-----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, EiHQGm0XmtfrH3MSk94v7w/kPrxpupZxgK001JNjjnZ+bZ4MqRk0ZoBMLLlLbGtF irkhG8Zqaub58D8p8A2QxQ== 0000950148-98-002633.txt : 19981124 0000950148-98-002633.hdr.sgml : 19981124 ACCESSION NUMBER: 0000950148-98-002633 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981123 FILER: COMPANY DATA: COMPANY CONFORMED NAME: JALATE LTD INC CENTRAL INDEX KEY: 0000914026 STANDARD INDUSTRIAL CLASSIFICATION: WOMEN'S, MISSES', AND JUNIORS OUTERWEAR [2330] IRS NUMBER: 954121885 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-12868 FILM NUMBER: 98756775 BUSINESS ADDRESS: STREET 1: 1675 SOUTH ALAMEDA STREET CITY: LOS ANGELES STATE: CA ZIP: 90021 BUSINESS PHONE: 2137655000 MAIL ADDRESS: STREET 1: 1675 SOUTH ALAMEDA STREET CITY: LOS ANGELES STATE: CA ZIP: 90021 FORMER COMPANY: FORMER CONFORMED NAME: JALATE LTD DATE OF NAME CHANGE: 19940301 10-Q 1 FORM 10-Q 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q (Mark one) /X/ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended September 30, 1998 Or / / Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from to ----------- ----------- Commission File Number 1-12868 JALATE, LTD. (Exact Name of Registrant as Specified in Its Charter) California 95-4121885 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification Number) 2085 South Garfield Avenue, Commerce, CA 90040 (Address of Principal Executive Offices) (Zip Code) (213) 765-5000 (Registrant's Telephone Number, Including Area Code) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- The number of shares outstanding of the registrant's Common Stock, no par value, at November 12, 1998 was 4,923,000 shares. This Form 10-Q contains 20 pages. =============================================================================== 2 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS. JALATE, LTD. Condensed Balance Sheets (In thousands) (Unaudited)
September 30, 1998 December 31, 1997 ------------------ ----------------- ASSETS Current assets: Cash $ 64 $ 170 Trade and other accounts receivable, less allowance for doubtful accounts of $231 in 1998 and $324 in 1997 338 119 Inventories 3,680 4,812 Prepaid expenses and other current assets 167 201 ------------- ------------ Total current assets 4,249 5,302 Property and equipment, at cost, net of accumulated depreciation of $1,819 in 1998 and $1,366 in 1997 1,540 961 Investment in unconsolidated subsidiaries 477 551 Other assets, at cost, net 251 79 ------------- ------------ $ 6,517 $ 6,893 ============= ============ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Note payable to bank $ 413 $ 1,120 Current portion of long term liabilities 517 -- Due to factor 45 1,315 Trade accounts payable 3,201 3,092 Accounts payable to unconsolidated subsidiary 262 143 Accrued expenses 326 401 ------------- ------------ Total current liabilities 4,764 6,071 ------------- ------------ Long term liabilities: Capitalized lease obligations, less current portion 88 -- Subordinated notes payable, less current installments 475 -- ------------- ------------ Total long term liabilities 563 -- ------------- ------------ Shareholders' equity: Preferred stock, no par value. Authorized 3,000,000 shares; none issued and outstanding -- -- Common stock, no par value. Authorized 20,000,000 shares; issued and outstanding 3,403,000 shares 5,576 5,311 Accumulated deficit (4,386) (4,489) ------------- ------------ Total shareholders' equity 1,190 822 ------------- ------------ $ 6,517 $ 6,893 ============= =============
See accompanying notes to condensed financial statements. 3 JALATE, LTD. Condensed Statements of Operations (In thousands except net earnings (loss) per share and weighted average shares outstanding) (Unaudited)
Nine months ended Three months ended September 30, September 30, ------------------ ----------------- 1998 1997 1998 1997 -------- ------- -------- -------- Net sales $ 36,222 $ 41,732 $ 10,599 $13,167 Cost of goods sold 26,575 32,049 7,522 10,169 --------- ------- -------- -------- Gross profit 9,647 9,683 3,077 2,998 Operating expenses 8,810 11,462 2,846 3,255 --------- ------- -------- -------- Earnings (loss) from operations 837 (1,779) 231 (257) Other (income) expense: Interest expense 766 568 242 226 Equity in (income) of unconsolidated subsidiaries (32) (427) (132) (100) Other (income) (1) (6) -- (5) --------- ------- -------- -------- Total other expense 733 135 110 121 --------- ------- -------- -------- Earnings (loss) before income taxes 104 (1,914) 121 (378) Income taxes -- 2 -- 2 --------- ------- -------- -------- Net earnings (loss) $ 104 $(1,916) $ 121 $ (380) ========= ======== ======== ======== Net earnings (loss) per share: Basic $ 0.03 $ (0.56) $ 0.03 $ (0.11) Diluted 0.03 (0.56) 0.03 (0.11) ========= ======= ======== =========
Weighted average shares outstanding: Basic 3,403,000 3,403,000 3,403,000 3,403,000 Diluted 3,403,000 3,403,000 3,403,000 3,403,000 ========= ========= ========= =========
See accompanying notes to condensed financial statements. 4 JALATE, LTD. Condensed Statements of Cash Flows (In thousands) (Unaudited)
Nine months ended September 30, -------------------- 1998 1997 -------- -------- Cash flows from operating activities: Net earnings (loss) $ 104 $ (1,916) -------- -------- Adjustments to reconcile net earnings (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 534 331 Increase (decrease) in allowance for doubtful receivables (93) 844 Equity in net earnings of unconsolidated subsidiaries (32) (427) Changes in assets and liabilities: (Increase) decrease in: Due from factor, net -- 2,921 Trade accounts receivable (126) (837) Inventories 1,132 (2,034) Refundable income taxes -- 111 Prepaid expenses and other current assets 34 (57) Other assets (39) (49) Increase (decrease) in: Accounts payable 228 576 Accrued expenses (75) 185 -------- -------- Total adjustments 1,563 1,564 -------- -------- Net cash provided by (used in) operating activities 1,667 (352) -------- -------- Cash flows from investing activities: Capital expenditures (1,032) (200) Investment in unconsolidated subsidiaries (314) -- Distributions from unconsolidated subsidiaries 420 361 -------- -------- Net cash provided by (used in) investing activities (926) 161 -------- -------- Cash flows from financing activities: Repayment to factor, net (1,270) -- Proceeds from issuance of (repayment of) note payable to bank (707) 610 Proceeds from capitalized leases 130 -- Proceeds from issuance of long term subordinated debt 950 -- Proceeds from issuance of warrants 50 -- -------- -------- Net cash provided by (used in) financing activities (847) 610 -------- -------- Net increase (decrease) in cash (106) 419 Cash at beginning of period 170 97 -------- -------- Cash at end of period $ 64 $ 516 ======== ======== Supplemental disclosures of cash flow information: Cash payments during the period for - Interest $ 742 $ 567 Income taxes -- -- ======== ========
See accompanying notes to condensed financial statements. 5 JALATE, LTD. Notes to Condensed Financial Statements (Unaudited) 1.GENERAL The unaudited condensed financial statements have been prepared on the same basis as the audited financial statements of Jalate, Ltd. (the Company) which are generally prepared at the end of each fiscal year and, in the opinion of management, reflect all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation for each of the periods presented. The results of operations for interim periods are not necessarily indicative of results to be achieved for full fiscal years. As contemplated by the Securities and Exchange Commission under Rule 10-01 of Regulation S-X, the accompanying financial statements and notes have been condensed and do not contain certain information that will be included in the Company's annual financial statements and notes thereto. For further information, refer to the financial statements and related notes for the year ended December 31, 1997 included in the Company's annual report on Form 10-K. 2.INVENTORIES A summary of inventories is as follows:
September 30, 1998 December 31, 1997 ------------------ ----------------- Piece goods and trim $ 1,545,000 $ 1,828,000 Work in process 1,176,000 1,657,000 Finished goods 959,000 1,327,000 ----------- ----------- $ 3,680,000 $ 4,812,000 =========== ===========
3.INVESTMENT IN UNCONSOLIDATED SUBSIDIARIES AIRSHOP. In October 1997, the Company purchased 40% of the outstanding common stock and 100% of the outstanding convertible preferred stock of Airshop Ltd. for $500,000, of which $186,000 was paid in 1997 and the remaining $314,000 was paid in 1998. The Company also has an option, through December 31, 2000, to purchase an additional 11% of the outstanding common stock of Airshop. Airshop sells junior women's apparel, footwear, cosmetics and accessories through mail order catalogs and its internet website. Airshop, which began operations during 1997, is currently in the start-up phase of its existence. The Company, which accounts for its investment in Airshop under the equity method of accounting, recorded $40,000 and $460,000 as its share of Airshop's loss in 1997 and in the first half of 1998, respectively. The Company has no commitment to provide additional funds to Airshop. JOINT VENTURE. In November 1994, the Company entered into a manufacturing joint venture, Linroz Manufacturing Company, L.P. (Joint Venture), with an affiliate of its largest sewing contractor (the Partner) to improve the efficiency, quality and cost of its products. The Joint Venture is a California limited partnership. The Company and the Partner each are equal limited partners and each hold one-half of the outstanding capital stock of the sole general partner, a California corporation. The Joint Venture commenced operations in May 1995. For the nine months ended September 30, 1998 and 1997, purchases from the Joint Venture aggregated $3,049,000 and $3,163,000, respectively. The Company had accounts payable to the Joint Venture for purchases of $262,000 and $143,000 at September 30, 1998 and December 31, 1997, respectively. 6 The tables below contain unaudited summarized financial information for the Joint Venture:
Nine months ended September 30, --------------------------------- 1998 1997 ---------------- --------------- (Unaudited) Net sales $ 3,089,000 $ 3,226,000 Gross profit 1,230,000 1,140,000 Operating expenses 226,000 259,000 Net earnings 984,000 853,000 =========== ===========
September 30, 1998 December 31, 1997 ------------------ ----------------- (Unaudited) Current assets $ 601,000 $ 405,000 Non current assets 645,000 811,000 ------------- ------------- Total assets $ 1,246,000 $ 1,216,000 ============= ============= Current liabilities $ 182,000 $ 205,000 Long-term debt 110,000 201,000 ------------- ------------- Total liabilities 292,000 406,000 Partners' capital 954,000 810,000 ------------- ------------- $ 1,246,000 $ 1,216,000 ============= =============
4.SUBORDINATED NOTES PAYABLE AND WARRANTS On January 27, 1998, the Company issued subordinated notes payable to certain shareholders of the Company totaling $950,000. These notes call for interest (at 10% per annum) to be paid quarterly beginning April 30, 1998 and quarterly installments of principal commencing April 30, 1999. As of September 30, 1998, $475,000 is classified as a current liability in the accompanying condensed financial statements. These notes mature on January 31, 2000 and are secured by the Company's interest in Airshop, Ltd. Interest payments of $25,000, $24,000 and $24,000 were made on April 30, 1998, July 31, 1998 and October 29, 1998, respectively. In connection with the issuance of these notes, the Company sold 500,000 stock purchase warrants to the shareholders for $50,000. The warrants are exercisable at an exercise price of $1.625 per share and expire on January 27, 2003. These warrants were independently valued at $265,000. The $215,000 discount is included on the Balance Sheet in other assets and is being amortized over the life of the notes, with $9,000 being expensed monthly beginning February 1998. On November 1, 1998, the Notes were converted to Common Stock (see note 10). 5.FACTOR AGREEMENT The Company has an agreement with Heller Financial, Inc., its factor, that provides for advances to the Company of up to 100% of qualified accounts receivable. This agreement also contains a revolving loan facility which permits the Company to borrow a maximum of $2,200,000 in addition to the advances against the total qualified receivables. This $2,200,000 maximum, which was scheduled to be reduced to $1,500,000 on March 31, 1998, was extended through July 1, 1998 by the April 1, 1998 amendment and extended again through December 31, 1998 by the August 1, 1998 amendment. At September 30, 1998, the Company was in default of certain covenants contained in this agreement. In November 1998, the Company entered into a new factor agreement with GE Capital First Factors to replace the current factor agreement that is scheduled to expire on December 31, 1998 (see note 10). 