in any of the above courts. JALATE, LTD. a California corporation By: ----------------------------------- Frederick A. Findley Vice President and Chief Financial Officer Accepted: /s/ KATHERINE U. SANDERS - ----------------------------------- Katherine U. Sanders -5- EX-10.22 9 EXHIBIT 10.22 1 EXHIBIT 10.20 JALATE,LTD. STOCK PURCHASE WARRANT THE WARRANTS EVIDENCED HEREBY AND THE SHARES OF STOCK ISSUABLE UPON EXERCISE THEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE OFFERED OR SOLD WITHOUT REGISTRATION UNLESS AN EXEMPTION FROM REGISTRATION IS AVAILABLE UNDER SUCH ACT OR THE RULES OR REGULATIONS PROMULGATED THEREUNDER WARRANT TO PURCHASE 125,000 SHARES OF COMMON STOCK AS DESCRIBED HEREIN Issue Date: January 27, 1998. Series A Warrant No. 1 Expiration Date: January 27, 2003. Sale Price: $.10 per Number of Shares. This certifies that, for value received, Don A. Sanders, his permitted successors and assigns ("HOLDER"), is entitled to purchase from Jalate, Ltd., a California corporation (the "COMPANY"), up to and including 125,000 fully paid and Nonassessable shares (the "NUMBER OF SHARES") of the Common Stock, no par value, of the Company (the "COMMON STOCK") on the terms set forth herein at an exercise price of $1.625 per share (the "PURCHASE PRICE"). The Number of Shares and the Purchase Price may be adjusted from time to time as described in this Warrant. 1 . EXERCISE. 1.1 TIME FOR EXERCISE. 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 January 27, 2003 (the "Exercise Period"). 1.2 MANNER OF EXERCISE. This Warrant shall be exercised by delivering it to the Company with the exercise form duly completed and signed, specifying (i) the number of shares as to which the Warrant is being exercised at that time (the "Exercise Number"), and (ii) whether the exercise is being made by "purchase" or "exchange". 1.2.1 PURCHASE. If the Holder elects the purchase option, the Holder shall simultaneously therewith deliver to the Company cash or a certified check in an amount equal to the Exercise Number multiplied by the Purchase Price, and the Holder shall be entitled to receive the full Exercise Number of shares of Common Stock. 1.2.2 EXCHANGE. If the Holder elects the exchange option, the Holder shall be entitled (without cash payment) to receive that number of shares of Common Stock having an aggregate Market Value on the date of exercise equal to the difference 2 between the Market Value of the Exercise Number of shares and the aggregate Purchase Price thereof. "MARKET VALUE" for any security on any given date means (i) the average closing price for the prior ten trading days for such security on the principal stock exchange on which such security is traded or (ii) if not so traded, the closing (or, if no closing price is available, the average of the bid and asked prices) for such period on The Nasdaq Stock Market if such security is quoted thereon or (iii) if not listed on any exchange or quoted on The Nasdaq Stock Market, such value, determined without regard to the minority shareholder position of the Holder, as may be determined in good faith by an independent appraiser selected by the Company and the Holder, which determination shall be conclusively binding on the parties. The costs of the independent appraiser shall be divided equally between the Company and the Holders. 1.3 EFFECT OF EXERCISE. Promptly (but in any case within five business days) after any exercise, the Company shall deliver to the Holder (i) duly executed certificates in the name or names specified in the exercise notice representing the aggregate number of shares issuable upon such exercise, and (ii) if this Warrant is exercised only in part, a new Warrant of like tenor representing the balance of the Number of Shares. Such certificates shall be deemed to have been issued, and the person receiving them shall be deemed to be a holder of record of such shares, as of the close of business on the date the actions required in Section 1.2 shall have been completed or, if on that date the stock transfer books of the Company are closed, as of the next business day on which the stock transfer books of the Company are open. 2. TRANSFER OF WARRANTS AND STOCK. 2.1 TRANSFER RESTRICTIONS. Neither this Warrant nor the securities issuable upon its exercise may be sold, transferred or pledged unless the Company shall have been supplied with reasonably satisfactory evidence that such transfer is not in violation of the Securities Act of 1933, as amended (the "ACT"), and any applicable state securities laws. The Company may place a legend to that effect on this Warrant, any replacement Warrant and each certificate representing shares issuable upon exercise of this Warrant. 2.2 MANNER OF TRANSFER. Upon delivery of this Warrant to the Company with the assignment form duly completed and signed, the Company will promptly (but in any case within five business days) execute and deliver to each transferee and, if applicable, the Holder, Warrants of like tenor evidencing the rights (i) of the transferees) to purchase the Number of Shares specified for each in the assignment forms, and (ii) of the Holder to purchase any untransferred portion, which in the aggregate shall equal the Number of Shares of the original Warrant. If this Warrant is properly assigned in compliance with this Section 2, it may be exercised by an assignee without having a new Warrant issued. 2.3 LOSS, DESTRUCTION OR MUTILATION OF WARRANT CERTIFICATES. Upon receipt of (i) evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of any Warrant and (ii) except in the case of mutilation, an indemnity or security reasonably satisfactory to the Company, the Company will promptly (but in any -2- 3 case within five business days) execute and deliver a replacement Warrant of like tenor representing the right to purchase the same Number of Shares. 3. COST OF ISSUANCES. The Company shall pay all expenses, transfer taxes and other charges payable in connection with the preparation, issuance and delivery of stock certificates or replacement Warrants, except for any transfer tax or other charge imposed as a result of (a) any issuance of certificates in any name other than the name of the Holder, or (b) any transfer of the Warrant. The Company shall not be required to issue or deliver any stock certificate or Warrant until it receives reasonably satisfactory evidence that any such tax or other charge has been paid by the Holder. 4. ANTI-DILUTION PROVISIONS. If any of the following events occur at any time hereafter during the life of the Warrant, then the Warrant immediately prior to such event shall be changed as described in order to prevent dilution: 4.1 If at any time (i) the outstanding shares of Common Stock are subdivided into a greater number of shares, then the Purchase Price will be reduced proportionately and the Number of Shares will be increased proportionately; conversely, (ii) if the outstanding shares of Common Stock are consolidated into a smaller number of shares, then the Purchase Price will be increased proportionately and the Number of Shares will be reduced proportionately. 4.2 Upon (i) any reorganization or reclassification of the Common Stock, (ii) the dissolution or liquidation of the Company, (iii) a reorganization, merger or consolidation of the Company with one or more corporations as a result of which the Company is not the surviving corporation or entity or becomes a subsidiary of another corporation or entity, or (iv) the sale of substantially all the property or more than fifty percent (50%) of the then outstanding stock of the Company to another corporation or entity (any such occurrence shall be an "Event"), in which holders of Common Stock are entitled to receive securities and/or assets as a result of their Common Stock ownership, then upon exercise of this Warrant the Holder will have the right to receive the shares of stock, securities or assets which it would have received if the Warrant had been fully exercised as of the record date for such Event. The Company will not effect any Event unless prior to or simultaneously with its consummation the successor corporation or entity resulting from the consolidation or merger (if other than the Company) or the Company's new ultimate parent corporation or entity (if the Company becomes a subsidiary), or the corporation purchasing the Company's assets or stock, assumes the performance of the Company's obligations under this Warrant (as appropriately adjusted to reflect such consolidation, merger or sale such that the Holder's rights under this Warrant remain, as nearly as practicable, unchanged) by a binding written instrument. 4.3 If at any time the Company declares a dividend on the Common Stock payable in shares of Common Stock or securities convertible into shares of Common Stock, the Number of Shares shall be increased, as of the record date for determining which holders of Common Stock shall be entitled to receive such dividend, -3- 4 in proportion to the increase in the number of outstanding shares of Common Stock as a result of such dividend. In the event any such securities convertible into shares of Common Stock are not so converted by the time any such conversion right expires, the Number of Shares shall be proportionately decreased, as of such expiration date. 4.4 Upon each computation of an adjustment under this Section 4, the Purchase Price shall be computed to the nearest tenth of a cent and the Number of Shares shall be calculated to the nearest whole share. However, the fractional amount shall be used in calculating any future adjustments. No fractional shares of stock shall be issued in connection with the exercise of this Warrant, but the Company shall, in the case of the final exercise under this Warrant, make a cash payment for any fractional shares based on the Market Value of a share of Common Stock on the date of exercise (as defined in Section 1.2.2). 4.5 OFFICER'S CERTIFICATE. Whenever the Number of Shares or the Purchase Price shall be adjusted as required by the provisions of this Section 4, the Company forthwith shall file in the custody of its secretary or an assistant secretary, at its principal office, a certificate of the chief financial officer of the Company showing the adjusted Number of Shares and the adjusted Purchase Price and setting forth in reasonable detail the circumstances requiring the adjustment. Each such officer's certificate shall be made available at all reasonable times during reasonable hours for inspection by the Holder. Notwithstanding any changes in the Purchase Price or the Number of Shares, this Warrant may continue to state the initial Purchase Price and the initial Number of Shares. Alternatively, the Company may elect to issue a new Warrant or Warrants of like tenor for the additional shares of Common Stock or, upon surrender of the existing Warrant, to issue a replacement Warrant evidencing all the Warrant Shares to which the Holder is entitled after such adjustments. 5. COVENANTS. The Company agrees that: 5.1 RESERVATION OF STOCK. During the period in which this Warrant may be exercised. the Company will reserve sufficient authorized but unissued securities (and, if applicable, property) to enable it to satisfy its obligations on exercise of this Warrant. If at any time the Company's authorized securities shall not be sufficient to allow the exercise of this Warrant, the Company shall take such corporate action as may be necessary to increase its authorized but unissued securities to be sufficient for such purpose. 5.2 NO LIENS, ETC. All securities that may be issued upon exercise of this Warrant will, upon issuance, be validly issued, fully paid, nonassessable and free from all taxes, liens and charges with respect to the issue thereof, and shall be listed on any exchanges on which that class of securities is listed. 5.3 NO DIMINUTION OF VALUE. The Company will not take any action to terminate this Warrant or to diminish it in value. -4- 5 5.4 FURNISH INFORMATION. The Company will promptly deliver to the Holder copies of all financial statements, reports and proxy statements which the Company shall have sent to its stockholders generally. 5.5 STOCK AND WARRANT TRANSFER BOOKS. Except upon dissolution, liquidation or winding up or for ordinary holidays and weekends, the Company will not at any time close its stock or warrant transfer books so as to result in preventing or delaying the exercise or transfer of this Warrant. 6. STATUS OF HOLDER. 6.1 NOT SHAREHOLDER. Unless the Holder exercises this Warrant in writing, the Holder shall not be entitled to any rights (i) as a stockholder of the Company with respect to the shares as to which the Warrant is exercisable including, without limitation, the right to vote or receive dividends or other distributions, or (ii) to receive any notice of any proceedings of the Company except as otherwise provided in this Warrant. 6.2 LIMITATION OF LIABILITY. Unless the Holder exercises this Warrant in writing, the Holder's rights and privileges hereunder shall not give rise to any liability for the Purchase Price or as a stockholder of the Company, whether to the Company or its creditors. 7. REGISTRATION RIGHTS. 7.1 DEMAND REGISTRATION. This Warrant is one in a series of warrants having the same terms and identified as "Series A" (the "SERIES A WARRANTS"). Upon the request of the holders of a majority of the shares issuable upon exercise of the Series A Warrants made anytime during the Exercise Period, the Company will use all reasonable efforts on one occasion to register for resale in accordance with the Act, all shares of Common Stock issuable upon exercise of the Warrant which do not qualify for an exemption from such registration under Rule 144 under the Act or a comparable or successor exemption from registration ("REGISTRABLE SHARES"); provided that such registration must cover at least one-half of the Number of Shares covered by the original Series A Warrants. The Holder agrees to cooperate with the Company in all reasonable ways to effect such registration. The Company will use all reasonable efforts to keep such registration effective for one hundred eighty days or, if shorter, until all Registrable Shares included in the registration statement have been disposed of. The effectiveness period of the registration statement shall be subject to customary and reasonable "blackout" periods in the event of any significant corporate transactions (including material financings); provided, however, that the one hundred eighty day effectiveness period shall be extended on a day-for-day basis in connection with any such "black-out." The Purchase Price shall be decreased by $.10 per share (subject to adjustment pursuant to Section 4.1 hereof) if the Company does not file the registration statement with the Securities and Exchange Commission (the "COMMISSION") within 90 days following the making of the demand and by an additional $.10 per share (subject to -5- 6 adjustment pursuant to Section 4.1 hereof) for each subsequent 90-day period in which the registration statement is not filed. 7.2 "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 such Holder's 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). 7.3 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 Section 7 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. 7.4 CONDITIONS TO HOLDER'S RIGHTS. It shall be a condition of the Holder's rights under this Section 7 that: 7.4.1 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 7.4.2 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 -6- 7 compliance with federal and state securities laws and the rules or other requirements of the National Association of Securities Dealers, Inc., The Nasdaq Stock Market or which the Company or the underwriters may reasonably request to otherwise effectuate the offering. 7.5 Registration Procedures. If and whenever the Company is required to use its reasonable efforts to effect the registration of any Registrable Shares under the Act as provided in this Section 7, the Company will, as expeditiously as practicable: (i) notify the Holder of the Commission's requests for amending or supplementing of the registration statement and the prospectus, and prepare and file with the Commission such amendments and supplements to such registration statement and the prospectus used in connection therewith as may be necessary to keep such registration statement effective and to comply with the provisions of the Act with respect to the disposition of all Registrable Shares covered by such registration statement; (ii) furnish to the Holder such number of conformed copies of such registration statement and of each such amendment and supplement thereto (in each case including all exhibits), such number of copies of the prospectus contained in such registration statement (including each preliminary prospectus and any summary prospectus) and any other prospectus filed under Rule 424 under the Act, in conformity with the requirements of the Act, and such other documents, as the Holder may reasonably request; (iii) use its reasonable efforts (x) to register or qualify all Registrable Shares covered by such registration statement under such other securities or blue sky laws of such States of the United States of America where an exemption is not available and as the Holder shall reasonably request, (y) to keep such registration or qualification in effect for so long as such registration statement remains in effect, and (z) to take any other action which may be reasonably necessary or advisable to enable the Holder to consummate the disposition in such jurisdictions of the Registrable Shares to be sold by the Holder, except that the Company shall not for any such purpose be required to qualify generally to do business as a foreign corporation in any jurisdiction wherein it would not but for the requirements of this subdivision (iii) be obligated to be so qualified or to consent to general service of process or become subject to general taxation in any such jurisdiction; (iv) use its reasonable efforts to cause all Registrable Shares covered by such registration statement to be registered with or approved by such other federal or state governmental agencies or authorities as may be necessary in the opinion of counsel to the Company and counsel to the Holder to consummate the disposition of such Registrable Shares; (v) furnish to the Holder a signed counterpart of -7- 8 (x) an opinion of counsel for the Company, and (y) a "comfort" letter signed by the independent public accountants who have certified the Company's financial statements included or incorporated by reference in such registration statement, covering substantially the same matters with respect to such registration statement (and the prospectus included therein) and, in the case of the accountant's comfort letter, with respect to events subsequent to the date of such financial statements, as are customarily covered in opinions of issuer's counsel and in accountants' comfort letters delivered to the underwriters in underwritten public offerings of securities (and dated the dates such opinions and comfort letters are customarily dated) and, in the case of the accountant's comfort letter, such other financial matters, and in the case of the legal opinion, such other legal matters, as the Holder or the underwriters may reasonably request; (vi) notify the Holder at any time when a prospectus relating thereto is required to be delivered under the Act, upon discovery that, or upon the happening of any event as a result of which, the prospectus included in such 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, and at the request of the Holder promptly prepare and furnish to him a reasonable number of copies of a supplement to or an amendment of such prospectus as may be necessary so that, as thereafter delivered to the purchasers of such securities, such prospectus shall not include an untrue statement of a material fact or omit to state a 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; and (vii) otherwise use its reasonable efforts to comply with all applicable rules and regulations of the Commission. The Holder agrees by acquisition of such Registrable Shares that upon receipt of any written notice from the Company of the happening of any event of the kind described in subdivision (vi) of this Section 7.5 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 contemplated by subdivision (vi) of this Section 7.5 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. Nothing contained in this Section 7.5 shall require or obligate the Company to cause any registration statement pursuant to which the Holder has exercised its -8- 9 "piggyback" registration rights pursuant to Section 7.2 hereof to become effective or, if declared effective, to maintain the effectiveness of such registration statement. 7.6 Indemnification. (a) 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, the Holder, its directors, officers, partners, heirs, personal representatives, agents and affiliates and each other person, if any, who controls the 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 the 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 the 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 the 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 the Holder. (b) Indemnification by the Holder. As a condition to including any Registrable Shares in any registration statement, the Company shall have received an undertaking reasonably satisfactory to it from each Holder, to indemnify and hold -9- 10 harmless (in the same manner and to the same extent as set forth in subdivision (a) of this Section 7.6) 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 the 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 7.6(b) shall be limited to the amount of proceeds received by the 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 the Holder. (c) 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 subdivisions of this Section 7.6, 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 subdivisions of this Section 7.6, 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 -10- 11 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. (d) CONTRIBUTION. If the indemnification provided for in this Section 7.6 shall for any reason be held by a court to be unavailable to an indemnified party under subparagraph (a) or (b) 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 subparagraph (a) or (b) hereof, the indemnified party and the indemnifying party under subparagraph (a) or (b) 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), (i) 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 (ii) if the allocation provided by clause (i) 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. (e) OTHER INDEMNIFICATION. Indemnification and contribution similar to that specified in the preceding subdivisions of this Section 7.6 (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. (f) INDEMNIFICATION PAYMENTS. The indemnification and contribution required by this Section 7.6 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, darnage or liability is incurred. 8. GENERAL PROVISIONS. 8.1 COMPLETE AGREEMENT; MODIFICATIONS. This Warrant and any documents referred to herein or executed contemporaneously herewith constitute the parties' entire agreement with respect to the subject matter hereof and supersede all agreements, -11- 12 representations, warranties, statements, promises and understandings, whether oral or written, with respect to the subject matter hereof. This Warrant may not be amended, altered or modified except by a writing signed by the parties. 8.2 ADDITIONAL DOCUMENTS. Each party hereto agrees to execute any and all further documents and writings and to perform such other actions which may be or become necessary or expedient to effectuate and carry out this Warrant. 8.3 NOTICES. All notices under this Warrant shall be in writing and shall be delivered by personal service or telecopy or certified mail, postage prepaid, to such address as may be designated from time to time by the relevant party, and which shall initially be: Jalate, Ltd. 6557 Flotilla Street City of Commerce, California 90040 Fax: (213) 728-3752 Attn: Frederick A. Findley Vice President-Finance and Chief Financial Officer Don A. Sanders c/o Sanders Morris Mundy Inc. 3100 Texas Commerce Tower Houston, Texas 77002 Fax: (713) 250-4298 Any notice sent by certified mail shall be deemed to have been given five (5) business days after the date on which it is mailed. All other notices shall 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. 8.4 NO THIRD-PARTY BENEFITS. Successors and Assigns. None of the provisions of this Warrant shall be for the benefit of, or enforceable by, any third-party beneficiary. Except as provided herein to the contrary, this Warrant shall be binding upon and inure to the benefit of the parties, their respective successors and permitted assigns. 8.5 DISPUTES. 8.5.1 GOVERNING LAW; JURISDICTION. This Warrant concerns a California business and all questions with respect to the Warrant and the rights and liabilities of the parties will be governed by the laws of California in all respects, including matters of construction, validity, enforcement and performance, regardless of the choice of law provisions of California or any other jurisdiction. Any and all disputes between the -12- 13 parties which may arise pursuant to this Warrant and not resolved by them will be heard and determined before an appropriate federal or state court located in Houston, Texas. The parties hereto acknowledge that such courts have the jurisdiction to interpret and enforce the provisions of this Warrant and the parties waive any and all objections that they may have as to personal jurisdiction or venue in any of the above courts. 8.5.2 ATTORNEYS' FEES. Should any litigation be commenced (including any proceedings in a bankruptcy court) between the parties hereto or their representatives concerning any provisions of this Warrant or the rights and duties of any person or entity hereunder, the party or parties prevailing in such proceeding shall be entitled, in addition to such other relief as may be granted, to the reasonable attorneys' fees and court costs incurred by reason of such litigation. 8.6 WAIVERS STRICTLY CONSTRUED. With regard to any power, remedy or right provided herein or otherwise available to any party hereunder (i) no waiver or extension of time shall be effective unless expressly contained in a writing signed by the waiving party; and (ii) no alteration, modification or impairment shall be implied by reason of any previous waiver, extension of time, delay or omission in exercise, or other indulgence. 8.7 RULES OF CONSTRUCTION. 8.7.1 HEADINGS. The Article and Section headings in this Warrant are inserted only as a matter of convenience, and in no way define, limit, or extend or interpret the scope of this Warrant or of any particular Article or Section. 8.7.2 TENSE AND CASE. Throughout this Warrant, as the context may require, references to any word used in one tense or case shall include all other appropriate tenses or cases. 8.7.3 SEVERABILITY. The validity, legality or enforceability of the remainder of this Warrant will not be affected even if one or more of the provisions of this Warrant are held to be invalid, illegal or unenforceable in any respect. 8.7.4 WARRANT NEGOTIATED. The parties hereto are sophisticated and have been represented throughout this transaction by lawyers who have carefully negotiated the provisions hereof. As a consequence, the parties do not believe that the presumptions of any laws or rules relating to the interpretation of contracts against the drafter of any particular clause should be applied in this case and therefore waive their effects. -13- 14 IN WITNESS WHEREOF, the Company has caused this Warrant to be duly executed effective as of January 27, 1998. JALATE, LTD., a California corporation By: /s/ FREDERICK A. FINDLEY --------------------------- Frederick A. Findley Vice President and Chief Financial Officer -14- 15 ASSIGNMENT FORM FOR VALUE RECEIVED, _________________________________hereby sells, assigns and transfers to the transferee named below [the rights to purchase __________________________ of the Number of Shares under] this Warrant, together with all rights, title and interest therein. [The rights to purchase the remaining Number of Shares shall remain the property of the undersigned.] This includes a transfer of the registration rights in the Warrant; provided, however, that in the case of a partial assignment of this Warrant, both the Holder and the transferee shall have the registration rights set forth in Section 7 of the Warrant. Dated: ________________ [NAME OF HOLDER] By ------------------------------------ Signature Name: ---------------------------------- (Please Print) Address: ------------------------------- ------------------------------- ------------------------------- Employer Identification Number, Social Security Number or other identifying number: _______________ TRANSFEREE: Name: ------------------------------ (Please Print) Address: -------------------------- -------------------------- -------------------------- Employer Identification Number, Social Security Number or other identifying number: ______________ -15- 16 EXERCISE FORM To Be Executed Upon Exercise of Warrant The undersigned hereby exercises the Warrant with regard to ____________ shares of Common Stock and herewith [makes payment of the purchase price in full] [or requests that the Company exchange the Warrant as provided in Section 1.2.2 of the Warrant]. The undersigned requests that certificate(s) for such shares [and the Warrant for the unexercised portion of this Warrant] be issued [to the Holder] [in the name set forth below]. Dated: ________________ [NAME OF HOLDER] By ------------------------------------ Signature Name: ---------------------------------- (Please Print) Address: ------------------------------- ------------------------------- ------------------------------- Employer Identification Number, Social Security Number or other identifying number: _______________ [TRANSFEREE: Name: ------------------------------ (Please Print) Address: -------------------------- -------------------------- -------------------------- Employer Identification Number, Social Security Number or other identifying number: ______________] -16- EX-10.23 10 EXHIBIT 10.23 1 EXHIBIT 10.23 SECURITY AND PLEDGE AGREEMENT This Security and Pledge Agreement (herein "AGREEMENT") is entered into as of this 27th day of January, 1998, between JALATE, LTD., a California corporation ("DEBTOR"), and WILLIAM M. DEARMAN, an individual ("SECURED PARTY"), as agent for the Holders (defined below). RECITALS A. Debtor has executed those certain Subordinated Secured Promissory Notes all dated as of even date herewith, in the amounts and in favor of the parties ("HOLDERS") as set forth on SCHEDULE I hereto (the "NOTES"). B. Pursuant to an Agency and Intercreditor Agreement (the "INTERCREDITOR AGREEMENT") between Secured Party and the Holders, Secured Party has been appointed "Agent" for the Holders, and Debtor is required to grant a security interest in certain Collateral as more particularly described herein as security for the repayment of the Notes. NOW, THEREFORE, for value received, the receipt and sufficiency of which is hereby acknowledged, the parties hereto agree as follows: 1. COLLATERAL. Debtor hereby conveys, assigns, transfers, delivers, pledges and grants to Secured Party a security interest in and to each and all of the following property (herein called the "COLLATERAL"): (1) Forty (40) shares of Common Stock of Air Shop Ltd., a New York corporation ) ("AIR SHOP") (the "COMMON STOCK"); (2) Three Thousand (3,000) shares of Preferred Stock of Air Shop (the "PREFERRED STOCK" and together with the Common Stock, the "STOCK"); (3) Any additional shares of capital stock of Air Shop that Debtor acquires pursuant to the certain letter agreement between Debtor and Air Shop dated October 17, 1997 (the "LETTER AGREEMENT"), a copy of which is attached hereto as SCHEDULE 2; (4) All of Debtor's rights under the Letter Agreement; and (5) All proceeds, products, Distributions (defined below) additions, substitutions and accessions of and to any and all of the foregoing. For purposes of this Agreement, the term "Distributions" shall mean all stock dividends, liquidating dividends, shares of stock resulting from stock splits, reclassifications, warrants, options, noncash dividends and other distributions on or with respect to the Stock whether similar 2 or dissimilar to the foregoing, except that Distributions shall not mean cash dividends paid on the Stock. 2. INDEBTEDNESS SECURED. This Agreement and the aforesaid security interest is granted to Secured Party to secure the following (all of which are herein called the "INDEBTEDNESS"): (1) the prompt and unconditional payment and performance of all indebtedness and obligations of Debtor to the Holders heretofore, now or hereafter existing under the Notes, and any other document or agreement now or hereafter executed in connection therewith or as security for any part thereof, and any and all renewals, amendments, modifications, increases, extensions or rearrangements thereof; and (2) the reimbursement and payment by Debtor of all advances, charges, costs and expenses, (including reasonable attorneys' fees and legal expenses) incurred by Secured Party and/or the Holders in connection with exercising any right, power or remedy conferred by this Agreement, the Notes or by law. 3. DELIVERY AND POSSESSION. The certificates representing the Stock, accompanied by instruments of assignment thereof, duly executed in blank by Debtor, have been delivered to Secured Party contemporaneously herewith. 4. TERMINATION. Secured Party shall promptly return the Collateral to Debtor, and this Agreement will be of no further force and effect, at such time as the Indebtedness has been paid in full. 5. EVENT OF DEFAULT. Any one or more of the following events shall constitute an event of default (an "EVENT OF DEFAULT") under this Agreement: (1) Debtor shall fail to pay all or any part of the Indebtedness when due, whether at scheduled maturity, by acceleration or otherwise and such failure shall continue for more than three (3) business days after notice from Secured Party; or (2) Debtor shall fail to observe or perform any material term, covenant or condition on its part to be performed or observed under the Notes or this Agreement and such failure shall continue for more than thirty (30) days after notice from Secured Party; or (3) Debtor shall: (i) become insolvent or admit in writing its inability to pay its debts as they mature; (ii) make a general assignment for the benefit of creditors or to an agent authorized to liquidate any substantial amount of its assets; (iii) become the subject of an "order for relief" within the meaning of the United States Bankruptcy Code; (iv) file a petition in bankruptcy, or for reorganization, or to effect a plan or other arrangement with creditors; (v) file an -2- 3 answer to a creditor's petition, admitting the material allegations thereof for an adjudication of bankruptcy or for reorganization or to effect a plan or other arrangement with creditors; (vi) apply to a court for the appointment of a receiver or custodian for any of its assets or properties; (vii) have a receiver or custodian appointed for any of its assets or properties, with or without consent, and such receiver shall not be discharged within ninety (90) days after appointment; or (viii) adopt a plan of complete liquidation of its assets; (4) Any warranty, representation or statement made to Secured Party by Debtor in this Agreement shall have been false or incomplete in any material respect as of the time when made; or (5) Any of the Notes or this Agreement shall cease to be an enforceable obligation or any of the same are rescinded, revoked or modified in any way without the express written consent of Secured Party. Secured Party agrees that, unless an Event of Default occurs and is continuing, Secured Party shall not be entitled to exercise any of Debtor's rights under the Letter Agreement and Debtor shall continue to be able to exercise all of such rights. Notwithstanding the foregoing, Debtor agrees that (i) it will not waive any of its rights under the Letter Agreement without the prior written consent of Secured Party and (ii) if it is unable to exercise any of its rights under the Letter Agreement, it will assign such rights to Secured Party. Debtor also agrees to fulfill all of its obligations under the Letter Agreement in a timely manner. Debtor further agrees that Secured Party is not required to perform any of Debtor's obligations under the Letter Agreement. 6. ACCELERATION, SECURED PARTY'S RIGHTS AND REMEDIES. (1) Upon the occurrence of an Event of Default specified in Section 5(3) above, then, without notice, demand or action of any kind by Secured Party, the entire amount of the Indebtedness shall be immediately due and payable. Upon the occurrence of any other Event of Default specified in this Agreement, Secured Party shall have the right, upon notice to Debtor, to declare the entire amount of the Indebtedness immediately due and payable. (2) Upon the occurrence of an Event of Default, Secured Party shall have all the rights and remedies of a secured party under the Uniform Commercial Code in effect at the time in Texas (the "CODE") and other applicable laws and under this Agreement and all other instruments and agreements evidencing, securing, governing or guaranteeing the Indebtedness. Without limiting the generality of the foregoing, Secured Party may exercise the following rights and remedies, without further notice to Debtor: (i) Proceed to selectively and successively enforce and exercise any and all rights and remedies which Secured Party may have under this Agreement, any other applicable agreement or applicable law, including, -3- 4 without limitation: (A) commencing one or more actions against Debtor and reducing the claims of Secured Party against Debtor to judgment, (B) foreclosure or other enforcement of Secured Party's security interest in the Collateral, or any portion thereof, or other enforcement of Secured Party's rights and remedies in respect of and to recover upon the Collateral, through judicial action or otherwise, including all available remedies under the applicable provisions of the Code, and (C) payment or discharge of any claim or lien, prior or subordinate, in respect of or affecting the Collateral; (ii) Sell, lease or otherwise dispose of the Collateral at private or public sale (provided that any sale of any portion of the Collateral constituting securities shall be made in compliance with federal and applicable state securities laws), in bulk or in parcels and, where permitted by law, without having the Collateral present at the place of sale. Secured Party will give Debtor reasonable notice of the time and place of any public sale or other disposition thereof or the time after which any private sale or other disposition thereof is to be made. The requirements of reasonable notice shall be met if such notice is given to Debtor at least ten (10) days before the time of any such sale or disposition; (iii) Exercise any and all rights and remedies of Debtor relating to the Collateral, including, but not by way of limitation, the right to collect, demand, receive, settle, compromise, adjust or sue for all amounts due thereon or thereunder and the right either in Secured Party's own name or in the name of Debtor, to take such legal or other action as Debtor might have taken except for this Agreement. For purposes of enforcing Secured Party's rights under this Section 6, effective upon the occurrence of an Event of Default, Debtor irrevocably constitutes and appoints Secured Party and any officer or agent thereof, with full power of substitution, as its true and lawful attorney-in-fact with full irrevocable power and authority in the place and stead of Debtor and in the name of Debtor or in its own name from time to time in Secured Party's discretion for the purposes of this Agreement, to take any and all appropriate action and to execute any and all documents and instruments which may be necessary or desirable to accomplish the purposes of this Agreement. (iv) Vote any or all of the Stock and to give all consents, waivers and ratifications in respect thereof and otherwise to act with respect thereto as though it were the absolute owner thereof. (v) Cause any or all of the Stock to be transferred into the name of the Secured Party or the names of any of its nominees. (3) In the event Secured Party shall elect to selectively and successively enforce its rights and remedies in respect of any of the Collateral, -4- 5 pursuant to any applicable agreements or otherwise, such action shall not be deemed a waiver or discharge of any other right, remedy, lien or encumbrance until such time as Secured Party shall have been paid in full the Indebtedness. 7. APPLICATION OF PROCEEDS. If Secured Party shall sell or otherwise dispose of all or any portion of the Collateral as a result of the exercise of its rights as a result of the occurrence of an Event of Default, the proceeds of such sale or disposition shall be applied by Secured Party in the following order: (1) To the payment of reasonable costs and expenses related to any sale of the Collateral and the exercise of any other right given to Secured Party pursuant hereto. (2) To the payment of the Indebtedness. (3) To the payment of Debtor or its successors or assigns. 8. EXPENSES. Debtor agrees to pay to the Secured Party all reasonable advances, charges, costs and expenses incurred in connection with the exercise by the Secured Party of any right, power or remedy conferred by this Agreement or by law (including but not limited to reasonable attorneys' fees). 9. DEBTOR'S REPRESENTATIONS AND WARRANTIES. Debtor represents and warrants to Secured Party that so long as this Agreement is in effect: 9.1 ENFORCEABLE AGREEMENT. This Agreement is the valid and binding obligation of Debtor, enforceable in accordance with its terms, subject to bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting or relating to creditors' rights generally and general principles of equity. 9.2 NO OTHER CLAIM. There is no other claim, lien, security interest or encumbrance on or against any of the Collateral. 9.3 NO FINANCING STATEMENT. No financing statement is on file in any public office covering any of the Collateral, except (i) in favor of Secured Party and (ii) that Heller Financial, Inc. and/or Wells Fargo Bank have filed financing statements, but have waived their security interests, if any, in the Collateral. 9.4 POWER AND AUTHORITY. Debtor has full corporate power and authority to enter into and perform its obligations under this Agreement, and neither the execution, delivery and performance of this Agreement, nor the creation of the security interests hereunder, will conflict with, or result in the breach or violation of, any material agreement or instrument binding on or enforceable against Debtor or the Collateral. The execution, delivery and performance of this Agreement, and the creation of the security interest hereunder, have been duly authorized by all necessary corporate -5- 6 action, and will not violate or contravene the Articles of Incorporation or Bylaws of Debtor. 10. COVENANTS. Debtor covenants and agrees with Secured Party that, from and after the date of this Agreement and until the Indebtedness is paid in full: 10.1 FURTHER ASSURANCE. Debtor will from time to time, at its sole expense, promptly execute and deliver all further instruments and documents, and take all further action that may be reasonably necessary or desirable, or that Secured Party may reasonably request, in order to continue, perfect and protect any security interest granted hereby or to enable Secured Party to exercise and enforce its rights and remedies hereunder with respect to any Collateral. Without limiting the generality of the foregoing, Debtor will execute and file such financing or continuation statements or amendments thereto and such other instruments or notices as may be reasonably necessary or desirable, or as Secured Party may request, in order to perfect and preserve the security interest granted or intended to be granted hereby. Debtor hereby authorizes Secured Party to file one or more financing or continuation statements and amendments thereto relative to all or part of the Collateral without the signature of such Debtor, where permitted by law, and to execute the same as attorney-in-fact for such Debtor to the extent such Debtor's signature is required by law. 10.2. MAINTENANCE OF OFFICE. Debtor shall keep its chief place of business and chief executive office and the offices where it keeps its records concerning the Collateral within the State of California and shall notify Secured Party at least thirty (30) days prior to any change from the location specified on the signature page hereof. Debtor will not change its name, identity or corporate structure to such an extent that any financing statement filed by Secured Party in connection with this Agreement would become seriously misleading, unless it shall have given Secured Party at least 30 days prior written notice thereof and prior to effecting any such change taken such steps as Secured Party may deem reasonably necessary or advisable to continue the perfection and priority of the security interest granted pursuant hereto. 10.3 DISPOSITION OF COLLATERAL. Debtor shall not (1) sell, assign, or otherwise dispose of or grant any option with respect to any of the Collateral, or (ii) create or suffer to exist any lien, security interest, option or other charge or encumbrance upon or with respect to any of the Collateral other than the lien contemplated by this Agreement; provided, however, that notwithstanding the foregoing, Debtor may at any time sell all or part of the Collateral, provided that the Indebtedness is repaid in full concurrently therewith. Secured Party agrees to cooperate with Debtor in effecting any such sale, including by releasing its security interest in any such Collateral in connection with the consummation of the sale thereof. 11. GENERAL PROVISIONS. 11.1 COMPLETE AGREEMENT: MODIFATIONS. This Agreement, the Notes and any documents referred to herein or therein or executed contemporaneously herewith -6- 7 constitute the parties' entire agreement with respect to the subject matter hereof and supersede all agreements, representations, warranties, statements, promises and understandings, whether oral or written, with respect to the subject matter hereof. This Agreement may not be amended, altered or modified except by a writing signed by the parties. 11.2 ADDITIONAL DOCUMENTS. Each party hereto agrees to execute any and all further documents and writings and to perform such other actions which may be or become necessary or expedient to effectuate and carry out this Agreement. 11.3 NOTICES. Unless otherwise specifically permitted by this Agreement, all notices under this Agreement shall be in writing and shall be delivered by personal service, telecopy, Federal Express or comparable overnight service or certified mail, postage prepaid, to such address as may be designated from time to time by the relevant party, and which shall initially be: Jalate, Ltd. 6557 Flotilla Street City of Commerce, California 90040 Fax: (213) 728-3752 Attn: Frederick A. Findley Vice President-Finance and Chief Financial Officer William M. DeArman 5420 Huckleberry Lane Houston, Texas 77056 Fax: (713) 552-1505 Any notice sent by certified mail shall be deemed to have been given five (5) business days after the date on which it is mailed. All other notices shall 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. 11.4 NO THIRD-PARTY BENEFITS. None of the provisions of this Agreement shall be for the benefit of, or enforceable by, any third-party beneficiary, except that each of the Holders is a third-party beneficiary of this Agreement whose rights may only be exercised by Secured Party in accordance with the terms of the Intercreditor Agreement. 11.5 NO ASSIGNMENT. Neither of the parties may assign any of his or its rights under this Agreement without the prior written consent of the other, which shall not be unreasonably withheld; provided, however, that Secured Party may assign this Agreement to any successor agent under the Intercreditor Agreement. -7- 8 11.6 SUCCESSORS AND ASSIGNS. The covenants, representations, warranties and agreements herein set forth shall be binding upon Debtor and shall inure to the benefit of Secured Party and his permitted successors and assigns. Subject to the foregoing, the term "Debtor," as used throughout this Agreement shall, regardless of use of the singular form, include the successors, legal representatives and permitted assigns of Debtor. 11.7 GOVERNING LAW: JURISDICTION. This Agreement has been negotiated in part in, the conveyance, assignment, transfer and delivery has been made in, and the security interest granted hereby is granted in, and each shall be governed by the laws of, the State of Texas in all respects, including matters of construction, validity, enforcement and performance, regardless of the choice of law provisions of Texas or any other jurisdiction. Any and all disputes between the parties which may arise pursuant to this Agreement and not resolved by them will be heard and determined before an appropriate federal or state court located in Houston, Texas. The parties hereto acknowledge that such courts have the jurisdiction to interpret and enforce the provisions of this Agreement and the parties waive any and all objections that they may have as to personal jurisdiction or venue in any of the above courts. 11.8 WAIVERS STRICTLY CONSTRUED. With regard to any power, remedy or right provided herein or otherwise available to any party hereunder (i) no waiver or extension of time shall be effective unless expressly contained in a writing signed by the waiving party; and (ii) no alteration, modification or impairment shall be implied by reason of any previous waiver, extension of time, delay or omission in exercise, or by any other indulgence. 11.9 RULES OF CONSTRUCTION. 11.9.1 HEADINGS. The Article and Section headings in this Agreement are inserted only as a matter of convenience, and in no way define, limit, or extend or interpret the scope of this Agreement or of any particular Article or Section. 11.9.2 TENSE AND CASE. Throughout this Agreement, as the context may require, references to any word used in one tense or case shall include all other appropriate tenses or cases. 11.9.3 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. 11.9.4 AGREEMENT NEGOTIATED. The parties hereto are sophisticated and have been represented throughout this transaction by lawyers who have carefully negotiated the provisions hereof. As a consequence, the parties do not believe that the presumptions of any laws or rules relating to the interpretation of contracts against the drafter of any particular clause should be applied in this case and therefore waive their effects. -8- 9 11.9.5 TERMS DEFINED IN UNIFORM COMMERCIAL CODE. Except as the context may otherwise require, any term used herein that is defined in the Texas Uniform Commercial Code shall have the meaning given therein. 11.10 COUNTERPARTS. This Agreement may be executed simultaneously in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. -9- 10 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date FIRST above written. "Secured Party" ________________________________________ William M. DeArman "Debtor" JALATE, LTD., a California corporation /s/ FREDERICK A. FINDLEY ---------------------------------------- By: Frederick A. Findley Its: Vice President and Chief Financial Officer Address: 6557 Flotilla Street Los Angeles, California 90040 -10- 11 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. "Secured Party" /s/ WILLIAM M. DEARMAN ---------------------------------------- William M. DeArman "Debtor" JALATE, LTD., a California corporation ________________________________________ By: Frederick A. Findley Its: Vice President and Chief Financial Officer Address: 6557 Flotilla Street Los Angeles, California 90040 -9- 12 SCHEDULE 1 NOTES AND HOLDERS
Holder Note Amount Percentage ------ ----------- ---------- Don A. Sanders $237,500 25% Katherine U. Sanders $142,500 15% John E. Drury $95,000 10% William M. DeArman $475,000 50% -------- ---- Total $950,000 100% -------- ----
-11- 13 SCHEDULE 2 LETTER AGREEMENT -12- 14 Airshop Ltd. 604 East 11th Street New York, New York 10009 October 17, 1997 Jalate, Ltd. 6557 Flotilla Avenue Los Angeles, California 90040 Attn: Fred Findley Dominique Camacho 604 East 11th Street New York, New York 10009 Dear Mr. Findley and Ms. Camacho: The purpose of this letter is to set forth the terms and conditions of our agreement (the "Agreement") regarding an equity investment by Jalate, Ltd. (the "Purchaser") in Airshop Ltd. (the "Company"), consisting of the purchase by Buyer of (i) shares (the "Common Shares") of common stock (the "Common Stock") of the Company representing forty percent (40%) of the outstanding capital stock of the Company on a fully-diluted basis and (ii) 3,000 shares (the "Preferred Shares") of convertible preferred stock of the Company, liquidation preference $100 per share (the "Preferred Stock"). 1. Sale and Purchase of Common Shares and Preferred Shares. Subject to the terms and conditions hereof, the Company agrees to sell to the Purchaser, and the Purchaser agrees to purchase from the Company, (i) Common Shares representing forty percent (40%) of the outstanding capital stock of the Company on a fully-diluted basis (measured as of the Closing Date (as defined below)) for an aggregate purchase price of $200,000 and (ii) 3,000 Preferred Shares for an aggregate purchase price of $300,000. 2. Closing; Payment. The closing (the "Closing") of the purchase and sale of the Common Shares and the Preferred Shares shall take place at the offices of Irell & Manella LLP, located at 1800 Avenue of the Stars, Suite 900, Los Angeles, California 90067-4276 (Telephone (310) 277-1010, Fax (310) 203-7199) as soon as practicable following the satisfaction or waiver of the conditions to the Closing, or at such other place, date or time as the parties shall agree upon (said date is referred to as the "Closing Date"), but in no event later than October 31, 1997. At the Closing, the Purchaser shall pay the aggregate purchase price of $500,000 for the Common Shares and the Preferred Shares by (i) cancellation of any indebtedness then owing by the Company to the Purchaser and, if such indebtedness is less than $500,000, (ii) wire 15 transfer in immediately available funds of the balance of such aggregate purchase price to an account designated in writing by the Company at least one business day prior to the Closing. 3. DELIVERY OF STOCK CERTIFICATES. At the Closing, or as soon as practicable thereafter, the Company shall deliver to the Purchaser certificates evidencing the Purchaser's ownership of the Common Shares and the Preferred Shares as set forth in Section 1 hereof. 4. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company represents and warrants to the Purchaser that: a. The Company is a corporation duly organized and existing in good standing under the laws of New York and has the corporate power to own its property, to carry on its business as now being conducted, to enter this Agreement, to issue and sell the Common Shares and the Preferred Shares, and to carry out the provisions hereof. The Company is duly qualified to do business as a foreign corporation in each other jurisdiction where the nature of the property owned or leased by it or the conduct of its business 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 business, financial condition or results of operations. The Company does not presently own or control, directly or indirectly, any interest in any other corporation, partnership, trust, joint venture, association or other entity. b. The authorized capital stock of the Company, on the Closing Date, will consist of Three Hundred (300) shares of Common Stock and Four Thousand (4,000) shares of Preferred Stock and the issued and outstanding capital stock of the Company, on the Closing Date, and immediately prior to the purchase of the Common Shares and the Preferred Shares, will consist of Ten (10) shares of Common Stock, all of which shares are owned by Dominique Camacho. After giving effect to the consummation of the transactions at the Closing, there will be validly issued and outstanding, fully paid and nonassessable, One Hundred (100) shares of Common Stock (sixty (60) of which will be owned by Dominique Camacho and forty (40) of which will be owned by the Purchaser), and Three Thousand (3,000) shares of Preferred Stock (all of which will be owned by the Purchaser), all of which shares shall have been issued in full compliance with all federal and state securities laws. c. The Company will not have outstanding as of the Closing Date any options, warrants or rights to purchase any of its Common Stock, nor have agreed to grant any such options, warrants or rights, nor have issued or agreed to issue any security convertible into Common Stock, nor have issued or agreed to issue any other debt or equity security (other than bank notes). d. All corporate action on the part of the Company, its officers, directors and shareholders necessary for the authorization, execution, delivery of, and the performance of all obligations of the Company under, this Agreement, and the 2 16 authorization, issuance, reservation for issuance and delivery of the Common Shares and the Preferred Shares and of the shares of Common Stock issuable upon conversion of the Preferred Shares has been taken or will be taken prior to the Closing. This Agreement is a valid and binding obligation of the Company enforceable in accordance with its terms, subject, as to enforcement of remedies, to applicable bankruptcy, insolvency, moratorium, reorganization and similar laws affecting creditors' rights generally and to general equitable principles. The Common Stock and the Preferred Stock is not subject to any preemptive rights, rights of first refusal or other similar rights. e. The execution and delivery of this Agreement, consummation of the transactions contemplated hereby, and compliance with the terms and provisions hereof will not conflict with or result in a breach (with or without the passage of time or the giving of notice or both) of the terms and conditions of, or constitute any default under the Certificate of Incorporation or Bylaws of the Company or of any contract or agreement to which it is now a party, except where such conflict, breach or default of any such contract or agreement, either individually or in the aggregate, would not be reasonably likely to have a material adverse effect on the Company's business, financial condition or result of operations. f. The Company has furnished the Purchaser with its balance sheet dated September 30, 1997 (the "BALANCE SHEET DATE"), and an income statement flows for the nine-month period ended September 30, 1997 (such financial statements being collectively referred to herein as the "FINANCIAL STATEMENTS"). Such Financial Statements (i) were prepared in accordance with generally accepted accounting principles, consistently applied, (ii) are in accordance with the books and records of the Company, and (iii) are true, correct and complete in all material respects and present fairly the financial condition of the Company at the date or dates therein indicated and the results of operations for the period or periods therein specified. Except as accrued in the Financial Statements or set forth in the notes thereto, the Company has no debts, liabilities or obligations (whether absolute, accrued, contingent, or otherwise, mature or unmatured, and whether due or to become due), which debts, liabilities or obligations are either required to be reflected in the Financial Statements or the notes thereto in accordance with generally accepted accounting principles or material to the Company, except for debts, liabilities and obligations incurred since the Balance Sheet Date in the ordinary course of business and consistent with past practice. All debts, liabilities and obligations of the Company incurred after the Balance Sheet Date were incurred in the ordinary course of business and are usual and normal in amount (in relation to the Company's past practice). The Company has good and marketable title to all assets set forth on the balance sheets of the Financial Statements, except for such assets as have been spent, sold or transferred in the ordinary course of business since their respective dates. g. To the best knowledge of the Company, no representation or warranty by the Company in this Agreement or in any statement or certificate signed by an officer of the Company furnished or to be furnished to the Purchaser pursuant to this Agreement contains or will contain any untrue statement of a material fact which would 3 17 cause the statements made herein or therein in the light of the circumstances materially misleading. h. Neither the Company, nor any agent acting on its behalf, has offered or will offer any or all of the Common Shares or the Preferred Shares or any part thereof for sale to, or has solicited, or will solicit, any offers to buy the Common Shares or the Preferred Shares from any person or persons so as to bring the issuance or sale of the Common Shares or the Preferred Shares within the provisions of Section 5 of the Securities Act of 1933, as amended (the "SECURITIES ACT"). 5. Representations and Warranties of the Purchaser. The Purchaser represents and warrants to the Company that: a. The Purchaser is an "accredited investor" as such term is defined in Regulation D adopted by the Securities and Exchange Commission and Purchaser is acquiring the Common Shares and the Preferred Shares purchased hereunder for the Purchaser's own account for investment and not with a present view to, or for sale or other disposition in connection with, any distribution thereof, nor with any present intention of selling or otherwise disposing of the same, and the Purchaser by reason of the Purchaser's business or financial experience has the capacity to protect the Purchaser's own interests in connection with the purchase of the Common Shares and the Preferred Shares. b. The Purchaser has reviewed all documents and other materials the Purchaser has requested for the purpose of examining the financial, business and other status of the Company. 6. Conditions to Obligations of the Purchaser. The Purchaser's obligation to purchase the Common Shares and the Preferred Shares on the Closing Date as provided in Sections 1 and 2 hereof shall be subject to the satisfaction of the following conditions, any of which may be waived by the Purchaser in writing: a. The representations and warranties contained in Section 4 hereof shall be true in all material respects as of the Closing Date; there shall exist no condition, event or fact constituting, or which with notice or lapse of time, or both, would constitute a default in the observance of any of the Company's undertakings or covenants hereunder; and no event shall have occurred which would be reasonably likely to have a material adverse effect on the Company's business, financial condition, results of operations or prospects. b. All corporate and other proceedings, including, without limiting the generality of the foregoing, the amendment of the Company's Certificate of Incorporation (and the filing thereof) to effect the stock split and provide for the Preferred Stock as contemplated by clause (f) below, which are required to be taken in connection with the transactions contemplated hereby and all documents incident thereto shall be satisfactory in form and substance to the Purchaser and Purchaser's counsel. 4 18 c. The offer and sale of the Common Shares and the Preferred Shares to the Purchaser pursuant to this Agreement shall be exempt from the registration requirements of the Securities Act and the registration and qualification requirements of all other applicable state securities laws. d. The Company shall have obtained any and all necessary consents and approvals, including those of any governmental entity, agency or instrumentality, necessary or appropriate for consummation of the transactions contemplated by this Agreement. e. The Company shall have (a) amended its bylaws to provide that (i) the Board of Directors (the "BOARD") of the Company shall consist of three (3) directors and (ii) the presence of all members of the Board or any committee thereof shall be necessary for a quorum, unless in advance of any meeting of the Board or any committee thereof, all of the members of the Board or of such committee agree in writing that a majority of the members of the Board or of such committee, as applicable, shall constitute a quorum for the purposes of that meeting and (b) reconstituted the Board to consist of Vinton Bacon, Dominique Camacho and Steven Lubinski. f. The Company shall have amended its articles of incorporation to (i) effect a six-for-one stock split of the Common Stock and (ii) provide for the Preferred Stock. The Preferred Stock shall (i) have a liquidation preference of $100 per share, (ii) have a ten percent (10%) dividend, payable "in-kind" for two years and in cash thereafter, (iii) automatically convert into Common Stock when the Company has four consecutive fiscal quarters of earnings before income and taxes of at least $1 with a conversion rate determined by dividing (x) the liquidation preference of a share of Preferred Stock, plus accumulated but unpaid dividends through the date of conversion, by (y) the greater of (i) ten (10) times the after-tax net income per fully-diluted share of Common Stock ("ATNI") for the Company's then-most recently completed fiscal year and (ii) the quotient of (a) $500,000 divided by (b) the number of shares of Common Stock then-outstanding on a fully-duluted basis, (iv) be redeemable at the option of the Company at any time, (v) be subject to repurchase by the Company at the option of the holder beginning three (93) years after issuance, and (vi) have such other customary rights, preferences and privileges as shall be agreed by the Company and the Purchaser in good faith. g. Dominique Camacho shall have entered into a five-year employment agreement to serve as chief creative officer of the Company and providing for a $50,000 annual salary (to be reviewed by the entire Board in January 1998) and an annual bonus by unanimous agreement of the Board based on EBIT (earnings before interest and taxes) and containing other terms and conditions satisfactory to the Purchaser. h. At the Closing there shall have been delivered to the Purchaser or Purchaser's counsel a certificate, dated as of the Closing Date, signed by an authorized 5 19 officer of the Company, certifying that the conditions specified in clauses (a), (c), (e), (f) and (g) of this Section 6 have been fulfilled. 7. Covenants of the Company. The Company covenants and agrees that: until the consummation of an underwritten public offering of the Company's Common Stock in which the gross proceeds to the Company are at least $15,000,000 (a "QUALIFYING IPO"): a. In order to permit the Purchaser to maintain its percentage ownership interest in the Company (as represented by its ownership of Common Stock and without regard to possible conversion of the Preferred Shares into shares of Common Stock), if the Company offers to sell its Common Stock, Preferred Stock or other equity security, any option, warrant or other security which may be exercised or exchanged for equity securities of the corporation, or any debt convertible into equity securities of the corporation, it will concurrently offer to the Purchaser for a period of thirty (30) days from receipt of a notice to that effect from the Company specifying the terms and conditions of the offering, at a price and on terms no less favorable than the price and terms of such offer, that number of such securities being offered necessary to prevent a reduction in the Purchaser's then-percentage ownership of the Company's Common Stock calculated on a fully diluted basis as of the closing of the offering and taking into account all similar rights held by other holders of the Company's debt or equity securities. If the Purchaser elects not to exercise its rights set forth in this Section 7(a), then, for a period of ten (10) days after the Purchaser so notifies the Company, Dominique Camacho shall have the right to purchase the securities not purchased by the Purchaser. The Purchaser and Ms. Camacho may elect to allocate between themselves the securities that Purchaser has the right to purchase pursuant to this Section 7(a). b. The Board shall consist of three members and as of the Closing shall consist of Vinton Bacon, Dominique Camacho and Steven Lubinski. The number of directors may be increased or decreased, and the composition of the Board may be changed, only by unanimous agreement of the Board, except that, at the request of the Purchaser, the Company agrees to take any such actions as may be necessary to change the Purchaser's nominee(s) on the Board. At all times, the Purchaser shall be entitled to proportional representation (based on its then-percentage ownership interest of the fully-diluted Common Stock) on the Board and each Board committee (and in any event shall be entitled to have at least one nominee on the Board and each Board committee). c. Commencing October 1, 1998, (i) the Purchaser shall have the right to manufacture any and all private label merchandise included in the Company's catalogs or advertised on the Company's website(s) and (ii) at least forty percent (40%) of the products advertised in each catalog shall be private label merchandise. Prior to October 1, 1998, the Purchaser and the Company shall mutually cooperate to maximize the percentage of the Company's private label merchandise that is manufactured by the Purchaser and included in the Company's catalogs, provided that this shall not be 6 20 deemed to require that any specified percentage of the Company's private label merchandise be manufactured by the Purchaser or that private label merchandise constitute any specified percentage of the Company's catalog offerings. d. The Purchaser shall be entitled to include at least four (4) of its own products without charge in each of the Company's catalogs and on the Company's website(s). e. Without the consent of the Purchaser's nominee(s) on the Board, the Company shall not (i) revise its existing Business Plan or adopt a new Business Plan, (ii) authorize or engage in any capital expenditure (or series of related capital expenditures) in excess of $15,000 or (iii) enter into any contract, agreement or arrangement having a value of more than $20,000. 8. Rights of First Refusal. (a) Until the consummation of a Qualifying IPO, the Company shall have a right of first refusal to purchase any shares of Common Stock or Preferred Stock which Purchaser seeks to sell or assign (a "FIRST REFUSAL SALE"). The Purchaser shall provide the Company with thirty (30) days written notice of any proposed First Refusal Sale, including the proposed terms and conditions thereof (including price). The Company shall have thirty (30) days from receipt of such notice in which to notify the Purchaser in writing that it will exercise its right of first refusal. if the Company exercises its right of first refusal, the closing of the sale by the Purchaser to the Company shall occur fifteen (15) days after the date of the Company's exercise notice at the Company's principal executive offices or at such other time and place as the parties may agree. If the Company does not exercise its right of first refusal, the Purchaser shall have ninety (90) days from the date of its initial notice to the Company to consummate its First Refusal Sale on terms and conditions (including price) no more favorable to the transferee than those presented to the Company. If the proposed First Refusal Sale does not occur prior to the end of such ninety (90) day period, the Purchaser may not sell or assign any shares of Common stock or Preferred Stock without again complying with the requirements set forth in this paragraph (if then applicable). The Company's right of first refusal shall not apply to any sale or assignment of shares of Common Stock or Preferred Stock by the Purchaser to any of its affiliates. (b) Until the consummation of a Qualifying IPO, the Purchaser shall have a right of first refusal to purchase any shares of Common Stock which Dominique Camacho seeks to sell or assign (a "CAMACHO FIRST REFUSAL SALE"). Ms. Camacho shall provide the Purchaser with thirty (30) days written notice of any proposed Camacho First Refusal Sale, including the proposed terms and conditions thereof (including price). The Purchaser shall have thirty (30) days from receipt of such notice in which to notify Ms. Camacho in writing that it will exercise its right of first refusal. If the Purchaser exercises its right of first refusal, the closing of the sale by Ms. Camacho to the Purchaser shall occur fifteen (15) days after the date of the Purchaser's exercise notice at the Purchaser's principal executive offices or at such other time and place as the parties 7 21 may agree. If the Purchaser does not exercise its right of first refusal, Ms. Camacho shall have ninety (90) days from the date of her initial notice to the Purchaser to consummate her Camacho First Refusal Sale on terms and conditions (including price) no more favorable to the transferee than those presented to the Purchaser. If the proposed Camacho First Refusal Sale does not occur prior to the end of such ninety (90) day period, Ms. Camacho may not sell or assign any shares of Common Stock without again complying with the requirements set forth in this paragraph (if then applicable). The Purchaser's right of first refusal shall not apply to any sale or assignment of shares of Common Stock by Ms. Camacho to any of her affiliates. 9. Option to Purchase Additional Shares of Common Stock. Effective at the Closing, the Company grants to the Purchaser an option to purchase a number of additional shares of Common Stock (the "ADDITIONAL COMMON SHARES") that, when added to any other shares of Common Stock then owned by the Purchaser, would result in the Purchaser owning, immediately following exercise of he option, fifty-one percent (51%) of the then-outstanding Common Stock of the Company on a fully-diluted basis. The option may be exercised in whole or in part on only one occasion and shall expire if not theretofore exercised on December 31, 2000. The exercise price per Additional Common Share shall be equal to the greater of (i) $5,000, subject to adjustment for stock splits, stock dividends, combinations, reclassifications and other similar events and (ii) ten (10) times the after-tax net income per fully-diluted share of Common Stock ("ATNI") for the year ended December 31, 1998 (if the option is exercised on or prior to December 31, 1999) or, if not so exercised by then, ten (10) times ATNI for the year ended December 31, 1999. Any dispute between the parties as to the calculation of the applicable ATNI not resolved by them shall be resolved by an independent accounting firm acceptable to the Company and the Purchaser. If the Purchaser exercises its option at a time when the exercise price has not been or cannot be finally determined, the Purchaser shall pay an estimated exercise price of $5,000 per share (i.e., the price per share paid by the Purchaser for the Common Shares), adjusted for stock splits, stock dividends, combinations, reclassifications and other similar events. If the exercise price as finally determined is greater than the estimated exercise price, the Purchaser shall, within ten (10) days of such determination, pay the balance of the exercise price to the Company. If the exercise price as finally determined is less than the estimated exercise price, the Company shall, within ten days of such determination, refund the excess payment of the exercise price to the Purchaser. The Purchaser acknowledges and agrees that, if it acquires ownership of more than fifty percent (50%) of the outstanding Common Stock on a fully-diluted basis, whether by exercise of the option granted to it pursuant to this Section 9 or otherwise, Ms. Camacho shall retain the creative control provided for in the employment agreement contemplated by Section 6(g) hereof. 8 22 10. Termination. This Agreement may be terminated at any time prior to the Closing: a. by mutual consent of the Company and the Purchaser; b. by the Purchaser, provided that it has not breached any of its obligations hereunder in any material respect, if any of the conditions specified in Section 6 have not been met or waived at such time as such condition is no longer capable of satisfaction; or c. by either the Purchaser or the Company (provided that the terminating party has not breached any of its obligations hereunder in any material respect) if the Closing has not occurred by October 31, 1997. 11. Miscellaneous. The miscellaneous provisions set forth in Exhibit 11 are incorporated herein in their entirety by this reference. If the foregoing accurately reflects our agreement with regard to the proposed equity investment by the Purchaser in the Company, please sign and return a copy of this letter to the undersigned, at which time this Agreement will be the binding agreement of the Company and the Purchaser. Very truly yours /s/ DOMINIQUE CAMACHO ---------------------------------------- Dominique Camacho ACCEPTED AND AGREED TO: JALATE, LTD. By: /s/ F.A. FINDLEY ----------------------------------- Name: F.A. Findley --------------------------------- Title: VP Finance -------------------------------- DOMINIQUE CAMACHO (as to Section 8(b) and the miscellaneous provisions) 9 23 EXHIBIT 11 Miscellaneous Provisions a. This Agreement constitutes the entire agreement between the parties hereto pertaining to the subject matter contained herein and supersedes any and all other prior or contemporaneous agreements, arrangements, and understandings, either oral or in writing, between the parties hereto with respect to the subject matter hereof. Each party to this Agreement acknowledges and represents that no representations, warranties, covenants, conditions, inducements, promises or agreements, oral or otherwise, other than as set forth herein, have been made by any party hereto, or anyone acting on behalf of any party. b. Each party to this Agreement shall make, execute, acknowledge and deliver such other instruments and documents and take all such other action as may be reasonably required to effectuate the purposes of this Agreement and to consummate the transactions contemplated hereby. In particular, but not by way of limitation of the foregoing, Ms. Camacho agrees to take such actions in her capacity as a stockholder of the Company as are necessary to effectuate the conditions to Closing set forth in Section 6 and the Purchaser's rights pursuant to Section 7(b). c. No waiver of any term, provision, condition or breach of this Agreement, whether by conduct or otherwise, in any one or more instances, shall be deemed to be or construed as a further or continuing waiver of any such term, provision, condition or breach of this Agreement. No failure or delay by a party to exercise any right it may have by reason of the breach or default of any other party shall operate as a waiver of default or modification of this Agreement or prevent the exercise of any right while the party continues to be in default. d. The Company acknowledges that the Purchaser would not have an adequate remedy at law for money damages in the event that any of the covenants or agreements of the Company set forth in Sections 7 and 9 hereof were not performed in accordance with its terms and therefore agrees that the Purchaser shall be entitled to specific enforcement of such covenants or agreements and to injunctive and other equitable relief in addition to any other remedy to which it may be entitled, at law or in equity. e. It is intended that each section of this Agreement should be viewed as separate and divisible, and in the event that any section, provision, covenant, or condition of this Agreement shall be held to be invalid, void, or unenforceable, the remainder of the provisions shall remain in full force and effect and shall in no way be affected, impaired, or invalidated. f. The provisions of this Agreement may be altered, amended, or repealed, in whole or in part, only on the written consent of the Company and the Purchaser (and, as to Section 8(b), Ms. Camacho). 