7 6.NOTE PAYABLE TO BANK The Company has a term loan payable to a bank. The principal balance of this loan was $1,120,000 on December 31, 1997. The agreement previously required the loan to be paid off completely by July 1998. In July 1998, the loan agreement was amended and now requires that outstanding balance be paid in monthly installments through August 1999. These payments of the principal balance are $10,000 due on the last day of each month from July 1998 through January 1999, then $60,000 due on the last day of each month from February 1999 through July 1999, with a final payment of any remaining unpaid principal balance due on August 31, 1999. Interest is due monthly in addition to these principal payments. Under the terms of the amendment, all financial covenants were eliminated. 7.CAPITALIZED LEASES The Company leases various pieces of equipment, primarily computers, under long- term leases and has the option to purchase the equipment for a nominal amount at the termination of the leases. At September 30, 1998, future minimum lease payments for these assets aggregated $150,000 ($45,000 per year through December 2001), of which $20,000 represents interest. 8.INCOME TAXES Income taxes for interim periods are computed using the effective tax rate estimated to be applicable for the full fiscal year, which is subject to ongoing review and evaluation by management. As of September 30, 1998, management's estimate of the 1998 effective tax rate is zero. 9.EARNINGS (LOSS) PER SHARE Basic earnings (loss) per share represent net earnings (loss) divided by the weighted average number of shares of common stock outstanding. Diluted earnings (loss) per share represents net earnings (loss) divided by the weighted average number of shares of common stock outstanding inclusive of any dilutive impact of common stock equivalents. During the three and nine month periods ended September 30, 1998 and September 30, 1997, there was no difference between basic and diluted earnings per share because the impact of options and warrants to purchase common stock was antidilutive. 10.SUBSEQUENT EVENTS SUBORDINATED NOTES PAYABLE AND WARRANTS. On November 1, 1998, the $950,000 subordinated notes payable (see note 4) were converted to common stock of the Company at $0.625 per share, resulting in the issuance of 1,520,000 shares. The price of the last trade of the Company's common stock on the AMEX prior to this conversion was $0.1875 per share. In connection with the conversion of these notes payable to Common Stock, the warrants (see note 4) were modified by reducing the exercise price to $0.625 and extending the expiration date to October 31, 2003. This conversion results in an increase in shareholders' equity at October 31, 1998 of approximately $816,000, consisting of the $950,000 of subordinate notes less the $134,000 unamortized discount. Additionally, had this conversion been reflected in the Balance Sheet as of September 30, 1998, working capital would have been increased by $475,000. FACTOR AGREEMENT. In November 1998 the Company signed a one-year agreement with GE Capital First Factors to replace the current factor agreement that is scheduled to expire on December 31, 1998. Under the terms of this new factor agreement, the Company may borrow up to 90% of eligible trade accounts receivable, up to 60% of certain eligible inventory balances, and up to $1,500,000 in excess of the collateral, on a revolving basis. ACQUISITION. During the fourth quarter of 1998, the Company entered into an agreement to purchase substantially of all the assets of ARC Manufacturing, Inc., consisting primarily of inventory and a license to use the trademark Breaker Jeans , for approximately $920,000. The purchase agreement requires a series of payments beginning in November 1998, and continuing through approximately March 1999. Additionally, under the agreement, the Company has agreed to employ the two owners of ARC Manufacturing, Inc. in connection with the acquisition. 8 11.RECENTLY ISSUED PRONOUNCEMENTS COMPREHENSIVE INCOME. The Company adopted Statement of Financial Accounting Standards (FAS) No. 130 Reporting Comprehensive Income on January 1, 1998. There were no differences between net earnings (loss) and comprehensive income as those terms are defined in FAS 130 for the nine and three month periods ending September 30, 1998. SEGMENT REPORTING. In June 1997, the Financial Accounting Standards Board issued Statement of Accounting Financial Standards Number 131, Disclosure about Segments of An Enterprise and Related Information (FAS 131). FAS 131 supersedes previous reporting requirements for reporting on segments of a business enterprise and is effective for the Company's fiscal year ending December 31, 1998. The Company plans to implement FAS 131 in connection with its 1998 fiscal year end reporting on Form 10-K. As FAS 131 only requires additional disclosures, the Company expects there will be no impact on its financial position or results of operations from the implementation. START-UP ACTIVITIES. On April 3, 1998, the American Institute of Certified Public Accountants (AICPA) Accounting Standards Executive Committee issued Statement of Position 98-5 (SOP 98-5), Reporting on the Costs of Start-up Activities. SOP 98-5 requires that costs of start-up activities, including organization costs, be expensed as incurred. SOP 98-5 is effective for financial statements for fiscal years beginning after December 15, 1998. In the fiscal year in which the SOP is first adopted, the application should be reported as a cumulative effect of a change in accounting principle. Based on information currently available, the Company does not expect the adoption of SOP 98-5 to have a significant impact on its financial position or results of operations. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. In 1998, the Financial Accounting Standards Board issued FAS No. 133, Accounting for Derivative Instruments and Hedging Activities. FAS No. 133 modifies the accounting for derivative and hedging activities and is effective for fiscal years beginning after December 15, 1999. The adoption of FAS No. 133 may require the Company to modify its method for accounting for its interest rate hedging activities. Based on information currently available, the Company does not expect the adoption of FAS No. 133 to have a significant impact on its financial position or results of operations. COMPUTER SOFTWARE. In 1998, the AICPA issued Statement of Position (SOP) 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use. The Company will adopt SOP 98-1 in 1999. The adoption of SOP 98-1 will require the Company to modify its method of accounting for software. Based on information currently available, the Company does not expect the adoption of SOP 98-1 to have a significant impact on its financial position or results of operations. 9 LINROZ MANUFACTURING COMPANY, L.P. Condensed Balance Sheets (Unaudited)
September 30, 1998 December 31,1997 ------------------ ---------------- ASSETS Current Assets: Cash $ 305,000 $ 237,000 Accounts receivable from Jalate Ltd. 262,000 143,000 Prepaid expenses and other current assets 34,000 25,000 ------------ ----------- Total current assets 601,000 405,000 Property and equipment, at cost less accumulated depreciation of $767,000 in 1998 and $570,000 in 1997 625,000 791,000 Other assets, at cost 20,000 20,000 ------------ ----------- $ 1,246,000 $ 1,216,000 ============ =========== LIABILITIES AND PARTNERS' CAPITAL Current Liabilities: Current maturities of long term debt $ 117,000 $ 120,000 Trade accounts payable 8,000 34,000 Accrued expenses and other current liabilities 57,000 51,000 ------------ ----------- Total current liabilities 182,000 205,000 Long-term debt, less current maturities 110,000 201,000 Partners' capital 954,000 810,000 ------------ ----------- $ 1,246,000 $ 1,216,000 ============ ===========
See accompanying notes to condensed financial statements. 10 LINROZ MANUFACTURING COMPANY, L.P. Condensed Statements of Operations (Unaudited)
Nine months ended Three months ended , September 30, September 30, -------------------- -------------------- 1998 1997 1998 1997 ----------- ---------- ---------- --------- Net sales $ 3,089,000 $ 3,226,000 $ 924,000 $ 942,000 Cost of sales 1,859,000 2,086,000 586,000 654,000 --------- --------- ---------- --------- Gross profit 1,230,000 1,140,000 338,000 288,000 Operating expenses 226,000 259,000 69,000 79,000 --------- --------- ---------- -------- Earnings from operations 1,004,000 881,000 269,000 209,000 Interest expense, net 20,000 28,000 6,000 9,000 --------- --------- ---------- --------- Net earnings $ 984,000 $ 853,000 $ 263,000 $ 200,000 ========= =========== ========== =========
See accompanying notes to condensed financial statements. 11 LINROZ MANUFACTURING COMPANY, L.P. Condensed Statements of Cash Flows (Unaudited)
Nine months ended September 30, ------------------------------ 1998 1997 ------------- ------------- Net earnings $ 984,000 $ 853,000 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization of property and equipment 197,000 175,000 Changes in assets and liabilities: (Increase) decrease in: Accounts receivable from Jalate, Ltd. (119,000) (40,000) Prepaid expenses and other current assets (9,000) 1,000 Increase (decrease) in: Trade accounts payable (26,000) (6,000) Accrued expenses and other current liabilities 6,000 (19,000) ------------ ----------- Net cash provided by operating activities 1,033,000 964,000 ------------ ----------- Cash flows from investing activities: Cash used in capital expenditures (31,000) (110,000) ------------ ----------- Cash flows from financing activities: Principal payments on long-term debt (94,000) (90,000) Distributions to partners (840,000) (730,000) ------------ ----------- Net cash used in financing activities (934,000) (820,000) ------------ ----------- Net increase in cash 68,000 34,000 Cash at beginning of period 237,000 421,000 ------------ ----------- Cash at end of period 305,000 455,000 ============ =========== Supplemental disclosures of cash flow information: Cash paid during the period for interest $ 20,000 $ 28,000 ============ ============
See accompanying notes to condensed financial statements. 12 LINROZ MANUFACTURING COMPANY L.P. Notes to Condensed Financial Statements (Unaudited) 1. GENERAL The unaudited condensed financial statements have been prepared on the same basis as the audited financial statements of Linroz Manufacturing Company, L.P. (the Company) which are generally prepared at the end of each fiscal year and, in the opinion of management, reflect all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation for each of the periods presented. The results of operations for interim periods are not necessarily indicative of results to be achieved for full fiscal years. As contemplated by the Securities and Exchange Commission under Rule 10-01 of Regulation S-X, the accompanying financial statements and notes have been condensed and do not contain certain information that will be included in the Company's annual financial statements and notes thereto. For further information, refer to the financial statements and related notes for the year ending December 31, 1997 included in Jalate, Ltd.'s annual report on Form 10-K. 13 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED HEREIN, THE MATTERS ADDRESSED IN THIS ITEM 2 CONSTITUTE "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934 AS AMENDED. SUCH FORWARD-LOOKING STATEMENTS ARE SUBJECT TO A VARIETY OF RISKS AND UNCERTAINTIES, INCLUDING THOSE DISCUSSED BELOW UNDER THE HEADING "FACTORS THAT MAY AFFECT FUTURE RESULTS" AND ELSEWHERE IN THIS REPORT ON FORM 10-Q THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE ANTICIPATED BY THE COMPANY'S MANAGEMENT. THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 (THE "ACT") PROVIDES CERTAIN "SAFE HARBOR" PROVISIONS FOR FORWARD-LOOKING STATEMENTS. ALL FORWARD-LOOKING STATEMENTS MADE IN THIS QUARTERLY REPORT ON FORM 10-Q ARE MADE PURSUANT TO THE ACT. As contemplated by the Securities and Exchange Commission under Instructions 2 and 3 to Item 303 (b) of Regulation S-K, this discussion and analysis has been prepared assuming that the user has read or has access to Management's Discussion and Analysis for the fiscal year ended December 31, 1997. Therefore some material which has not changed materially from that presented in the Form 10-K for December 31, 1997 may have been omitted from this Form 10-Q. RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, the percentage which certain items in the statements of operations data (unaudited) bear to net sales and the percentage dollar increase (decrease) of such items (unaudited) from period to period.