10 24 g. All notices, requests, demands and other communications which a party is required to or may desire to give any other party in connection with this Agreement shall be in writing, and shall be personally delivered, delivered by facsimile transmission, or delivered by United States registered or certified mail, postage prepaid with return receipt requested, addressed as follows: If to the Company: Dominique Camacho Airshop Ltd. 604 East 11th Street New York, New York 10009 Fax No. (212) 539-1648 If to the Purchaser: Fred Findley Jalate, Ltd. 6557 Flotilla Avenue Los Angeles, California 90040 Fax No. (213) 728-3752 If to Dominique Camacho: Dominique Camacho Airshop Ltd. 604 East 11th Street New York, New York 10009 Fax No. (212) 539-1648 If notice is given by personal delivery in accordance with the provisions of this clause (g), such notice shall conclusively be deemed given at the time of delivery. If notice is given by confirmed facsimile transmission in accordance with the provisions of this clause (g), such notice shall conclusively be deemed given at the time of the transmission. If notice is given by mail in accordance with the provisions of this clause (g), such notice shall conclusively be deemed given 48 hours after deposit thereof in the United States mail. The addresses or addresses set forth above may be changed form time to time by a notice sent to the other parties. h. This Agreement shall be governed by and construed under the laws of the State of California, without reference to conflict of laws principles. Any and all disputes between the parties which may arise pursuant to this Agreement not covered by arbitration shall be brought and heard only in an appropriate state or federal court located in the County of Los Angeles, California. The parties hereto acknowledge that such courts have, in the absence of arbitration, the exclusive jurisdiction to interpret and enforce the provisions of this Agreement, and the parties waive any and all objections that they may have as to personal jurisdiction or venue in any of the above courts. i. Except for actions seeking injunctive relief, which may be brought before any court having jurisdiction, any dispute, controversy or claim, regardless of the legal or equitable theory involved, arising out of or with reference to this Agreement, or the interpretation, making, performance, breach or termination thereof, which is not 11 25 settled by agreement between the parties, shall be finally resolved, at the request of either party to the dispute, by confidential binding arbitration conducted in Los Angeles, California in accordance with the then most applicable rules of the American Arbitration Association, and judgment upon any award rendered by the arbitrator may be entered by any state or federal court having jurisdiction thereof. In any such arbitration, the arbitrator shall have the jurisdiction and authority to issue any remedy (but only such remedy) that a court of competent jurisdiction could have provided based upon the facts found by the arbitrator. After soliciting the views of each party, the arbitrator shall order such discovery as he or she may consider reasonable and appropriate given the subject matter of the dispute. At the conclusion of the proceeding, the arbitrator shall issue a written opinion setting forth the legal analysis and basis for his or her decision and material findings of fact. In the event either party to the dispute shall suspend its or her performance on the basis that its or her performance has been excused by a material breach by the other party, either party seeking performance may request preliminary relief from the arbitrator and the parties agree to cooperate to have such issue heard on an expedited basis. The arbitrator may hear such issue on a preliminary basis and may grant such preliminary relief, and under such conditions, as the arbitrator shall deem to be appropriate and equitable. In the event the parties are unable to agree upon an arbitrator, the parties shall select a single arbitrator from a list designated by the nearest office of the American Arbitration Association of seven arbitrators, all of whom shall be retired judges who have had experience in the corporate law, who are actively involved in hearing private cases and who are resident in the greater Los Angeles area. If the parties are unable to select an arbitrator from the list provided by the American Arbitration Association, then the parties shall each strike names alternatively from the list, with the first to strike being determined by lot. After each party has used three strikes, the remaining name on the list, with the first to strike being determined by lot. After each party has used three strikes, the remaining name on the list shall be the arbitrator. The parties intend that this agreement to arbitrate be valid, enforceable and irrevocable and that it provide the exclusive remedy with respect to all disputes within its scope. The fees and expenses of the arbitrator shall initially be divided evenly between the parties. Thereafter they shall be treated as costs pursuant to subparagraph (j). j. If any action at law or equity, including an action for declaratory relief, or any proceeding in arbitration, is brought to enforce or interpret the provisions of this Agreement, the successful or prevailing party shall be entitled to recover reasonable attorneys' fees, and other costs incurred in that action or proceeding which may be set by the court or the arbitration panel in the same action or any separate action brought for that purpose, in addition to any other relief to which such party may be entitled. k. Captions contained in this Agreement are inserted only as a matter of convenience and shall not affect the construction or interpretation of any of its provisions. l. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 12 26 m. Any calculations of the Purchaser's ownership interest in the Company on a fully-diluted basis shall not take into account any possible conversion of the Preferred Shares into shares of Common Stock, although such possible conversion shall be taken into account in determining EBIT and ATNI. 13 EX-10.35 11 EXHIBIT 10.35 1 EXHIBIT 10.35 ============================================= CREDIT AGREEMENT by and between JALATE, LTD., A CALIFORNIA CORPORATION and WELLS FARGO HSBC TRADE BANK, N.A. Dated as of JAN 21, 1998 ============================================= Exhibit A - Addendum to Agreement Exhibit B - Facility Supplement(s) Exhibit C - Collateral/Credit Support Document 2 WELLS FARGO HSBC TRADE BANK CREDIT AGREEMENT ================================================================================ JALATE, LTD., a corporation ("Borrower"), organized under the laws of the State of California whose chief executive office is located at the address specified after its signature to this Agreement ("Borrower's Address") and WELLS FARGO HSBC TRADE BANK, N.A. ("Trade Bank"), whose address is specified after its signature to this Agreement, have entered into this CREDIT AGREEMENT as of _________________ , 199_ ("Effective Date"). All references to this "Agreement" include those covenants included in the Addendum to Agreement ("Addendum") attached as Exhibit A hereto. I. CREDIT FACILITIES 1.1 THE FACILITIES. Subject to the terms and conditions of this Agreement, Trade Bank will make available to Borrower each of those credit facilities ("Facilities") for which a Facility Supplement ("Supplement") is attached as Exhibit B hereto. Additional terms for each individual Facility (and each subfacility thereof ("Subfacility")) are set forth in the Supplement for that Facility. Each Facility will be available from the Closing Date until the Facility Termination Date for that Facility. Collateral and credit support required for each Facility are also set forth in the Supplement for each Facility. Definitions for those capitalized terms not otherwise defined are contained in Article 8 below. 1.2 CREDIT EXTENSION LIMIT, The aggregate outstanding amount of all Credit Extensions may at no time exceed One Million One Hundred Twenty-Seven Thousand Six Hundred Thirteen Dollars ($127.613) ("Overall Credit Limit"). The aggregate outstanding amount of all Credit Extensions outstanding at any time under any Facility may not exceed that amount specified as the "Credit Limit" in the Supplement for that Facility, and the aggregate outstanding amount of all Credit Extensions outstanding at any time under each Subfacility (or any subcategory thereof) may not exceed that amount specified as the "Credit Sublimit" in the Supplement for the relevant Facility. An amount equal to 100% of each unfunded Credit Extension shall be used in calculating the outstanding amount of Credit Extensions under this Agreement. 1.3 REPAYMENT; INTEREST AND FEES. Each funded Credit Extension shall be repaid by Borrower, and shall bear interest from the date of disbursement at those per annum rates and such interest shall be paid, at the times specified in the applicable Supplement, Note or Facility Document. With respect to each Facility, Borrower agrees to pay to Trade Bank the fees specified in the related Supplement as well as those fees specified in the relevant Facility Document(s). Interest and fees will be calculated on the basis of a 360 day year, actual days elapsed. Any overdue payments of principal (and interest to the extent permitted by law) shall bear interest at a per annum floating rate equal to the Prime Rate plus 8.0%. 1.4 PREPAYMENTS. Credit Extensions under any Facility may only be prepaid in accordance with the terms of the related Supplement. At the time of any prepayment (including, but not limited to, any prepayment which is a result of the occurrence of an Event of Default and an acceleration of the Obligations) Borrower will pay to Trade Bank all interest accrued on the amount so prepaid to the date of such prepayment and all costs, expenses and fees specified in the Loan Documents. II. REPRESENTATIONS AND WARRANTIES Borrower represents and warrants to Trade Bank that the following representations and warranties are true and correct: 2.1 LEGAL STATUS. Borrower is duly organized and existing and in good standing under the laws of the jurisdiction indicated in this Agreement, and is qualified or licensed to do business in all jurisdictions in which such qualification or licensing is required and in which the failure to so qualify or to be so licensed could have a material adverse affect on Borrower. 2.2 AUTHORIZATION AND VALIDITY. The execution, delivery and performance of this Agreement, and all other Loan Documents to which Borrower is a party, have been duly and validly authorized, executed and delivered by Borrower and constitute legal, valid and binding agreements of Borrower, and are enforceable against Borrower in accordance with their respective terms. 2.3 BORROWER'S NAME. The name of Borrower set forth at the end of this Agreement is its correct name. If Borrower is conducting business under a fictitious business name, Borrower is in compliance with all laws relating to the conduct of such business under such name. 2.4 FINANCIAL CONDITION AND STATEMENTS. All financial statements of Borrower delivered to Trade Bank have been prepared in conformity with GAAP, and completely and accurately reflect the financial condition of Borrower (and any consolidated Subsidiaries) at the times and for the periods stated in such financial statements. Neither Borrower nor any Subsidiary has any material contingent liability not reflected in the aforesaid financial statement. Since the date of the financial statements delivered to Trade Bank for the last fiscal period of Borrower to end before the Effective Date, there has been no material adverse change in the financial condition, business or prospects of Borrower. Borrower is solvent. Page 1 of 9 3 2.5 LITIGATION. Except as disclosed in writing to Trade Bank prior to the Effective Date, there is no action, claim, suit, litigation, proceeding or investigation pending or (to best of Borrower's knowledge) threatened by or against or affecting Borrower or any Subsidiary in any court or before any governmental authority, administrator or agency which may result in (a) any material adverse change in the financial condition or business of Borrower, or (b) any material impairment of the ability of Borrower to carry on its business in substantially the same manner as it is now being conducted. 2.6 OTHER OBLIGATIONS. Except as disclosed in writing to Trade Bank prior to the Effective Date, neither Borrower nor any Subsidiary are in default of any obligation for borrowed money, any purchase money obligation or any material lease, commitment, contract, instrument or obligation. 2.7 NO DEFAULTS. No Event of Default, and event which with the giving of notice or the passage of time or both would constitute an Event of Default, has occurred and is continuing. 2.8 INFORMATION PROVIDED TO TRADE BANK. The information provided to the Trade Bank concerning Borrower's business is true and correct. 2.9 ENVIRONMENTAL MATTERS. Except as disclosed by Borrower to Bank in writing prior to the Effective Date, Borrower (as well as any Subsidiary) is each in compliance in all material respects with all applicable Federal or state environmental, hazardous waste, health and safety statutes, and any rules or regulations adopted pursuant thereto, which govern or affect any of Borrower's or any Subsidiary's operations and/or properties, including without limitation, the Comprehensive Environmental Response, Compensation and Liability Act of 1980, the Superfund Amendments and Reauthorization Act of 1986, the Federal Resource Conservation and Recovery Act of 1976, the Federal Toxic Substances Control Act and the California Health and Safety Code, as any of the same may be amended, modified or supplemented from time to time. None of the operations of Borrower or of any Subsidiary is the subject of any Federal or state investigation evaluating whether any remedial action involving a material expenditure is needed to respond to a release of any toxic or hazardous waste or substance into the environment. III. CONDITIONS TO EXTENDING FACILITIES 3.1 Conditions to Initial Credit Extension. The obligation of Trade Bank to make the first Credit Extension is subject to the fulfillment to Trade Bank's satisfaction of the following conditions: (a) APPROVAL OF TRADE BANK COUNSEL. All legal matters relating to making the Facilities available to Borrower must be satisfactory to counsel for Trade Bank. (b) DOCUMENTATION. Trade Bank must have received, in form and substance satisfactory to Trade Bank, the following documents and instruments duly executed and in full force and effect: (1) a corporate borrowing resolution and incumbency certificate if Borrower is a corporation, a partnership or joint venture borrowing certificate if Borrower is a partnership or joint venture, and a limited liability company borrowing certificate if Borrower is a limited liability company; (2) the Facility Documents for each Facility, including, but not limited to, note(s) ("Notes") for any Revolving Credit or Term Loan Facility, Trade Bank's standard Continuing Commercial Letter of Credit Agreement or Continuing Standby Letter of Credit Agreement for any letter of credit Facility; (3) those guarantees, security agreements, deeds of trust, subordination agreements, intercreditor agreements, factoring agreements, tax service contracts, and other Collateral Documents required by Trade Bank to evidence the collateral/credit support specified in the Supplement; (4) if an audit or inspection of any books, records or property is specified in the Supplement for any Facility, an audit or inspection report from Wells Fargo or another auditor or inspector acceptable to Trade Bank reflecting values and property conditions satisfactory to Trade Bank; (5) if an appraisal of any real property is specified in any Facility Supplement, an appraisal from an appraiser acceptable to Trade Bank reflecting values satisfactory to Trade Bank; (6) if a policy of title insurance is specified in any Facility Supplement, an ALTA policy containing the endorsements, and issued by a company, acceptable to Trade Bank; and (7) if insurance is required in the Addendum, the insurance policies specified in the Addendum (or other satisfactory proof thereof) from insurers acceptable to Trade Bank. 3.2 CONDITIONS TO MAKING EACH CREDIT EXTENSION. The obligation of Trade Bank to make each Credit Extension is subject to the fulfillment to Trade Bank's satisfaction of the following conditions: (a) REPRESENTATIONS AND WARRANTIES. The representations and warranties contained in this Agreement, the Facility Documents and the Collateral Documents will be true and correct on as of the date of the Credit Extension with the same effect as though such representations and warranties had been made on and as of such date; Page 2 of 9 4 (b) DOCUMENTATION. Trade Bank must have received, in form and substance satisfactory to Trade Bank, the following documents and instruments duly executed and in full force and effect: (1) if the Credit Extension is the issuance of a Commercial Letter of Credit, Trade Bank's standard Application For Commercial Letter of Credit or standard Application and Agreement For Commercial Letter of Credit; (2) if the Credit Extension is the issuance of a Standby Letter of Credit, Trade Bank's standard Application For Standby Letter of Credit or standard Application and Agreement For Standby Letter of Credit; (3) if a Borrowing Base Certificate is required for the Credit Extension, a Borrowing Base Certificate demonstrating compliance with the requirements for such Credit Extension. (c) FEES. Trade Bank must have received any fees required by the Loan Documents to be paid at the time such Credit Extension is made. IV. AFFIRMATIVE COVENANTS Borrower covenants that so long as Trade Bank remains committed to make Credit Extensions to Borrower, and until payment of all Obligations and Credit Extensions, Borrower will comply with each of the following covenants: (For purposes of this Article IV, and Article V below, reference to "Borrower" may also extend to Borrower's subsidiaries, if so specified in the Addendum.) 4.1 PUNCTUAL PAYMENTS. Punctually pay all principal, interest, fees and other Obligations due under this Agreement or under any Loan Document at the time and place and in the manner specified herein or therein. 4.2 NOTIFICATION TO TRADE BANK. Promptly, but in no event more than 5 calendar days after the occurrence of each such event, provide written notice in reasonable detail of each of the following: (a) OCCURRENCE OF A DEFAULT. The occurrence of any Event of Default or any event which with the giving of notice or the passage of time or both would constitute an Event of Default, (b) BORROWER'S TRADE NAMES, PLACE OF BUSINESS. Any change of Borrower's (or any Subsidiary's) name, trade name or place of business, or chief executive officer; (c) LITIGATION. Any action, claim, proceeding, litigation or investigation threatened or instituted by or against or affecting Borrower (or any Subsidiary) in any court or before any government authority, administrator or agency which may materially and adversely affect Borrower's (or any Subsidiary's) financial condition or business or Borrower's ability to carry on its business in substantially the same manner as it is now being conducted; (d) UNINSURED OR PARTIALLY UNINSURED LOSS. Any uninsured or partially uninsured loss through liability or property damage or through fire, theft or any other cause affecting Borrower's (or any Subsidiary's) property in excess of the aggregate amount required hereunder; (e) REPORTS MADE TO INSURANCE COMPANIES. Copies of all material reports made to insurance companies; and (f) ERISA. The occurrence and nature of any Reportable Event or Prohibited Transaction, each as defined in ERISA, or any funding deficiency with respect to any Plan. 4.3 BOOKS AND RECORDS. Maintain at Borrower's address books and records in accordance with GAAP, and permit any representative of Trade Bank, at any reasonable time, to inspect, audit and examine such books and records; to make copies of them, and to inspect the properties of Borrower. 4.4 TAX RETURNS AND PAYMENTS. Timely file all tax returns and reports required by foreign, federal, state and local law, and timely pay all foreign, federal, state and local taxes, assessments, deposits and contributions owed by Borrower. Borrower may, however, defer payment of any contested taxes, provided that Borrower (i) in good faith contests Borrower's obligation to pay the taxes by appropriate proceedings promptly instituted and diligently conducted, (ii) notifies Trade Bank in writing of the commencement of, and any material development in, the proceedings, (iii) posts bonds or takes any other steps required to keep the contested taxes from becoming a lien upon any of the Collateral, and (iv) makes provision, to Trade Bank's satisfaction, for eventual payment of such taxes in the event Borrower is obligated to make such payment. 4.5 COMPLIANCE WITH LAWS. Comply in all material respects with the provisions of all foreign, federal, state and local laws and regulations relating to Borrower, including, but not limited to, those relating to Borrower's ownership of real or personal property, the conduct and licensing of Borrower's business, and health and environmental matters. 4.6 INSURANCE. Maintain and keep in force insurance of the types and in amounts customarily carried in lines of business similar to that of Borrower, including, but not limited to, fire, extended coverage, public liability, flood, property damage and workers' compensation, with all such insurance to be in amounts satisfactory to Trade Bank and to be carried with companies approved by Trade Bank before such companies are retained, and deliver to Trade Bank from time to time at Trade Bank's request Page 3 of 9 5 schedules setting forth all insurance then in effect. All insurance policies shall name Trade Bank as an additional loss payee, and shall contain a lenders loss payee endorsement in form reasonably acceptable to Trade Bank. (Upon receipt of the proceeds of any such insurance, Trade Bank shall apply such proceeds in reduction of the outstanding funded Credit Extensions and shall hold any remaining proceeds as collateral for the outstanding unfunded Credit Extensions, as Trade Bank shall determine in its sole discretion, except that, provided no Event of Default has occurred, Trade Bank shall release to Borrower insurance proceeds with respect to equipment totaling less than $100,000, which shall be utilized by Borrower for the replacement of the equipment with respect to which the insurance proceeds were paid, if Trade Bank receives reasonable assurance that the insurance proceeds so released will be so used.) If Borrower fails to provide or pay for any insurance, Trade Bank may, but is not obligated to, obtain the insurance at Borrower's expense. 4.7 FURTHER ASSURANCES. At Trade Bank's request and in form and substance satisfactory to Trade Bank, execute all documents and take all such actions at Borrower's expense as Trade Bank may deem reasonably necessary or useful to perfect and maintain Trade Bank's perfected security interest in the Collateral and in order to fully consummate all of the transactions contemplated by the Loan Documents. V. NEGATIVE COVENANTS Borrower covenants that so long as Trade Bank remains committed to make any Credit Extensions to Borrower and all Obligations and Credit Extensions have been paid, Borrower will not: 5.1 MERGE OR CONSOLIDATION, TRANSFER OF ASSETS. Merge into or consolidate with any other entity; make any substantial change in the nature of Borrower's business as conducted as of the date hereof; acquire all or substantially all of the assets of any other entity; nor sell, lease, transfer or otherwise dispose of all or a substantial or material portion of Borrower's assets except in the ordinary course of its business. 5.2 LIENS. Except for Permitted Liens, mortgage, pledge, grant or permit to exist a security interest in, or lien upon, all or any portion of Borrower's assets now owned or hereafter acquired. 5.3 USE OF PROCEEDS. Borrower will not use the proceeds of any Credit Extension except for the purposes, if any, specified for such Credit Extension in the Supplement covering the Facility under which such Credit Extension is made. VI. EVENTS OF DEFAULT AND REMEDIES 6.1 EVENTS OF DEFAULT. The occurrence of any of the following shall constitute an "Event of Default": (a) FAILURE TO MAKE PAYMENTS WHEN DUE. Borrower's failure to pay principal, interest, fees or other amounts when due under any Loan Document. (b) FAILURE TO PERFORM OBLIGATIONS. Any failure by Borrower to comply with any covenant or obligation in this Agreement or in any Loan Document (other than those referred to in subsection (a) above), and such default shall continue for a period of twenty calendar days from the earlier of (i) Borrower's failure to notify Trade Bank of such Event of Default pursuant to Section 4.2(a) above, or (ii) Trade Bank's notice to Borrower of such Event of Default. (c) UNTRUE OR MISLEADING WARRANTY OR STATEMENT. Any warranty, representation, financial statement, report or certificate made or delivered by Borrower under any Loan Document is untrue or misleading in any material respect when made or delivered. (d) DEFAULTS UNDER OTHER LOAN DOCUMENTS. Any "Event of Default" occurs under any other Loan Document; any Guaranty is no longer in full force and effect (or any claim thereof made by Guarantor) or any failure of a Guarantor to comply with the provisions thereof, or any breach of the provisions of any Subordination Agreement or Intercreditor Agreement by any party other than the Trade Bank. (e) DEFAULTS UNDER OTHER AGREEMENTS OR INSTRUMENTS. Any default in the payment or performance of any obligation, or the occurrence of any event of default, under the terms of any other agreement or instrument pursuant to which Borrower, any Subsidiary or any Guarantor or general partner of Borrower has incurred any debt or other material liability to any person or entity. (f) CONCEALING OR TRANSFERRING PROPERTY. Borrower conceals, removes or transfers any part of its property with intent to hinder, delay or defraud its creditors, or makes or suffers any transfer of any of its property which may be fraudulent under any bankruptcy, fraudulent conveyance or similar law. (g) JUDGMENTS AND LEVIES AGAINST BORROWER. the filing of a notice of judgment lien against Borrower, or the recording of any abstract of judgment against Borrower, in any county in which Borrower has ail interest in real property, or the service of a notice of levy and/or of a writ of attachment or execution, or other like process, against the assets of Borrower, or the entry of a judgment against Borrower. (h) EVENT OR CONDITION IMPAIRING PAYMENT OR PERFORMANCE. Any event occurs or condition arises which Trade Bank in good faith believes impairs or is substantially likely to impair the prospect of payment or performance by Borrower of the Obligations. including, but not limited to any material adverse change in Borrower's financial condition, business or prospects. Page 4 of 9 6 (i) VOLUNTARY INSOLVENCY. Borrower, any Subsidiary or any Guarantor (i) becomes insolvent, (ii) suffers or consents to or applies for the appointment of a receiver, trustee, custodian or liquidator of itself or any of its property, (iii) generally fails to pay its debts as they become due, (iv) makes a general assignment for the benefit of creditors, or (v) files a voluntary petition in bankruptcy, or seeks reorganization, in order to effect a plan or other arrangement with creditors or any other relief under the Bankruptcy Reform Act, Title 11 of the United States Code, as amended or recodified from time to time ("Bankruptcy Code"), or under any state or Federal law granting relief to debtors, whether now or hereafter in effect. (j) INVOLUNTARY INSOLVENCY. Any involuntary petition or proceeding pursuant to the Bankruptcy Code or any other applicable state or federal law relating to bankruptcy, reorganization or other relief for debtors is filed or commenced against Borrower, any Subsidiary or Guarantor, or (b) have an order for relief entered against it by any court of competent jurisdiction under the Bankruptcy Code or any other applicable state or federal law relating to bankruptcy, reorganization or other relief for debtors. (k) CHANGE IN OWNERSHIP. Any change in the ownership of Borrower, any general partner of Borrower or any Guarantor which the Trade Bank determines, in its sole discretion, may adversely affect the creditworthiness of Borrower or credit support for the Obligations. REMEDIES. Upon the occurrence of any Event of Default, or at any time thereafter, Trade Bank, at its option, and without notice or demand of any kind (all of which are hereby expressly waived by Borrower), may do any one or more of the following: (a) terminate Trade Bank's obligation to make Credit Extensions or to make available to Borrower the Facilities or other financial accommodations; (b) accelerate and declare all or any part of the Obligations to be immediately due, payable, and performable, notwithstanding any deferred or installment payments allowed by any instrument evidencing or relating to any Credit Extension; and/or (c) exercise all its rights, powers and remedies available under the Loan Documents, or accorded by law, including, but not limited to, the right to resort to any or all Collateral or other security for any of the Obligations and to exercise any or all of the rights of a beneficiary or secured party pursuant to applicable law. Notwithstanding the provisions in the foregoing sentence, if any Event of Default set out in subsections (i) and (j) of Section 6.1 above shall occur, then all the remedies specified in the preceding sentence shall automatically take effect without notice or demand of any kind (all of which are hereby expressly waived by Borrower) with respect to any and all Obligations. All rights, powers and remedies of Trade Bank may be exercised at any time by Trade Bank and from time to time after the occurrence of an Event of Default, are cumulative and not exclusive, and shall be in addition to any other rights, powers or remedies provided by law or equity. VII. GENERAL PROVISIONS 7.1 NOTICES. All notices to be given under this Agreement shall be in writing and shall be given personally or by regular first-class mail, by certified mail return receipt requested, by a private delivery service which obtains a signed receipt, or by facsimile transmission addressed to Trade Bank or Borrower at the address indicated after their signature to this Agreement, or at any other address designated in writing by one party to the other party. Trade Bank is hereby authorized by Borrower to act on such instructions or notices sent by facsimile transmission or telecommunications device which Trade Bank believes come from Borrower. All notices shall be deemed to have been given upon delivery, in the case of notices personally delivered or delivered by private delivery service, upon the expiration of 3 calendar days following the deposit of the notices in the United States mail, in the case of notices deposited in the United States mail with postage prepaid, or upon receipt, in the case of notices sent by facsimile transmission. 7.2 WAIVERS. No delay or failure of Trade Bank in exercising any right, power or remedy under any of the Loan Documents shall affect or operate as a waiver of such right, power or remedy nor shall any single or partial exercise of any such right, power or remedy preclude, waive or otherwise affect any other or further exercise thereof or the exercise of any other right, power or remedy. Any waiver, consent or approval by Trade Bank under any of the Loan Documents must be in writing and shall be effective only to the extent set out in such writing. 7.3 BENEFIT OF AGREEMENT. The provisions of the Loan Documents shall be binding upon and inure to the benefit of the respective successors, assigns, heirs, executors, administrators, beneficiaries and legal representatives of Borrower and Trade Bank; provided, however, that Borrower may not assign or transfer any of its rights under any Loan Document without the prior written consent of Trade Bank, and any prohibited assignment shall be void. No consent by Trade Bank to any assignment shall release Borrower from its liability for the Obligations unless such release is specifically given by Trade Bank to Borrower in writing. Trade Bank reserves the right to sell, assign, transfer, negotiate or grant participations in all or any part of, or any interest in, Trade Bank's rights and benefits under each of the Loan Documents. In connection therewith, Trade Bank may disclose any information relating to the Facilities, Borrower or its business, or any Guarantor or its business. 7.4 JOINT AND SEVERAL LIABILITY. If Borrower consists of more than one person or entity, the liability of each of them shall be joint and several, and the compromise of any claim with, or the release of, any one such Borrower shall not constitute a compromise with, or a release of, any other such Borrower. 7.5 NO THIRD PARTY BENEFICIARIES. This Agreement is made and entered into for the sole protection and benefit of Borrower and Trade Bank and their respective permitted successors and assigns, and no other person or entity shall be a third party beneficiary of, or have any direct or indirect cause of action or claim in connection with, any of the Loan Documents to which it is not a party. 7.6 GOVERNING LAW AND JURISDICTION. This Agreement shall, unless provided differently in any Loan Document, be governed by, and be construed in accordance with, the internal laws of the State of California, except to the extent Trade Bank has greater rights or remedies under federal law whether as a national bank or otherwise. Borrower and Trade Bank (a) agree that all actions and proceedings relating directly or indirectly to this Agreement shall be litigated in courts located within California; (b) consent to the jurisdiction of any such court and consent to service of process in any such action or proceeding by personal delivery or Page 5 of 9 7 any other method permitted by law; and (c) waive any and all rights Borrower may have to object to the jurisdiction of any such court or to transfer or change the venue of any such action or proceeding. 7.7 SEVERABILITY. Should any provision of any Loan Document be prohibited by, or invalid under applicable law, or held by any court of competent jurisdiction to be void or unenforceable, such defect shall not affect, the validity of the other provisions of the Loan Documents. 7.8 ENTIRE AGREEMENT, AMENDMENTS. This Agreement and the other Loan Documents are the final, entire and complete agreement between Borrower and Trade Bank concerning the Credit Extensions and the Facilities; supersede all prior and contemporaneous negotiations and oral representations and agreements. There are no oral understandings, representations or agreements between the parties concerning the Credit Extensions or the Facilities which are not set forth in the Loan Documents. This Agreement and the Supplements may not be waived, amended or superseded except in a writing executed by Borrower and Trade Bank. 7.9 COLLECTION OF PAYMENTS. Unless otherwise specified in any Loan Document, other than this Agreement or any Note, all principal, interest and any fees due to Trade Bank by Borrower under this Agreement, the Addendum, any Supplement, any Facility Document, any Collateral Document or any Note, will be paid by Trade Bank having Wells Fargo debit any of Borrower's accounts with Wells Fargo and forwarding such amount debited to Trade Bank, without presentment, protest, demand for reimbursement or payment, notice of dishonor or any other notice whatsoever, all of which are hereby expressly waived by Borrower. Such debit will be made at the time principal, interest or any fee is due to Trade Bank pursuant to this Agreement, the Addendum, any Supplement, any Facility Document, any Collateral Document or any Note. 7.11 COSTS, EXPENSES AND ATTORNEYS' FEES. Borrower will reimburse Trade Bank for all costs and expenses, including, but not limited to, reasonable attorneys' fees and expenses (which counsel may be Trade Bank or Wells Fargo employees), expended or incurred by Trade Bank in the preparation and negotiation of this Agreement, the Notes, the Collateral Documents, the Addenda, and the Facility Documents, in amending this Agreement, the Collateral Documents, the Notes, the Addenda, or the Facility Documents, in collecting any sum which becomes due Trade Bank on the Notes, under this Agreement, the Collateral Documents, the Addenda, the Supplements, or any of the Facility Documents, in the protection, perfection, preservation and enforcement of any and all rights of Trade Bank in connection with this Agreement, the Notes, any of the Collateral Documents, any of the Supplements, any of the Addenda, or any of the Facility Documents, including, without limitation, the fees and costs incurred in any out-of-court work out or a bankruptcy or reorganization proceeding. VIII. DEFINITIONS 8.1 "AGREEMENT" means this Agreement and the Addendum attached hereto, as corrected or modified from time to time by Trade Bank and Borrower. 8.2 "BANKING DAY" means each day except Saturday, Sunday and a day specified as a holiday by federal or California statute. 8.3 "CLOSING DATE" means the date on which the first Credit Extension is made. 8.4 "COLLATERAL" means all property securing the Obligations. 8.5 "COLLATERAL DOCUMENTS" means those security agreement(s), deed(s) of trust, guarantee(s), subordination agreement(s), intercreditor agreement(s), and other credit support documents and instruments required by the Trade Bank to effect the collateral and credit support requirements set forth in the Supplement with respect to the Facilities. 8.6 "CREDIT EXTENSION" means each extension of credit under the Facilities (whether funded or unfunded), including, but not limited to, (a) the issuance of sight or usance commercial letters of credit or commercial letters of credit supported by back-up letters of credit, (b) the issuance of standby letters of credit, (c) the issuance of shipping Guarantees, (d) the making of loans against imports for letters of credit, (d) the making of clean import loans outside letters of credit, (e) the making of advances against export orders, (f) the making of advances against outgoing collections, (g) the making of revolving credit working capital loans, (h) the making of term loans, (i) the discounting of drafts or foreign receivables with recourse, (j) the discounting or purchasing of promissory notes with recourse to Borrower, and (k) the entry into foreign exchange contracts. 8.7 "CREDIT LIMIT" means, with respect to any Facility, the amount specified under the column labeled "Credit Limit" in the Supplement for that Facility. 8.8 "CREDIT SUBLIMIT" means, with respect to any Subfacility, the amount specified after the name of that Subfacility under the column labeled "Credit Sublimit" in the Supplement for the related Facility. 8.9 "DOLLARS" and "$" means United States dollars. 8.10 "FACILITY DOCUMENTS" means, with respect to any Facility, those documents specified in the Supplement for that Facility, and any other documents customarily required by Trade Bank for such Facility. 8.11 "FACILITY TERMINATION DATE" means, with respect to any Facility, the date specified in the Supplement for that Facility after which no further Credit Extensions will be made under that Facility. 8.12 "GAAP" means generally accepted accounting principles, which are applicable to the circumstances, as of the date of determination, set out in the opinions and pronouncements of the Accounting Principles Board and the American Institute of Page 6 of 9 8 Certified Public Accountants and in the statements and pronouncements of the Financial Accounting Standards Board or in such other statements by such other entity as may be approved by a significant segment of the accounting profession. 