Percent of Net Sales Percent of Net Sales --------------------- -------------------- Nine months ended Three months ended September 30, Increase September 30, Increase -------------------- ------------------- 1998 1997 (Decrease) 1998 1997 (Decrease) -------- -------- -------- -------- -------- ------- Net sales 100.0% 100.0% (13.2)% 100.0% 100.0% (19.5)% Cost of goods sold (73.4) (76.8) (17.1) (71.0) (77.3) (26.0) -------- -------- -------- -------- -------- ------- Gross profit 26.6 23.2 (0.4) 29.0 22.7 2.6 Operating expenses (24.3) (27.4) (23.1) (26.8) (24.7) (12.6) -------- -------- -------- -------- -------- ------- Earnings (loss) from operations 2.3 (4.3) * 2.2 (2.0) * Interest expense (2.1) (1.3) 34.9 (2.3) (1.7) 7.1 Equity in earnings of Unconsolidated subsidiaries 0.1 1.0 * 1.2 0.8 32.0 -------- -------- -------- -------- -------- ------- Net earnings (loss) 0.3 (4.6) * 1.1 (2.9) * ======== ======== ======== ======== ======== ========
* This percent change is not meaningful. 14 GROSS SALES decreased to $39,024,000 for the nine months ended September 30, 1998 from $45,532,000 for the comparable period of fiscal 1997, a decrease of 14.3%, and decreased to $11,350,000 for the three months ended September 30, 1998 from $14,382,000, for the comparable period of fiscal 1997, a decrease of 21.1%. The decrease in gross sales for the nine month period was primarily due to a decrease in the volume of apparel sold to 3,616,000 units from 4,720,000 units, a decrease of 23.4%. The decrease in gross sales for the three month period was primarily due to a decrease in the volume of apparel sold to 980,000 units from 1,303,000 units, a decrease of 24.8%. These decreases in the volume of apparel sold were partially offset by increases in the average unit price of items sold. DISCOUNTS, RETURNS AND ALLOWANCES decreased 29.8% to $1,906,000 (4.9% of gross sales) for the nine months ended September 30, 1998 from $2,717,000 (6.0% of gross sales) for the comparable period of fiscal 1997, and 52.7% to $438,000 (3.9% of gross sales) for the three months ended September 30, 1998 from $926,000 (6.4% of gross sales) for the comparable period of fiscal 1997. The 1997 figures were unusually high primarily due to significant returns of one line of apparel (shipped during the second quarter of 1997) because of defective design and production problems which were remedied during the third quarter of 1997. In addition, other causes of the high level of returns and allowances experienced during 1997 have been identified and improved. GROSS PROFIT decreased $36,000 to $9,647,000 (26.6% of net sales) for the nine months ended September 30, 1998 from $9,683,000 (23.2% of net sales) for the comparable period of fiscal 1997, and increased $79,000 to $3,077,000 (29.0% of net sales) for the three months ended September 30, 1998 from $2,998,000 (22.7% of net sales) for the comparable period of fiscal 1997. The increases in gross profit percentages for both the nine and three month periods of 1998 were primarily due to the combined effect of management's cost reduction initiatives and the reduced level of discounts, returns and allowances noted above. OPERATING EXPENSES decreased $2,652,000, a decrease of 23.1%, to $8,810,000 (24.3% of net sales) for the nine months ended September 30, 1998, and $409,000, decreased 12.6% to $2,846,000 (26.8% of net sales) for the three months ended September 30, 1998, primarily due to management's cost control initiatives and the impact of lower sales volume. INTEREST EXPENSE primarily reflects interest related to advances from the factor, on the subordinated notes payable, and on the term loan with the bank. Interest expense increased 34.9% to $766,000 for the nine months ended September 30, 1998, and 7.1% to $242,000 for the three months ended September 30, 1998, primarily due to increased borrowings to finance the Company's operations. EQUITY IN EARNINGS (LOSS) OF UNCONSOLIDATED SUBSIDIARIES. Investment in the Company's unconsolidated subsidiaries is accounted for by the equity method, under which the Company's share of earnings or loss of each subsidiary is reflected in income or expense as earned and distributions are credited against the investment in the subsidiaries when received. Joint Venture. Equity in earnings increased to $492,000 for the nine months ended September 30, 1998 from $427,000 for the comparable period of fiscal 1997, an increase of 15.2%, and increased to $132,000 for the three months ended September 30, 1998 from $100,000 for the comparable period of fiscal 1997, an increase of 32.0%. The increases are primarily attributable to an improvement in the operating margins of the Joint Venture. Airshop. In the fourth quarter of 1997, the Company acquired an interest in Airshop, Ltd. which is still in its start-up phase. The Company's share of Airshop's net loss was $40,000 for the fourth quarter of 1997 and $460,000 for the six months ended June 30, 1998. After recognizing this loss in the first six months of 1998, the Company's investment in Airshop was reduced to zero. Even though Airshop, Ltd.'s net losses continued into the third quarter of 1998, those losses were not recognized by the Company because generally accepted accounting principles limits the Company's loss to its total investment in Airshop, Ltd. The Company has no further commitment to provide additional funds to Airshop. INCOME TAXES for the interim periods were computed using the effective tax rate estimated to be applicable for the full fiscal year, which is subject to ongoing review and evaluation by management. As of September 30, 1998, management's estimate of the 1998 effective tax rate is zero. 15 LIQUIDITY AND CAPITAL RESOURCES The Company has financed its working capital requirements from advances drawn against factored receivables, a revolving loan agreement with a factor, distributions from a joint venture, proceeds from issuing subordinated notes payable and proceeds from its initial public offering in 1994. Cash provided by operating activities aggregated $1,667,000 for the nine months ended September 30, 1998 compared with cash used in operating activities of $352,000 for the comparable period of 1997, an improvement of $2,019,000 over the prior year. At September 30, 1998, the Company had a working capital deficiency of $515,000, compared to a working capital deficiency of $344,000 at June 30, 1998, and $769,000 at December 31, 1997. However, had the conversion of subordinated notes payable into common stock, which was completed on November 1, 1998, been reflected in the Balance Sheet as of September 30, 1998, the working capital deficiency would have been $40,000. This conversion eliminates principal payments of $712,500 and $237,500 for the years 1999 and 2000, respectively, and interest payments of $94,000 from November 1998 through December 1999. Inventory at September 30, 1998 was $3,680,000, a decrease from $4,812,000 at December 31, 1997. Inventory at September 30, 1997 was $5,606,000. This reduction in inventory was achieved by management's efforts to reduce inventory costs combined with lower inventory needs related to reduced sales levels. At September 30, 1998 the net amount due to the factor consisted of the following:
Receivables held by factor $ 7,191,000 Advances from factor (6,976,000) Open credit memos (260,000) ------------- $ (45,000) =============
In November 1998 the Company signed a one-year agreement with GE Capital First Factors to replace the current factor agreement that is scheduled to expire on December 31, 1998. Under the terms of this new factor agreement, the Company may borrow up to 90% of eligible trade accounts receivable, up to 60% of certain eligible inventory balances, and an additional $1,500,000 on a revolving basis. The Company has a term loan payable to a bank. The principal balance of this loan was $1,120,000 on December 1997. The agreement previously required the loan to be paid off completely by July 1998. In July 1998, the loan agreement was amended and now requires that outstanding balance be paid in monthly installments through August 1999. These payments of the principal balance are $10,000 due on the last day of each month from July 1998 through January 1999, then $60,000 due on the last day of each month from February 1999 through July 1999, with a final payment of any remaining unpaid principal balance due on August 31, 1999. Interest is due monthly in addition to these principal payments. Under the terms of the amendment, all financial covenants were eliminated. The Company is actively pursuing various options of providing for its long term liquidity needs and assuring its long term vitality including additional debt or equity financing, and possible mergers or other business combinations. However, there is no assurance that additional financing, if obtained, will be sufficient to sustain operations. Should management be unsuccessful, the Company may be required to restructure or curtail operations. 16 FOURTH QUARTER EXPECTATION The Company expects sales volume in the fourth quarter of 1998 to be similar or slightly lower than the fourth quarter of 1997. However, the expected gross margin percentage in the fourth quarter of 1998 should be more comparable to the first nine months of 1998 rather than the fourth quarter of 1997. The Company expects to incur net losses for the fourth quarter and the fiscal year 1998, but not nearly to the extent of the losses in fiscal 1997. ACQUISITION During the fourth quarter of 1998, the Company entered into an agreement to purchase substantially of all the assets of ARC Manufacturing, Inc., consisting primarily of inventory and a license to use the trademark. Breaker Jeans, for approximately $920,000. The purchase agreement requires a series of payments beginning in November 1998, and continuing through approximately March 1999. This acquisition is not expected to have a material impact on the company's operating results for the fourth quarter 1998 or the fiscal year 1998. MERGER On April 13, 1998, the Company signed a letter of intent to merge with Chorus Line Corporation. In June 1998, the Company announced that negotiations relative to this merger had been terminated. YEAR 2000 ISSUE The year 2000 issue results from computer programs written using two digits to identify the year in the date field. These computer programs were designed and developed without consideration of the impact of the upcoming change in the century. If not corrected, those programs could create erroneous information by or at the year 2000. The Company is assessing the internal readiness of its computer systems for handling the year 2000 issue. The Company expects to implement the systems and programming changes necessary to address year 2000 issues with respect to its internal systems and does not believe that the cost of such actions will have a material adverse effect on its results of operations or financial condition. Although the Company is not aware of any material operational issues or costs associated with preparing its internal systems for the year 2000, there can be no assurance that there will not be a delay in, or increased costs associated with, the implementation of the necessary systems and changes to address the year 2000 issues, and the Company's inability to implement such systems and changes in a timely manner could have an adverse effect on future results of operations. The Company is in the process of evaluating the extent to which the Company is vulnerable to third parties' failure to address their own year 2000 issues. Those parties include customers, suppliers and other third party business partners. The Company has not yet completed a review process with respect to these third parties. As a result, the Company cannot determine at this time the extent, if any, to which the Company may be exposed to financial risk from the inability of the Company's customers, suppliers and other business partners to remediate their own year 2000 issues. After this review process has been completed, the Company will be able to prepare contingency plans to prepare for the most reasonably likely worst case scenarios. RECENTLY ISSUED PRONOUNCEMENTS COMPREHENSIVE INCOME. The Company adopted Statement of Financial Accounting Standards (FAS) No. 130 Reporting Comprehensive Income on January 1, 1998. There were no differences between net earnings (loss) and comprehensive income as those terms are defined in FAS 130 for the three and nine month periods ending September 30, 1998. SEGMENT REPORTING. In June 1997, the Financial Accounting Standards Board issued Statement of Accounting Financial Standards Number 131, Disclosure about Segments of An Enterprise and Related Information (FAS 131). FAS 131 supersedes previous reporting requirements for reporting on segments of a business enterprise and is effective for the Company's fiscal year ending December 31, 1998. The Company plans to implement FAS 131 in connection with its 1998 fiscal year end reporting on Form 10-K. As FAS 131 only requires additional disclosures, the Company expects there will be no impact on its financial position or results of operations from the implementation. START-UP ACTIVITIES. On April 3, 1998, the American Institute of Certified Public Accountants Accounting Standards Executive Committee issued Statement of Position 98-5 (SOP 98-5), Reporting on the Costs of Start-up Activities. SOP 98-5 requires that costs of start-up activities, including organization costs, be expensed as incurred. SOP 98-5 is effective for financial statements for fiscal years beginning after December 15, 1998. In the fiscal year in which the SOP is first adopted, the application should be reported as a cumulative effect of a change in accounting principle. Based on information currently available, the Company does not expect the adoption of SOP 98-5 to have a significant impact on its financial position or results of operations. 17 DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. In 1998, the Financial Accounting Standards Board issued FAS No. 133, Accounting for Derivative Instruments and Hedging Activities. FAS No. 133 modifies the accounting for derivative and hedging activities and is effective for fiscal years beginning after December 15, 1999. The adoption of FAS No. 133 may require the Company to modify its method for accounting for its interest rate hedging activities. Based on information currently available, the Company does not expect the adoption of FAS No. 133 to have a significant impact on its financial position or results of operations. COMPUTER SOFTWARE. In 1998, the AICPA issued Statement of Position (SOP) 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use. The Company will adopt SOP 98-1 in 1999. The adoption of SOP 98-1 will require the Company to modify its method of accounting for software. Based on information currently available, the Company does not expect the adoption of SOP 98-1 to have a significant impact on its financial position or results of operations. FACTORS THAT MAY AFFECT FUTURE RESULTS All forward-looking statements contained in this Item 2 are subject to, in addition to the other matters described in this report on Form 10-Q, a variety of significant risks and uncertainties. The following discussion highlights some of these risks and uncertainties. Further, from time to time, information provided by the Company or statements made by its employees may contain forward- looking information. The Company cautions the reader that there can be no assurance that actual results or business conditions will not differ materially from those projected or suggested in such forward-looking statements as a result of various factors, including those discussed below. SUBSTANTIAL COMPETITION. The apparel industry is highly competitive. Many of the Company's competitors have substantially greater financial, distribution, marketing and other resources, including greater brand awareness, than the Company. The Company competes with numerous apparel manufacturers, including those with their own retail stores, as well as department stores, specialty stores, retail chains and mass merchandisers which sell apparel under their own labels. From time to time, the Company has lowered prices on certain products to maintain market share, which has adversely affected the Company's gross profit margin on such products. There can be no assurance that such price competition will not recur. CHANGING FASHION TRENDS. The Company's success depends in substantial part on its ability to correctly anticipate, gauge and respond to rapidly changing consumer preferences in a timely manner. If the Company materially misjudges the market for a particular product or product line, the Company may be faced with a substantial reduction in sales and excess inventory. There can be no assurance that the Company will be able to correctly anticipate, gauge and respond to changing consumer preferences in a timely manner in the future. ECONOMIC CONDITIONS. The apparel industry historically has been subject to substantial cyclical variation, and a recession in the general economy or uncertainties regarding future economic prospects that affect consumer spending habits have in the past had, and may in the future have, a materially adverse effect on the Company's results of operations. In addition, certain retailers, including some of the Company's customers, are experiencing financial difficulties which increase the risk of extending credit to such retailers. Many retailers have attempted to improve their own operating efficiencies by concentrating their purchasing power among an increasingly small group of vendors. There can be no assurance that the Company will remain a preferred vendor for its existing customers. A decrease in business from, or loss of, a major customer could have a material adverse effect on the Company's results of operations. In addition, there can be no assurance that the Company's factor will approve the extension of credit to certain retail customers in the future. If a customer's credit is not approved by the factor, the Company could either assume the collection risk on sales to such customer itself, or choose not to make sales to such customer. VARIABILITY OF QUARTERLY RESULTS. The Company has experienced, and expects to continue to experience, variability in its net sales and operating results on a quarterly basis. The Company believes the factors which influence this variability include (i) the timing of the Company's introduction of new apparel collections, (ii) the level of consumer acceptance of each new collection, (iii) general economic and industry conditions that affect consumer spending and retailer purchasing, (iv) the timing of the placement or cancellation of customer orders, (v) the timing of expenditures in anticipation of changes in sales volume and customer delivery requirements, (vi) the weather and (vii) actions of competitors. In addition, the women's apparel business is highly seasonal. 18 RELIANCE ON KEY PERSONNEL. The operations of the Company depend to a great extent on the efforts of its senior management, including Vinton W. Bacon and Larry Brahim. The extended loss of the services of one or both of these individuals could have a materially adverse effect on the Company's operations. IMPACT OF FOREIGN OPERATIONS. In July 1994, the Company commenced manufacturing products abroad. As a result, the Company's operations are subject to the customary risks of doing business abroad, including, but not limited to, transportation delays, political instability, expropriation, currency fluctuations and the imposition of tariffs, import and export controls and other non-tariff barriers (including changes in the allocation of quotas). ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK. The Company does not invest in derivative financial instruments, other financial instruments or derivative commodity instruments. However, significant increases in interest rates or contractions of credit could have a materially adverse effect on the Company's operations through its bank borrowings and factor contracts. Likewise, significant increases in the cost of the Company's labor or raw materials could have a materially adverse effect on the Company's operations. Also see Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations -- Factors That May Affect Future Results. 19 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. None. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS. On January 27, 1998, the Company issued subordinated notes payable to certain shareholders of the Company totaling $950,000. These notes called for interest (at 10% per annum) to be paid quarterly beginning April 30, 1998 and quarterly installments of principal commencing April 30, 1999. These notes were to mature on January 31, 2000 and are secured by the Company's interest in Airshop, Ltd. In connection with the issuance of these notes, the Company sold 500,000 stock purchase warrants to the shareholders for $50,000. The warrants are exercisable at an exercise price of $1.625 per share and expire on January 27, 2003. These warrants were independently valued at $265,000. The $215,000 discount is being amortized over the life of the notes, with $9,000 being expensed monthly beginning February 1998. On November 1, 1998, these notes were converted to common stock of the Company at $0.625 per share resulting in the issuance of 1,520,000 shares, the exercise price of the warrants was reduced to $0.625, and the expiration date of the warrants was extended to October 31, 2003. The price of the last trade of the Company's common stock on the AMEX prior to this conversion was $0.1875 per share. ITEM 3. DEFAULTS UPON SENIOR SECURITIES. The Company has an agreement with its factor, as more completely described in the Company's annual report on Form 10-K, that provides for advances to the Company of up to 100% of qualified accounts receivable plus a revolving loan facility. The Company was in default of certain restrictive covenants under this agreement from December 31, 1997 through March 31, 1998. On April 1, 1998, these defaults were waived by the factor, and the agreement was amended by revising these covenants for 1998. Under this revised agreement, the amount of the revolving loan available to the Company was increased to allow the Company to borrow up to $2,200,000 in addition to the advances against the total qualified receivables. This $2,200,000 amount was scheduled to reduce to $1,500,000 on July 1, 1998. This agreement was subsequently amended by extending the revolving loan facility at the $2,200,000 amount through December 31, 1998; the $2,200,000 amount is now scheduled to reduce to $1,500,000 on January 1, 1999. The Company is in default of certain restrictive covenants under this agreement as of September 30, 1998. The Company intends to repay its current factor by utilizing the agreement with its new factor, as described in the next paragraph. In November 1998 the Company signed a one-year agreement with GE Capital First Factors to replace the current factor agreement described above that is scheduled to expire on December 31, 1998. Under the terms of this new factor agreement, the Company may borrow up to 90% of eligible trade accounts receivable, up to 60% of certain eligible inventory balances, and an additional $1,500,000 on a revolving basis. In addition, the Company has a term loan payable to a bank. On December 31, 1997, the Company was in default of certain restrictive covenants under the loan agreement dated June 30, 1997. Subsequently, a new agreement was entered into effective January 21, 1998. On March 31, 1998, the Company was in default of certain restrictive covenants under this new agreement. On April 1, 1998, the bank agreed to waive the Company's compliance with those covenants through June 30, 1998. The revised agreement, which required the loan to be paid off completely by July 1998, was amended again in July 1998, and now requires that outstanding balance be paid in monthly installments through August 1999. Principal payments of $10,000 are due on the last day of each month from July 1998 through January 1999, then $60,000 due on the last day of each month from February 1999 through July 1999, with a final payment of any remaining unpaid principal balance due on August 31, 1999. Interest is due monthly in addition to these principal payments. Under the terms of the amendment, all financial covenants were eliminated. 20 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None. ITEM 5. OTHER INFORMATION. None. ITEM 6. EXHIBITS AND REPORT ON FORM 8-K. a .Exhibits - The following is a list of exhibits filed as apart of this report. Exhibit Number Description - ------- --------------------------------------------------------------------- 3.1 Restated Articles of Incorporation of the Company. [3.1*] (3) 3.2 Amendment to by-laws reducing the number of directors to seven.[3.2*](3) 3.3 Restated by-laws of the Company. [3.3*](3) 4.1 Form of stock certificate. [4.3*] (1) 4.2 Underwriters' Warrant Agreement dated March 16, 1994, among the Company,H.J. Meyers & Co., Inc. and Sanders Morris Mundy Inc. [4.2*](2) 10.1 Subordinated notes payable Conversion agreement 10.2 ARC Manufacture Inc. Assets purchase agreement 10.3 G.E. Capital First Factor Factoring agreement 27. Financial Data Schedule. (Filed as part of the EDGAR (electronic) version of this report only.) ----------------------------- * Indicates the exhibit number in the original filing. (1) Filed as an exhibit to Amendment No. 1 to Registration Statement on Form S-1 filed with the Securities and Exchange Commission on March 16, 1994. (2) Filed as an exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 1994. (3) Filed as an exhibit to the Company's quarterly report on Form 10-Q for the quarter ended March 31, 1998. b. Reports on Form 8-K. None. 21 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized JALATE, LTD. November 13, 1998 By: /s/ VINTON W. BACON -------------------- Vinton W. Bacon Chief Executive Officer and Chief Operating Officer November 13, 1998 By: /s/ JOHN DIESENBRUCH --------------------- John Diesenbruch Vice President, Finance and Chief Financial Officer EX-10.1 2 EXHIBIT 10.1 1 EXHIBIT 10.1 SUBORDINATED NOTE PAYABLE CONVERSION AGREEMENT ---------------------------------------------- This Conversion Agreement (the "Agreement") is entered into as of November 1, 1998, by and among Jalate, Ltd., a California corporation (the "Company"), Katherine U. Sanders, an individual ("Ms. Sanders"), John E. Drury, an individual ("Mr. Drury"), and William M. DeArman, an individual ("Mr. DeArman") (Ms. Sanders, Mr. Drury and Mr. DeArman hereinafter are referred to individually as a "Holder" and collectively as the "Holders"), with reference to the following facts A. The Company has executed those certain Subordinated Secured Promissory Notes all dated as of January 27, 1998, in the amounts and in favor of the Holders as set forth on Schedule 1 hereto (the "Notes") (a Note in the amount of $237,500 was originally issued by the Company to Don A. Sanders, an individual, ("Mr. Sanders"), who subsequently assigned such Note to Ms. Sanders). B. In connection with the execution of the Notes, (i) the Holders entered into an Agency and Intercreditor Agreement (the "Intercreditor Agreement") between the Holders and Mr. DeArman as "Secured Party," pursuant to which, among other things, Secured Party was appointed as "Agent" for the Holders; and (ii) the Company entered into a Security and Pledge Agreement dated as of January 27, 1998 (the "Security and Pledge Agreement") between the Company and the Secured Party, pursuant to which the Company conveyed, assigned, transferred, delivered, pledged and granted to Secured Party a security interest in and to the Collateral (as defined in the Security and Pledge Agreement). C. The Company has executed those certain Stock Purchase Warrants all dated January 27, 1998 with the Holders, each as identified on Schedule 2 hereto (the "Warrants") (Warrant No. 1 was originally issued to Mr. Sanders, who subsequently assigned such Warrant to Ms. Sanders). D. The Company wishes to convert (the "Conversion") the outstanding principal amounts of the Notes into shares of common stock, no par value, of the Company ("Common Stock") at a conversion rate of $0.625 per share of Common Stock, and each of the Holders wishes to receive such shares of Common Stock in full satisfaction of the principal amounts owed to them under the Notes. E. As a condition to the willingness of the Holders to effect the Conversion, the Company has agreed to reduce the exercise prices of the Warrants and extend the expiration dates under the Warrants as described herein. NOW, THEREFORE, based on the above premises and in consideration of the mutual covenants and agreements contained herein and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties agree as follows: 1. Conversion of Notes into Common Stock. The parties hereby agree that the outstanding principal amount of the Notes shall be converted into shares of Common Stock at a conversion rate of $0.625 per share of Common Stock. The number of shares of Common Stock to be received by each Holder in connection with the Conversion is shown in Schedule 1 attached hereto ("Conversion Shares"). Each of the Holders hereby agrees that receipt of the Conversion Shares by each of them pursuant to this Section 1 shall be in full satisfaction and discharge of the principal amounts owed to them by the Company under their respective Notes. 