8.13 "LOAN DOCUMENTS" means this Agreement, the Addendum, the Supplements, the Facility Documents and the Collateral Documents. 8.14 "NOTE" has the meaning specified in Section 3.1(b)(2) above. 8.15 "OBLIGATIONS" means (a) the obligation of Borrower to pay principal, interest and fees on all funded Credit Extensions and fees on all unfunded Credit Extensions, and (b) the obligation of Borrower to pay and perform when due all other indebtedness, liabilities, obligations and covenants required under the Loan Documents. 8.16 "PERMITTED LIENS" shall have the meaning provided in the Addendum. 8.17 "PERSON" means and includes natural persons, corporations, limited partnerships, general partnerships, joint stock companies, joint ventures, associations, companies, trusts, banks, trust companies, land trusts, business trusts or other organizations, whether or not legal entities, and governments and agencies and political subdivisions thereof. 8.18 "PRIME RATE" means the rate most recently announced by Wells Fargo at its principal office in San Francisco, California as its "Prime Rate", with the understanding that the Prime Rate is one of Wells Fargo's base rates and serves as the basis upon which effective rates of interest are calculated for those loans making reference thereto, and is evidenced by the recording thereof after its announcement in such internal publication or publications as Wells Fargo may designate. Any change in an interest rate resulting from a change in the Prime Rate shall become effective as of 12:01 A.M. of the Banking Day on which each change in the Prime Rate is announced by Wells Fargo. 8.19 "SUBSIDIARY" means (i) any corporation at least the majority of whose securities having ordinary voting power for the election of directors (other than securities having such power only by reason of the happening of a contingency) are at the time owned by Borrower and/or one or more Subsidiaries, and (ii) any joint venture or partnership in which Borrower and/or one or more Subsidiaries has a majority interest. 8.20 "WELLS FARGO" means Wells Fargo Bank, N.A. IX. GENERAL RELEASE 9.1 RELEASE OF CLAIMS. In consideration of Bank extending credit to Borrower as set forth herein, Borrower hereby agrees as follows: (a) Each Borrower, for itself and on behalf of its successors and assigns, does hereby release, acquit and forever discharge Trade Bank, and all of Trade Bank's officers, directors, attorneys, affiliates, employees and agents, of and from any and all claims, demands, obligations, liabilities, indebtedness, breaches of contract, breaches of duty or any relationship, acts, omissions, misfeasance, malfeasance, cause or causes of action, debts, sums of money, accounts, compensation, contracts, controversies, promises, damages, costs, losses and expenses, of every type, kind, nature, description or character, whether known or unknown, suspected or unsuspected, liquidated or unliquidated, each as though fully set forth herein at length, which in any way arises out of, are connected with or related to the Agreement, any of the other Loan Documents or the transactions contemplated thereby or hereby, or any other agreement or document referred to herein or therein or any other action, claim, cause of action, demand, damage or cost of whatever nature as of the date hereof. (b) Each Borrower hereby acknowledges, represents and warrants to Trade Bank as follows: (i) Each Borrower understands the meaning and effect of Section 1542 of the California Civil Code which provides: "Section 1542. GENERAL RELEASE; EXTENT. A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR." With regard to Section 1542 of the California Civil Code, Each Borrower agrees to assume the risk of any and all unknown, unanticipated or misunderstood defenses, claims, causes of action, contracts, liabilities, indebtedness and obligations which are released by this release in favor of Trade Bank, and Each Borrower hereby waives and releases ail rights and benefits which it might otherwise have under the aforementioned Section 1542 of the California Civil Code with regard to the release of such unknown, unanticipated or misunderstood defenses, claims, causes of action, contracts, liabilities, indebtedness and obligations. (ii) Each person signing this Amendment on behalf of each Borrower acknowledges that he or she has read the foregoing Release. Said persons fully understand that this Release has important legal consequences. Said persons realize that they are releasing any and all claims that such persons have as set forth above. Each such person has had an opportunity to obtain a lawyer's advice concerning the legal consequences of this Release. (c) This Release is not to be construed and does not constitute an admission of any liability on the part of Trade Bank. This Release shall constitute an absolute bar to any claim of any kind, whether any such claim is based on contract, tort, warranty, mistake or any other theory, whether legal, statutory or equitable. Each Borrower specifically agrees that any attempt to assert a claim barred by this Release shall subject each Borrower to the provisions of applicable law setting forth the remedies for the bringing of groundless, frivolous or baseless claims or causes of action." Page 7 of 9 9 X. ARBITRATION 10.01 ARBITRATION. Upon the demand of any party, any Dispute shall be resolved by binding arbitration (except as set forth in 10.05 below) in accordance with the terms of this Agreement. 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, any of the Loan Documents or the Notes, 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 Loan Documents or the Notes, 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 Loan Documents or the Notes. 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. 10.02 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 Loan 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. 10.03 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. 10.04 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 laws 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. 10.05 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 (i) 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, (ii) 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 the substantive law of the state of California, and (iii) 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 (A) whether the findings of fact rendered by the arbitrators are supported by substantial evidence, and (B) 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. 10.06 REAL PROPERTY COLLATERAL; JUDICIAL REFERENCE. Notwithstanding anything herein to the contrary, no Dispute shall be submitted to arbitration if the Dispute concerns indebtedness secured directly or indirectly, in whole or in part, by any real property unless (i) the holder of the mortgage, lien or security interest specifically elects in writing to proceed with the arbitration, or (ii) all parties to the arbitration waive any rights or benefits that might accrue to them by virtue of the single action rule statute of California, thereby agreeing that all indebtedness and obligations of the parties, and all mortgages, liens and security interests securing such indebtedness and obligations, shall remain fully valid and enforceable. If any such Dispute is not submitted to arbitration, the Dispute shall be referred to a referee in accordance with California Code of Civil Procedure Section 638 et seq., and this general reference agreement is intended to be specifically enforceable in accordance with said Section 638, A referee with the qualifications required herein for arbitrators shall be selected pursuant to the AAA's selection procedures. Judgment upon the decision rendered by a referee shall be entered in the court in which such proceeding was commenced in accordance with California Code of Civil Procedure Sections 644 and 645. 10.07 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 Loan Documents or the subject matter of the Dispute shall control. This Page 8 of 9 10 arbitration provision shall survive termination, amendment or expiration of any of the Loan Documents, the Notes or any relationship between the parties. Borrower and Trade Bank have caused this Agreement to be executed by their duly authorized officers or representatives on the date specified below. This Agreement supercedes and replaces that certain Credit Agreement between Jalate Limited, Inc. and Wells Fargo HSBC Trade Bank dated May 31, 1997. "BORROWER" JALATE, LTD. By: /s/ F. A. FINDLEY ------------------------------------------- Title: VP Finance & CFO Borrower's Address: 1675 South Alameda Street Los Angeles, CA. 90021 "LENDER" WELLS FARGO HSBC TRADE BANK, NATIONAL ASSOCIATION By: -------------------------------------------- Greg Richardson Title: Vice President Lender's Address: 333 South Grand Avenue, 9th Floor Los Angeles, CA 90071 Page 9 of 9 11 EXHIBIT A WELLS FARGO HSBC TRADE BANK ADDENDUM TO CREDIT AGREEMENT ================================================================================ THIS ADDENDUM IS AN INTEGRAL PART OF THE CREDIT AGREEMENT ("CREDIT AGREEMENT") BETWEEN WELLS FARGO HSBC TRADE BANK AND THE FOLLOWING BORROWER: NAME OF BORROWER: JALATE, LTD. ADDITIONAL AFFIRMATIVE COVENANTS The following covenants are part of Article IV of the Credit Agreement: REPORTS. Borrower will furnish the following information or deliver the following reports to Trade Bank at the times indicated below: o ANNUAL FINANCIAL STATEMENTS. Not later than ninety (90) calendar days after and as of the end of each of Borrower's fiscal years, an annual audited financial statement of Borrower prepared by a certified public accountant acceptable to Trade Bank and prepared in accordance with GAAP, to include balance sheet, income statement, statement of cash flow, and source and application of funds statement. o ANNUAL FORM 10-K STATEMENT. Not later than ninety (90) calendar days after and as of the end of each of Borrower's fiscal years, a 10-K Statement. o QUARTERLY FORM 10-Q STATEMENT. Not later than sixty (60) calendar days after and as of the end of each of Borrower's fiscal quarters, a 10-Q Statement. CERTIFICATE OF ACCURACY AND NO EVENT OF DEFAULT. At the time each financial statement of Borrower required above is delivered to Trade Bank, a certificate of the president or chief financial officer of Borrower that said financial statements are accurate and that there exists no Event of Default under the Agreement nor any condition, act or event which with the giving of notice or the passage of time or both would constitute an Event of Default. o INVENTORY LIST: Not later than thirty (30) calendar days after and as of the end of each quarter, an inventory report showing the types, locations and unit or dollar values of all the inventory collateral. o COLLATERAL AUDIT: Collateral audit to be performed annually, by auditors acceptable to Trade Bank. o INSURANCE: Borrower will maintain in full force and effect insurance coverage on all Borrower's property, including, but not limited to, the following types of insurance coverage: policies of fire insurance marine cargo insurance business personal property insurance All the insurance referred to in the preceding sentence must be in form, substance and amounts, and issued by companies, satisfactory to Trade Bank, and cover risks required by Trade Bank and contain loss payable endorsements in favor of Trade Bank. FINANCIAL COVENANTS. Borrower will maintain the following (if Borrower has any Subsidiaries which must be consolidated under GAAP, the following applies to borrower and the consolidated Subsidiaries): o CURRENT RATIO. From and after December 31, 1997, not at any time less than 1.0 to 1.0. ("CURRENT RATIO" means total current assets divided by total current liabilities, and "CURRENT ASSETS" and "CURRENT LIABILITIES" have the meanings given to them in accordance with GAAP; provided, however, that "current liabilities" will include indebtedness which is subordinated to the Obligations to Trade Bank under a subordination agreement in form and substance acceptable to Trade Bank or by subordination language acceptable to Trade Bank in the instrument evidencing such indebtedness.) o WORKING CAPITAL. From and after December 31, 1997, not at any time less than $750,000. ("WORKING CAPITAL" means total current assets minus total current liabilities, provided, however, that "current liabilities" will include indebtedness which is subordinated to the Obligations to Trade Bank under a subordination agreement in form and substance acceptable to Trade Bank or by subordination language acceptable to Trade Bank in the instrument evidencing such indebtedness.) o TANGIBLE NET WORTH. From and after December 31, 1997, not at any time less than $750,000. ("TANGIBLE NET WORTH" means the excess of total assets over total liabilities determined in accordance with GAAP, (a) excluding, however, in determining total assets (i) all assets which would be classified as intangible assets under GAAP, including, but not limited to, goodwill, licenses., patents, trademarks, trade names, copyrights, capitalized software and organizational costs, licenses and franchises, and (ii) assets which Trade Bank determines in its business judgment would not be available or would be of relatively small value in a liquidation of Borrower's business, including, but not limited to, prepaid expenses, loans to officers or affiliates and other items, and (b) including, in determining total liabilities, indebtedness which is subordinated to the Obligations to Trade Bank.) o TOTAL LIABILITIES DIVIDED BY TANGIBLE NET WORTH. From and after December 31, 1997, not at any time greater 2.25 to 1.0. ("Tangible Net Worth" has the meaning given to it above, and "Total Liabilities" includes indebtedness which is subordinated to Page 1 of 2 12 the Obligations to Trade Bank under a subordination agreement in form and substance acceptable to Trade Bank or by subordination language acceptable to Trade Bank in the instrument evidencing such indebtedness.) ADDITIONAL NEGATIVE COVENANTS The following covenants are part of Article V of the Credit Agreement (Borrower shall also cause any Subsidiary to comply with the following covenants): o USE OF PROCEEDS. Borrower will not use the proceeds of any Credit Extension except for the purposes, if any, specified for such Credit Extension in the Supplement covering the Facility under which such Credit Extension is made. o LIENS. Borrower will not create or permit any liens, charges, security interests, encumbrances or adverse claims with respect to any of its property or other assets except for the following "PERMITTED LIENS": purchase money security interests in specific items of Borrower's equipment; additional security interests and liens consented to in writing by Trade Bank in its sole discretion; o ACQUISITIONS OF ASSETS. Borrower will not acquire any assets or enter into any other transaction outside the ordinary course of Borrower's business. o LOANS AND INVESTMENTS. Borrower will not make any loans or advances to, or investments in, any person or entity except for accounts receivable created in the ordinary course of Borrower's business. o INDEBTEDNESS FOR BORROWED MONEY. Borrower will not incur any indebtedness for borrowed money, except to Trade Bank and except for indebtedness subordinated to the Obligations by an instrument or agreement in form acceptable to Trade Bank. o GUARANTEES. Borrower will not guarantee or otherwise become liable with respect to the obligations of any other person or entity, except for endorsement of instruments for deposit into Borrower's account in the ordinary course of Borrower's business. o DIVIDENDS AND DISTRIBUTIONS OF CAPITAL OF CORPORATION. If Borrower is a corporation, Borrower will not pay or declare any dividends or make any distribution of capital on Borrower's stock (except for dividends payable solely in stock of Borrower). o STOCK REDEMPTIONS. Borrower will not redeem, retire, purchase or otherwise acquire, directly or indirectly, any of Borrower's stock. o INVESTMENTS IN, OR ACQUISITIONS OF, SUBSIDIARIES. Borrower will not make any investments in, or form or acquire, any subsidiaries. o CAPITAL EXPENDITURES. Borrower shall not, without the prior written consent of Trade Bank, make any capital expenditures in any fiscal year in an aggregate amount in excess of $750,000. o COMPENSATION. Borrower will not, without the prior written consent of Trade Bank, pay, accrue or obligate itself to pay, directly or indirectly, any salaries, bonuses or other compensation or fees to its officers, directors, shareholders or partners, or any members of their immediate families, in any fiscal year in an aggregate amount in excess of $2,000,000. BY SIGNING HERE BORROWER AGREES TO THE DESIGNATED PROVISIONS IN THIS ADDENDUM: /s/ F.A. FINDLEY, VP FINANCE & CFO -------------------------------------------- (SIGNATURE) Page 2 of 2 13 EXHIBIT B WELLS FARGO HSBC TRADE BANK SIGHT COMMERCIAL LETTERS OF CREDIT SUPPLEMENT ================================================================================ THIS SUPPLEMENT IS AN INTEGRAL PART OF THE CREDIT AGREEMENT BETWEEN WELLS FARGO HSBC TRADE BANK AND THE FOLLOWING BORROWER: NAME OF BORROWER: JALATE, LTD. FACILITY TERMINATION DATE: MARCH 31,1998 CREDIT LIMIT FOR THIS SIGHT COMMERCIAL LETTERS OF CREDIT FACILITY AND SUBLIMITS: CREDIT LIMIT: $34,668 IN SIGHT COMMERCIAL LETTERS OF CREDIT ISSUED AND OUTSTANDING AS OF DECEMBER 31, 1997. EFFECTIVE AS OF DECEMBER 31, 1997, TRADE BANK WILL NOT ISSUE ANY NEW SIGHT COMMERCIAL LETTERS OF CREDIT FOR THE ACCOUNT OF BORROWER. ---------------------------------- CREDIT SUBLIMITS o GOODS CONSIGNED TO, OR $34,668 up to December 31, 1997 CONTROLLED BY, TRADE BANK $O Effective December 31, 1997 and thereafter THE AGGREGATE AMOUNT OF CREDIT EXTENSIONS OUTSTANDING UNDER THIS FACILITY AND THE FOLLOWING OTHER FACILITIES MAY NOT AT ANY ONE TIME EXCEED $1,127,613: 1. THE BALANCE UNDER THE TERM LOANS SUPPLEMENT FACILITY DESCRIPTION: Trade Bank will issue sight commercial letters of credit (each a "Sight Commercial Credit") for the account of Borrower as indicated under the heading "Facility Purpose" below. Subject to the credit sublimits specified above, these Sight Commercial Credits will be transferable or not transferable and have the goods related to them consigned to or not consigned to, or controlled by or not controlled by, Trade Bank. The Facility Credit Limit specified above refers to the aggregate undrawn amount of all Sight Commercial Credits which may be at any one time outstanding under this Facility together with the aggregate amount of all drafts drawn under such Sight Commercial Credits which have not been reimbursed as provided below at such time. The Facility Credit Sublimits specified above refer to the aggregate undrawn amount of all Sight Commercial Credits which may be at any one time outstanding under each subcategory under this Facility together with the aggregate amount of all drafts drawn under such Sight Commercial Credits which have not been reimbursed as provided below at such time. FACILITY PURPOSE: The Facility may only be used for the following purpose(s): To finance the importation of garments. FACILITY DOCUMENTS: Before the first Sight Commercial Credit is issued: Trade Bank's standard form Continuing Commercial Letter of Credit Agreement (Form TB 020) Before each Sight Commercial Credit is issued: Trade Bank's standard form Application For Commercial Letter of Credit (Form TB 002) Before each Sight Commercial Credit is amended: Trade Bank's standard form Application For Amendment To Letter of Credit (Form TB 010) SUBFACILITY DOCUMENTS: o GOODS CONSIGNED TO, OR CONTROLLED BY, TRADE BANK: See Exhibit C - Collateral/Credit Support Document. TERM: The Sight Commercial Credits, issued and outstanding as of the date of this Agreement, may not expire later than February 2, 1998. Page 1 of 2 14 FEES: The following fees will apply to the Sight Commercial Credits: o ISSUANCE FEES/FEES FOR INCREASING CREDIT AMOUNTS OR EXTENDING EXPIRATION DATES: (Minimum $50) 1/8 of 1% per annum for every 120-day period or fraction thereof of the term of each Sight Commercial Credit on the amount of each Sight Commercial Credit and of any increase in such amount. PAYABLE: At the time each Sight Commercial Credit is issued or increased and at the time the expiration date of any Sight Commercial Credit is extended. o AMENDMENT FEES: (Minimum $50) $50 for each amendment, unless the amendment is an increase in the Sight Commercial Credit amount or an extension of the expiration date, in which case the Issuance Fee above will substitute for any Amendment Fee. PAYABLE: At the time each amendment is issued. o NEGOTIATION/PAYMENT/EXAMINATION FEES: (Minimum $75) 1/8 of 1% of the face amount of each drawing under each Sight Commercial Credit. PAYABLE: At the time any draft or other documents are negotiated, paid or examined. INTEREST RATE: All drawings under Sight Commercial Credits not reimbursed on the day they are paid by Trade Bank will bear interest at the following rate from the date they are paid by Trade Bank to the date such payment is fully reimbursed: o PRIME RATE: The Prime Rate plus 5% per annum. o INTEREST PAYMENT DATES: Interest on unreimbursed drawings under Sight Commercial Credits will be paid on the date the unreimbursed drawing is fully reimbursed. COLLATERAL/CREDIT SUPPORT DOCUMENTS: See Exhibit C - Collateral/Credit Support Document. BY INITIALING HERE BORROWER AGREES TO ALL THE TERMS OF THIS SUPPLEMENT:_[INIT]_ Page 2 of 2 15 EXHIBIT B WELLS FARGO HSBC TRADE BANK TERM LOAN SUPPLEMENT ================================================================================ THIS SUPPLEMENT IS AN INTEGRAL PART OF THE CREDIT AGREEMENT BETWEEN WELLS FARGO HSBC TRADE BANK AND THE FOLLOWING BORROWER: NAME OF BORROWER: JALATE, LTD. FACILITY TERMINATION DATE: JULY 17,1998 CREDIT LIMIT FOR THIS TERM LOANS FACILITY AND SUBLIMITS: CREDIT LIMIT: $1,092,945 CREDIT SUBLIMITS ------------------------------------- o SUPPORTED BY ACCOUNTS RECEIVABLE, INVENTORY OR OTHER COLLATERAL $1,092,945 THE AGGREGATE AMOUNT OF CREDIT EXTENSIONS OUTSTANDING UNDER THIS FACILITY AND THE FOLLOWING OTHER FACILITIES MAY NOT AT ANY ONE TIME EXCEED $1,127,613: 1. LETTERS OF CREDIT UNDER THE SIGHT COMMERCIAL LETTERS OF CREDIT SUPPLEMENT 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): Payoff outstanding Letters of Credit and advances under the Loans Against Imports for Letter of Credit Reimbursement Facility. FACILITY DOCUMENT: Term Note SUBFACILITY DOCUMENTS: o SUPPORTED BY ACCOUNTS RECEIVABLE, INVENTORY OR OTHER COLLATERAL: See Exhibit C - Collateral/Credit Support Document. TERM: Term Loan will mature on July 17, 1998. INTEREST RATE: Term Loan will bear interest at the following rate: o 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 four (4) weekly installments of $25,000 commencing February 6, 1998; and nineteen (19) weekly installments of $50,000 commencing March 6, 1998, with the entire principal outstanding due and payable in full on July 17, 1998. 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: [INIT] ------ Page 1 of 1 16 EXHIBIT C WELLS FARGO HSBC TRADE BANK COLLATERAL/CREDIT SUPPORT DOCUMENT ================================================================================ o PERSONAL PROPERTY SECURITY FROM BORROWER: First priority lien in the following assets of Borrower: inventory Second priority lien in the following assets of Borrower: accounts receivable COLLATERAL DOCUMENTS: Security Agreement: Rights to Payment and Inventory UCC-1 Financing Statement UCC-3 Search o INTERCREDITOR AGREEMENT: The creditor or creditors named below under the heading "Collateral Documents" will enter into an intercreditor arrangement with Trade Bank with respect to the Obligations under this Facility. COLLATERAL DOCUMENTS: Intercreditor Agreement with Heller Financial, Inc. BY INITIALING HERE BORROWER AGREES TO ALL THE TERMS OF THIS EXHIBIT: [INIT] ------ Page 1 of 1 EX-10.36 12 EXHIBIT 10.36 1 EXHIBIT 10.36 WELLS FARGO HSBC TRADE BANK TERM NOTE ================================================================================ Los Angeles, California $1,092,945 _________________, 199___ FOR VALUE RECEIVED, the undersigned JALATE, LTD., A CALIFORNIA CORPORATION ("Borrower") promises to pay to the 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 One Million Ninety-Two Thousand Nine Hundred Forty-Five Dollars ($1,092,945), 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 July 17, 1998, 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 Fred Findley 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 January 31, 1998. Principal shall be payable in twenty-three weekly installments as follows:
Installments Payment Amount Due Date ------------ -------------- -------- 1 through 4 S25,000 commencing 2/6/98 5 through 23 $50,000 commencing 3/6/98
with a final installment consisting of all remaining unpaid principal due and payable in full on July 17, 1998. 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 Jan. 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 2 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 Loans Against Imports Note dated May 31, 1997. "BORROWER" JALATE, LTD. By: /s/ F.A. FINDLEY ------------------------------------------ Title: VP, Finance & CEO Borrower's Address: 6557 Flotilla City of Commerce, CA. 90040 Page 2 of 4 3 ADDENDUM TO PROMISSORY NOTE THIS ADDENDUM is attached to and made a part of 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 Jan. __, 1998 in the principal amount of One Million Ninety-Two Thousand Nine Hundred Forty-Five Dollars ($1,092,945) (the "Note"). The following arbitration provision is hereby incorporated into the Note: ARBITRATION: (a) Arbitration. Upon the 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 the 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. (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 Page 3 of 4 4 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/ F.A. FINDLEY ------------------------------------------- Title: VP Finance & CEO Page 4 of 4 EX-10.37 13 EXHIBIT 10.37 1 EXHIBIT 10.37 [THE TRADE BANK LETTERHEAD] January 22, 1998 Jalate, Ltd. 6557 Flotilla St. City of Commerce, CA 90040 Attn: Frederick A. Findley RE: Credit Agreement dated as of January 21, 1998 (the "Credit Agreement") by and between Jalate, Ltd. ("Jalate") and Wells Fargo HSBC Trade Bank, N.A. (the "Bank") Dear Mr. Findley: This letter is in reference to the above-described Credit Agreement. The Bank understands that Jalate intends to sell and issue to certain lenders (the "Lenders") $950,000 aggregate principal amount of 10% subordinated secured promissory notes (the "Notes"). A copy of the form of the Notes in substantially its final form is attached to this letter as Exhibit A. The Bank further understands that Jalate will execute a Security and Pledge Agreement (the "Security Agreement") pursuant to which Jalate will pledge as collateral for the Notes (i) all of the capital stock of Air Shop Ltd. ("Air Shop") now or hereafter acquired by Jalate and (ii) all of Jalate's rights under that certain letter agreement (the "Letter Agreement") among Jalate, Dominique Camacho and Air Shop dated October 17, 1997 with respect to the investment by Jalate in Air Shop. A copy of the form of the Security Agreement in substantially its final form is attached hereto as Exhibit B. To the extent required by the terms of the Credit Agreement, the Bank hereby consents to the sale and issuance of the Notes (in substantially the form attached hereto) by Jalate to the Lenders and the grant of the security interests provided for in the Security Agreement (in substantially the form attached hereto). In addition, the Bank hereby waives any security interest it may otherwise have in the collateral provided for in the Security Agreement. Very truly yours, WELLS FARGO HSBC TRADE BANK, N.A. /s/ Greg Richardson ---------------------------------- Greg Richardson Vice President EX-10.41 14 EXHIBIT 10.41 1 EXHIBIT 10.41 Current Asset Management Group Heller Financial, Inc. 505 North Brand Boulevard Glendale, California 91203-1903 818 409 8600 - -------------------------------------------------------------------------------- HELLER FINANCIAL June 30, 1997 Jalate, Ltd. 1675 S. Alameda Street Los Angeles, CA 90021 RE: Revolving Loan Agreement Gentlemen: We refer to each of the following agreements between JALATE, LTD. ("Client") and HELLER FINANCIAL, INC. ("Heller" ), each as amended from time to time (the "Factoring Documents"): that certain Collection Date Factoring Agreement of even date herewith (the "Factoring Agreement") and any other documents and agreements between Client and Heller. Capitalized terms not defined in this Agreement shall have the meaning ascribed to such terms in the Factoring Agreement. This Revolving Loan Agreement (this "AGREEMENT") shall confirm the agreement between Heller and Client that, subject to the terms of this Agreement and in reliance upon the representations and warranties set forth herein, Heller may, upon Client's request and in Heller's sole discretion, make loans to Client on a revolving credit basis ("Revolving Loans") in an outstanding aggregate amount of up to the amounts set forth below during the periods set forth below (the "Maximum Revolving Loan").
PERIOD MAXIMUM REVOLVING LOAN ------------------------------- ------------------------------------------------- Effective Date through The lesser of: September 30, 1997 (i) $2,500,000 in excess of the amount equal to ninety percent (90%) of the Purchase Price of outstanding Accounts purchased by Heller pursuant to the Factoring Agreement or (ii) $2,000,000 in excess of the amount equal to one hundred percent (100%) of the Purchase Price of outstanding Accounts purchased by Heller pursuant to the Factoring Agreement October 1, 1997 and thereafter The lesser of: (i) $2,000,000 in excess of the amount equal to ninety percent (90110) of the Purchase Price of outstanding Accounts purchased by Heller pursuant to the Factoring Agreement or (ii) $1,500,000 in excess of the amount equal to one hundred percent (100%) of the Purchase Price of outstanding Accounts purchased by Heller pursuant to the Factoring Agreement
Amounts borrowed under this Agreement may be repaid and reborrowed at any time, as set forth in the above table, provided that this Agreement has not been terminated as provided herein or in the Factoring Agreement. 2 Jalate, Ltd. Page 2 - -------------------------------------------------------------------------------- HELLER FINANCIAL If at any time during the term of this Agreement the aggregate outstanding amount of Revolving Loans exceeds the Maximum Revolving Loan, then Client shall immediately pay to Heller, or Heller may charge Client's account with, such amount as may be necessary to eliminate such excess. During the term of this Agreement, upon the request of Heller, in its sole discretion, Client shall promptly provide to Heller the projected income statement, balance sheet and statement of cash flows of Client for the forthcoming ninety (90) day period from the date of such a request. In order to induce Heller to make Revolving Loans, Client represents and warrants to Heller that the following statements are and will be true, correct, and complete: (a) There are no judgments outstanding or affecting any of Client's property nor is there any action, charge, claim, demand, suit, proceeding, petition, governmental investigation or arbitration now pending or, to the best of Client's knowledge after due inquiry, threatened against or affecting Client or any of its property which could reasonably be expected to result in any material adverse effect. Client has not received any opinion or memorandum or legal advice from legal counsel to the effect that it is exposed to any liability or disadvantage which could reasonably be expected to result in any material adverse effect. (b) All of Client's material tax returns and reports required to be filed have been timely filed, and all taxes, assessments, fees and other governmental charges upon Client and upon its properties, assets, income and franchises which are shown on such returns as due and payable have been paid when due and payable. None of Client's United States income tax returns are under audit and no tax liens have been filed and no claims are being asserted with respect to any such taxes. The charges, accruals and reserves on Client's books in respect of any taxes or other governmental charges are in accordance with GAAP. (c) Client is not in default in the performance, observance or fulfillment of any of the obligations, covenants or conditions contained in any contractual obligation between Client and any person or entity, and no condition exists that, with the giving of notice or the lapse of time or both, would constitute such a default. (d) Client has been and is currently in compliance with all applicable environmental laws, including, obtaining and maintaining in effect all permits, licenses or other authorizations required by applicable environmental laws. There are no claims, liabilities, investigations, litigation, administrative proceedings, whether pending or threatened, or judgments or orders relating to any hazardous materials asserted or threatened against Client or relating to any real property currently or formerly owned, leased or operated by Client. This Agreement shall terminate (a) one year from the Effective Date or any time thereafter upon either party giving the other at least sixty (60) days prior written notice of its election to terminate or (b) on the date the Factoring Agreement is terminated (the date which is the earlier to occur of (a) and (b) shall hereinafter be referred to as the "Termination Date"). All obligations owing by Client to Heller under this Agreement including, without limitation, the obligation to repay Revolving Loans and to pay interest as provided herein shall be due and payable by Client on the Termination Date. All obligations owing by Client to Heller under this Agreement may, at Heller's option, be charged to Client's account. 3 Jalate, Ltd. Page 3 - -------------------------------------------------------------------------------- HELLER FINANCIAL All obligations owing by Client to Heller hereunder are Obligations under the Factoring Agreement and shall be secured by all collateral of Client in which Heller has been granted a security interest under the Factoring Documents and any other agreement between Client and Heller (the "Collateral"). Interest shall be charged on the daily balance of all Revolving Loans and shall be calculated daily at the rate per annum (meaning 360 days) equal to the Interest Rate defined in the Factoring Agreement. Interest will be payable by Client or, at Heller's option, charged to Client's account monthly at the end of each month. After the occurrence of a default or event of default under this Agreement and after any applicable cure period, the Revolving Loans and all other obligations under this Agreement shall, at the option of Heller, bear interest at a rate per annum equal to two and one half percent (2.5%) plus the Interest Rate. Failure by Client to repay Revolving Loans or to pay interest thereon pursuant to the terms of this Agreement or to comply with any other term or provision of this Agreement shall constitute an event of default under the Factoring Agreement and the Factoring Documents. Any event of default under the Factoring Agreement or the Factoring Documents shall constitute a default under this Agreement. After the occurrence of any default or event of default and after any applicable cure period, Heller shall have the right to terminate this Agreement, the Factoring Agreement and the Factoring Documents and to demand payment in full from Client of all of Client's liabilities, indebtedness and obligations to Heller. If at any time or times on or after a default hereunder Heller employs counsel (a) to advise or represent Heller with respect to the Collateral, this Agreement, or any other agreement between Heller and Client, (b) to represent Heller in any litigation, contest, dispute, suit or proceeding, including any proceeding under federal bankruptcy laws or any other insolvency or receivership laws, or to commence, defend or intervene or to take any other action in or with respect to any litigation, contest, dispute, suit or proceeding (whether instituted by Heller, Client or any other person) in any way or respect relating to the Collateral, this Agreement, or any other agreement between Heller and Client, (c) to enforce any rights of Heller against Client or any other person which may be obligated to Heller by virtue of this Agreement or any other agreement between Heller and Client, (d) to protect, collect, sell, liquidate or otherwise dispose of the Collateral, and/or (e) to attempt to or to enforce Heller's security interest in the Collateral, then Client shall pay to Heller on demand all reasonable attorneys' fees of outside counsel retained by Heller and, in addition, in the event of a fraud by Client, all allocated costs of Heller's internal counsel, together with all expenses, costs, charges and other fees in excess of $5,000 incurred by such counsel or by Heller in any way or respect arising in connection with or relating to any of the events described in this paragraph. This Agreement cannot be changed or terminated orally; it constitutes the entire agreement between Client and Heller and shall be binding upon their respective successors and assigns, but may not be assigned by Client without Heller's prior written consent. No delay or failure on Heller's part in exercising any right, privilege, or option hereunder shall operate as a waiver thereof or of any other right, privilege or option. No waiver whatsoever shall be valid unless in writing, signed by Heller, and then only to the extent therein set forth. If any term or provision of this Agreement is held invalid under any statute, rule or regulation of any jurisdiction competent to make such a decision, the remaining terms and provisions shall not be affected, but shall remain in full force and effect. THIS AGREEMENT SHALL BE GOVERNED BY AND INTERPRETED IN ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA. CLIENT HEREBY CONSENTS TO THE JURISDICTION OF ANY LOCAL, STATE OR FEDERAL COURT LOCATED WITHIN THE STATE OF CALIFORNIA. IF CLIENT PRESENTLY IS, OR IN THE FUTURE BECOMES, A NON-RESIDENT OF THE STATE OF CALIFORNIA, CLIENT HEREBY WAIVES PERSONAL SERVICE OF ANY AND ALL PROCESS AND 4 Jalate, Ltd. PAGE 4 - -------------------------------------------------------------------------------- HELLER FINANCIAL AGREES THAT ALL SUCH SERVICE OF PROCESS MAY BE MADE BY CERTIFIED OR REGISTERED MAIL, RETURN RECEIPT REQUESTED, DIRECTED TO CLIENT, AT ITS ADDRESS APPEARING IN HELLER'S RECORDS AND SERVICE SO MADE SHALL BE COMPLETE TEN (10) DAYS AFTER THE SAME HAS BEEN POSTED AS AFORESAID. CLIENT AND HELLER HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS AGREEMENT, OR ANY OTHER DOCUMENTS EXECUTED IN CONNECTION WITH THIS AGREEMENT, OR ANY DEALINGS BETWEEN THEM RELATING TO THE SUBJECT MATTER OF THIS TRANSACTION AND THE BUSINESS RELATIONSHIP THAT IS BEING ESTABLISHED. CLIENT AND HELLER ACKNOWLEDGE THAT THIS WAIVER IS A MATERIAL INDUCEMENT TO ENTER INTO A BUSINESS RELATIONSHIP, THAT EACH HAS ALREADY RELIED ON THE WAIVER IN ENTERING INTO THIS AGREEMENT AND THAT EACH WILL CONTINUE TO RELY ON THE WAIVER IN THEIR RELATED FUTURE DEALINGS. CLIENT AND HELLER FURTHER WARRANT AND REPRESENT THAT THEY KNOWINGLY AND VOLUNTARILY WAIVE THEIR RESPECTIVE JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL. Sincerely, Accepted and Agreed: HELLER FINANCIAL, INC. JALATE,LTD. By: [SIG] By: [SIG] ------------------------------- ------------------------------ Title: S.V.P. Title: V.P. Finance & CFO ---------------------------- --------------------------- EX-10.42 15 EXHIBIT 10.42 1 EXHIBIT 10.42 FIRST AMENDMENT TO REVOLVING LOAN AGREEMENT This First Amendment to that certain Revolving Loan Agreement ("AMENDMENT") is made and entered into as of this 21ST day of August, 1997, 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:
PERIOD MAXIMUM REVOLVING LOAN ----------------------------------------------------------------------------- Effective Date through The greater of: September 30, 1997 (i) $2,500,000 in excess of the amount equal to ninety percent (90%) of the Purchase Price of outstanding Accounts purchased by Heller pursuant to the Factoring Agreement or (ii) $2,000,000 in excess of the amount equal to one hundred percent (100%) of the Purchase Price of outstanding Accounts purchased by Heller pursuant to the Factoring Agreement October 1, 1997 and thereafter The greater of: (i) $2,000,000 in excess of the amount equal to ninety percent (90%) of the Purchase Price of outstanding Accounts purchased by Heller pursuant to the Factoring Agreement or (ii) $1,500,000 in excess of the amount equal to one hundred percent (100%) of the Purchase Price of outstanding Accounts purchased by Heller pursuant to the Factoring Agreement
3. CONDITIONS. The effectiveness of this Amendment is subject to the following conditions precedent (unless specifically waived in writing by Heller): 2 (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. 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: [SIG] By: [SIG] _____________________________ _______________________________ Title: Vice President Title: V.P. FINANCE & CFO __________________________ ____________________________ ATTEST: ___________________________________ Secretary [CORPORATE SEAL] 2 EX-10.43 16 EXHIBIT 10.43 1 EXHIBIT 10.43 SECOND AMENDMENT TO REVOLVING LOAN AGREEMENT This Second Amendment to that certain Revolving Loan Agreement ("AMENDMENT") is made and entered into effective as of December 22, 1997, 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:
PERIOD MAXIMUM REVOLVING LOAN ---------------------------------- ------------------------------------ December 22, 1997 through $2,100,000 in excess of the amount January 29, 1998 equal to one hundred percent (100%) of the Purchase Price of outstanding Accounts purchased by Heller pursuant to the Factoring Agreement January 30, 1998 through March 31, $2,200,000 in excess of the amount 1998 equal to one hundred percent (100%) of the Purchase Price of outstanding Accounts purchased by Heller pursuant to the Factoring Agreement March 31, 1998 and thereafter $1,500,000 in excess of the amount equal to one hundred percent (100%) of the Purchase Price of outstanding Accounts purchased by Heller pursuant to the Factoring Agreement
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. 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: [SIG] By: [SIG] ____________________________ ______________________________ Title: V.P Title: V.P. FINANCE & CFO _________________________ ___________________________ ATTEST: [ILLEGIBLE] __________________________________ Secretary [CORPORATE SEAL] 2 EX-10.44 17 EXHIBIT 10.44 1 EXHIBIT 10.44 COLLECTION DATE FACTORING AGREEMENT This Collection Date Factoring Agreement (this "AGREEMENT"), dated and effective as of the Effective Date, is entered into between HELLER FINANCIAL, INC. ("HELLER"), with offices at 505 N. Brand Blvd., Glendale, CA 91203, Telecopy No: (818) 246-6380, and JALATE, LTD. ("CLIENT"), whose address is 1675 S. Alameda Street, Los Angeles, CA 90021, Telecopy No. (213) 765-5020, and will constitute the terms upon which Heller will act as the sole factor of Client. Capitalized terms used herein will have the meanings assigned to such terms in Section 12 of this Agreement. SECTION 1. SALE AND APPROVAL OF ACCOUNTS 1.1 Client does hereby sell, assign and transfer to Heller, and Heller hereby agrees to purchase, all of Client's Accounts created on or after the Effective Date, with full power to Heller to collect and otherwise deal with such Accounts as the sole and exclusive owner thereof. 1.2 (a) Client will submit for Heller's credit approval the credit requirements of Client's customers, a description of Client's normal selling terms and such other information as Heller requests concerning Client's customers. Heller may, in Heller's sole credit judgment, establish credit lines for sales to Client's customers on Client's normal selling terms or on other selling terms approved by Heller by Written Notice. Client may also submit for Heller's credit approval specific orders from Client's customers and Heller may, in Heller's sole credit judgment, approve such orders on a single order credit approval basis. All of Heller's credit approvals will be delivered to Client by Written Notice and/or Transmission. (b) Heller may amend or withdraw a credit line or single order credit approval at any time prior to Delivery by notifying Client verbally and/or by Written Notice or Transmission. Notwithstanding the foregoing, during the sixty (60) day period commencing on the date on which Heller advises Client of such amendment or withdrawal (the "Advice Date"), Client may continue to ship goods with respect to which piece goods were ordered prior to the Advice Date or which were in production prior to the Advice Date and the amendment or withdrawal of the credit line shall not be effective with respect to Client's sales of such goods during such sixty (60) day period; provided, however, that if such goods are shipped under a single order credit approval, the sales of such goods shall be on the selling terms approved by Heller when Heller originally gave such single order approval. If a single order approval is not amended or withdrawn as set forth above, such single order credit approval will automatically expire in the event Delivery of the goods ordered is not made on or prior to the expiration date indicated on the single order credit confirmation form Heller sends to Client by Written Notice or Transmission. In addition, a single order approval will automatically terminate in the event any change is made in any of the terms of a sale under a single order approval without Heller's prior consent by Written Notice or Transmission. (c) Heller will have no liability to Client or to any customer for Heller's refusal to credit approve an Account or Heller's withdrawal or amendment of a credit approval. 1.3 Heller will assume the Credit Risk on all Approved Accounts. Heller will have full recourse to Client for all Non-Approved Accounts. 2 1.4 In the event that monies are at any time owing by a customer for both Approved Accounts and Non-Approved Accounts, any amount when paid by or credited to the customer will be applied as follows: (a) If Heller issued single order approvals, all amounts paid by or credited to the customer will be deemed applied first to Approved Accounts. (b) If Heller established a credit line for such customer and if the credit line was in force at the time amounts were received from or credited to the customer, such amounts will be deemed applied first to Non-Approved Accounts. If the credit line is canceled, any amount thereafter received or credited will be deemed applied first to Approved Accounts. 1.5 If a bankruptcy or insolvency proceeding is instituted by or against a customer and if Heller agrees by Written Notice to Client to make a claim in such proceeding for Non-Approved Accounts, all amounts distributed to Heller in such proceeding will be shared pro rata between Approved Accounts and Non-Approved Accounts. SECTION 2. ADVANCES, PAYMENT AND FEES 2.1 As payment for an Account, (a) the Collected Amount of the Purchase Price of an Account will be credited to Client's account as of the Collection Date and (b) if an approved Account which remains partially or fully unpaid solely as a result of the financial inability of the customer thereon to pay such Approved Account and if such Account is not subject to a Dispute, the Purchase Price of such Approved Account less any Collected Amounts previously credited to Client's account with respect to such Approved Account will be credited to Client's account on the Approved Payment Date for such Approved Account. The payments, when credited to Client's account, shall first be applied to all advances, interest, and other amounts due Heller hereunder. 2.2 Subject to the terms and conditions of this Agreement, Heller may, upon Client's request, and in Heller's sole discretion, make advances to Client or for Client's account in amounts, in Heller's sole discretion, of up to one hundred percent (100%) of the Purchase Price of such Accounts. Notwithstanding the foregoing, if at any time the aggregate Net Amount of Accounts arising from sales to a single customer exceeds an amount equal to fifty percent (50%) of the total Net Amount of all Accounts from all customers outstanding at such time, Heller does not intend to make any advances on any such Accounts in excess of said amount. 2.3 At the time Heller purchases an Account, Heller will charge Client's account with a factoring commission of forty-five hundredths of one percent (0.45%) of the Net Amount of the Account; provided, however, that on such date during a Contract Year that the aggregate Net Amount of all Accounts purchased by Heller form Client exceeds $50,000,000 (the "$50,000,000 Date"), the factoring commission on each Account purchased by Heller from Client during such Contract Year in excess of said $50,000,000 shall be reduced to four tenths of one percent (0.4%) of the Net Amount of such Account and Heller will credit Client's account with an amount equal to five hundredths of one percent (0.05%) of the total Net Amount of all Accounts purchased by Heller during such Contract Year prior to the $50,000,000 Date. On Accounts bearing payment terms in excess of ninety (90) days, the 2 3 factoring commission will be increased by one tenth of one percent (0.10%) for each thirty (30) days or part thereof that the stated terms exceed ninety (90) days. 2.4 Client will pay to Heller or Heller may charge Clients account with (i) wire transfer fees on all wire transfers; (ii) all data transmission telephone charges relating to Transmissions; (iii) exchanges on checks, changes for returned items and all other bank charges; (iv) all Costs;' (v) all other amounts owing by Client to Heller under the Agreement; and (vi) all other Obligations. Notwithstanding the foregoing, Heller will not charge Client's account with the amount of any Ledger Debt with respect to which Client asserts a Dispute unless Heller determines, through an examination of Client's financial statements and Client's payment trend with respect to amounts owing by Client to other Heller Clients or to other suppliers of Client, that Client's failure to pay such Ledger Debt is due to Client's financial inability to pay such Ledger Debt. 2.5 Heller may, in its sole credit judgment, establish credit lines for sales to Client by Heller Clients or approve specific orders from Client to Heller Clients on a single order approval basis; provided, however, that the aggregate amount of all Ledger Debt outstanding at any time shall not exceed $1,500,000. SECTION 3. INTEREST AND COLLECTION CLEARANCE CHARGE 3.1 Client will pay Heller interest on the Daily Balance. Interest will be calculated daily at a rate per annum equal to two and one-half percent (2.5%) plus the LIBOR Rate (the "Interest Rate") and will be charged to Client's account monthly at the end of each month. The Interest Rate will also be charged to Client on all other Obligations, except those specifying a different rate, from the date incurred through the date paid. The LIBOR Rate will be adjusted on the last Business day of each month for the following month and the adjusted Interest Rate will remain in effect during such month. After the occurrence of an Event of Default and after any applicable cure period, all the Obligations will, at Heller's option, bear interest at a rate per annum equal to two and one-half percent (2.5%) plus the Interest Rate. Interest will be calculated on the basis of a 360-day year for the actual number of days elapsed. In no event will the total amount of interest received by Heller pursuant to the terms of this Agreement exceed the maximum rate permitted by applicable law and in the event excess interest is determined by a court of competent jurisdiction to have been paid by Client to Heller, such excess interest will be applied as a credit against the outstanding Obligations and Client will not have any action against Heller for any damages arising out of the payment or collection of such excess interest. 3.2 If funds remain with Heller past the Payment Date, and there are no outstanding Obligations ("matured funds"), Heller will credit Client's account with interest on such matured funds at the rate per annum equal to the LIBOR Rate. 3.3 If an Account or any payment is charged back to Client after the Payment Date, Client will pay Heller interest at the Interest Rate on the Net Amount of such Account or on such payment from the Payment Date to the charge back date. 3 4 3.4 To allow for collection clearance on all checks and other payments remitted by Client's customers, Client will, pay Heller each month a collection clearance charge based on two (2) calendar days for that month's collections at the Interest Rate. Heller will charge Client's account at the end of each month for the collection clearance charge. SECTION 4. REPRESENTATIONS, WARRANTIES AND COVENANTS 4.1 Client represents, warrants and covenants as to each Account that, at the time of its sale and assignment to Heller, the Account is a valid, bona fide account, representing an undisputed indebtedness incurred by the named customer for goods actually sold and delivered or for services completely rendered; the Account is payable in United States dollars; there are no setoffs, offsets, counterclaims or other defenses, genuine or otherwise, to the payment or collection of the Account; the Account does not represent a sale to any of Client's subsidiaries, affiliates, directors, officers, agents, stockholders, or employees, or a consignment sale, guaranteed sale, or bill and hold transaction, or a cash on delivery sale; no agreement exists permitting any deduction or discount (other than the discount stated on the invoice); Client is the lawful owner of the Account and has the right to sell and assign the same to Heller; the Account is free of all security interests, liens and encumbrances (including tax liens) other than those in favor of Heller, and the Account is due and payable in accordance with its terms. 4.2 Client will not grant or suffer to exist in favor of any party other than Heller or Bank, any lien upon or security interest in Client's inventory. 4.3 Client is a solvent corporation, duly incorporated and in good standing under the laws of the State of California and qualified in all States where such qualification is required; the execution, delivery and performance of this Agreement have been duly authorized and are not in contravention of any applicable law, Client's corporate charter or by-laws or any agreement or order by which Client is bound; Client is not, to the best of Client's knowledge, in violation of any law, ordinance, rule, regulation, order or other requirement of any government or any instrumentality or agency thereof. 4.4 Client will not change Client's corporate name or the location of Client's office or open any new offices without giving Heller at least thirty (30) days prior Written Notice. At the present time, Client carries on business only at the above address and the addresses set forth below. 6557 Flotilla Street, City of Commerce, CA 90040 4.5 All books and records pertaining to the Accounts or to any inventory owned by Client will be maintained solely and exclusively at the above address or the addresses listed in Section 4.4 hereof and no such books and records will be moved or transferred without giving Heller thirty (30) days prior Written Notice. 4.6 After Heller's request, Client will hold all returned, replevined or reclaimed goods relating to Accounts coming into Client's possession in trust for Heller and all such goods will be segregated and identified as held in trust for Heller's benefit and Client will, at 4 5 Heller's request, and at Heller's expense, deliver such goods to such place or places as Heller may designate. 4.7 The trade names or styles set forth below are the only trade names or styles under which Client transacts business; Accounts sold to Heller hereunder and represented by invoices bearing such trade names or styles are wholly owned by Client; the undertakings, representations and warranties made in connection therewith will be identical to and of the same force and effect as those made with respect to invoices bearing Client's corporate name; Client's use of any trade names or styles is in compliance with all laws regarding the use of such trade names or styles. Client will give Heller thirty (30) days prior Written Notice of the change of any trade name or style or Client's use of any new trade name or style. JALATE JALATE KIDS ZANONI Client hereby grants to Heller, effective after the occurrence of any Event of Default hereunder and after any applicable cure period, the non-exclusive license to use all trade names, marks and styles owned or used by Client together with any goodwill associated therewith, but only to the extent necessary to enable Heller to sell returned, reclaimed and repossessed goods. Such license is granted free of charge without requirement that any monetary payment whatsoever be made to Client or any third party by Heller. 4.8 Client may, in the ordinary course of business, issue, grant or allow discounts, credits and allowances on Accounts to customers and accept returns until Heller notifies Client to the contrary by Written Notice or Transmission. Such discounts, credits or allowances once issued may be claimed only by the customer. Client will promptly issue and assign to Heller all full invoice credit memos. 4.9 to the best of Client's knowledge, (a) there are no judgments outstanding against or affecting Client, its officers, directors or affiliates or any of Client's property, (b) there are no actions, charges, claims, demands, suits, proceedings, or governmental investigations now pending or threatened against Client or any of Client's property, and (c) none of Client's inventory has been produced in violation of the Fair Labor Standards Act or any similar law, nor imported in violation of any United States customs regulation. 4.10 Client agrees that no provision in this Agreement and no course of dealing between the parties shall be deemed to create any fiduciary duty by Heller to Client. Client agrees that neither Heller nor any of Heller's affiliates, officers, directors, shareholders, employees, attorneys, or agents shall have any liability with respect to, and Client hereby waives, releases, and agrees not to sue any of them upon, any claim for any special, indirect, incidental, consequential or punitive damages suffered or incurred by Client in connection with, arising out of, or in any way related to this Agreement or any of the transactions contemplated by this Agreement. 5 6 4.11 Client shall at all times maintain Tangible Net Worth of at least the amounts set forth below during the periods set forth below.
PERIOD TANGIBLE NET WORTH ---------------------------------------------------- June 1, 1997 through September 29, 1997 $3,200,000 ---------------------------------------------------- September 30, 1997 through March 30, 1998 $4,000,000 ---------------------------------------------------- March 31, 1998 and at all times thereafter $4,200,000 ----------------------------------------------------
4.12 From June 1, 1997 through September 29, 1997, Client shall maintain a ratio of total Liabilities to Tangible Net Worth no greater than 1.75:1.0. On September 30, 1997 and at all times thereafter, Client shall maintain a ratio of total Liabilities to Tangible Net Worth no greater than 1.40:1.0. 4.13 Client shall at all times maintain a Current Ratio of at least 1.25:1.0. 4.14 Client shall at all times maintain Working Capital of at least $2,000,000. 4.15 Client will give Heller Written Notice of: (a) the occurrence of a default or event of default under any of the Bank Agreements; (b) any waiver of any such default or event of default; and/or (c) the suspension by the Securities and Exchange Commission of the public trading of Client's stock. SECTION 5. DISPUTES, CHARGEBACKS AND RESERVES 5.1 With respect to any Account, upon the occurrence of a breach of any of the representations or warranties contained in Section 4.1, or upon the assertion by a customer of a Dispute, such Account may, at Heller's option, be charged back to Client. In the event Client does not, within fifteen (15) days of Heller's request, deliver to Heller a copy of the invoice and such other information as Heller requests relating to an Account with respect to which information was transmitted to Heller through Transmission, Heller will have the right to charge back such Account to Client. 5.2 Client will promptly notify Heller, by Written Notice, in the event that a customer alleges any Dispute, or returns or desires to return any goods purchased from Client relating to an Account. After an Event of Default and after any applicable cure period, Heller may but is not obligated to settle, compromise, adjust or litigate all such Disputes or returns upon such terms as Heller deems advisable. 5.3 Client will supply customers, in the format required by customers, with all forms, documents, certificates, etc. that customer requires to process the Account for payment. If Heller notifies Client verbally and/or by Written Notice or transmission that a customer which only accepts invoices for payment from Client through Transmission is requesting that Client review its invoice data for correctness and re-transmit invoices by Transmission and if after thirty (30) days from the date of such Notice such invoices remain unposted to such customer's records, Heller will place the Accounts evidenced by such invoices in Dispute. 5.4 Heller may, at Heller's option, charge back to Client all amounts owing on Non-Approved Accounts which are not paid when due. 6 7 5.5 Client will pay Heller, or Heller may charge Client's account with, the amount of any payment which Heller receives with respect to a Non-Approved Account if such payment is subsequently disgorged by Heller, whether as a result of any proceeding in bankruptcy or otherwise. 5.6 Client shall purchase promptly all Accounts charged back by Heller, provided, however, that until payment by Client to Heller of all monies due with respect to such charged back Account, title thereto shall remain with Heller. At such time as Client shall pay to Heller all monies due with respect to such charged back account, title shall pass to Client subject, however, to Heller's security interest therein. Client agrees to indemnify and save Heller harmless from and against any and all loss, costs and expenses caused by or arising out of disputed Accounts, including, but not limited to, collection expenses and attorney's fees incurred with respect thereto. 5.7 Heller may maintain such reserves as Heller, in Heller's sole discretion, deems advisable as security for the payment and performance of the Obligations, including, without limitation, reserves for the amount of any Account which is subject to a Dispute. SECTION 6. ADMINISTRATION 6.1 Client will, from time to time, (i) execute and deliver to Heller confirmatory schedules of Accounts assigned to Heller (each an "Assignment Schedule"), together with one copy of each invoice, acceptable evidence of shipment and such other documentation and proofs of delivery as Heller may require or (ii) transmit to Heller by Transmission information concerning Accounts in a format acceptable to Heller and, upon Heller's request, deliver to Heller copies of invoices, acceptable evidence of shipment and such other documentation and proofs of delivery as Heller may require relating to Accounts so transmitted. Client will not deliver Assignment Schedules in connection with Transmissions, but Client acknowledges and agrees that every invoice transmitted to Heller by Transmission will be deemed to have been sent pursuant to the terms and conditions of an Assignment Schedule. Each invoice relating to an Account and all copies and Transmissions thereof will bear a notice, in form satisfactory to Heller, that the Account has been sold and assigned to and is payable only to Heller. Client agrees that Client will not change such notice on invoices and will not direct its customers to pay Client or any third party amounts due under invoices. Client agrees to prepare and mail (or when required, send by Transmission) all invoices relating to Accounts, but Heller may do so at Heller's option. Client agrees to execute and deliver to Heller such further instruments of assignment, financing statements and instruments of further assurance as Heller may reasonably require. Client authorizes Heller to execute on Client's behalf and file such UCC financing statements as Heller may deem necessary in order to perfect and maintain the security interests granted by Client in accordance with this Agreement. Client further agrees that Heller may file this Agreement or a copy thereof as such UCC financing statement. 6.2 On any day when Client desires to have advances made in accordance with subsection 2.2 Client shall give Heller telephone notice of the requested advance by 12:00 noon Los Angeles time. Heller shall not incur any liability to Client for acting upon any telephonic notice that Heller believes in good faith to have been given by a duly authorized officer or other person authorized to request advances on 7 8 Client's behalf or for otherwise acting in good faith under this subsection. 6.3 If any remittances are made directly to Client or Client's employees or agents, Client will act as trustee of an express trust for Heller's benefit, hold the same as Heller's property and deliver the same to Heller forthwith in kind. Heller and/or such designee as Heller may from time to time appoint are hereby appointed Client's attorney-in-fact to endorse Client's name on any and all checks or other forms of remittances received by Heller where such endorsement is required to effect collection and to transmit notices to customers, in Client's or Heller's name, that amounts owing by them have been assigned and are payable directly to Heller; this power, being coupled with an interest, is irrevocable. 6.4 Client shall permit Heller and any representatives designated by Heller to visit and inspect any of the properties of Client, including its financial and accounting records, and to make copies and take extracts therefrom, and to discuss its affairs, finances, and business with its officers at such times during normal business hours and as often as Heller requests. Heller may, at any time after the occurrence of an Event of Default, remove from Client's premises copies of all such records, files and books relating to Accounts. 6.5 If Heller determines that the credit standing of a customer has deteriorated after Heller has assumed the Credit Risk on an Account, Client will, at Heller's request, exercise such rights as Client may have to reclaim or stop the goods in transit, and Client hereby grants to Heller the right to take such steps in Client's or Heller's name. 6.6 Heller will render a monthly statement of account to Client within twenty (20) days after the end of each month. Such statement of account will constitute an account stated unless Client makes objection thereto by Written Notice within thirty (30) days from the date such statement is rendered to Client. 6.7 Client will maintain a system of accounting established and administered in accordance with sound business practices to permit preparation of financial statements in conformity with GAAP. Client will promptly furnish Heller with such statements prepared by or for Client showing Client's financial condition and the results of Client's operations as Heller requests verbally or by Written Notice, including without limitation for each of Client's fiscal years: (i) as soon as available but not later than ninety (90) days after the end of each fiscal year, Client's balance sheet, income statement and the related statement of cash flows for and as at the end of such fiscal year and a statement of stockholder's equity for such fiscal year, audited by Client's independent certified public accountants and reported by such accountants as unqualified with respect to going concern and scope of audit and certified by Client to be prepared in accordance with GAAP and to fairly present Client's financial position and results of operations for such fiscal year; and (ii) as soon as available but not later than sixty (60) days after the end of the first, second and third quarters of each fiscal year, Client's balance sheet, income statement and the related statement of cash flows for and as at the end of, the portion of Client's fiscal year then elapsed and a statement of stockholder's equity for such period, reviewed by Client's independent certified public accountants and certified by Client to fairly present Client's financial position and results of operations for such period; and (iii) as soon as available 8 9 but not later than thirty (30) days after the end of each month, Client's internally prepare balance sheet and income statement of Client as at the end of such month for the period from the beginning of the then current fiscal year to the end of such month. Upon the request of Heller, in its sole discretion, Client shall promptly provide to Heller the projected income statement, balance sheet and statement of cash flows of Client for the forthcoming ninety (90) day period from the date of such a request. Client authorizes Heller to communicate, with Client's consent, directly with Client's independent certified public accountants and authorizes such accountants to discuss Client's financial condition and financial statements directly with Heller. 6.8 Client authorizes Heller to disclose such information as Heller deems appropriate to persons making credit inquiries about Client. SECTION 7. COLLATERAL SECURITY As collateral security for all Obligations, Client hereby assigns and grants to Heller a continuing security interest in all of the following property, whether now owned by Client or hereafter created or acquired by Client or arising in Client's favor: (i) Accounts; (ii) general intangibles (as defined in the UCC) excluding Client's trade marks; (iii) monies, securities and other property now or hereafter held or received by, or in transit to Heller from or for Client, whether for safekeeping, pledge, custody, transmission, collection or otherwise, and all of Client's deposits, reserves, and credit balances in Heller's possession; (iv) books, records and other property at any time evidencing or relating to any of the foregoing property; and (v) proceeds of any of the foregoing property including, without limitation, the proceeds of any insurance policies covering any of the foregoing property. Recourse to the collateral security herein provided will not be required, and Client will at all times remain liable for the payment and performance of the Obligations upon demand by Heller. SECTION 8. EVENTS OF DEFAULT The occurrence of any of the following acts or events will constitute an Event of Default: (a) if Client fails to make payment of any of the Obligations when due; (b) if Client fails to make any remittance required by this Agreement; (c) if Client commits any breach of any of the terms, representations, warranties, covenants, conditions or provisions of this Agreement (including subsections 4.11, 4.12, 4.13 and 6.7), or of any present or future supplement or amendment hereto or of any other agreement between Heller and Client; (d) if Client becomes insolvent or unable to meet Client's debts as they mature; (e) if Client fails to pay when due any material obligations or liabilities owing by Client to any person or entity (including without limitation, any United States and state taxes); (f) if Client delivers to Heller a false financial statement or if any representation, warranty, certification, or other statement made by Client to Heller is false in any material respect when made; (g) if Client calls or agrees to the calling by a third party of a meeting of creditors; (h) if any bankruptcy proceeding, insolvency arrangement or similar proceeding is commenced by or against Client including, without limitation, an assignment for the benefit of creditors; (i) if Client suspends or discontinues doing business for any reason; (j) if a receiver or trustee of any kind is appointed for Client or any of Client's property; (k) to the extent there are at any time any guarantors of Client's Obligations, if any such guarantor dies or becomes insolvent or has commenced by or against such guarantor any bankruptcy proceeding, insolvency arrangement or similar proceeding including, without limitation, an assignment for the benefit of 9 10 creditors; (l) to the extent there are at any time any guaranties of Client's Obligations, if any such guaranty is terminated or any guarantor alleges that any such guaranty is unenforceable, or if there is a default under any such guaranty; (m) if there shall be a change in the beneficial ownership and control, directly or indirectly, of the majority of the outstanding voting securities or other interests entitled (without regard to the occurrence of any contingency) to elect or appoint members of the board of directors or other managing body of Client; (n) if a notice of lien, money judgment, levy, assessment, seizure or writ, or warrant of attachment is entered or filed against Client or with respect to the Accounts or any other collateral in which Client has granted Heller a security interest; (o) if Client sells, leases, transfers or otherwise disposes of all or substantially all of Client's property or assets, or consolidates with or merges into or with any corporation or entity; or (p) if any default or event of default occurs under the Related Agreement or any of the Bank Agreements. Client shall have a cure period of thirty (30) days from (i) the commencement of any arrangement or proceeding under subpart (h) above, to the extent Client did not commence the proceeding, or under subpart (k) above, to the extent such guarantor did not commence the proceeding, to have such arrangement or proceeding dismissed or (ii) the date of the entering or filing of a notice of lien, money judgment, levy, assessment, seizure or writ or warrant of attachment under subpart (n) above to have such lien, judgment, levy, assessment, seizure or writ or warrant of attachment discharged. Notwithstanding anything contained herein to the contrary, Heller may, in its discretion, suspend making advances hereunder during any of the cure periods set forth above. If Client fails to cure or have cured an Event of Default within any applicable cure period or upon the occurrence of any other Event of Default, Heller will have the right to terminate this Agreement and all other arrangements existing between Client and Heller forthwith and without notice, and the Obligations will mature and become immediately due and payable and Heller will have the right to withhold any further payments to Client until all Obligations have been paid in full. In addition, Heller will have all of the rights of secured party under the UCC, including, without limitation, the right to take possession of any collateral in which Heller has a security interest and to dispose of same at public or private sale and Client will be liable for any deficiency. Heller will not be required to proceed against any collateral but may proceed against Client directly. If either party to this Agreement shall bring any action for any relief against the other, declaratory or otherwise, arising out of this Agreement, the losing party shall pay to the prevailing party a reasonable sum for attorney fees incurred in bringing such suit and/or enforcing any judgment granted therein, all of which shall be deemed to have accrued upon the commencement of such action and shall be paid whether or not such action is prosecuted to judgment. Any judgment or order entered in such action shall contain a specific provision providing for the recovery of attorney fees and costs incurred in enforcing such judgment. For the purposes of this section, attorney fees shall include, without limitation, fees incurred in the following: (1) postjudgment motions; (2) contempt proceedings; (3) garnishment, levy, and debtor and third party examinations; (4) discovery; and (5) bankruptcy litigation. 10 11 SECTION 9. TERM AND TERMINATION This Agreement will continue in effect for an original term of one year from the Effective Date and shall remain in force thereafter, but it may be terminated at the end of the original one year term or at any time thereafter by either Heller or Client giving the other party not less than sixty (60) days prior Written Notice thereof. Notwithstanding any such Written Notice of termination, Client's and Heller's respective rights and obligations arising out of transactions having their inception prior to the date of termination of this Agreement will not be affected by the termination of this Agreement and all terms, provisions and conditions hereof, including but not limited to, the security interests hereinabove granted to Heller (including Heller's security interest in Accounts arising, acquired or created after the date of termination of this Agreement), will continue in full force and effect until all Obligations have been paid in full. All of the representations, warranties, indemnities and covenants made by Client herein (including without limitation the undertaking set forth in Section 5.5 hereof) will survive the termination of this Agreement. SECTION 10. MODIFICATIONS, WAIVERS, NOTICES AND MISCELLANEOUS PROVISIONS This Agreement may not be changed or terminated orally; it constitutes the entire agreement between Client and Heller and will be binding upon Client's and Heller's respective successors and assigns, but may not be assigned by Client without Heller's prior written consent. No delay or failure on Heller's part in exercising any right, privilege, or option hereunder will operate as a waiver thereof or of any other right, privilege or option. No waiver whatsoever will be valid unless in a Written Notice, signed by Heller, and then only to the extent therein set forth. If any term or provision of this Agreement is held invalid under any statute, rule or regulation of any jurisdiction competent to make such a decision, the remaining terms and provisions will not be affected, but will remain in full force and effect. Any Written Notice to be given under this Agreement will be in writing addressed to the respective party as set forth in the heading to this Agreement (or such other address as may have been designated in a Written Notice) and will be personally served, telecopied or sent by overnight courier service or United States mail and will be deemed to have been given: (a) if delivered in person, when delivered; (b) if delivered by telecopy, on the date of transmission if transmitted on a Business Day before 4:00 p.m. Los Angeles time or, if not, on the next succeeding Business Day; (c) if delivered by overnight courier, two (2) days after delivery to such courier properly addressed; or (d) if by U.S. Mail, four (4) Business Days after depositing in the United States mail, with postage prepaid and properly addressed. Heller conducts business under California Finance Lender License number 603-2495. SECTION 11. GOVERNING LAW, VENUE AND WAIVER OF JURY THIS AGREEMENT SHALL BE GOVERNED BY AND INTERPRETED IN ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA, WITHOUT REGARD TO ANY CONFLICT OF LAWS PRINCIPLES. CLIENT HEREBY CONSENTS TO THE JURISDICTION OF ANY LOCAL, STATE OR FEDERAL COURT LOCATED WITHIN THE COUNTY OF LOS ANGELES, THE STATE OF CALIFORNIA. IF CLIENT PRESENTLY IS, OR IN THE FUTURE BECOMES, A NON-RESIDENT OF THE STATE OF CALIFORNIA, CLIENT HEREBY WAIVES PERSONAL SERVICE 11 12 OF ANY AND ALL PROCESS AND AGREES THAT ALL SUCH SERVICE OF PROCESS MAY BE MADE BY CERTIFIED OR REGISTERED MAIL, RETURN RECEIPT REQUESTED, DIRECTED TO CLIENT, AT CLIENT'S ADDRESS APPEARING IN HELLER'S RECORDS AND SERVICE SO MADE SHALL BE COMPLETE TEN (10) DAYS AFTER THE SAME HAS BEEN POSTED AS AFORESAID. WAIVER OF JURY TRIAL. CLIENT AND HELLER HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS AGREEMENT, OR ANY OTHER DOCUMENTS EXECUTED IN CONNECTION WITH THIS AGREEMENT, OR ANY DEALINGS BETWEEN CLIENT AND HELLER RELATING TO THE SUBJECT MATTER OF THIS TRANSACTION AND THE BUSINESS RELATIONSHIP THAT IS BEING ESTABLISHED. CLIENT AND HELLER ACKNOWLEDGE THAT THIS WAIVER IS A MATERIAL INDUCEMENT TO ENTER INTO A BUSINESS RELATIONSHIP, THAT EACH OF CLIENT AND HELLER HAS ALREADY RELIED ON THE WAIVER IN ENTERING INTO THIS AGREEMENT AND THAT EACH OF CLIENT AND HELLER WILL CONTINUE TO RELY ON THE WAIVER IN THE RELATED FUTURE DEALINGS BETWEEN CLIENT AND HELLER. CLIENT AND HELLER FURTHER WARRANT AND REPRESENT THAT THEY KNOWINGLY AND VOLUNTARILY WAIVE THEIR RESPECTIVE JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL. SECTION 12. DEFINITIONS "Accounts" -- All presently existing or outstanding and all hereafter created or acquired accounts (as that term is defined in the UCC), contract rights, documents, notes, drafts, instruments and other forms of obligations owed to or owned by Client arising or resulting from the sale of goods or the rendering of services by Client, all general intangibles relating thereto, all proceeds thereof, all guaranties and security therefor, and all goods and rights represented thereby or arising therefrom, including, but not limited to, returned, reclaimed and repossessed goods and the rights of stoppage in transit, replevin and reclamation. "Affiliate" -- means any Person in which Client and/or any one or more of Client's Stockholders has or controls, directly or indirectly, jointly and/or severally, now or at any time or times hereafter, an equity or other ownership interest that is either (a) equal to or in excess of twenty percent (20%) of the total equity of or other ownership interest in such Person, or (b) sufficient to materially influence or control such Person. "Approved Account" -- An Account representing a sale to a customer within the credit line established for such customer on Client's normal selling terms or within the single order credit approval given by Heller for orders from such customer provided that Delivery is completed while the credit line or single order credit approval remains in effect and which has not been charged back to Client. "Approved Payment Date" -- The date which is one hundred twenty (120) days after the due date for payment of an Approved Account. "Assets" -- has the meaning usually ascribed to such term in accordance with GAAP. "Bank" -- means Wells Fargo HSBC Trade Bank, N.A. "Bank Agreements" -- All instruments, documents, and agreements between Client and Bank, including, without limitation, that certain Credit Agreement dated as of June 1, 1996 and that certain Loans Against Imports Note dated March 17, 1997, all as amended from time to time. 12 13 "Business Day" -- Any day excluding Saturday, Sunday and any day which is a legal holiday under the laws of the State of Illinois, Pennsylvania, or California or is a day on which banking institutions located in any such state are closed. "Collected Amount" -- The amount received by Heller from a customer in payment of an Account up to the Net Amount of such Account. "Collection Date" -- The date on which Heller receives payment of an Account. "Contract Year" -- The twelve month period commencing on the Effective Date or any anniversary thereof. "Costs" -- All costs fees and expenses (including attorney's fees) incurred by Heller in connection with (i) the administration of this Agreement or the Related Agreement, or any waiver, forbearance, amendment or modification thereof (ii) the perfection, protection, preservation or enforcement of Heller's rights in any collateral in which Heller has been granted a security interest and (iii) all filing fees, filing taxes or search reports. "Credit Risk" -- The risk that a customer will be financially unable to pay an Account at maturity, provided that the merchandise has been received or services rendered and accepted by the customer without Dispute. "Current Ratio" -- Client's current Assets divided by Client's current Liabilities, in accordance with GAAP. "Daily Balance" -- The outstanding balance of all monies remitted, paid or otherwise advanced to Client or for Client's account plus all commissions, fees, charges and expenses charged to Client's account in accordance with the terms hereof less all amounts credited to Client's account in accordance with subsection 2.1 hereof. "Delivery" -- The delivery of goods or performance of services in accordance with the terms agreed to in writing between Client and a customer, provided that if no such terms are specified in writing, delivery shall mean delivery of goods or performance of services at the customer's place of business. "Dispute" -- A dispute or claim, bona fide or otherwise, as to price, terms, quantity, quality, Delivery, or any claim or defense to collection or payment of an Account whatsoever other than the financial inability of a customer to pay the Account. "Effective Date" -- The date set forth below Heller's signature hereto. "GAAP" -- Generally accepted accounting principles set forth in the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board that are applicable to the circumstances as of the date of determination. "Heller Clients" -- Any Persons (other than Client) which have entered into factoring, intercredit or financing agreements with Heller. "Indebtedness" -- shall mean, obligations and liabilities owing by Client to any Person (including without limitation all debts, claims and indebtedness) whether primary, secondary, direct, contingent, fixed or 13 14 otherwise, heretofore now and/or from time to time hereafter owing, due or payable, however evidenced, created, incurred, acquired or owing and however arising, whether under written or oral agreement, operation of law or otherwise. "Ledger Debt" -- Obligations owing to Heller as a result of Heller's purchases of invoices evidencing sales to Client by Heller Clients. "Liabilities" -- has the meaning usually ascribed to such term in accordance with GAAP; provided, however, that both current Liabilities and total Liabilities shall include Indebtedness which is subordinated to the Obligations (as defined herein) owing to Heller and/or the Obligations (as defined in the Bank Agreements) owing to Bank, in subordination agreements, in form and substance acceptable to Heller and/or Bank, as applicable. "LIBOR Rate" -- The one month London Interbank Offered Rate (LIBOR) announced from time to time in the Wall Street Journal as the average of Interbank offered rates for dollar deposits in the London Market based on quotations at five major banks. "Net Amount" -- the gross amount of an Account less the discount offered by Client and taken by Heller at the time Heller purchases such Account. "Non-Approved Account" -- (a) An Account with respect to which Heller has not issued a credit approval or has subsequently withdrawn a credit approval or (b) an Approved Account that has been charged back to Client. "Obligations" -- All loans, advances, debts, indebtedness, liabilities, obligations, covenants and duties owing by Client to Heller, direct or indirect, absolute or contingent, due or to become due, now existing or hereafter arising, whether under this Agreement, the Related Agreement, any other agreement between Heller and client or otherwise, including, without limitation, Ledger Debt and indebtedness arising under any guaranty made by Client for Heller's benefit or issued by Heller on Client's behalf. "Payment Date" -- The Collection Date or the Approved Payment Date as applicable. "Person" -- Any individual, sole proprietorship, partnership, joint venture, trust, unincorporated organization, association, corporation, company, institution, entity, party or government (whether national, federal, state, county, city, municipal or otherwise, including without limitation, any instrumentality, division, agency, body or department of any such government). "Purchase Price" -- An amount equal to the Net Amount of an Account, less factoring commissions, credits (including, without limitation, merchandise returns and credit memos), charge backs, allowances, and all other fees and charges provided hereunder. "Related Agreement" -- That certain Revolving Loan Agreement dated as of the Effective Date, as amended from time to time. "Stockholder" -- Any owner (beneficial or of record) of Client's stock. "Tangible Net Worth" -- means an amount equal to the excess of total Assets over total Liabilities determined in accordance with GAAP, excluding, however, in determining total Assets (i) all Assets which 14 15 would be classified as intangible assets under GAAP, including, but not limited to, goodwill, licenses, patents, trademarks, trade names, copyrights, capitalized software and organizational costs, licenses and franchises, and (ii) Assets which Heller determines, in its business judgment, would not be available or would be of relatively small value in a liquidation of Client's business, including, but not limited to, prepaid expenses, loans to officers, Stockholders, employees or Affiliates and other items. "Transmission" -- Transmission through Heller's proprietary system or through Electronic Data Interchange. "UCC" -- The Uniform Commercial Code as in effect on the date hereof in the State of California, as amended from time to time, and any successor statute. "Working Capital" -- means an amount equal to: (a) Client's current Assets; less (b) Client's current Liabilities; and less (c) the amount of any obligations owing by Affiliates or Stockholders to Client. "Written Notice" -- Notice given in writing in accordance with Section 10 of this Agreement. In Witness Whereof, the undersigned have caused this agreement to be executed and delivered by their thereunto duly authorized officers as of the Effective Date. HELLER FINANCIAL, INC. JALATE, LTD. By: [SIG] By: [SIG] ------------------------------- ------------------------------- Title: S.V.P. Title: V.P. Finance [ILLEGIBLE] ---------------------------- ---------------------------- Effective Date: June 30, 1997 ------------------- 15 EX-10.45 18 EXHIBIT 10.45 1 EXHIBIT 10.45 Current Asset Management Group Heller Financial, Inc. 505 North Brand Boulevard Glendale, California 91203-1903 818 409 8600 - -------------------------------------------------------------------------------- HELLER FINANCIAL November 18, 1997 Jalate, Ltd. 1675 South Alameda Street Los Angeles, California 90021 RE: Amendment of Factoring Agreement Gentlemen: We refer to that certain Collection Date Factoring Agreement dated June 30, 1997, by and between JALATE, LTD. (the "COMPANY") and HELLER FINANCIAL, INC. ("HELLER"), as amended from time to time (the "FACTORING AGREEMENT"). This letter shall confirm our agreement to amend certain terms of the Factoring Agreement. Effective December 1, 1997, the Factoring Agreement is hereby amended by deleting subsection 3.1 in its entirety and substituting the following new subsection: 3.1 Client will pay Heller interest on the Daily Balance. Interest will be calculated daily at a rate per annum equal to three and one-half percent (3.50%) plus the LIBOR Rate (the "Interest Rate") and will be charged to Client's account monthly at the end of each month. The Interest Rate will also be charged to Client on all other Obligations, except those specifying a different rate, from the date incurred through the date paid. The LIBOR Rate will be adjusted on the last Business day of each month for the following month and the adjusted Interest Rate will remain in effect during such month. After the occurrence of an Event of Default and after any applicable cure period, all the Obligations will, at Heller's option, bear interest at a rate per annum equal to two and one-half percent (2.5%) plus the Interest Rate. Interest will be calculated on the basis of a 360-day year for the actual number of days elapsed. In no event will the total amount of interest received by Heller pursuant to the terms of this Agreement exceed the maximum rate permitted by applicable law and in the event excess interest is determined by a court of competent jurisdiction to have been paid by Client to Heller, such excess interest will be applied as a credit against the outstanding Obligations and Client will not have any action against Heller for any damages arising out of the payment or collection of such excess interest. To induce Heller to enter into this amendment, the Company represents and warrants that after giving effect to this amendment no violations of the terms of the Factoring Agreement exist and all representations and warranties contained in the Factoring Agreement are true, correct and complete in all material respects on and as of the date hereof. Except as amended above, all of the terms and conditions of the Factoring Agreement are unchanged, and said agreement, as amended, shall remain in full force and effect and is hereby confirmed, affirmed and ratified. 2 Jalate, Ltd. November 18, 1997 Page 2 - -------------------------------------------------------------------------------- HELLER FINANCIAL If the foregoing is in accordance with your understanding of our agreement, please so indicate by signing in the place and manner provided below. Sincerely yours, Accepted and Agreed: HELLER FINANCIAL, INC. JALATE,LTD. By: [SIG] By: [SIG] _____________________________ ______________________________ Title: V.P. Title: V.P. FINANCE __________________________ ___________________________ EX-10.46 19 EXHIBIT 10.46 1 EXHIBIT 10.46 [LOGO] [HELLER FINANCIAL LETTERHEAD] January 22, 1998 Jalate, Ltd. 6557 Flotilla Street Los Angeles, CA 90040 Attn: Fred Findley Re: Collection Date Factoring Agreement and Revolving Loan Agreement, both dated June 30, 1997 Dear Mr. Findley: This letter is in reference to the above described factoring and loan agreements. We understand that Jalate, Ltd. ("Jalate") intends to sell and issue to certain lenders (the "Lenders") $950,000 aggregate principal amount of 10% subordinated secured promissory notes (the "Notes"). A copy of the form of the Notes in substantially its final form is attached to this letter as Exhibit A. We further understand that Jalate will execute a Security and Pledge Agreement (the "Security Agreement") pursuant to which Jalate will pledge as collateral for the Notes (i) all of the capital stock of Air Shop Ltd. ("Air Shop") now or hereafter acquired by Jalate and (ii) all of Jalate's rights under that certain letter agreement (the "Letter Agreement") among Jalate, Dominique Camacho and Air Shop dated October 17, 1997 with respect to the investment by Jalate in Air Shop. A copy of the form of the Security Agreement in substantially its final form is attached hereto as Exhibit B. To the extent required by the terms of the above described factoring and loan agreements, we hereby consent to the sale and issuance of the Notes (in substantially the form attached hereto) by Jalate to the Lenders and the grant of the security interests provided for in the Security Agreement (in substantially the form attached hereto). In addition, we hereby waive any security interest that we may otherwise have in the collateral provided for in the Security Agreement. Our consent and waiver is conditioned upon Jalate's agreement that, without our prior written consent, Jalate will not prepay the Notes except with the net proceeds of an equity offering. Please indicate your agreement to this condition by counter-signing both copies of this letter and returning one of those copies to us. Very truly your, HELLER FINANCIAL, INC. By: [SIG] -------------------------- Title: ----------------------- SIGNATURE ON FOLLOWING PAGE 2 Jalate, Ltd. Page 2 - -------------------------------------------------------------------------------- [LOGO] HELLER FINANCIAL Jalate hereby agrees that, without the prior written consent of Heller Financial, Inc. Jalate will not prepay the Notes except with the net proceeds of an equity offering. JALATE, LTD. By: /s/ FREDERICK A. FINDLEY ----------------------------------- Frederick A. Findley Vice President and Chief Financial Officer EX-10.47 20 EXHIBIT 10.47 1 EXHIBIT 10.47 LETTER OF CREDIT/GUARANTY AGREEMENT THIS AGREEMENT is made this day of November, 1997 between Jalate, Ltd. ("CLIENT") and Heller Financial, Inc. ("HELLER"). All capitalized terms used herein and not otherwise defined herein shall have the meanings ascribed thereto in the Collection Date Factoring Agreement between Client and Heller having an Effective Date of June 30, 1997 (the "FACTORING AGREEMENT"). WHEREAS, Client will, from time to time, request Heller to finance its purchase of merchandise by (i) establishing letters of credit in favor of the sellers of such merchandise or (ii) issuing a guaranty of PAYMENT in favor of any such sellers or other issuers of letters of credit in favor of such sellers, or (iii) honoring sight or term drafts drawn by any seller of such merchandise; and WHEREAS, when such merchandise is delivered, Client will request Heller, in its sole discretion, to deliver such merchandise to Client for the purposes of manufacturing or resale, or both. NOW, THEREFORE, in consideration of the foregoing premise and for other good and valuable consideration, receipt and sufficiency of which is acknowledged, Client and Heller agree as follows: 1. Client will, from time to time, request that Heller finance the purchase of merchandise by (i) establishing a letter of credit in favor of the seller thereof or (ii) issuing a guaranty of payment in favor of such seller or other issuer of a letter of credit in favor of such seller, or (iii) agreeing to honor sight or term drafts drawn against Heller by the seller of such merchandise. 2. Within a reasonable time thereafter Heller will advise Client if Heller is willing to finance such purchase as aforesaid and the terms and conditions upon which Heller is willing to do so; it being understood and agreed that in all instances Heller shall have sole and complete discretion to determine whether or not or to what extent Heller is willing to assist in financing any such purchase of merchandise. 3. If Heller is willing to finance such purchase, it will establish a letter of credit, issue its guaranty, or honor drafts as aforesaid, subject to whatever terms and conditions Heller may specify in any such letter of credit, guaranty or other agreements. 4. Client unconditionally agrees to indemnify Heller and hold it harmless from any and all indebtedness, obligations and liabilities Heller may incur in connection with any letter of credit which it may establish or obtain for Client's account, or in connection with any guaranty Heller may issue and Client will pay all such indebtedness, obligations and liabilities upon Heller's demand and in United States currency. Page 1 of 5 2 5. Heller will have the right at any time and without notice to charge Client's account on Heller's books with the amount of any and all indebtedness, obligations or liabilities paid or incurred by Heller in connection with any such letter of credit guaranty or draft including, but without limitation, (i) all amounts which may be charged to Heller by any bank or other financial institution issuing such letter of credit, (ii) bank charges, (iii) fees and commissions, (iv) duties, (v) cost of insurance and (vi) such other charges and expenses, including interest, attorneys' fees and collection charges, which may pertain either directly or indirectly to such letter of credit guaranty or draft, or to the merchandise referred to therein. Client further agrees that any debit balance which may exist in its account by virtue of the foregoing charges will be repaid upon Heller's demand and in United States currency. 6. Client agrees to hold Heller harmless for any errors or omissions whether caused by Heller or otherwise, and Client's unconditional obligation to Heller hereunder shall not be modified or diminished for any reason. 7. Heller shall not be responsible for the existence, character, quality, condition or value of the property purporting to be represented by documents; for the validity, sufficiency or genuineness of documents, even if such documents shall in effect prove to be in any or all respects invalid, insufficient, fraudulent or forged; for the time, place, manner or order in which shipments are made; for partial or incomplete shipments or failure or omission to ship any or all of the property referred to in any Letter of Credit or Guaranty; for any deviation from instructions, delay, default or fraud by the shipper or anyone else in connection with the property or the shipping thereof; for any breach of contract between any shipper or any vendor and Client. Client agrees that any action taken by Heller under or in connection with any letter of credit, guaranty or draft or the related documents or property, if taken in good faith, shall be binding on Client and shall not cause Heller any resulting liability to Client, and in furtherance thereof, Client hereby agrees to and waives notice of any extension of the maturity or time for payments or for presentation of drafts, acceptance or documents or any other modifications of the terms of any letter of credit or guaranty. 8. Client agrees to procure promptly any necessary import or other licenses for the import of the property and to comply with all foreign and domestic governmental regulations in connection with the shipment of the property or the financing thereof, and to furnish such certificates in that respect as Heller may at any time require. In this connection Client warrants and represents that all shipments made under any letter of credit or guaranty are in accordance with and are not prohibited by the governmental laws and regulations of the countries in which the shipments originate or terminate. Client assumes all risks and liability for all present and future local, state or governmental taxes, levies or embargo of any country, state, city or other political sub-division wherein payments are to be made or where such drafts may be drawn, negotiated, accepted or paid; and Client assumes all risks, liability and responsibility for any laws, customs and regulations which may be effective in the countries wherein payments are to be made or where such drafts are drawn, negotiated or paid. 9. Client hereby grants to Heller a continuing security interest in all of Client's now owned and hereafter acquired inventory acquired in connection with any of Heller's letters of credit Page 2 of 5 3 and/or guaranties and/or honoring any drafts drawn against Heller and further grants, to Heller a security interest in and assign to Heller all of Client's right, title and interest in or to shipping documents, drafts, warehouse receipts, bills of lading and other documents or instruments with respect to such inventory, and the proceeds thereof, and the contract rights relating thereto as collateral security for all Obligations. 10. Until Heller is repaid, Client agrees to keep the merchandise adequately covered by insurance in companies, in amounts and under policies acceptable to Heller but at Client's expense, and to assign the policies or certificates of insurance to Heller or to make the loss or adjustment, if any, payable to Heller at Heller's option and to, upon demand, furnish Heller with evidence of acceptance of such assignment by the insurers. 11. All advances made by Heller under or in connection with such purchase of merchandise shall bear interest at the rate set forth in the Factoring Agreement. If Heller, in its sole discretion, shall deliver possession to Client of any property shipped under a Heller letter of credit or guaranty, such merchandise will continue to stand as security for all Obligations and Client agrees to hold such merchandise as Trustee, subject to the terms and provisions of this Agreement, and subject to the terms and provisions of the Uniform Commercial Code, if applicable, and Client agrees to execute such instruments and file such instruments as are deemed necessary or desirable by Heller in order to insure that Heller's security will not be impaired in any such transfer of possession. 12. Upon the sale by Client of any such merchandise, the accounts receivable or other proceeds generated thereby shall be assigned and delivered to Heller and shall be applied to the payment of the Obligations. 13. Client agrees to pay Heller all bank charges incurred or paid by Heller in connection with any letter of credit. In addition to such bank charges, Client shall pay to Heller three percent (3.0%) per annum of the face amount of each letter of credit or guaranty for each month, or part thereof that said letter of credit or guaranty is outstanding. 14. The following acts or occurrences shall constitute a default under this Agreement: (a) Client's failure to pay any amounts owing to Heller when due or upon Heller's demand; (b) Client's sale outside the ordinary course of business or pledge or attempted pledge of any merchandise entrusted to Client; (c) Client fails to comply with any of the terms, conditions or provisions of this Agreement; (d) Client's default under the Factoring Agreement or under any other agreement between Client and Heller. Page 3 of 5 4 15. Upon the occurrence of a default under this Agreement, the Factoring Agreement or under any of the terms and conditions of any promissory note, financing statement, agreement or other document given to Heller by Client, then and in any such event, Heller may terminate this Agreement, demand payment from Client of all sums owing to Heller and exercise any rights and remedies given Heller hereunder or under any such other documents or under the Uniform Commercial Code, if applicable. Client hereby waives presentment, demand, protest and notice as to any instrument given to Heller hereunder and with respect to any notice to which we might otherwise be entitled. Client expressly authorizes Heller to take possession of any and all merchandise subject to Heller's lien and to sell it immediately without advertisement, and without notice to Client, at private sale or at public auction, or at broker's board or otherwise at Heller's option, at such times, at such places and for such prices, and upon such terms and conditions as Heller may deem proper and to apply the net proceeds of such sales, after deducting the expenses thereof, to the Obligations, and Client agrees to be responsible for any deficiency upon Heller's demand. If any such sale be at broker's board or at public auction, Heller may be a purchaser at such sale free from any right of redemption which Client hereby expressly waives and releases. In furtherance of such disposition of any such merchandise, Client shall execute such power of attorney or other documents Heller may request. 16. Heller shall be entitled to offset and apply to the Obligations any sums or property of Client's coming into Heller's possession or to hold the same as attachable security for any of the Obligations no matter how arising and whether under this Agreement or otherwise. Client acknowledges that Heller shall also be entitled to establish reserves in the aggregate amount of all letters of credit or guaranties outstanding from time to time against amounts otherwise available to Client for Revolving Loans under that certain Revolving Loan Agreement dated June 30, 1997 between Client and Heller, as amended from time to time. 17. Heller's failure to exercise any rights hereunder shall not operate as a waiver of any of its rights and remedies contained in this Agreement or in any other agreement between Client and Heller and all of such rights and remedies are cumulative and not alternative. 18. This Agreement embodies the entire agreement among the parties hereto and supersedes all prior commitments, agreements, representations, and understandings, whether written or oral, relating to the subject matter hereof, and may not be contradicted or varied by evidence of prior, contemporaneous, or subsequent oral agreements or discussions of the parties hereto. 19. This Agreement shall be binding upon and inure to the benefit of Client's and Heller's respective successors and assigns. 20. THIS AGREEMENT SHALL BE GOVERNED BY AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF CALIFORNIA, WITHOUT REGARD TO CONFLICTS OF LAW PRINCIPLES. 21. This Agreement, on acceptance by Heller, shall continue until the earlier of (i) termination by either party giving to the other party thirty (30) days prior written notice or (ii) termination of the Factoring Agreement, but any such termination of this Agreement shall not Page 4 of 5 5 terminate or otherwise affect an), of Client's Obligations or Heller's rights hereunder and such Obligations, and rights shall continue until all of the Obligations are paid in full. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their thereunto duly authorized officers on the date first set forth above. JALATE, LTD. HELLER FINANCIAL, INC. By: [SIG] By: [SIG] ___________________________ ________________________________ Name: [ILLEGIBLE] Name: [ILLEGIBLE] _________________________ ______________________________ Title: V.P. FINANCE & CFO Title: V.P. ________________________ _____________________________ Page 5 of 5 EX-10.48 21 EXHIBIT 10.48 1 EXHIBIT 10.48 Current Asset Management Group Heller Financial, Inc. 505 North Brand Boulevard Glendale, California 91203-1903 818 409 8600 - -------------------------------------------------------------------------------- HELLER FINANCIAL November_____, 1997 Jalate, Ltd. 1675 S. Alameda Street Los Angeles, CA 90021 RE: Agreement to Issue Supplier and/or Factor Guaranties Gentlemen: We refer to all of the factoring arrangements by and between you and HELLER FINANCIAL, INC. ("Heller") including, without limitation, that certain Collection Date Factoring Agreement dated June 30, 1997, as amended from time to time (collectively called the "Factoring Agreements"). You have requested certain additional financing accommodations from us to assist you in purchasing merchandise from certain suppliers for use in your current line of business. This letter agreement (this "Agreement") will confirm our mutual understanding and agreement pursuant to which Heller, in its sole discretion, may guaranty in favor of your suppliers and/or factors of such suppliers your payment at maturity of invoices representing merchandise delivered to you in conformity with your purchase order specifications therefor, subject to the following terms and conditions: 1. Invoices shall be drawn for valid purchases of merchandise by you, timely delivered to you in conformity with your specifications therefor and shall be payable not more than sixty (60) days from the respective dates thereof. 2. You will notify Heller simultaneously of your issuance of purchase orders for merchandise to be purchased from suppliers who require Heller's guaranty, and absent the occurrence of an event of default by you under the Factoring Agreements, Heller will confirm, by writing acceptable to Heller, Heller's guaranty of your payment at maturity. 2 Jalate, Ltd. PAGE 2 - -------------------------------------------------------------------------------- HELLER FINANCIAL 3. No extensions, modifications or amendments to, or settlements or compromises of, invoices under guaranties issued by Heller shall be made without Heller's prior written consent. 4. In the event that you fail to pay an invoice at maturity, the payment of which Heller has guarantied, and Heller is called upon to pay the invoice in accordance with its guaranty, all such payments made by Heller shall be considered to be advances under the Factoring Agreements and shall bear interest at the rate provided in the Factoring Agreements. 5. If requested by Heller, you shall promptly execute and deliver to Heller demand promissory notes evidencing any or all of your obligations and indebtedness to Heller hereunder, and you shall execute and deliver such other instruments, documents and agreements as Heller shall require from time to time to give effect hereto. 6. All of your obligations and indebtedness arising hereunder to Heller shall be secured by all collateral now or hereafter assigned, pledged or granted to Heller by you under the Factoring Agreements or any other agreement between us. You acknowledge that Heller shall also be entitled to establish reserves in the aggregate amount of all guaranties outstanding from time to time against amounts otherwise available to you for Ledger Debt pursuant to subsection 2.5 of the Collection Date Factoring Agreement. 7. For and in consideration of the issuance of the guaranties contemplated herein, you agree to pay to Heller a monthly charge equal to three percent (3.0%) per annum of the face amount of all guaranties issued by Heller hereunder from the time such guaranties are issued by Heller through the time Heller is released of liability thereunder. 8. It is understood and agreed that Heller's guaranties by separate writing shall in no way be construed to create any liability, obligations, warranty or representation on Heller's part with respect to any matter other than your payment at maturity of the invoice to which it relates. 9. You shall, on demand, reimburse Heller for any and all sums paid by Heller under any guaranty issued for the benefit of your supplier and/or the factor of your supplier, and you shall indemnify and hold 3 Jalate, Ltd. Page 3 - -------------------------------------------------------------------------------- HELLER FINANCIAL Heller harmless from and against any and all liability, loss, costs, fees and expenses, including attorneys' fees, that Heller may sustain or incur in connection with the issuance or enforcement of any such guaranty. Your obligation to reimburse and indemnify Heller shall be conclusive but shall not prejudice any rights you may have against any other person in the event that you dispute liability of the obligations guarantied by us. 10. Your execution of this Agreement shall be a continuing authorization and direction to Heller to pay any claim presented with respect to any guaranty issued by Heller pursuant to this Agreement from any of your funds in the hands of or under the control of Heller and such payment shall be considered made for your benefit and at your request. 11. This Agreement may be terminated by Heller at any time and shall be effective upon Heller's giving notice of termination, provided, however, that such termination shall not affect the rights and obligations of the parties hereto with respect to guaranties issued prior to the date of such termination. If the foregoing is acceptable to you, please so indicate by signing in the place and manner provided below. Sincerely yours, Accepted and Agreed: HELLER FINANCIAL, INC. JALATE,LTD. By: [SIG] By: [SIG] _____________________________ ______________________________ Title: V.P. Title: V.P. FINANCE & CFO __________________________ ____________________________ EX-10.49 22 EXHIBIT 10.49 1 EXHIBIT 10.49 INVENTORY SECURITY AGREEMENT This Inventory Security Agreement is made this 2nd day of December 1997 by and between JALATE, LTD., a California corporation having a principal place of business at 1675 South Alameda Street, Los Angeles, CA 90021 ("DEBTOR") and HELLER FINANCIAL, INC., a Delaware corporation having a place of business at 505 N. Brand Boulevard, Glendale, CA ("HELLER"). WHEREAS, Heller has made and from time to time may make loans or otherwise extend credit to Debtor, and in connection therewith, Debtor has agreed to grant to Heller a security interest in all of Debtor's now owned or hereafter acquired inventory, and WHEREAS, Heller is willing to do so, subject to the terms, covenants and warranties hereinafter set forth. NOW, THEREFORE, in consideration of the foregoing, the mutual covenants contained herein and other valuable consideration, the parties do hereby covenant, warrant and agree as follows: 1. Debtor hereby grants to Heller a security interest in all its now owned and hereafter acquired (a) Inventory and all proceeds of the Inventory, and the payment and performance of all indebtedness now or hereafter owed by Debtor to Heller including, without limitation, all indebtedness arising under or referred to in that certain Collection Date Factoring Agreement executed by Debtor and Heller (the "AGREEMENT") together with all other related amendments, documents and instruments, all of which are effective as of June 30, 1997 (the "FINANCING AGREEMENTS"), and delivered or assigned to Heller, and (ii) any and all other present or future indebtedness, obligations or liabilities (direct or indirect, absolute or contingent) now due or hereafter due from Debtor to Heller. "INVENTORY" as used in this Security Agreement means and includes all goods intended for sale or lease by Debtor or to be furnished by Debtor under contracts of service, all such goods that may be returned to Debtor by its customers, all raw materials, goods in process in all stages of manufacture, finished goods, materials and supplies of every nature, used or usable, in connection with the manufacture, packing, shipping, advertising, selling, leasing or furnishing of such goods, all contract rights with respect thereto, and all documents of title representing the same. 2. Upon Debtor's request, Heller may make loans to Debtor prior to Debtor's sale of Inventory. All such loans will be made at Heller's sole discretion, will be charged to Debtor's account, will be repayable upon Heller's demand and will bear interest payable in the manner and at the same rate as a specified in the Agreement and shall in all other respects be governed thereby. 3. Debtor hereby represents, warrants, covenants and agrees that: (a) all Inventory, patents, trademarks. and trade names are and shall be owned by it free from any security interest, lien or encumbrance except such as are held by Heller, and that the Inventory shall be kept at the locations identified below; (b) Debtor shall not (without Heller's prior written approval) remove, sell or otherwise dispose of any Inventory except for the purposes of sale in the ordinary course of business; (c) if any sale of Inventory is made for cash, Debtor shall immediately deliver to Heller the identical checks, cash or other forms of payments which Debtor receives therefor, and all payments received by Debtor on Accounts (as defined in the Agreement) or other proceeds arising from the sale of Inventory will be credited to Debtor's account in accordance with the provisions of the Agreement; (d) Debtor shall perform any and all actions requested by Heller to perfect its security interests in the Inventory and all of Heller's rights hereunder (such actions shall include but not be limited to, leasing warehouses to Heller or its designee; placing and 2 maintaining signs; appointing custodians; executing and filing financing or continuation statements under the Uniform Commercial Code in form and substance satisfactory to Heller; maintaining Inventory records; transferring Inventory to warehouses and delivering to Heller documents of title in Heller's name, and; if any Inventory is in the possession or control of any of Debtor's agents or processors, Debtor shall notify such agents or processors of Heller's security interests therein and, upon Heller's request, instruct them to hold all such Inventory for Heller's account and subject to Heller's instructions); (e) Heller may examine and inspect the Inventory at any time and a physical listing of all Inventory wherever located shall be taken by Debtor at least every three (3) months and whenever otherwise requested by Heller, and a copy of each such physical listing shall be supplied to Heller; (f) Debtor shall reimburse Heller for all expenses, including reasonable attorneys' fees, incurred or paid by Heller in protecting or enforcing any of its rights hereunder; (g) in the event of a default hereunder or under the Agreement, Heller shall have the right to take physical possession of the Inventory and to maintain such possession on Debtor's premises or request Debtor to assemble the Inventory and make it available to Heller at a place to be reasonably designated by Heller; and (h) Debtor shall at all times and at its own expense keep the Inventory insured against loss or damage by fire, theft, extended coverage and such other hazards as Heller may specify, in such amounts and companies and under such policies and in such form as shall be acceptable to Heller, and the policies shall be endorsed in Heller's favor so that any loss thereunder shall be payable to Heller as its interest may appear and such policies shall be deposited with Heller. In the event Debtor fails to provide Heller with evidence of the insurance coverage required by or this Agreement, Heller may, but is not required to, purchase insurance at Debtor's expense to protect Heller's interests in the Inventory. This insurance may, but need not, protect Debtor's interests. The coverage purchased by Heller may not pay any claim made by Debtor or any claim that is made against Debtor in connection with the Inventory. Debtor may later cancel any insurance purchased by Heller, but only after providing Heller with evidence that Debtor has obtained insurance as required by this Agreement. If Heller purchases insurance for the Inventory, Debtor will be responsible for the costs of that insurance, including interest and other charges imposed by Heller in connection with the placement of the insurance, until the effective date of the cancellation or expiration of the insurance. The costs of the insurance may be added to the Obligations. The costs of the insurance may be more than the cost of insurance Debtor is able to obtain on its own. 4. Debtor further warrants to and agrees with Heller that: (a) Debtor is and will be a corporation, validly existing and in good standing under the laws of the State of California and duly qualified to conduct its business in any jurisdiction where any of the Inventory may now or hereafter be located; (b) Debtor is duly authorized to execute this Agreement and the Financing Agreements and such agreements upon execution, will be valid, enforceable and binding upon the Debtor in accordance with their terms; (c) Debtor shall pay and perform all of its obligations to Heller under the Financing Agreements and this Agreement according to their terms, whether by maturity, by acceleration or otherwise; (d) Debtor shall immediately advise Heller in writing of any change in any of Debtor's places of business or the opening of any new place of business; and (e) Debtor shall join with Heller in executing one or more financing statements pursuant to the Uniform Commercial Code and any other document, in a form satisfactory to Heller, necessary to perfect the security interest granted herein or to effectuate the purposes of this Agreement. 