2 1.1 Delivery of Stock Certificates and Cancelled Notes; Listing Application. Concurrently herewith the Company is issuing to the Holders certificates evidencing their respective Conversion Shares in the names of such Holders, and the accrued and unpaid interest due on each of the Notes as indicated on Schedule 1 attached hereto, and the Holders are delivering the original Notes to the Company marked "CANCELLED." The Company will file an application to list the Conversion Shares on the American Stock Exchange in connection with the earlier of (i) the registration of the Conversion Shares pursuant to the registration rights granted under Section 3 hereof, (ii) such date as the Conversion Shares may be sold pursuant to Rule 144 promulgated under the Securities Act of 1933, as amended (the "Act"), or (iii) any other listing application filed by the Company with the American Stock Exchange with respect to which it would be cost-effective (as determined by the Company) to also list the Conversion Shares; provided, however, that in any event the Company will file the listing application with the American Stock Exchange by November 1, 1999. 1.2 Termination of Security and Pledge Agreement. The Company and Secured Party hereby agree that the Security and Pledge Agreement is hereby terminated and of no further force and effect and concurrently herewith the Secured Party is returning the Collateral to the Company. 1.3 Restrictions on Transfer. The Holders hereby acknowledge that (i) the Conversion Shares have not been registered under the Act, and are "restricted securities" within the meaning of Rule 144 under the Act; and (ii) the Conversion Shares may not be sold, transferred or pledged by such Holders unless the Company shall have been supplied with reasonably satisfactory evidence that such transfer is not in violation of the Act and any applicable state securities laws. The Company may place a legend to that effect on each certificate representing shares issuable to the Holders pursuant to this Section 1.3. 2. Amendments to Warrants. The parties agree that each of the Warrants is hereby amended as follows (capitalized terms used herein and not otherwise defined shall have the meanings set forth in the Warrant Agreements): (a) The Purchase Price set forth in the introductory paragraph is hereby changed from "$1.625" to "$0.625." (b) The Expiration Date is hereby changed from "January 27, 2003" to "November 1, 2003." (c) Section 1.1 is hereby deleted and replaced with the following: "This Warrant may be exercised in whole or in part at any time, and from time to time, during the period commencing on the date of this Warrant and expiring on November 1, 2003." 3. Registration Rights. The Conversion Shares will be entitled to the registration rights set forth in Exhibit A attached hereto. 4. Voting Agreement. As an inducement to the Holders to enter into this Agreement and effect the Conversion, simultaneously with the execution and delivery of this Agreement, Larry Brahim and Vinton W. Bacon have each executed and delivered a voting agreement substantially in the form set forth in Exhibit B attached hereto. 3 5. Appointment of Director. Simultaneously with the execution and delivery of this Agreement, the Company appoints Mr. DeArman to serve as a director of the Company and Mr. DeArman accepts such appointment. 6. Representations of Holders. As a material inducement to the Company to enter into this Agreement, each of the Holders individually represents and warrants to the Company as follows: 6.1. Sole Ownership of Notes; No Encumbrances. Holder is the sole owner of his or her Note, in the outstanding principal amount, plus accrued and unpaid interest thereon, as set forth on such Schedule 1, free and clear of all liens, claims, security interests or any other encumbrances whatsoever. Holder has not transferred any of its interests in his or her Note. 6.2 Authorization. Holder has full right, power, capacity and authority to execute and deliver this Agreement and to perform its obligations hereunder. This Agreement has been duly executed and delivered by Holder, and constitutes the legal, valid and binding obligation of Holder, enforceable against Holder in accordance with its terms. 6.3 Investment. Holder is an "accredited investor" within the meaning of Regulation D promulgated under the Act. Holder is acquiring the Conversion Shares for its own account for investment and not with a view to a distribution thereof in violation of the Securities Act. 7. Representations of Company. As a material inducement to the Holders to enter into this Agreement, the Company represents and warrants to each of the Holders as follows: 7.1 Organization and Good Standing; Authorization; Absence of Conflicts. The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of California and is duly qualified to transact business as a foreign corporation in each jurisdiction where the nature of its business or its ownership of property requires such qualification, except where the failure to be so qualified would not be reasonably likely to have a material adverse effect on the Company's financial condition or results of operation (a "Material Adverse Effect"). The Company has full right, power, capacity and authority to execute and deliver this Agreement and to perform its obligations hereunder. This Agreement has been duly executed and delivered by the Company, and constitutes the legal, valid and binding obligation of the Company, enforceable against the Company in accordance with its terms. The execution, delivery and performance of this Agreement by the Company do not violate or conflict with or constitute a default under the Company's articles of incorporation or bylaws or any agreement or contract to which the Company is a party, except where such violation, conflict or default would not be reasonably likely to have a Material Adverse Effect. 7.2 Issuance of Shares. The issuance and delivery of the Conversion Shares has been duly authorized by all necessary corporate action on the part of the Company. The Conversion Shares when issued in accordance with the provisions of this Agreement will be duly and validly issued, fully paid and non-assessable. 7.3 Conversion Rate. As of the approval of this Agreement by the Company's Board of Directors, the conversion rate of $0.625 per share was higher than the greater of book or market value of the Common Stock. 4 8. Indemnification. The Company, on one hand, and the Holders, on the other hand, hereby agree to defend, indemnify and hold harmless the other and their respective affiliates, officers, directors, controlling persons, agents, representatives and employees from and against all liabilities, damages, losses, costs and expenses (including reasonable attorneys' fees and other professionals' fees) which they may incur by reason of any breach of the representations, warranties and covenants made by the Company or such Holder herein. 9. Miscellaneous. 9.1 Amendments. This Agreement may be amended or supplemented at any time by the mutual written consent of the parties. 9.2 Entire Agreement. This Agreement, its exhibits and the documents executed in connection herewith, constitute the entire agreement between the parties hereto with respect to the subject matter hereof and supersede all prior agreements and understandings, oral and written, between the parties hereto with respect to the subject matter hereof. 9.3 Binding Effect, Benefits. This Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective successors and assigns. Notwithstanding anything contained in this Agreement to the contrary, nothing in this Agreement, expressed or implied, is intended to confer on any person other than the parties hereto or their respective successors and assigns, any rights, remedies, obligations or liabilities under or by reason of this Agreement, except Section 8 hereof which shall inure to the benefit of and be enforceable by indemnified parties. 9.4 Assignability. Neither this Agreement nor any of the parties' rights hereunder shall be assignable by a party without the prior written consent of the other parties; provided, however, that a Holder may assign the registration rights set forth in Exhibit A hereto to any transferee of the Conversion Shares so long as (i) the Holder provides written notice to the Company of such assignment within thirty (30) days of the transfer and (ii) the transferee agrees in writing to be bound by all of the terms of Exhibit A; and provided further that in no event may the registration rights set forth in Exhibit A be assigned in such a manner that more than ten persons are entitled to the benefits thereof. 9.5 Notices. All notices under this Agreement will be in writing and will be delivered by personal service, facsimile transmission or telegram, telecopy, certified mail (if such service is not available, then by first class mail), postage prepaid, to such address as may be designated from time to time by the relevant party, and which will initially be as set forth in each party's signature block set forth below. Any notice sent by certified mail will be deemed to have been given three (3) days after the date on which it is mailed. All other notices will be deemed given when received. No objection may be made to the manner of delivery of any notice actually received in writing by an authorized agent of a party. 9.6 Governing Law. This Agreement shall be governed by and construed in accordance with the internal laws of the State of California, without regard to any applicable conflicts of law principles thereof, including all matters of construction, validity and performance. 5 9.7 Fees and Expenses. Each party shall bear and be responsible for all of the fees and expenses incurred by it in connection with the transactions contemplated by this Agreement; provided, however, that the Company will pay the fees and expenses (up to $1,500) of one attorney for the Holders selected by Mr. DeArman. 9.8 The validity, legality or enforceability of the remainder of this Agreement will not be affected even if one or more of the provisions of this Agreement will be held to be invalid, illegal or unenforceable in any respect. 9.9 Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original, but all of which shall be one and the same document. [signatures on following page] 6 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed, as of the day and year first above written. "Company" "Secured Party" JALATE, LTD., a California corporation /s/ William M. DeArman ---------------------------------- William M. DeArman, an individual By: /s/ John Diesenbruch Address: 5420 Huckleberry Lane ------------------------------ Houston, Texas 77056 John Diesenbruch Fax: (713) 552-1505 Vice President and Chief Financial Officer Address: 2085 South Garfield Street "Holders" City of Commerce, CA 90040 Fax: (213) 728-3752 /s/ Katherine U. Sanders ----------------------------------- Katherine U. Sanders, an individual Address: 4014 Inverness Houston, Texas 77109 Fax: (713) 250-4298 Attn: Don A. Sanders /s/ John E. Drury ----------------------------------- John E. Drury, an individual Address: c/o USA Waste Services, Inc. First City Tower, Suite 4000 Houston, Texas 77002 Fax: (713) 512-6323 /s/ William M. DeArman ----------------------------------- William M. DeArman, an individual Address: 5420 Huckleberry Lane Houston, Texas 77056 Fax: (713) 552-1505 7 SCHEDULE 1 NOTES AND HOLDERS
Number of Accrued and Conversion Unpaid Holder Amount Shares Interest ------ -------- ---------- ----------- Katherine U. Sanders $ 237,500 380,000 $ 2,045.14 Katherine U. Sanders $ 142,500 228,000 $ 1,227.08 John E. Drury $ 95,000 152,000 $ 818.06 William M. DeArman $ 475,000 760,000 $ 4,090.28 --------- --------- ---------- Total $ 950,000 1,520,000 $ 8,180.56 ========= ========= ==========
By assignment from Don A. Sanders. 8 SCHEDULE 2 WARRANTS Series A Warrant No. 1, Stock Purchase Warrant issued by the Company to Don A. Sanders on January 27, 1998, covering right to purchase up to 125,000 shares of Common Stock at an exercise price of $1.625 per share, and subsequently assigned by Don A. Sanders to Katherine U. Sanders Series A Warrant No. 2, Stock Purchase Warrant issued by the Company to Katherine U. Sanders on January 27, 1998, covering right to purchase up to 75,000 shares of Common Stock at an exercise price of $1.625 per share. Series A Warrant No. 3, Stock Purchase Warrant issued by the Company to John E. Drury on January 27, 1998, covering right to purchase up to 50,000 shares of Common Stock at an exercise price of $1.625 per share. Series A Warrant No. 4, Stock Purchase Warrant issued by the Company to William M. DeArman on January 27, 1998, covering right to purchase up to 250,000 shares of Common Stock at an exercise price of $1.625 per share. 9 EXHIBIT A --------- Registration Rights 1. "Piggyback" Registration. If at any time the Company proposes to file a registration statement under the Act with respect to an offering of its Common Stock (other than a registration statement on Form S-4 or Form S-8 or any successor or similar forms), whether or not for sale for its own account, then the Company each such time shall give the Holder ten (10) business days written notice before the filing thereof, which such notice shall offer the Holder the opportunity to register all of such Holder's Conversion Shares which do not qualify for an exemption from such registration under Rule 144 under the Securities Act of 1933, as amended (the "Act") or a comparable or successor exemption from registration ("Registrable Shares"). The Company shall include in such registration statement all of the Holder's Registrable Shares with respect to which the Company has received written request for inclusion within ten (10) business days after notice has been duly given by the Company. Notwithstanding the foregoing, the Company shall not be required to include the Holder's Registrable Shares if the managing underwriter or underwriters of such offering determine and advise the Company that inclusion of the Registrable Shares and any other shares having "piggyback" registration rights (the "Other Shares") would likely adversely affect such offering. If the managing underwriter or underwriters determine that a portion of the Registrable Shares and Other Shares may be included in the offering, the Registrable Shares and the Other Shares shall be included in the registration on a pro rata basis (in relation to the number of such Registrable Shares and Other Shares so requested to be included in the offering). The Holders acknowledge that nothing contained herein shall require or obligate the Company to cause any registration statement pursuant to which the Holder has exercised its "piggyback" registration rights pursuant to this Exhibit A to become effective or, if declared effective, to maintain the effectiveness of such registration statement. 2. Registration Expenses. Except as otherwise required by state securities laws or the rules and regulations promulgated thereunder, all expenses, disbursements and fees incurred by the Company in connection with carrying out its obligations under this Exhibit A shall be borne by the Company; provided, however, that the Holder shall pay (i) all costs and expenses of counsel, accounting or financing professionals retained by such Holder, (ii) all underwriting discounts, commissions, fees and expenses and all transfer taxes with respect to the shares sold by such Holder, and (iii) all other expenses incurred by such Holder and incidental to the sale and delivery of the shares to be sold by such Holder. 3. Conditions to Holder's Rights. It shall be a condition of the Holder's rights under this Exhibit A that: 3.1 Cooperation. Such Holder shall cooperate with the Company by supplying information and executing documents relating to such Holder or the securities of the Company owned by such Holder in connection with such registration which are customary for offerings of this type or is required by applicable laws or regulations (including agreeing to sell such Holder's Registrable Securities on the basis provided in any underwriting arrangements containing customary terms reasonably satisfactory to such Holder); and 10 3.2 Undertakings. Such Holder shall enter into any undertakings and take such other action relating to the conduct of the proposed offering which the Company or the underwriters may reasonably request as being necessary to insure compliance with federal and state securities laws and the rules or other requirements of the National Association of Securities Dealers, Inc. or the American Stock Exchange, or which the Company or the underwriters may reasonably request to otherwise effectuate the offering. 4. Discontinuation of Use of Prospectus. The Holder agrees that upon receipt of any written notice from the Company that the prospectus included in the registration statement, as then in effect, includes an untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein not misleading, in the light of the circumstances under which they were made, the Holder will forthwith discontinue its disposition of Registrable Shares pursuant to the registration statement relating to such Registrable Shares until the Holder's receipt of the copies of the supplemented or amended prospectus and, if so directed by the Company, will deliver to the Company (at the Company's expense) all copies, other than permanent file copies, then in the Holder's possession, of the prospectus relating to such Registrable Shares current at the time of receipt of such notice. 5. Indemnification. 5.1. Indemnification by the Company. In the event of any registration of any Registrable Shares under the Act, the Company will, and it hereby does, indemnify and hold harmless, to the full extent permitted by law, each Holder, its directors, officers, partners, heirs, personal representatives, agents and affiliates and each other person, if any, who controls such Holder within the meaning of the Act, against any and all losses, claims, damages or liabilities (or actions or proceedings, whether commenced or threatened, in respect thereof) which arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in any registration statement under which such securities were registered under the Act, any preliminary prospectus, final prospectus or summary prospectus contained therein, or any amendment or supplement thereto, or any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein in light of the circumstances in which they were made not misleading, and the Company will reimburse each Holder and each such director, officer, partner, heir, personal representative, agent or affiliate, and controlling person for any legal or any other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, liability, action or proceeding; provided, however, that the Company shall not be liable in any such case to the extent that any such loss, claim, damage, liability (or action or proceeding in respect thereof) or expense arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in such registration statement, any such preliminary prospectus, final prospectus, summary prospectus, amendment or supplement (i) in reliance upon and in conformity with written information furnished to the Company through an instrument duly executed by or on behalf of such Holder, specifically stating that it is for use in the preparation thereof or (ii) which is corrected in an amendment or supplement or final prospectus (or amendment or supplement thereto) provided to the indemnified person and such amended, supplemented or final prospectus (or amendment or supplement thereto) was not given by or on behalf of such indemnified person to the person who purchased the Registrable Securities, if such is required by law at or prior to the written confirmation of the sale of the Registrable Securities to such person; and provided, further, that the Company shall not be liable to any person to the extent that any such loss, claim, damage, liability (or action or proceeding in respect thereof) or expense arises out of or is based upon any violation by such person of the Act or the Securities Exchange Act of 1934, as amended. Such indemnity shall remain in full force regardless of any investigation made by or on behalf of such Holder or any such director, officer, partner, heir, personal representative, agent or affiliate or controlling person and shall survive the transfer of such securities by such Holder. 11 5.2 Indemnification by the Holders. As a condition to including any Registrable Shares of a Holder in any registration statement, the Company shall have received an undertaking reasonably satisfactory to it from such Holder, to indemnify and hold harmless (in the same manner and to the same extent as set forth in Section 5.1 of this Exhibit A) the Company, its directors, officers, agents and affiliates and each other person, if any, who controls the Company within the meaning of the Act, with respect to any statement or alleged statement in or omission or alleged omission from such registration statement, any preliminary prospectus, final prospectus or summary prospectus contained therein, or any amendment or supplement thereto, if such statement or alleged statement or omission or alleged omission (i) was made in reliance upon and in conformity with written information furnished to the Company through an instrument duly executed by such Holder specifically stating that it is for the use in the preparation of such registration statement, preliminary prospectus, final prospectus, summary prospectus, amendment or supplement or (ii) is corrected in an amendment or supplement or final prospectus (or amendment or supplement thereto) provided to the indemnifying person and such amended, supplemented or final prospectus (or amendment or supplement thereto) was not given by or on behalf of such indemnifying person to the person who purchased the Registrable Securities, if such is required by law at or prior to the written confirmation of the sale of the Registrable Securities to such person; provided, however, that the liability of such indemnifying party under this Section 5.2 of Exhibit A shall be limited to the amount of proceeds received by such Holder in the offering giving rise to such liability. Such indemnity shall remain in full force and effect, regardless of any investigation made by or on behalf of the Company or any such director, officer or controlling person and shall survive the transfer of such securities by such Holder. 5.3 Notices of Claims, etc. Promptly after receipt by an indemnified party hereunder of written notice of the commencement of any action or proceeding involving a claim referred to in the preceding subsections of this Section 5 of Exhibit A, such indemnified party will, if a claim in respect thereof is to be made against an indemnifying party, give written notice to the latter of the commencement of such action; provided, however, that the failure of any indemnified party to give notice as provided herein shall not relieve the indemnifying party of its obligations under the preceding subsections of this Section 5 of Exhibit A, except to the extent that the indemnifying party is actually prejudiced by such failure to give notice. In case any such claim or action is brought against an indemnified party, the indemnifying party shall be entitled to participate in and, unless representation of such indemnified party and any such indemnifying party by the same counsel would be inappropriate under applicable standards of professional conduct (whether or not such representation by the same counsel has been proposed) due to actual or potential differing interests between them, to assume the defense thereof, jointly with any other indemnifying party similarly notified to the extent that it may wish, with counsel reasonably satisfactory to such indemnified party, and after notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof, the indemnifying party shall not be liable to such indemnified party for any legal or other expenses subsequently incurred by the latter in connection with the defense thereof other than reasonable costs of investigation. No indemnifying party shall be liable for any settlement of any action or proceeding effected without its written consent. No indemnifying party shall, without the consent of the indemnified party, consent to entry of any judgment or enter into any settlement which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such indemnified party of a release from all liability in respect to such claim or litigation. An indemnifying party who is not entitled to, or elects not to, assume the defense of a claim will not be obligated to pay the fees and expenses of more than one counsel for all parties indemnified by an indemnifying party with respect to such claim, unless representation of such indemnified parties by the same counsel would be inappropriate under applicable standards of professional conduct (whether or not such representation by the same counsel has been proposed) due to actual or potential differing interests between them with respect to such claim, in which event the indemnifying party shall be obligated to pay the fees and expenses of such additional counsel or counsels. 12 5.4. Contribution. If the indemnification provided for in this Section 5 of Exhibit A shall for any reason be held by a court to be unavailable to an indemnified party under Section 5.1 or 5.2 of Exhibit A hereof in respect of any loss, claim, damage or liability, or any action in respect thereof, then, in lieu of the amount paid or payable under Section 5.1 or 5.2 of Exhibit A hereof, the indemnified party and the indemnifying party under Section 5.1 or 5.2 of Exhibit A hereof shall contribute to the aggregate losses, claims, damages and liabilities (including legal or other expenses reasonably incurred in connection with investigation of the same), (a) in such proportion as is appropriate to reflect the relative fault of the Company and the Holder with respect to the acts, statements or omissions which resulted in such loss, claim, damage or liability, or action in respect thereof, as well as any other relevant equitable considerations or (b) if the allocation provided by clause (a) above is not permitted by applicable law, in such proportion as shall be appropriate to reflect the relative benefits received by the Company and the Holder from the offering of the securities covered by such registration statement. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. In addition, no person shall be obligated to contribute hereunder any amounts in payment for any settlement of any action or claim effected without such person's consent, which consent shall not be unreasonably withheld. 