5. Default by Debtor as to any present or future agreement, obligation, indebtedness, note, mortgage, guaranty, security agreement, instrument or document to which Heller and Debtor are parties, shall constitute an event of default under every other agreement, obligation, instrument or document to which Heller and Debtor are parties, and all security and collateral theretofore or to be delivered to Heller pursuant thereto shall be deemed and considered to be and shall be collateral and security for each and every present or future agreement, obligation, indebtedness, note, mortgage, guaranty, security agreement, instrument or document delivered by Debtor to 2 3 Heller. Heller shall have the right, without obligation of apportionment to look to any of such collateral or security for satisfaction of any present or future obligation of Debtor to Heller. 6. Until default, Debtor may retain possession of the Inventory and use it in any lawful manner not inconsistent with this Agreement or with the terms or conditions of any policy of insurance thereon. Debtor shall be in default under this Agreement upon the happening of any of the following events or conditions: (a) Default by Debtor in payment of any indebtedness or obligation now or hereafter owed by Debtor to Heller or default in the performance of any obligation, covenant or liability contained in this Agreement or the Financing Agreements; or (b) Any warranty, representation or statement made or furnished to Heller by or on behalf of Debtor proves to have been false in any material respect when made or furnished; or (c) Any loss, theft, damage or destruction of any material portion of the Inventory which is not covered by insurance as provided herein, or the making of any levy, seizure or attachment thereof or thereon, or any unauthorized sale or encumbrance with respect thereto; or (d) Dissolution, termination of existence, discontinuance of the business, insolvency, business failure, or appointment of a receiver of any part of the property of, or assignment for the benefit of creditors by, the Debtor or the commencement of any proceedings under any bankruptcy or insolvency laws by or against Debtor. 7. Upon any such default as set forth in the preceding section of this Agreement, Heller shall then, or at any time thereafter, have all the rights and remedies of a Secured Party under the Uniform Commercial Code, all rights provided in this Agreement and the Financing Agreements, or in any other applicable security or loan agreement or document, all of which rights and remedies shall, to the full extent permitted by law, be cumulative. Heller may enter upon the Debtor's premises to take possession of the Inventory, to remove it, to render it unusable or dispose of the Inventory on the Debtor's premises, and the Debtor agrees not to resist or interfere. The Debtor waives notice of and the holding of a judicial hearing prior to repossession or replevin of the Inventory by Heller. Heller may require the Debtor to assemble the Inventory and make it available at a place designated by Heller which is mutually convenient. Any notice in writing of the sale, disposition or other intended action by Heller after default by Debtor which is sent by mail, postage prepaid, to the Debtor at its principal place of business specified above, or such other address of Debtor which may from time to time be shown on Heller's records, at least ten days prior to such actions, shall constitute reasonable notice to the Debtor. The waiver of any default hereunder shall not be a waiver of any subsequent default or of the same default on a future occasion. 8. All rights of Heller hereunder shall inure to the benefit of its successors and assigns and all obligations of the Debtor shall bind its heirs, executors, administrators, successors and assigns. 9. This Agreement may not be amended, modified or terminated except in writing signed by the party to be charged. 10. APPLICABLE LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF CALIFORNIA, WITHOUT REGARD TO CONFLICTS OF LAW PRINCIPLES. 11. CONSENT TO JURISDICTION. DEBTOR HEREBY CONSENTS TO THE JURISDICTION OF ANY STATE OR FEDERAL COURT LOCATED WITHIN THE COUNTY OF LOS ANGELES 3 4 STATE OF CALIFORNIA AND IRREVOCABLY AGREES THAT, SUBJECT TO HELLER'S ELECTION, ALL ACTIONS OR PROCEEDINGS ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE OTHER FINANCING AGREEMENTS SHALL BE LITIGATED IN SUCH COURTS. DEBTOR EXPRESSLY SUBMITS AND CONSENTS TO THE JURISDICTION OF THE AFORESAID COURTS AND WAIVES ANY DEFENSE OF FORUM NON CONVENIENS. DEBTOR HEREBY WAIVES PERSONAL SERVICE OF ANY AND ALL PROCESS AND AGREES THAT ALL SUCH SERVICE OF PROCESS MAY BE MADE UPON DEBTOR BY CERTIFIED OR REGISTERED MAIL, RETURN RECEIPT REQUESTED, ADDRESSED TO DEBTOR, AT THE ADDRESS SET FORTH IN THIS AGREEMENT AND SERVICE SO MADE SHALL BE COMPLETE TEN (10) DAYS AFTER THE SAME HAS BEEN POSTED. 12. WAIVER OF JURY TRIAL. DEBTOR AND HELLER HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS AGREEMENT AND THE OTHER FINANCING AGREEMENTS. DEBTOR AND HELLER ACKNOWLEDGE THAT THIS WAIVER IS A MATERIAL INDUCEMENT TO ENTER INTO A BUSINESS RELATIONSHIP, THAT EACH HAS RELIED ON THE WAIVER IN ENTERING INTO THIS AGREEMENT AND THE OTHER FINANCING AGREEMENTS AND THAT EACH WILL CONTINUE TO RELY ON THE WAIVER IN THEIR RELATED FUTURE DEALINGS. DEBTOR AND HELLER WARRANT AND REPRESENT THAT EACH HAS HAD THE OPPORTUNITY OF REVIEWING THIS JURY WAIVER WITH LEGAL COUNSEL, AND THAT EACH KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS. This Agreement has been executed by Debtor, being duly authorized and empowered, and Heller on the day and year just above written. JALATE,LTD. HELLER FINANCIAL, INC. By: [SIG] By: [SIG] _______________________________ ____________________________ Title: V.P. FINANCE Title: V.P. ____________________________ _________________________ 4 EX-10.57 23 EXHIBIT 10.57 1 EXHIBIT 10.51 ========================================= CREDIT AGREEMENT by and between JALATE LIMITED, INC., A CALIFORNIA CORPORATION and WELLS FARGO HSBC TRADE BANK, N.A. Dated as of May 31, 1997 ========================================= Exhibit A - Addendum To Agreement Exhibit B - Facility Supplement(s) Exhibit C - Collateral/Credit Support Document 2 WELLS FARGO HSBC TRADE BANK CREDIT AGREEMENT ================================================================================ JALATE LIMITED, INC., a California corporation ("Borrower"), organized under the laws of the State of California whose chief executive office is located at the address specified after its signature to this Agreement ("Borrower's Address") and WELLS FARGO HSBC TRADE BANK, N.A. ("Trade Bank"), whose address is specified after its signature to this Agreement, have entered into this CREDIT AGREEMENT as of May 31, 1997 ("Effective Date"). All references to this "Agreement" include those covenants included in the Addendum ("Addendum") attached as Exhibit A hereto. I. CREDIT FACILITIES 1.1 THE FACILITIES. Subject to the terms and conditions of this Agreement, Trade Bank will make available to Borrower each of those credit facilities ("Facilities") for which a Facility Supplement ("Supplement") is attached as Exhibit B hereto, Additional terms for each individual Facility (and each subfacility thereof ("Subfacility")) are set forth in the Supplement for that Facility. Each Facility will be available from the closing Date until the Facility Termination Date for that Facility. Collateral and credit support required for each Facility are also set forth in the Supplement for each Facility. Definitions for those capitalized terms not otherwise defined are contained in Article 8 below. 1.2 CREDIT EXTENSION LIMIT. The aggregate outstanding amount of all Credit Extensions may at no time exceed Four Million Dollars ($4,000,000) ("Overall Credit Limit"). The aggregate outstanding amount of all Credit Extensions outstanding at any time under any Facility may not exceed that amount specified as the "Credit Limit" in the Supplement for that Facility, and the aggregate outstanding amount of all Credit Extensions outstanding at any time under each Subfacility (or any subcategory thereof) may not exceed that amount specified as the "Credit Sublimit" in the Supplement for the relevant Facility. An amount equal to 100% of each unfunded Credit Extension shall be used in calculating the outstanding amount of Credit Extensions under this Agreement. 1.3 REPAYMENT; INTEREST AND FEES. Each funded Credit Extension shall be repaid by Borrower, and shall bear interest from the date of disbursement at those per annum rates and such interest shall be paid, at the times specified in the applicable Supplement, Note or Facility Document. With respect to each Facility, Borrower agrees to pay to Trade Bank the fees specified in the related Supplement as well as those fees specified in the relevant Facility Document(s). Interest and fees will be calculated on the basis of a 360 day year, actual days elapsed. Any overdue payments of principal (and interest to the extent permitted by law) shall bear interest at a per annum floating rate equal to the Prime Rate plus 5.0%. 1.4 PREPAYMENTS. Credit Extensions under any Facility may only be prepaid in accordance with the terms of the related Supplement. At the time of any prepayment (including, but not limited to, any prepayment which is a result of the occurrence of an Event of Default and an acceleration of the Obligations) Borrower will pay to Trade Bank all interest accrued on the amount so prepaid to the date of such prepayment and all costs, expenses and fees specified in the Loan Documents. II. REPRESENTATIONS AND WARRANTIES Borrower represents and warrants to Trade Bank that the following representations and warranties are true and correct: 2.1 LEGAL STATUS. Borrower is duly organized and existing and in good standing under the laws of the jurisdiction indicated in this Agreement, and is qualified or licensed to do business in all jurisdictions in which such qualification or licensing is required and in which the failure to so qualify or to be so licensed could have a material adverse affect on Borrower. 2.2 AUTHORIZATION AND VALIDITY. The execution, delivery and performance of this Agreement, and all other Loan Documents to which Borrower is a party, have been duly and validly authorized, executed and delivered by Borrower and constitute legal, valid and binding agreements of Borrower, and are enforceable against Borrower in accordance with their respective terms. 2.3 BORROWER'S NAME. The name of Borrower set forth at the end of this Agreement is its correct name. If Borrower is conducting business under a fictitious business name, Borrower is in compliance with all laws relating to the conduct of such business under such name. 2.4 FINANCIAL CONDITION AND STATEMENTS. All financial statements of Borrower delivered to Trade Bank have been prepared in conformity with GAAP, and completely and accurately reflect the financial condition of Borrower (and any consolidated Subsidiaries) at the times and for the periods stated in such financial statements. Neither Borrower nor any Subsidiary has any material contingent liability not reflected in the aforesaid financial statement. Since the date of the financial statements delivered to Trade Bank for the last fiscal period of Borrower to end before the Effective Date, there has been no material adverse change in the financial condition, business or prospects of Borrower. Borrower is solvent. Page 1 of 9 3 2.5 LITIGATION. Except as disclosed in writing to Trade Bank prior to the Effective Date, there is no action, claim, suit, litigation, proceeding or investigation pending or (to best of Borrower's knowledge) threatened by or against or affecting Borrower or any Subsidiary in any court or before any governmental authority, administrator or agency which may result in (a) any material adverse change in the financial condition or business of Borrower, or (b) any material impairment of the ability of Borrower to carry on its business in substantially the same manner as it is now being conducted. 2.6 OTHER OBLIGATIONS. Except as disclosed in writing to Trade Bank prior to the Effective Date, neither Borrower nor any Subsidiary are in default of any obligation for borrowed money, any purchase money obligation or any material lease, commitment, contract, instrument or obligation. 2.7 NO DEFAULTS. No Event of Default, and event which with the giving of notice or the passage of time or both would constitute an Event of Default, has occurred and is continuing. 2.8 INFORMATION PROVIDED TO TRADE BANK. The information provided to the Trade Bank concerning Borrower's business is true and correct. 2.9 ENVIRONMENTAL MATTERS. Except as disclosed by Borrower to Bank in writing prior to the Effective Date, Borrower (as well as any Subsidiary) is each in compliance in all material respects with all applicable Federal or state environmental, hazardous waste, health and safety statutes, and any rules or regulations adopted pursuant thereto, which govern or affect any of Borrower's or any Subsidiary's operations and/or properties, including without limitation, the Comprehensive Environmental Response, Compensation and Liability Act of 1980, the Superfund Amendments and Reauthorization Act of 1986, the Federal Resource Conservation and Recovery Act of 1976, the Federal Toxic Substances Control Act and the California Health and Safety Code, as any of the same may be amended, modified or supplemented from time to time. None of the operations of Borrower or of any Subsidiary is the subject of any Federal or state investigation evaluating whether any remedial action involving a material expenditure is needed to respond to a release of any toxic or hazardous waste or substance into the environment. III. CONDITIONS TO EXTENDING FACILITIES 3.1 Conditions to Initial Credit Extension. The obligation of Trade Bank to make the first Credit Extension is subject to the fulfillment to Trade Bank's satisfaction of the following conditions: (a) APPROVAL OF TRADE BANK COUNSEL. All legal matters relating to making the Facilities available to Borrower must be satisfactory to counsel for Trade Bank. (b) DOCUMENTATION. Trade Bank must have received, in form and substance satisfactory to Trade Bank, the following documents and instruments duly executed and in full force and effect: (1) a corporate borrowing resolution and incumbency certificate if Borrower is a corporation, a partnership or joint venture borrowing certificate if Borrower is a partnership or joint venture, and a limited liability company borrowing certificate if Borrower is a limited liability company; (2) the Facility Documents for each Facility, including, but not limited to, note(s) ("Notes") for any Revolving Credit or Term Loan Facility, Trade Bank's standard Continuing Commercial Letter of Credit Agreement or Continuing Standby Letter of Credit Agreement for any letter of credit Facility; (3) those guarantees, security agreements, deeds of trust, subordination agreements, intercreditor agreements, factoring agreements, tax service contracts, and other Collateral Documents required by Trade Bank to evidence the collateral/credit support specified in the Supplement; (4) if an audit or inspection of any books, records or property is specified in the Supplement for any Facility, an audit or inspection report from Wells Fargo or another auditor or inspector acceptable to Trade Bank reflecting values and property conditions satisfactory to Trade Bank; (5) if an appraisal of any real property is specified in any Facility Supplement, an appraisal from an appraiser acceptable to Trade Bank reflecting values satisfactory to Trade Bank; (6) if a policy of title insurance is specified in any Facility Supplement, an ALTA policy containing the endorsements, and issued by a company, acceptable to Trade Bank; and (7) if insurance is required in the Addendum, the insurance policies specified in the Addendum (or other satisfactory proof thereof) from insurers acceptable to Trade Bank. Page 2 of 9 4 3.2 CONDITIONS TO MAKING EACH CREDIT EXTENSION. The obligation of Trade Bank to make each Credit Extension is subject to the fulfillment to Trade Bank's satisfaction of the following conditions: (a) REPRESENTATIONS AND WARRANTIES. The representations and warranties contained in this Agreement, the Facility Documents and the Collateral Documents will be true and correct on as of the date of the Credit Extension with the same effect as though such representations and warranties had been made on and as of such date; (b) DOCUMENTATION. Trade Bank must have received, in form and substance satisfactory to Trade Bank, the following documents and instruments duly executed and in full force and effect: (1) if the Credit Extension is the issuance of a Commercial Letter of Credit, Trade Bank's standard Application For Commercial Letter of Credit or standard Application and Agreement For Commercial Letter of Credit; (2) if the Credit Extension is the issuance of a Standby Letter of Credit, Trade Bank's standard Application For Standby Letter of Credit or standard Application and Agreement For Standby Letter of Credit; (3) if a Borrowing Base Certificate is required for the Credit Extension, a Borrowing Base Certificate demonstrating compliance with the requirements for such Credit Extension. (c) FEES. Trade Bank must have received any fees required by the Loan Documents to be paid at the time such Credit Extension is made. IV. AFFIRMATIVE COVENANTS Borrower covenants that so long as Trade Bank remains committed to make Credit Extensions to Borrower, and until payment of all Obligations and Credit Extensions, Borrower will comply with each of the following covenants: (For purposes of this Article IV, and Article V below, reference to "Borrower" may also extend to Borrower's subsidiaries, if so specified in the Addendum.) 4.1 PUNCTUAL PAYMENTS. Punctually pay all principal, interest, fees and other Obligations due under this Agreement or under any Loan Document at the time and place and in the manner specified herein or therein. 4.2 NOTIFICATION TO TRADE BANK. Promptly, but in no event more than 5 calendar days after the occurrence of each such event, provide written notice in reasonable detail of each of the following: (a) OCCURRENCE OF A DEFAULT. The occurrence of any Event of Default or any event which with the giving of notice or the passage of time or both would constitute an Event of Default; (b) BORROWER'S TRADE NAMES; PLACE OF BUSINESS. Any change of Borrower's (or any Subsidiary's) name, trade name or place of business, or chief executive officer; (c) LITIGATION. Any action, claim, proceeding, litigation or investigation threatened or instituted by or against or affecting Borrower (or any Subsidiary) in any court or before any government authority, administrator or agency which may materially and adversely affect Borrower's (or any Subsidiary's) financial condition or business or Borrower's ability to carry on its business in substantially the same manner as it is now being conducted; (d) UNINSURED OR PARTIALLY UNINSURED LOSS. Any uninsured or partially uninsured loss through liability or property damage or through fire, theft or any other cause affecting Borrower's (or any Subsidiary's) property in excess of the aggregate amount required hereunder; (e) REPORTS MADE TO INSURANCE COMPANIES. Copies of all material reports made to insurance companies; and (f) ERISA. The occurrence and nature of any Reportable Event or Prohibited Transaction, each as defined in ERISA, or any funding deficiency with respect to any Plan. 4.3 BOOKS AND RECORDS. Maintain at Borrower's address books and records in accordance with GAAP, and permit any representative of Trade Bank, at any reasonable time, to inspect, audit and examine such books and records, to make copies of them, and to inspect the properties of Borrower. Page 3 of 9 5 4.4 TAX RETURNS AND PAYMENTS. Timely file all tax returns and reports required by foreign, federal, state and local law, and timely pay all foreign, federal, state and local taxes, assessments, deposits and contributions owed by Borrower. Borrower may, however, defer payment of any contested taxes, provided that Borrower (i) in good faith contests Borrower's obligation to pay the taxes by appropriate proceedings promptly instituted and diligently conducted, (ii) notifies Trade Bank in writing of the commencement of, and any material development in, the proceedings, (iii) posts bonds or takes any other steps required to keep the contested taxes from becoming a lien upon any of the Collateral, and (iv) makes provision, to Trade Bank's satisfaction, for eventual payment of such taxes in the event Borrower is obligated to make such payment. 4.5 COMPLIANCE WITH LAWS. Comply in all material respects with the provisions of all foreign, federal, state and local laws and regulations relating to Borrower, including, but not limited to, those relating to Borrower's ownership of real or personal property, the conduct and licensing of Borrower's business, and health and environmental matters. 4.6 INSURANCE. Maintain and keep in force insurance of the types and in amounts customarily carried in lines of business similar to that of Borrower, including, but not limited to, fire, extended coverage, public liability, flood, property damage and workers' compensation, with all such insurance to be in amounts satisfactory to Trade Bank and to be carried with companies approved by Trade Bank before such companies are retained, and deliver to Trade Bank from time to time at Trade Bank's request schedules setting forth all insurance then in effect. All insurance policies shall name Trade Bank as an additional loss payee, and shall contain a lenders loss payee endorsement in form reasonably acceptable to Trade Bank. (Upon receipt of the proceeds of any such insurance, Trade Bank shall apply such proceeds in reduction of the outstanding funded Credit Extensions and shall hold any remaining proceeds as collateral for the outstanding unfunded Credit Extensions, as Trade Bank shall determine in its sole discretion, except that, provided no Event of Default has occurred, Trade Bank shall release to Borrower insurance proceeds with respect to equipment totaling less than $100,000, which shall be utilized by Borrower for the replacement of the equipment with respect to which the insurance proceeds were paid, if Trade Bank receives reasonable assurance that the insurance proceeds so released will be so used.) If Borrower fails to provide or pay for any insurance, Trade Bank may, but is not obligated to, obtain the insurance at Borrower's expense. 4.7 FURTHER ASSURANCES. At Trade Bank's request and in form and substance satisfactory to Trade Bank, execute all documents and take all such actions at Borrower's expense as Trade Bank may deem reasonably necessary or useful to perfect and maintain Trade Bank's perfected security interest in the Collateral and in order to fully consummate all of the transactions contemplated by the Loan Documents. V. NEGATIVE COVENANTS Borrower covenants that so long as Trade Bank remains committed to make any Credit Extensions to Borrower and all Obligations and Credit Extensions have been paid, Borrower will not: 5.1 MERGE OR CONSOLIDATION, TRANSFER OF ASSETS. Merge into or consolidate with any other entity; make any substantial change in the nature of Borrower's business as conducted as of the date hereof; acquire all or substantially all of the assets of any other entity; nor sell, lease, transfer or otherwise dispose of all or a substantial or material portion of Borrower's assets except in the ordinary course of its business. 5.2 LIENS. Except for Permitted Liens, mortgage, pledge, grant or permit to exist a security interest in, or lien upon, all or any portion of Borrower's assets now owned or hereafter acquired. 5.3 USE OF PROCEEDS. Borrower will not use the proceeds of any Credit Extension except for the purposes, if any, specified for such Credit Extension in the Supplement covering the Facility under which such Credit Extension is made. VI. EVENTS OF DEFAULT AND REMEDIES 6.1 EVENTS OF DEFAULT. The occurrence of any of the following shall constitute an "Event of Default": (a) FAILURE TO MAKE PAYMENTS WHEN DUE. Borrower's failure to pay principal, interest, fees or other amounts when due under any Loan Document. (b) FAILURE TO PERFORM OBLIGATIONS. Any failure by Borrower to comply with any covenant or obligation in this Agreement or in any Loan Document (other than those referred to in subsection (a) above), and such default shall continue for a period of twenty calendar days from the earlier of (i) Borrower's failure to notify Trade Bank of such Event of Default pursuant to Section 4.2(a) above, or (ii) Trade Bank's notice to Borrower of such Event of Default. (c) UNTRUE OR MISLEADING WARRANTY OR STATEMENT. Any warranty, representation, financial statement, report or certificate made or delivered by Borrower under any Loan Document is untrue or misleading in any material respect when made or delivered. Page 4 of 9 6 (d) DEFAULTS UNDER OTHER LOAN DOCUMENTS. Any "Event of Default" occurs under any other Loan Document; any Guaranty is no longer in full force and effect (or any claim thereof made by Guarantor) or any failure of a Guarantor to comply with the provisions thereof; or any breach of the provisions of any Subordination Agreement or Intercreditor Agreement by any party other than the Trade Bank. (e) DEFAULTS UNDER OTHER AGREEMENTS OR INSTRUMENTS. Any default in the payment or performance of any obligation, or the occurrence of any event of default, under the terms of any other agreement or instrument pursuant to which Borrower, any Subsidiary or any Guarantor or general partner of Borrower has incurred any debt or other material liability to any person or entity. (f) CONCERNING OR TRANSFERRING PROPERTY. Borrower conceals, removes or transfers any part of its property with intent to hinder, delay or defraud its creditors, or makes or suffers any transfer of any of its property which may be fraudulent under any bankruptcy, fraudulent conveyance or similar law. (g) JUDGEMENTS AND LEVIES AGAINST BORROWER. The filing of a notice of judgment lien against Borrower, or the recording of any abstract of judgment against Borrower, in any county in which Borrower has an interest in real property, or the service of a notice of levy and/or of a writ of attachment or execution, or other like process, against the assets of Borrower, or the entry of a judgment against Borrower. (h) EVENT OR CONDITION IMPAIRING PAYMENT OR PERFORMANCE. Any event occurs or condition arises which Trade Bank in good faith believes impairs or is substantially likely to impair the prospect of payment or performance by Borrower of the Obligations, including, but not limited to any material adverse change in Borrower's financial condition, business or prospects. (i) VOLUNTARY INSOLVENCY. Borrower, any Subsidiary or any Guarantor (i) becomes insolvent, (ii) suffers or consents to or applies for the appointment of a receiver, trustee, custodian or liquidator of itself or any of its property, (iii) generally fails to pay its debts as they become due, (iv) makes a general assignment for the benefit of creditors, or (v) files a voluntary petition in bankruptcy, or seeks reorganization, in order to effect a plan or other arrangement with creditors or any other relief under the Bankruptcy Reform Act, Title 11 of the United States Code, as amended or recodified from time to time ("Bankruptcy Code"), or under any state or Federal law granting relief to debtors, whether now or hereafter in effect. (j) INVOLUNTARY INSOLVENCY. Any involuntary petition or proceeding pursuant to the Bankruptcy Code or any other applicable state or federal law relating to bankruptcy, reorganization or other relief for debtors is filed or commenced against Borrower, any Subsidiary or Guarantor, or (b) have an order for relief entered against it by any court of competent jurisdiction under the Bankruptcy Code or any other applicable state or federal law relating to bankruptcy, reorganization or other relief for debtors. (k) CHANGE IN OWNERSHIP. Any change in the ownership of Borrower, any general partner of Borrower or any Guarantor which the Trade Bank determines, in its sole discretion, may adversely affect the creditworthiness of Borrower or credit support for the Obligations. 6.2 REMEDIES. Upon the occurrence of any Event of Default, or at any time thereafter, Trade Bank, at its option, and without notice or demand of any kind (all of which are hereby expressly waived by Borrower), may do any one or more of the following: (a) terminate Trade Bank's obligation to make Credit Extensions or to make available to Borrower the Facilities or other financial accommodations; (b) accelerate and declare all or any part of the Obligations to be immediately due, payable, and performable, notwithstanding any deferred or installment payments allowed by any instrument evidencing or relating to any Credit Extension; and/or (c) exercise all its rights, powers and remedies available under the Loan Documents, or accorded by law, including, but not limited to, the right to resort to any or all Collateral or other security for any of the Obligations and to exercise any or all of the rights of a beneficiary or secured party pursuant to applicable law. Notwithstanding the provisions in the foregoing sentence, if any Event of Default set out in subsections (i) and (j) of Section 6.1 above shall occur, then all the remedies specified in the preceding sentence shall automatically take effect without notice or demand of any kind (all of which are hereby expressly waived by Borrower) with respect to any and all Obligations. All rights, powers and remedies of Trade Bank may be exercised at any time by Trade Bank and from time to time after the occurrence of an Event of Default, are cumulative and not exclusive, and shall be in addition to any other rights, powers or remedies provided by law or equity. VII. GENERAL PROVISIONS 7.1 NOTICES. All notices to be given under this Agreement shall be in writing and shall be given personally or by regular first-class mail, by certified mail return receipt requested, by a private delivery service which obtains a signed receipt, or by facsimile transmission addressed to Trade Bank or Borrower at the address indicated after their signature to this Agreement, or at any other address designated in writing by one party to the other party. Trade Bank is hereby authorized by Borrower to act on such instructions or notices sent by facsimile transmission or telecommunications device which Trade Bank believes come from Borrower. All notices shall be deemed to have been given upon delivery, in the case of notices personally delivered or delivered by private delivery service, upon the expiration of 3 calendar days following the deposit of the notices in the United States mail, in the case of notices deposited in the United States mail with postage prepaid, or upon receipt, in the case of notices sent by facsimile transmission. Page 5 of 9 7 7.2 WAIVERS. No delay or failure of Trade Bank in exercising any right, power or remedy under any of the Loan Documents shall affect or operate as a waiver of such right, power or remedy; nor shall any single or partial exercise of any such right, power or remedy preclude, waive or otherwise affect any other or further exercise thereof or the exercise of any other right, power or remedy. Any waiver, consent or approval by Trade Bank under any of the Loan Documents must be in writing and shall be effective only to the extent set out in such writing. 7.3 BENEFIT OF AGREEMENT. The provisions of the Loan Documents shall be binding upon and inure to the benefit of the respective successors, assigns, heirs, executors, administrators, beneficiaries and legal representatives of Borrower and Trade Bank; provided, however, that Borrower may not assign or transfer any of its rights under any Loan Document without the prior written consent of Trade Bank, and any prohibited assignment shall be void. No consent by Trade Bank to any assignment shall release Borrower from its liability for the Obligations unless such release is specifically given by Trade Bank to Borrower in writing. Trade Bank reserves the right to sell, assign, transfer, negotiate or grant participations in all or any part of, or any interest in, Trade Bank's rights and benefits under each of the Loan Documents. In connection therewith, Trade Bank may disclose any information relating to the Facilities, Borrower or its business, or any Guarantor or its business. 7.4 JOINT AND SEVERAL LIABILITY. If Borrower consists of more than one person or entity, the liability of each of them shall be joint and several, and the compromise of any claim with, or the release of, any one such Borrower shall not constitute a compromise with, or a release of, any other such Borrower. 7.5 NO THIRD PARTY BENEFICIARIES. This Agreement is made and entered into for the sole protection and benefit of Borrower and Trade Bank and their respective permitted successors and assigns, and no other person or entity shall be a third party beneficiary of, or have any direct or indirect cause of action or claim in connection with, any of the Loan Documents to which it is not a party. 7.6 GOVERNING LAW AND JURISDICTION. This Agreement shall, unless provided differently in any Loan Document, be governed by, and be construed in accordance with, the internal laws of the State of California, except to the extent Trade Bank has greater rights or remedies under federal law whether as a national bank or otherwise. Borrower and Trade Bank (a) agree that all actions and proceedings relating directly or indirectly to this Agreement shall be litigated in courts located within California; (b) consent to the jurisdiction of any such court and consent to service of process in any such action or proceeding by personal delivery or any other method permitted by law; and (c) waive any and all rights Borrower may have to object to the jurisdiction of any such court or to transfer or change the venue of any such action or proceeding. 7.7 SEVERABILITY. Should any provision of any Loan Document be prohibited by, or invalid under applicable law, or held by any court of competent jurisdiction to be void or unenforceable, such defect shall not affect, the validity of the other provisions of the Loan Documents. 7.8 ENTIRE AGREEMENT; AMENDMENTS. This Agreement and the other Loan Documents are the final entire and complete agreement between Borrower and Trade Bank concerning the Credit Extensions and the Facilities; supersede all prior and contemporaneous negotiations and oral representations and agreements. There are no oral understandings, representations or agreements between the parties concerning the Credit Extensions or the Facilities which are not set forth in the Loan Documents. This Agreement and the Supplements may not be waived, amended or superseded except in a writing executed by Borrower and Trade Bank. 7.9 COLLECTION OF PAYMENTS. Unless otherwise specified in any Loan Document, other than this Agreement or any Note, all principal, interest and any fees due to Trade Bank by Borrower under this Agreement, the Addendum, any Supplement, any Facility Document, any Collateral Document or any Note, will be paid by Trade Bank having Wells Fargo debit any of Borrower's accounts with Wells Fargo and forwarding such amount debited to Trade Bank, without presentment, protest, demand for reimbursement or payment, notice of dishonor or any other notice whatsoever, all of which are hereby expressly waived by Borrower. Such debit will be made at the time principal, interest or any fee is due to Trade Bank pursuant to this Agreement, the Addendum, any Supplement, any Facility Document, any Collateral Document or any Note. 7.11 COSTS, EXPENSES AND ATTORNEYS' FEES. Borrower will reimburse Trade Bank for all costs and expenses, including, but not limited to, reasonable attorneys' fees and expenses (which counsel may be Trade Bank or Wells Fargo employees), expended or incurred by Trade Bank in the preparation and negotiation of this Agreement, the Notes, the Collateral Documents, the Addenda, and the Facility Documents, in amending this Agreement, the Collateral Documents, the Notes, the Addenda, or the Facility Documents, in collecting any sum which becomes due Trade Bank on the Notes, under this Agreement, the Collateral Documents, the Addenda, the Supplements, or any of the Facility Documents, in the protection, perfection, preservation and enforcement of any and all rights of Trade Bank in connection with this Agreement, the Notes, any of the Collateral Documents, any of the Supplements, any of the Addenda, or any of the Facility Documents, including, without limitation, the fees and costs incurred in any out-of-court work out or a bankruptcy or reorganization proceeding. Page 6 of 9 8 VIII. DEFINITIONS 8.1 "AGREEMENT" means this Agreement and the Addendum attached hereto, as corrected or modified from time to time by Trade Bank and Borrower. 8.2 "BANKING DAY" means each day except Saturday, Sunday and a day specified as a holiday by federal or California statute. 8.3 "CLOSING DATE" means the date on which the first Credit Extension is made. 8.4 "COLLATERAL" means all property securing the Obligations. 8.5 "COLLATERAL DOCUMENTS" means those security agreement(s), deed(s) of trust, guarantee(s), subordination agreement(s), intercreditor agreement(s), and other credit support documents and instruments required by the Trade Bank to effect the collateral and credit support requirements set forth in the Supplement with respect to the Facilities. 