5.5. Other Indemnification. Indemnification and contribution similar to that specified in the preceding subdivisions of this Section 5 of Exhibit A (with appropriate modifications) shall be given by the Company and the Holder with respect to any required registration or other qualification of securities under any federal or state law or regulation of any governmental authority other than the Act. 5.6. Indemnification Payments. The indemnification and contribution required by this Section 5 of Exhibit A shall be made by periodic payments of the amount thereof during the course of the investigation or defense, as and when bills are received or expense, loss, damage or liability is incurred. EX-10.2 3 EXHIBIT 10.2 1 EXHIBIT 10.2 ARC MANUFACTURING INC. ASSET PURCHASE AGREEMENT This ASSET PURCHASE AGREEMENT (the "Agreement") is made and entered into as of October 26, 1998, by and among JALATE, LTD., a California corporation (the "Buyer") and ARC MANUFACTURING, INC., a Florida corporation (the "Seller"), JOHN PAUL ARCIA, an individual ("Arcia") and DENNIS McCONKEY, an individual ("McConkey", and collectively with Seller and Arcia, the "Selling Parties"). RECITALS: --------- WHEREAS, Seller is engaged in the design, manufacturing, importation, and retail distribution and sale of jeans, denim and other clothing throughout the United States (the "Business"). WHEREAS, Seller owns and maintains equipment, merchandise, inventory, intellectual property, proprietary information and miscellaneous assets used in connection with the operation of the Business. WHEREAS, Seller desires to sell certain of such assets used in the Business to Buyer and Buyer desires to acquire certain of such assets used, useful or intended to be used in the operation of the Business (the "Transactions"). WHEREAS, as an inducement to Buyer to engage in the Transactions, the Selling Parties currently herewith have (i) caused ARC Merchandising, Inc., a Florida corporation (ARC Merchandising"), to enter into an agreement with Buyer to provide ongoing warehousing and distribution services on behalf of Buyer within the state of Florida and (ii) caused ARC International Ltd., a Colombian corporation ("ARC Colombia"), to enter into an agreement with Buyer to continue to provide certain manufacturing services to ARC Merchandising for the benefit of Buyer. WHEREAS, in connection with the Transactions, Buyer will enter into employment agreements (the "Employment Agreements") with each of Arcia and McConkey. NOW, THEREFORE, in consideration of the foregoing and the mutual covenants hereinafter set forth, it is mutually agreed by and between the parties as follows: ARTICLE I PURCHASE AND SALE OF ASSETS 1.1 Assets Purchased. Upon the terms and conditions and at the times set forth in this Agreement, Seller will sell, assign, transfer and 2 deliver to Buyer, and Buyer will purchase and acquire from Seller, all of Seller's right, title and interest in and to the following assets (the "Assets"), free and clear of any liens, claims, security interests or other encumbrances of any kind or nature whatsoever: 1.11 All inventory, including without limitation, fabric, trim, work in process, finished apparel, clothing, garments, accessories, samples and any related items of Seller that is sold in the Business, and that is physically located at 7150 NW 36th Avenue, Miami, Florida 33147 or in transit as of the opening of business on the Closing Date (as defined below) and all documents of title or other documents representing the foregoing (collectively, "Inventory"). 1.12 All rights under purchase orders or contracts for the acquisition of Inventory (collectively, "Purchase Orders"). 1.13 All rights under sales orders or contracts for the sale of finished goods constituting Seller's backlog (collectively, "Sales Orders"). 1.14 All files, documents, papers, customer lists, supplier lists, inventory records, sales data, distribution records, permits, licenses, approvals and agreements pertaining to the foregoing or otherwise related to the Business that are material to the ownership or sale of the Assets (wherever such files, documents papers, customer lists, supplier lists, inventory records, sales data, distribution records, permits, licenses, approvals and agreements may be located and whether in tangible or electronic form); provided, however, that Seller may keep those records that are necessary for it to comply with requirements of the Internal Revenue System and shall make copies of those records available to Buyer upon request. 1.15 All of Seller's rights under that certain Merchandise License Agreement between Anita Industries, Inc. ("Licensor") and Seller effective as of September 1, 1998 (the "License Agreement"). 1.2 Assumption of Liabilities. Buyer is not assuming, and shall not be deemed to have assumed or be liable for, any liabilities or obligations of Seller of any kind or nature whatsoever (including without limitation Seller's continuing operational liabilities, expenses and leases), other than Seller's obligations under (i) the Seller's obligations under the Sales Orders set forth on Schedule 4.8(b) attached hereto, (ii) Seller's obligations under the License Agreement arising from and after the Closing Date to the extent that such obligations relate to Buyer's sale of finished goods, and (iii) Seller's obligation to pay royalties under the License Agreement for sales of finished goods by Seller from October 1, 1998 through the Closing Date (not to exceed $9,500). Buyer expressly assumes and agrees to pay the obligations under items (i) through (iii), inclusive. 3 ARTICLE II PURCHASE PRICE AND RELATED MATTERS 2.1 Purchase Price. In consideration for the sale and purchase of the Assets upon the terms and subject to the conditions contained in this Agreement, Buyer shall pay to Seller the sum of (x) $1,018,884 (representing (i) $919,994 (the book value of the Inventory as shown on Schedule 4.7 hereto) minus (ii) $9,500 (the maximum amount of royalty obligations to be assumed by Buyer pursuant to Section 1.2(iii) hereof) plus (iii) $108,390 (the dollar amount of the Purchase Orders as shown on Schedule 4.8(a) hereto), plus (y) the costs (representing sewing, cutting and other labor costs and freight and duty charges) (the "Conversion Costs") incurred by or on behalf of Seller in the ordinary course of business consistent with past practice and Section 4.8 from the date of this Agreement through and including the Closing Date (as defined below) in connection with the manufacturing and delivery of finished goods inventory utilizing the "Breaker Jeans" trademark being acquired by Buyer pursuant to this Agreement (the sum of (x) and (y) being the "Purchase Price"). The Purchase Price shall be paid as follows: (a) $25,000 of the Purchase Price shall be paid at Closing and (b) the balance of the Purchase Price shall be paid after the sale of the Inventory as finished goods under the trademark "Breaker Jeans" by Buyer, with Buyer to pay thirty five percent (35%) of its sales price for the finished goods until such time as the balance of the Purchase Price has been paid in full. Buyer shall make payments to Seller of the balance of the Purchase Price with respect to each shipment by overnight courier on the Friday of the week following the week in which the Inventory is shipped as finished goods by Buyer to its customers (e.g., if Buyer shipped finished goods inventory to its customers on a Thursday, Buyer would make payments to Seller on Friday of the following week); provided, however, that until Seller has delivered to Buyer the clarification to the UCC-1 financing statement as required by Section 6.7 hereof, no payments shall be required by Buyer to Seller pursuant to this sentence. Notwithstanding the foregoing, payments by Buyer for the sale of portions of the Inventory which constitute finished goods (as indicated on the inventory report dated October 28, 1998) (the "Finished Goods Inventory") and which are shipped between October 29, 1998 and the Closing Date shall be made as follows: Seller shall ship and invoice all Finished Goods Inventory from time to time with respect to the applicable sales order in its name but on behalf, at the direction, and for the benefit of Buyer and shall apply one hundred percent (100%) of the gross selling price (net of customary freight allowances) as indicated on the invoice to the payment of the balance of the Purchase Price. Seller shall be responsible for the factoring or collection of the accounts receivable generated by the sale of the Finished Goods Inventory and Seller's inability to collect any portion of the selling price of such Finished Goods Inventory shall not affect the application of the invoiced selling price to the balance of the Purchase Price. 2.2 Sales Taxes. All sales, use, documentary and transfer taxes arising out of the sale of the Assets hereunder, if any, shall be paid by the Seller. Seller shall pay all costs and fees imposed by parties to Purchase Orders assigned to Buyer hereunder which may arise by reason of the Transactions. 2.3 Tax Allocation. Buyer and the Selling Parties will agree on a valuation solely for tax purposes of the aggregate consideration paid for transfer of the Assets. Buyer shall then, subject to the approval of 4 Selling Parties, which shall not unreasonably be withheld, determine an allocation of such consideration to broad categories constituting components of the Assets and shall determine the information to be included on the Form 8594 to be filed with respect to the Transactions. Each of the parties will report the purchase and sale of the Assets in accordance with the agreed upon valuation and allocation among such broad categories for all federal, state and local tax purposes. 2.4 Determination of Conversion Costs. Buyer and the Selling Parties acknowledge that the Conversion Costs cannot be determined at the time of the Closing Date. The Seller shall provide Buyer with its good faith determination (the "Seller's Determination") of the Conversion Costs within fifteen days after the Closing. The Seller shall include with the Seller's Determination a reasonably detailed statement showing how Seller arrived at the Seller's Determination. The Seller shall provide Buyer with reasonable access to its books and records to enable Buyer to determine whether it agrees with the Seller's Determination and shall provide such documentation to support its calculations as Buyer may reasonably request. If Buyer disagrees with Seller's Determination, Buyer shall inform the Seller of the reasons therefor and Buyer and the Seller shall meet to attempt in good faith to resolve any such disagreement within forty-five days of the Closing. If Buyer and Seller are unable to reach agreement on the final determination of the Conversion Costs within forty five days after the Closing, then Buyer and Seller shall either (i) agree to extend the period of time to reach such a final determination by mutual agreement or (ii) agree on an alternative method to reach such a final determination (e.g., by submitting such matter to a mutually-agreeable accounting firm). Until such time as the Conversion Costs are finally determined, the Conversion Costs for purposes of calculating the Purchase Price under Section 2.1 hereof shall be assumed to be $100,000. ARTICLE III CLOSING 3.1 Closing. The closing (the "Closing") of the Transactions contemplated by this Agreement are taking place at the offices of Irell & Manella LLP, 1800 Avenue of the Stars, Suite 900, Los Angeles, California 90067. The date of the Closing (the "Closing Date") is November 16, 1998. 3.2 Selling Parties Deliveries. At the Closing, the Selling Parties are delivering to the Buyer the following: 3.2.1 Bill of Sale. An executed general assignment, assumption and bill of sale with respect to the Assets in the form attached hereto as Exhibit A. 3.2.2 Warehouse Letter Agreement. An executed letter agreement (the "Warehouse Letter Agreement") from ARC Merchandising in the form attached hereto as Exhibit B. 3.2.3 Manufacture Letter Agreement. An executed letter agreement (the "Manufacture Letter Agreement") from ARC Colombia in the form attached hereto as Exhibit C. 5 3.2.4 Employment Agreements. Executed Employment Agreements with Buyer from each of Arcia and McConkey in the form attached hereto as Exhibit D. 3.2.5 Consent to Assignment. A consent from the Licensor to assignment of the License Agreement by Seller to Buyer in the form attached hereto as Exhibit E. 3.2 6 UCC-1 Financing Statement Clarification. An executed clarification with respect to the UCC-1 Financing Statement in favor of The CIT Group/Commercial Services, Inc. (filing number 970000124056) in the form attached hereto as Exhibit F. 3.3 Buyer Deliveries. At the Closing, the Buyer is delivering to Arcia and McConkey executed copies of their respective Employment Agreements with Buyer in the form attached hereto as Exhibit D. 3.4 Transfer of Title; Risk of Loss; Rescission. The parties acknowledge that the sale and transfer of title of the Inventory from Seller to Buyer shall occur from time to time when Seller ships such Inventory on behalf of Buyer as finished goods to Buyer's customers; provided, however, that transfer of title to the Finished Goods Inventory shall occur at the Closing. Seller shall bear all risk of loss, damage, impairment, destruction, confiscation or condemnation of or to the Inventory, or any portion thereof, prior to transfer of title. The Purchase Price shall be reduced on a dollar-for-dollar basis if, prior to transfer of title, the Inventory is lost, damaged, impaired, destroyed, confiscated or condemned (measured by dollar amount as shown on Exhibit 4.7 hereto); provided, however, that if more than fifty percent (50%) of the Inventory (measured by dollar amount as shown on Exhibit 4.7 hereto) is lost, damaged, impaired, destroyed, confiscated or condemned, then Buyer shall have the option of terminating the Transactions and all related matters, including the Employment Agreements and the option grants provided for therein. If Buyer exercises its termination right, the License Agreement shall revert to Seller automatically and without any further action by Buyer and Seller may thereafter exercise its rights pursuant to the License Agreement as if Agreement had never been executed. Such rescission shall not relieve Buyer from its payment obligations for any Inventory already sold to Buyer. 