8.6 "CREDIT EXTENSION" means each extension of credit under the Facilities (whether funded or unfunded), including, but not limited to, (a) the issuance of sight or usance commercial letters of credit or commercial letters of credit supported by backup letters of credit, (b) the issuance of standby letters of credit, (c) the issuance of shipping guarantees, (d) the making of loans against imports for letters of credit, (d) the making of clean import loans outside letters of credit, (e) the making of advances against export orders, (f) the making of advances against outgoing collections, (g) the making of revolving credit working capital loans, (h) the making of term loans, (i) the discounting of drafts or foreign receivables with recourse, (j) the discounting or purchasing of promissory notes with recourse to Borrower, and (k) the entry into foreign exchange contracts. 8.7 "CREDIT LIMIT" means, with respect to any Facility, the amount specified under the column labeled "Credit Limit" in the Supplement for that Facility. 8.8 "CREDIT SUBLIMIT" means, with respect to any Subfacility, the amount specified after the name of that Subfacility under the column labeled "Credit Sublimit" in the Supplement for the related Facility. 8.9 "DOLLARS" and "$" means United States dollars. 8.10 "FACILITY DOCUMENTS" means, with respect to any Facility, those documents specified in the Supplement for that Facility, and any other documents customarily required by Trade Bank for such Facility. 8.11 "FACILITY TERMINATION DATE" means, with respect to any Facility, the date specified in the Supplement for that Facility after which no further Credit Extensions will be made under that Facility. 8.12 "GAAP" means generally accepted accounting principles, which are applicable to the circumstances, as of the date of determination, set out in the opinions and pronouncements of the Accounting Principles Board and the American Institute of Certified Public Accountants and in the statements and pronouncements of the Financial Accounting Standards Board or in such other statements by such other entity as may be approved by a significant segment of the accounting profession. 8.13 "LOAN DOCUMENTS" means this Agreement, the Addendum, the Supplements, the Facility Documents and the Collateral Documents. 8.14 "NOTE" has the meaning specified in Section 3.1(b)(2) above. 8.15 "OBLIGATIONS" means (a) the obligation of Borrower to pay principal, interest and fees on all funded Credit Extensions and fees on all unfunded Credit Extensions, and (b) the obligation of Borrower to pay and perform when due all other indebtedness, liabilities, obligations and covenants required under the Loan Documents. 8.16 "PERMITTED LIENS" shall have the meaning provided in the Addendum. 8.17 "PERSON" means and includes natural persons, corporations, limited partnerships, general partnerships, joint stock companies, joint ventures, associations, companies, trusts, banks, trust companies, land trusts, business trusts or other organizations, whether or not legal entities, and governments and agencies and political subdivisions thereof. 8.18 "PRIME RATE" means the rate most recently announced by Wells Fargo at its principal office in San Francisco, California as its "Prime Rate", with the understanding that the Prime Rate is one of Wells Fargo's base rates and serves as the basis upon which effective rates of interest are calculated for those loans making reference thereto, and is evidenced by the recording thereof after its announcement in such internal publication or publications as Wells Fargo may designate. Any change in an interest rate resulting from a change in the Prime Rate shall become effective as of 12:01 a.m. of the Banking Day on which each change in the Prime Rate is announced by Wells Fargo. Page 7 of 9 9 8.19 "SUBSIDIARY" means (i) any corporation at least the majority of whose securities having ordinary voting power for the election of directors (other than securities having such power only by reason of the happening of a contingency) are at the time owned by Borrower and/or one or more Subsidiaries, and (ii) any joint venture or partnership in which Borrower and/or one or more Subsidiaries has a majority interest. 8.20 "WELLS FARGO" means Wells Fargo Bank, N.A. IX. ARBITRATION 9.01 ARBITRATION. Upon the demand of any party, any Dispute shall be resolved by binding arbitration (except as set forth in 9.05 below) in accordance with the terms of this Agreement. 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, any of the Loan Documents or the Notes, 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 Loan Documents or the Notes, 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 Loan Documents or the Notes. 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. 9.02 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 Loan 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. 9.03 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. 9.04 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 laws 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. 9.05 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 (i) 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, (ii) 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 the substantive law of the state of California, and (iii) 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 (A) whether the findings of fact rendered by the arbitrators are supported by substantial evidence, and (B) 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 8 of 9 10 9.06 REAL PROPERTY COLLATERAL; JUDICIAL REFERENCE. Notwithstanding anything herein to the contrary, no Dispute shall be submitted to arbitration if the Dispute concerns indebtedness secured directly or indirectly, in whole or in part, by any real property unless (i) the holder of the mortgage, lien or security interest specifically elects in writing to proceed with the arbitration, or (ii) all parties to the arbitration waive any rights or benefits that might accrue to them by virtue of the single action rule statute of California, thereby agreeing that all indebtedness and obligations of the parties, and all mortgages, liens and security interests securing such indebtedness and obligations, shall remain fully valid and enforceable. If any such Dispute is not submitted to arbitration, the Dispute shall be referred to a referee in accordance with California Code of Civil Procedure Section 638 et seq., and this general reference agreement is intended to be specifically enforceable in accordance with said Section 638. A referee with the qualifications required herein for arbitrators shall be selected pursuant to the AAA's selection procedures. Judgment upon the decision rendered by a referee shall be entered in the court in which such proceeding was commenced in accordance with California Code of Civil Procedure Sections 644 and 645. 9.07 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 Loan Documents or the subject matter of the Dispute shall control. This arbitration provision shall survive termination, amendment or expiration of any of the Loan Documents, the Notes or any relationship between the parties. Borrower and Trade Bank have caused this Agreement to be executed by their duly authorized officers or representatives on the date specified below. "BORROWER" JALATE LIMITED, INC. By: /s/ [SIG] ---------------------------------------------- Title: VP Finance & CEO Borrower's Address: 6557 Flotilla City of Commerce, CA. 90040 "LENDER" WELLS FARGO HSBC TRADE BANK, NATIONAL ASSOCIATION By: /s/ JAN MACY-BUESCHER --------------------------------------------- Jan Macy-Buescher Title: Vice President Lender's Address: 333 South Grand Avenue, 8th Floor Los Angeles, CA 90071 Page 9 of 9 11 EXHIBIT A WELLS FARGO HSBC TRADE BANK ADDENDUM TO CREDIT AGREEMENT ================================================================================ THIS ADDENDUM IS ATTACHED TO THE CREDIT AGREEMENT ("CREDIT AGREEMENT") BETWEEN WELLS FARGO HSBC TRADE BANK AND THE FOLLOWING BORROWER: NAME OF BORROWER: JALATE LIMITED, INC. ADDITIONAL AFFIRMATIVE COVENANTS The following covenants are part of Article IV of the Credit Agreement: REPORTS. Borrower will furnish the following information or deliver the following reports to Trade Bank at the times indicated below: o ANNUAL FINANCIAL STATEMENTS. Not later than ninety (90) calendar days after and as of the end of each of Borrower's fiscal years, an annual audited financial statement of Borrower prepared by a certified public accountant acceptable to Trade Bank and prepared in accordance with GAAP, to include balance sheet, income statement, statement of cash flow, and source and application of funds statement. o ANNUAL FORM 10-K STATEMENT. Not later than ninety (90) calendar days after and as of the end of each of Borrower's fiscal years, a 10-K Statement. o QUARTERLY FORM 10-Q STATEMENT. Not later than sixty (60) calendar days after and as of the end of each of Borrower's fiscal quarters, a 10-Q Statement. o MONTHLY FINANCIAL STATEMENTS. Not later than thirty (30) calendar days after and as of the end of each calendar month, a financial statement of Borrower prepared by Borrower, to include balance sheet and income statement. CERTIFICATE OF ACCURACY AND NO EVENT OF DEFAULT. At the time each financial statement of Borrower required above is delivered to Trade Bank, a certificate of the president or chief financial officer of Borrower that said financial statements are accurate and that there exists no Event of Default under the Agreement nor any condition, act or event which with the giving of notice or the passage of time or both would constitute an Event of Default. o ACCOUNT DEBTORS AGED LISTING: A list of the names, addresses and phone numbers of all Borrower's account debtors and an aged listing of their balances shall be due: Not later than thirty (30) calendar days after and as of each month-end, and aged listing of accounts receivable, including both factored and unfactored accounts. o INVENTORY LIST: Not later than thirty (30) calendar days after and as of the end of each quarter, an inventory report showing the types, locations and unit or dollar values of all the inventory collateral. o COLLATERAL AUDIT: Collateral audit to be performed annually, by auditors acceptable to Trade Bank. o INSURANCE: Borrower will maintain in full force and effect insurance coverage on all Borrower's property, including, but not limited to, the following types of insurance coverage: policies of fire insurance marine cargo insurance business personal property insurance All the insurance referred to in the preceding sentence must be in form, substance and amounts, and issued by companies, satisfactory to Trade Bank, and cover risks required by Trade Bank and contain loss payable endorsements in favor of Trade Bank. FINANCIAL COVENANTS. Borrower will maintain the following (if Borrower has any Subsidiaries which must be consolidated under GAAP, the following applies to borrower and the consolidated Subsidiaries): o CURRENT RATIO. Not at any time less than 1.25 to 1.0. ("CURRENT RATIO" means total current assets divided by total current liabilities, and "CURRENT ASSETS" and "CURRENT LIABILITIES" have the meanings given to them in accordance with GAAP; provided, however, that "current liabilities" will include indebtedness which is subordinated to the Obligations to Trade Bank under a subordination agreement in form and substance acceptable to Trade Bank or by subordination language acceptable to Trade Bank in the instrument evidencing such indebtedness.) o WORKING CAPITAL. Not at any time less than $2,000,000. ("WORKING CAPITAL" means total current assets minus total current liabilities; provided, however, that "current liabilities" will include indebtedness which is subordinated to the Obligations to Trade Bank under a subordination agreement in form and substance acceptable to Trade Bank or by subordination language acceptable to Trade Bank in the instrument evidencing such indebtedness.) Page 1 of 2 12 o TANGIBLE NET WORTH. Not at any time less than $3,200,000 up to and including September 29, 1997 and $4,000,000 thereafter, ("TANGIBLE NET WORTH" means the excess of total assets over total liabilities determined in accordance with GAAP, (a) excluding, however, in determining total assets (i) all assets which would be classified as intangible assets under GAAP, including, but not limited to, goodwill, licenses, patents, trademarks, trade names, copyrights, capitalized software and organizational costs, licenses and franchises, and (ii) assets which Trade Bank determines in its business judgment would not be available or would be of relatively small value in a liquidation of Borrower's business, including, but not limited to, prepaid expenses, loans to officers or affiliates and other items, and (b) including, in determining total liabilities, indebtedness which is subordinated to the Obligations to Trade Bank.) o TOTAL LIABILITIES DIVIDED BY TANGIBLE NET WORTH. Not at any time greater than 1.75 to 1.0 up to and including September 29, 1997 and 1.40 to 1.0 thereafter. ("Tangible Net Worth" has the meaning given to it above, and "Total Liabilities" includes indebtedness which is subordinated to the Obligations to Trade Bank under a subordination agreement in form and substance acceptable to Trade Bank or by subordination language acceptable to Trade Bank in the instrument evidencing such indebtedness.) o PRE-TAX LOSS. Year-to-date pre-tax loss not to exceed $1,250,000 through June 30, 1997; and not to exceed $500,000 through year to date September 30, 1997. ADDITIONAL NEGATIVE COVENANTS The following covenants are part of Article V of the Credit Agreement (Borrower shall also cause any Subsidiary to comply with the following covenants): o USE OF PROCEEDS. Borrower will not use the proceeds of any Credit Extension except for the purposes, if any, specified for such Credit Extension in the Supplement covering the Facility under which such Credit Extension is made. o LIENS. Borrower will not create or permit any liens, charges, security interests, encumbrances or adverse claims with respect to any of its property or other assets except for the following "PERMITTED LIENS": purchase money security interests in specific items of Borrower's equipment; additional security interests and liens consented to in writing by Trade Bank in its sole discretion; o ACQUISITIONS OF ASSETS. Borrower will not acquire any assets or enter into any other transaction outside the ordinary course of Borrower's business. o LOANS AND INVESTMENTS. Borrower will not make any loans or advances to, or investments in, any person or entity except for accounts receivable created in the ordinary course of Borrower's business. o INDEBTEDNESS FOR BORROWED MONEY. Borrower will not incur any indebtedness for borrowed money, except to Trade Bank and except for indebtedness subordinated to the Obligations by an instrument or agreement in form acceptable to Trade Bank. o GUARANTEES. Borrower will not guarantee or otherwise become liable with respect to the obligations of any other person or entity, except for endorsement of instruments for deposit into Borrower's account in the ordinary course of Borrower's business. o DIVIDENDS AND DISTRIBUTIONS OF CAPITAL OF CORPORATION. If Borrower is a corporation, Borrower will not pay or declare any dividends or make any distribution of capital on Borrower's stock (except for dividends payable solely in stock of Borrower). o STOCK REDEMPTIONS. Borrower will not redeem, retire, purchase or otherwise acquire, directly or indirectly, any of Borrower's stock. o INVESTMENTS IN, OR ACQUISITIONS OF, SUBSIDIARIES. Borrower will not make any investments in, or form or acquire, any subsidiaries. o CAPITAL EXPENDITURES. Borrower shall not, without the prior written consent of Trade Bank, make any capital expenditures in any fiscal year in an aggregate amount in excess of $750,000. o COMPENSATION. Borrower will not, without the prior written consent of Trade Bank, pay, accrue or obligate itself to pay, directly or indirectly, any salaries, bonuses or other compensation or fees to its officers, directors, shareholders or partners, or any members of their immediate families, in any fiscal year in an aggregate amount in excess of $2,500,000. BY SIGNING HERE BORROWER AGREES TO THE DESIGNATED PROVISIONS IN THIS ADDENDUM: /s/ [SIG] -------------------------------------- (SIGNATURE) Page 2 of 2 13 EXHIBIT B WELLS FARGO HSBC TRADE BANK SIGHT COMMERCIAL LETTERS OF CREDIT SUPPLEMENT ================================================================================ THIS SUPPLEMENT IS AN INTEGRAL PART OF THE CREDIT AGREEMENT BETWEEN WELLS FARGO HSBC TRADE BANK AND THE FOLLOWING BORROWER: NAME OF BORROWER: JALATE LIMITED, INC. FACILITY TERMINATION DATE: December 1, 1997 CREDIT LIMIT FOR THIS SIGHT COMMERCIAL LETTERS OF CREDIT FACILITY AND SUBLIMITS: CREDIT LIMIT: $4,000,000 CREDIT SUBLIMITS --------------------------------------- o GOODS CONSIGNED TO, OR CONTROLLED BY, TRADE BANK $4,000,000 THE AGGREGATE AMOUNT OF CREDIT EXTENSIONS OUTSTANDING UNDER THIS FACILITY AND THE FOLLOWING OTHER FACILITIES MAY NOT AT ANY ONE TIME EXCEED $4,000,000: 1. LOANS UNDER THE LOANS AGAINST IMPORTS FOR LETTER OF CREDIT REIMBURSEMENT SUPPLEMENT 1. GUARANTEES UNDER THE SHIPPING GUARANTEES SUPPLEMENT FACILITY DESCRIPTION: Trade Bank will issue sight commercial letters of credit (each a "Sight Commercial Credit") for the account of Borrower as indicated under the heading "Facility Purpose" below. Subject to the credit sublimits specified above, these Sight Commercial Credits will be transferable or not transferable and have the goods related to them consigned to or not consigned to, or controlled by or not controlled by, Trade Bank, The Facility Credit Limit specified above refers to the aggregate undrawn amount of all Sight Commercial Credits which may be at any one time outstanding under this Facility together with the aggregate amount of all drafts drawn under such Sight Commercial Credits which have not been reimbursed as provided below at such time. The Facility Credit Sublimits specified above refer to the aggregate undrawn amount of all Sight Commercial Credits which may be at any one time outstanding under each subcategory under this Facility together with the aggregate amount of all drafts drawn under such Sight Commercial Credits which have not been reimbursed as provided below at such time. FACILITY PURPOSE: The Facility may only be used for the following purpose(s): Assist Borrower in its business of importing, manufacturing and wholesaling of women's and children's apparel. FACILITY DOCUMENTS: Before the first Sight Commercial Credit is issued: Trade Bank's standard form Continuing Commercial Letter of Credit Agreement (Form TB 020) Before each Sight Commercial Credit is issued: Trade Bank's standard form Application For Commercial Letter of Credit (Form TB 002) Before each Sight Commercial Credit is amended: Trade Bank's standard form Application For Amendment To Letter of Credit (Form TB 010) SUBFACILITY DOCUMENTS: o GOODS CONSIGNED TO, OR CONTROLLED BY, TRADE BANK: See Exhibit C - Collateral/Credit Support Document. TERM: No Sight Commercial Credit may expire more than one hundred twenty (120) calendar days after the date it is issued. REIMBURSEMENTS FOR DRAWINGS: The amount of each drawing paid by Trade Bank under a Sight Commercial Credit will be reimbursed to Trade Bank as follows: o By Trade Bank having Wells Fargo Bank, N.A. debit any of Borrower's accounts with Wells Fargo Bank, N.A. and forwarding such amount debited to Trade Bank. o Immediately on demand of Trade Bank. o By treating such amount drawn as an advance to Borrower to be repaid at the end of any term specified by Trade Bank to Borrower in writing. Page 1 of 2 14 FEES: The following fees will apply to the Sight Commercial Credits: o FACILITY FEE: Borrower will pay the following Facility Fee to Trade Bank before any Facility, including this Facility, is made available to Borrower: $5,000. o ISSUANCE FEES/FEES FOR INCREASING CREDIT AMOUNTS OR EXTENDING EXPIRATION DATES: (Minimum $50) 1/8 of 1% for every 120-day period or fraction thereof of the term of each Sight Commercial Credit on the amount of each Sight Commercial Credit and of any increase in such amount. PAYABLE: At the time each Sight Commercial Credit is issued or increased and at the time the expiration date of any Sight Commercial Credit is extended. o AMENDMENT FEES: (Minimum $50) $50 for each amendment, unless the amendment is an increase in the Sight Commercial Credit amount or an extension of the expiration date, in which case the Issuance Fee above will substitute for any Amendment Fee. PAYABLE: At the time each amendment is issued. o NEGOTIATION PAYMENT/EXAMINATION FEES: (Minimum $75) 1/8 of 1% of the face amount of each drawing under each Sight Commercial Credit. PAYABLE: At the time any draft or other documents are negotiated, paid or examined. INTEREST RATE: All drawings under Sight Commercial Credits not reimbursed on the day they are paid by Trade Bank will bear interest at the following rate from the date they are paid by Trade Bank to the date such payment is fully reimbursed: o PRIME RATE: The Prime Rate plus 5% per annum. o INTEREST PAYMENT DATES: Interest on unreimbursed drawings under Sight Commercial Credits will be paid on the date the unreimbursed drawing is fully reimbursed. COLLATERAL/CREDIT SUPPORT DOCUMENTS: See Exhibit C - Collateral/Credit Support Document. BY INITIALING HERE BORROWER AGREES TO ALL THE TERMS OF THIS SUPPLEMENT: /s/ INIT -------- Page 2 of 2 15 EXHIBIT B LOANS AGAINST IMPORTS WELLS FARGO HSBC TRADE BANK FOR LETTER OF CREDIT REIMBURSEMENT SUPPLEMENT ================================================================================ THIS SUPPLEMENT IS AN INTEGRAL PART OF THE CREDIT AGREEMENT BETWEEN WELLS FARGO HSBC TRADE BANK AND THE FOLLOWING BORROWER: NAME OF BORROWER: JALATE LIMITED, INC. FACILITY TERMINATION DATE: DECEMBER 1, 1997 CREDIT LIMIT FOR THIS LOANS AGAINST IMPORTS FOR LETTER OF CREDIT FACILITY AND SUBLIMITS: CREDIT LIMIT: $2,000,000 CREDIT SUBLIMITS ----------------------------------------- SUPPORTED BY GUARANTEE OR INSURANCE OR OTHER COLLATERAL $2,000,000 Floating Interest Rate No Borrowing Base THE AGGREGATE AMOUNT OF CREDIT EXTENSIONS OUTSTANDING UNDER THIS FACILITY AND THE FOLLOWING OTHER FACILITIES MAY NOT AT ANY ONE TIME EXCEED $2,000,000: 1. GUARANTEES UNDER THE SHIPPING GUARANTEES SUPPLEMENT FACILITY DESCRIPTION: Trade Bank will make loans to Borrower solely for the purpose of financing Borrower's obligations to reimburse Trade Bank for amounts paid by Trade Bank under Sight and usance Commercial Credits issued by Trade Bank for the account of Borrower in connection with Borrower's imports. At the time of request for a loan under this Facility, Borrower will provide to Trade Bank evidence of any related supplier financing available to Borrower for goods or other property shipped to Borrower under sight and usance Commercial Credits. Loans made by Trade Bank under this Facility cannot be used by Borrower to repay outstanding clean import loans that have matured. Subject to the credit sublimits specified above, these loans may be supported by (i) a standby letter of credit in favor of Trade Bank or (ii) a guarantee or other collateral. FACILITY DOCUMENTS: Promissory Note SUBFACILITY DOCUMENTS: o SUPPORTED BY ACCOUNTS RECEIVABLE, INVENTORY OR OTHER COLLATERAL: See Exhibit C - Collateral/Credit Support Document. TERM: Each loan made under this Facility must be repaid within sixty (60) calendar days after it is made. Trade Bank, in its sole discretion, may deduct from the term of a loan made under this Facility the number of days of financing period extended to Borrower by the relevant supplier. FEES: The following fees will apply to this Facility: o FACILITY FEE: Borrower will pay the following Facility Fee to Trade Bank before any Facility, including this Facility, is made available to Borrower: $5,000. INTEREST RATE: All advances under this Facility will bear interest at the following rate: o PRIME RATE: The Prime Rate plus .25% per annum. INTEREST PAYMENT DATES: Interest on the outstanding advances under this Facility will be paid at the maturity of each advance. PREPAYMENTS: Prepayments of the outstanding loans under this Facility are permitted in any amounts. BORROWING BASE TERMS: COLLATERAL/CREDIT SUPPORT DOCUMENTS: See Exhibit C - Collateral/Credit Support Document. BY INITIALING HERE BORROWER AGREES TO ALL THE TERMS OF THIS SUPPLEMENT: /s/ INIT -------- Page 1 of 1 16 WELLS FARGO HSBC TRADE BANK LOANS AGAINST IMPORTS NOTE ================================================================================ $2,000,000 May 31, 1997 FOR VALUE RECEIVED, the undersigned JALATE LIMITED, INC., a California corporation (jointly and severally, if the undersigned be more than one) ("Borrower") hereby promises to pay to the order of WELLS FARGO HSBC TRADE BANK, N.A. ("Bank"), when due as provided herein, at its 333 South Grand Avenue, 8th Floor, Los Angeles, CA 90071 office, in lawful money of the United States and in immediately available funds, the principal sum of Two Million Dollars ($2,000,000) or, if less, the aggregate unpaid principal amount of all advances made by Bank to Borrower from time to time, as evidenced on the records of Bank, together with interest thereon as hereinafter provided. Borrower may from time to time from the date of this Note up to and including December 1, 1997, borrow and partially or wholly repay its outstanding advances, and reborrow, subject to all of the limitations, terms and conditions of this Note and of that certain Credit Agreement between Borrower and Trade Bank dated as of May 31, 1997, as amended from time to time ("Credit Agreement") executed in connection with or governing this Note; provided that the total advances made under this Note shall not exceed the principal amount stated above. The unpaid principal balance of this obligation at any time shall be the total amounts advanced hereunder by the holder hereof less the amount of principal payments made hereon by or for any Borrower, which balance may be endorsed hereon from time to time by the holder. The principal amount and maturity of each advance shall be agreed upon by Borrower and Bank prior to the making of each advance, and such terms, together with the applicable interest rate of each advance and all payments of principal and interest made on this Note shall be inscribed by Bank on its records. Each advance shall be payable on the earlier of (i) the due date thereof, as inscribed by Bank on its records, or (ii) 60 days after the date such advance is made. All payments shall be made free of any setoff, counterclaims or withholdings. Each entry set forth on Bank's records shall be the prima facie evidence of the facts so set forth. No failure by Bank to make, or no error by Bank in making, any inscription on its records shall affect Borrower's obligation to repay the full principal amount advanced by Bank to or for the account of Borrower, or Borrower's obligation to pay interest thereon at the agreed upon rate. Each advance shall bear interest at the Prime Rate (defined herein) plus one-quarter of one percent (.25%). Interest will be calculated for each day at 1/360th of the applicable per annum rate, which will result in a higher effective annual rate. Accrued interest shall be payable at such times and dates as shall be agreed upon by Borrower and Bank prior to the making of each advance and evidenced on the records of Bank, provided that, all accrued interest on an advance shall be due and payable at the maturity (by acceleration or otherwise) of such advance. After maturity, whether by acceleration or otherwise, accrued interest shall be payable on demand. "Prime Rate" means the rate of interest most recently announced by Wells Fargo Bank, N.A. at its principal office in San Francisco, California as its "Prime Rate", with the understanding that the Prime Rate is one of Wells Fargo Bank's base rates and serves as the basis upon which effective rates of interest are calculated for those loans making reference thereto, and is evidenced by the recording thereof after its announcement in such internal publication or publications as Wells Fargo Bank may designate. Any change in an interest rate resulting from a change in the Prime Rate shall become effective as of 12:01 a.m. of the Banking Day on which each change in the Prime Rate is announced by Wells Fargo Bank. Advances hereunder, to the total amount of the principal sum stated above and up to and including the date set forth in the receding paragraph, may be made by the holder at the oral or written request of Frederick R. Fenway or Vinton Bacin any one acting alone, who are authorized to request advances and direct the disposition of any advances until written notice of the revocation of such authority is received by the holder at the office designated above, or (b) any person, with respect to advances deposited to the credit of any account of any Borrower with the holder, which advances, when so deposited, shall be conclusively presumed to have been made to or for the benefit of each Borrower regardless of the fact that persons other than those authorized to request advances may have authority to draw against such account. The holder shall have no obligation to determine whether any person requesting an advance is or has been authorized by any Borrower. Upon the occurrence of any Event of Default as defined in the Credit Agreement, the holder of this Note, at the holder's option, may declare all sums of principal and interest outstanding hereunder to be immediately due and payable without presentment, demand, protest or notice of dishonor, all of which are expressly waived by each Borrower, and the obligation, if any, of the holder to extend any further credit hereunder shall immediately cease and terminate. Each Borrower shall pay to the holder immediately upon demand the full amount of all payments, advances, charges, costs and expenses, including reasonable attorneys' fees (to include outside counsel fees and all allocated costs of the holder's in-house counsel), incurred by the holder in connection with the enforcement of the holder's rights and/or the collection of any amounts which become due to the holder under this Note, and the prosecution or defense of any action in any way related to this Note, including without limitation, any action for declaratory relief, and including any of the foregoing incurred in connection with any bankruptcy proceeding relating to any Borrower. Page 1 of 4 17 Should more than one person or entity sign this Note as a Borrower, the obligations of each such Borrower shall be joint and several. This Note shall be governed by and construed in accordance with the laws of the State of California, except to the extent Bank has greater rights or remedies under Federal law, whether as a national bank or otherwise, in which case such choice of California law shall not be deemed to deprive Bank of any such rights and remedies as may be available under Federal law. "BORROWER" JALATE LIMITED, INC. By: /s/ [SIG] ---------------------------------------- Title: VP Finance & CFO Borrower's Address: 6557 Flotilla City of Commerce, CA. 90040 Page 2 of 4 18 ADDENDUM TO PROMISSORY NOTE THIS ADDENDUM is attached to and made a part of that certain promissory note executed by JALATE LIMITED, INC., a California corporation ("Borrower") and payable to WELLS FARGO HSBC TRADE BANK, NATIONAL ASSOCIATION, or order, dated as of May 31,1997, in the principal amount of Two Million Dollars ($2,000,000) (the "Note"). The following arbitration provision is hereby incorporated into the Note: ARBITRATION: (a) Arbitration. Upon the 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 the 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. (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 Page 3 of 4 19 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 LIMITED, INC. By: /s/ [SIG] ---------------------------------------- Title: VP Finance & CFO Page 4 of 4 20 EXHIBIT B WELLS FARGO HSBC TRADE BANK SHIPPING GUARANTEES SUPPLEMENT ================================================================================ THIS SUPPLEMENT IS AN INTEGRAL PART OF THE CREDIT AGREEMENT BETWEEN WELLS FARGO HSBC TRADE BANK AND THE FOLLOWING BORROWER: NAME OF BORROWER: JALATE LIMITED, INC. FACILITY TERMINATION DATE: DECEMBER 1, 1997 CREDIT LIMIT FOR THIS SHIPPING GUARANTEE FACILITY AND SUBLIMITS: CREDIT LIMIT: $500,000 CREDIT SUBLIMITS ------------------------------------------ o SHIPPING GUARANTEE FACILITY $500,000 THE AGGREGATE AMOUNT OF CREDIT EXTENSIONS OUTSTANDING UNDER THIS FACILITY AND THE FOLLOWING OTHER FACILITIES MAY NOT AT ANY ONE TIME EXCEED $2,000,000: 1. LOANS UNDER THE LOANS AGAINST IMPORTS FOR LETTER OF CREDIT REIMBURSEMENT SUPPLEMENT FACILITY DESCRIPTION AND PURPOSE: Trade Bank will issue shipping guarantees for the account of Borrower. These shipping guarantees will be undertakings for delivery of cargo without surrender of bills of lading, or any other undertakings, agreements, guarantees, indemnities, releases, bonds, letters, documents or authorizations to or in favor of a carrier or other person or entity in order to permit delivery to Borrower of property. The Credit Limit specified above for this Facility refers to the aggregate amount of all shipping guarantees which may be outstanding at any one time. FACILITY DOCUMENTS: Indemnity For Undertakings In Connection With Deliveries of Goods or Issuance of Duplicate Bills of Lading. TERM: No shipping guarantee issued by Trade Bank for Borrower will expire more than ninety (90) calendar days after the date it is issued. REIMBURSEMENTS FOR PAYMENTS UNDER GUARANTEES: The amount of each payment made by Trade Bank under shipping guarantees issued by Trade Bank for Borrower will be reimbursed to Trade Bank as follows: o By Trade Bank having Wells Fargo Bank, N.A. debit any of Borrower's accounts with Wells Fargo Bank, N.A. and forwarding such amount debited to Trade Bank. o Immediately on demand of Trade Bank. o By treating such amount drawn as an advance to Borrower to be repaid at the end of any term specified by Trade Bank to Borrower in writing. FEES: The following fees will apply to this Facility and the issuance of each shipping guarantee: o FACILITY FEE: Borrower will pay the following Facility Fee to Trade Bank before this Facility is made available to Borrower: $5,000. o ISSUANCE FEE: Flat $75 for each issuance. PAYABLE: At the time each shipping guarantee is issued. INTEREST RATE: All payments made by Trade Bank under shipping guarantees issued for Borrower which are not reimbursed on THE day they are MADE by Trade Bank will bear interest at the following rate from the date they are made to the date such payment is fully reimbursed: o PRIME RATE: The Prime Rate plus 5% per annum. o INTEREST PAYMENT DATES: Interest on payments made by Trade Bank under this Facility which are not reimbursed on the day they are made will be paid on the date the payment is fully reimbursed. Page 1 of 2 21 PREPAYMENTS: Permitted in any amounts. COLLATERAL/CREDIT SUPPORT DOCUMENTS: See Exhibit C - Collateral/Credit Support Document. BY INITIALING HERE BORROWER AGREES TO ALL THE TERMS OF THIS SUPPLEMENT: /s/ INIT -------- Page 2 of 2 22 EXHIBIT C WELLS FARGO HSBC TRADE BANK COLLATERAL/CREDIT SUPPORT DOCUMENT ================================================================================ o PERSONAL PROPERTY SECURITY FROM BORROWER: First priority lien in the following assets of Borrower: inventory Second priority lien in the following assets of Borrower: accounts receivable COLLATERAL DOCUMENTS: Security Agreement: Rights to Payment and Inventory UCC-1 Financing Statement UCC-3 Search o INTERCREDITOR AGREEMENT: The creditor or creditors named below under the heading "Collateral Documents" will enter into an intercreditor arrangement with Trade Bank with respect to the Obligations under this Facility. COLLATERAL DOCUMENTS: Intercreditor Agreement with Heller Financial, Inc. BY INITIALING HERE BORROWER AGREES TO ALL THE TERMS OF THIS EXHIBIT: /s/ INIT ------------ Page 1 of 1 EX-23.1 24 EXHIBIT 23.1 1 EXHIBIT 23.1 INDEPENDENT AUDITORS' CONSENT The Board of Directors Jalate, Ltd.: We consent to incorporation by reference in the registration statement on Form S-8 of Jalate, Ltd. of our report dated March 3, 1998, relating to the balance sheets of Linroz Manufacturing Company, L.P. as of December 31, 1996 and 1997 and the related statements of operations, partners' capital, and cash flows for the two years then ended, which report appears in the December 31, 1997 annual report on Form 10-K of Jalate, Ltd. KPMG PEAT MARWICK LLP Los Angeles, California March 27, 1998 EX-27 25 FINANCIAL DATA SCHEDULE (YEAR 12/31/1997)
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM JALATE, LTD. BALANCE SHEET AS OF DECEMBER 31, 1997 AND STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH STATEMENTS FILED IN JALATE, LTD.'S ANNUAL REPORT FILED ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1997. 1,000 YEAR DEC-31-1997 JAN-01-1997 DEC-31-1997 170 0 443 324 4,812 5,302 2,327 1,366 6,893 6,071 0 0 0 5,311 (4,489) 6,893 51,216 51,216 40,629 40,629 0 108 785 (4,542) 0 (4,542) 0 0 0 (4,542) (1.33) (1.33) EPS amounts reflect FAS 128 computations.
EX-27.1 26 FINANCIAL DATA SCHEDULE (YEAR 12/31/1996)
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM JALATE, LTD. BALANCE SHEET AS OF DECEMBER 31, 1996 AND STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH STATEMENTS FILED IN JALATE, LTD.'S ANNUAL REPORT FILED ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1996. 1,000 YEAR DEC-31-1996 JAN-01-1996 DEC-31-1996 97 0 1,179 358 3,572 7,547 1,967 917 9,173 3,809 0 0 0 5,311 53 9,173 54,021 54,021 39,514 39,514 0 62 548 27 0 27 0 0 0 27 .01 .01 EPS amounts have been recalculated to reflect the provisions of FAS 128.
EX-27.2 27 FINANCIAL DATA SCHEDULE (YEAR 12/31/1995)
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM JALATE, LTD. BALANCE SHEET AS OF DECEMBER 31, 1995 AND STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH STATEMENTS FILED IN JALATE, LTD.'S ANNUAL REPORT FILED ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1995. 1,000 YEAR DEC-31-1995 JAN-01-1995 DEC-31-1995 92 0 1,658 669 4,432 8,626 1,380 512 9,855 4,518 0 0 0 5,177 160 9,855 70,800 70,800 56,211 56,211 0 0 896 (3,209) (313) (2,896) 0 0 0 (2,896) (.85) (.85) EPS amounts have been recalculated to reflect the provisions of FAS 128.
EX-27.3 28 FINANCIAL DATA SCHEDULE (3-MOS 03/31/1997)
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM JALATE, LTD. CONDENSED BALANCE SHEET AS OF MARCH 31, 1997 AND CONDENSED STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH STATEMENTS FILED IN JALATE, LTD.'S QUARTERLY REPORT FILED ON FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 1997. 1,000 3-MOS DEC-31-1997 JAN-01-1997 MAR-31-1997 28 0 1,823 940 5,066 9,763 2,036 1,022 11,434 6,104 0 0 0 5,311 19 11,434 13,919 13,919 10,091 10,091 0 0 131 (34) 0 (34) 0 0 0 (34) (.01) (.01) EPS amounts have been recalculated to reflect the provisions of FAS 128.
EX-27.4 29 FINANCIAL DATA SCHEDULE (6-MOS 06/30/1997)
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM JALATE, LTD. CONDENSED BALANCE SHEET AS OF JUNE 30, 1997 AND CONDENSED STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1997 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, 1997. 1,000 6-MOS DEC-31-1997 JAN-01-1997 JUN-30-1997 2 0 1,525 1,186 5,364 7,340 2,151 1,132 9,087 5,243 0 0 0 5,311 (1,467) 9,087 28,565 28,565 21,865 21,865 0 105 341 (1,521) 0 (1,521) 0 0 0 (1,521) (.45) (.45) EPS amounts have been recalculated to reflect the provisions of FAS 128.
EX-27.5 30 FINANCIAL DATA SCHEDULE (9-MOS 09/30/1997)
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM JALATE, LTD. CONDENSED BALANCE SHEET AS OF SEPTEMBER 30, 1997 AND CONDENSED STATEMENT OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 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, 1997. 1,000 9-MOS DEC-31-1997 JAN-01-1997 SEP-30-1997 516 0 2,016 1,202 5,606 7,018 2,167 1,248 8,628 5,180 0 0 0 5,311 (1,863) 8,628 41,732 41,732 32,049 32,049 0 108 568 (1,914) 2 (1,916) 0 0 0 (1,916) (.56) (.56) EPS amounts have been recalculated to reflect the provisions of FAS 128.
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