3.5 Default in Payments. If Buyer fails to make any payments to Seller or ARC Merchandising when due pursuant to Section 2.1 or Section 6.4 hereunder, and such failure continues for five (5) business days after written notice thereof: (i) Seller may upon written notice to Buyer (the "Election Notice") elect not to deliver any remaining Inventory and may sell such Inventory for its own account, to the third party buyer under an applicable Sales Order; and (ii) the assignment of the License Agreement shall, upon delivery of the Election Notice to Buyer, revert to Seller. Notwithstanding the foregoing, Seller may not elect the remedies described in clauses (i) and (ii) of the previous sentence (x) if such payment default is less than ten percent (10%) of the amount due at that time to Seller or ARC Merchandising, as applicable, (y) if Buyer cures such payment default prior to Seller's delivery of the Election Notice, or (z) at any time after Buyer has paid at least ninety percent (90%) of the Purchase Price. If Seller elects to deliver an Election Notice, Buyer may 6 elect upon written notice to Seller to terminate this Agreement and the Employment Agreements (including rescission of the option grants provided thereby), in which case none of the parties will have any further obligations thereunder. ARTICLE IV REPRESENTATIONS AND WARRANTIES OF THE SELLING PARTIES The Selling Parties jointly and severally represent and warrant to Buyer that each of the following statements is true and correct as of the date of this Agreement and as of the Closing Date: 4.1 Organization, Corporate Power and Authority. Seller is a corporation duly organized, validly existing and in good standing under the laws of the State of Florida and is duly qualified to transact business as a foreign corporation in all jurisdictions in which Seller conducts the Business, except where the failure so to qualify will not have a material adverse effect on the Assets or the Business. Seller has all requisite corporate power and authority to own, operate and lease the Assets, to conduct the Business, to execute and deliver this Agreement, and to perform its obligations hereunder. 4.2 Authorization of Agreements. The execution, delivery and performance by Seller of this Agreement and the consummation of the Transactions contemplated herein have been duly authorized by all necessary corporate action by Seller (including without limitation by the requisite vote of Seller's shareholders). This Agreement has been duly executed and delivered by each of the Selling Parties and constitutes the legal, valid and binding obligation of each of the Selling Parties, enforceable against each of the Selling Parties in accordance with its terms except as may be limited by bankruptcy, insolvency, reorganization, moratorium, and other similar laws and equitable principles relating to or limiting creditors' rights generally. 4.3 No Violation or Conflict. The execution, delivery and performance of this Agreement by each of Selling Parties do not (i) violate any provision of the Articles of Incorporation or Bylaws of Seller; (ii) contravene any law, rule, or regulation of any State or of the United States, or any order, writ, judgment, injunction, decree, determination or award currently in effect that affects or binds any of the Selling Parties; or (iii) result in any manner whatsoever in the violation or breach of, or constitute a default (or give rise to any right of termination, cancellation, or acceleration) under, any of the terms, conditions, or provisions of any license, permit, note, bond, mortgage, indenture, lease, contract, agreement or other instrument or obligation to which any of the Selling Parties is a party or by which any of the Selling Parties or any of their properties or assets may be bound, or result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of any of Selling Parties. 4.4 No Existing Defaults. None of the Selling Parties is in default under any license, permit, note, bond, mortgage, indenture, lease, contract, agreement or other instrument or obligation, whether written or oral, to which any of the Selling Parties is a party or by which any of the Assets are bound, and there exists no condition or event which, after 7 notice or lapse of time or both, would constitute a default in connection with any of the foregoing, except to the extent any of the foregoing would not have a material adverse effect on the Business or the Assets. 4.5 Approvals. No approval, authorization, consent, order or action of or filing with any court, administrative agency or other governmental authority, or any other third party (other than the consent of the Licensor under the License Agreement, which such consent has been obtained), is required to be obtained by any of the Selling Parties for the execution and delivery by the Selling Parties of this Agreement or the consummation of the Transactions contemplated herein. 4.6 Title to Assets. Seller holds good, valid and marketable title to the Assets, free and clear of restrictions on or condition to transfer or assignment and free and clear of all mortgages, liens, pledges, charges, security interests or other encumbrances of any kind or nature whatsoever. Except as set forth on Schedule 4.6, the Assets are in the sole possession of Seller. The delivery to Buyer of this Agreement and any other instruments of transfer of ownership contemplated by this Agreement will vest good and marketable title to the Assets in Buyer, free and clear of all mortgages, liens, pledges, charges, security interests or other encumbrances of any kind or nature whatsoever, at the times set forth in Section 3.4. Without limiting the generality of the foregoing, the Assets are not subject to any lien for federal, state or local taxes or assessments, whether or not perfected. 4.7 Inventory. Schedule 4.7 attached hereto sets forth a true and correct list of all of the Inventory, including the book value thereof (determined in accordance with generally accepted accounting principles applicable in the United States ("GAAP"), consistently applied, as of the date hereof. The Inventory is of good and merchantable quality and is free of any defects, latent or patent, and is useable or saleable, as applicable, in the ordinary course of the operations of the Business. None of the Inventory constitutes returned or repossessed goods. 4.8 Purchase Orders, Sales Orders and Manufacturing Costs. Schedule 4.8(a) attached hereto sets forth a true and correct list of all of the Purchase Orders, including the vendor, the dollar amount of the Purchase Order and the items ordered. Schedule 4.8(b) attached hereto sets forth a true and correct list of all of the Sales Orders, including the customer, the items ordered and the dollar amount of the order. The Purchase Orders have been placed in the ordinary course of business, consistent with past practice (including in terms of dollar amount and items ordered). True and correct copies of the Purchase Orders and the Sales Orders have been made available by the Selling Parties to the Buyer. Seller has provided to Buyer true and correct documentation regarding the full and entire cost of manufacturing and delivering to Miami, Florida the products which are to be sold and delivered pursuant to the Sales Orders. 4.9 License Agreement. The License Agreement is in full force and effect and Seller and the Licensor are in full compliance with all of the terms thereof. No circumstances exist which, with notice or the passage of time or both, would constitute a default under the License Agreement or otherwise permit the Licensor to terminate or cancel the license granted by the License Agreement. Seller's use of the trademark "Breaker Jeans" 8 and any other rights granted under the License Agreement to the best knowledge of the Selling Parties do not infringe or violate the intellectual property rights of any third party. Seller and its predecessor-in-interest have not received notice from any third party that the trademark "Breaker Jeans" or any other rights granted under the License Agreement violate or infringe the intellectual property rights of such third party. Seller has provided a true and correct copy of the License Agreement to Buyer. Except as set forth in the License Agreement, Seller is not required to pay any royalty, license fee or similar compensation in connection with any such intellectual property. 4.10 Labor Matters. Seller has no collective bargaining agreements or employment or consulting agreements of any kind or nature (other than employment arrangements terminable at will without liability on the part of the employer or upon payment of no more than the applicable statutory or regulatory severance or termination benefits). The Selling Parties are not aware of any labor dispute or labor trouble involving employees of Seller nor has there been any such disputes or trouble during the two years preceding the date of this Agreement. 4.11 Claims and Litigation. There are no claims, causes of action, actions, suits or proceedings relating to any of the Selling Parties pending or, to the knowledge of the Selling Parties, threatened against any of the Selling Parties at law or in equity, or before or by any federal, state or other governmental agency or instrumentality that might result in a material adverse effect on the Assets or the Business. To the knowledge of the Selling Parties, there are no orders, judgments or decrees of any court or governmental agency, that apply to any of the Selling Parties, the Business or any of the Assets. 4.12 Compliance with Laws. The Business has been and is being conducted in compliance in all respects with all applicable federal, state and local laws and required approvals, orders, licenses and permits. 4.13 Brokers and Finders. Except for the fee to Barry Ludlim of $.05 per garment sold by Buyer during the three-year period ending on the third anniversary of the Closing Date which utilizes the "Breaker Jeans" trademark (or any substitute trademark utilized by Buyer for the products currently sold by Seller), which Buyer assumes and agrees to pay, none of the Selling Parties nor any of their directors, officers, employees or agents has employed, or incurred any liability to, any broker, finder or agent for any brokerage fees, finder's fees, commissions or other amounts with respect to the sale of Assets, this Agreement or the Transactions contemplated herein. 4.14 True Copies. All documents furnished to Buyer by any of the Selling Parties pursuant to this Agreement are true and correct copies, and there are no amendments or modifications thereto except as set forth in such documents. 4.15 No Material Adverse Change; Operations in Ordinary Course. Since September 30, 1998, (i) there has been no material adverse change in the Business and no material adverse change affecting the Assets or the Business, and (ii) Seller has operated the Business only in the ordinary course, consistent with past practice. 9 4.16 Transfer. The transfer of the Assets contemplated herein will not leave Seller unable to meet its obligations to its creditors as they become due and the value of all of Seller's assets upon completion of the transfer contemplated herein will exceed the amount of its liabilities. 4.17 Accuracy of Representations and Warranties. No representation or warranty made by the Selling Parties in this Agreement or any disclosure schedule or certificate or other agreement delivered hereunder contains or will contain any untrue statement of a material fact or omits any material fact necessary to make the statements contained herein or therein not misleading. None of the Selling Parties knows of any fact which has resulted or which in the reasonable judgment of any of the Selling Parties, will result in a material change in the Business or the Assets which have not been set forth in this Agreement or otherwise disclosed in writing to Buyer. ARTICLE V BUYER'S REPRESENTATIONS AND WARRANTIES Buyer represents and warrants to the Selling Parties that each of the following statements is true and correct as of the date of this Agreement and as of the Closing Date: 5.1 Organization, Corporate Power and Authority. Buyer is a corporation duly organized, validly existing and in good standing under the laws of the State of California and is duly qualified to transact business as a foreign corporation in all jurisdictions in which Buyer conducts its business, except where the failure so to qualify will not have a material adverse effect on Buyer's ability to perform its obligations under this Agreement. Buyer has all requisite corporate power and authority to execute and deliver this Agreement and to perform its obligations hereunder. 5.2 Authorization of Agreements. The execution, delivery and performance by Buyer of this Agreement and the consummation of the Transactions contemplated herein have been duly authorized by all necessary corporate action by Buyer. This Agreement has been duly executed and delivered by Buyer and constitutes the legal, valid and binding obligation of Buyer, enforceable against Buyer in accordance with its terms except as may be limited by bankruptcy, insolvency, reorganization, moratorium, and other similar laws and equitable principles relating to or limiting creditors' rights generally. 5.3 No Violation or Conflict. The execution, delivery and performance of this Agreement by Buyer do not (i) violate any provision of the Articles of Incorporation or Bylaws of Buyer; (ii) contravene any law, rule, or regulation of any State or of the United States, or any order, writ, judgment, injunction, decree, determination or award currently in effect that affects or binds Buyer; or (iii) result in any manner whatsoever in the violation or breach of, or constitute a default (or give rise to any right of termination, cancellation, or acceleration) under, any of the terms, conditions, or provisions of any license, permit, note, bond, mortgage, indenture, lease, contract, agreement or other 10 instrument or obligation to which Buyer is a party or by which Buyer or any of its properties or assets may be bound, or result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of Buyer. 5.4 Financial Statements. Buyer has provided to Seller its unaudited balance sheet as of September 30, 1998 and its statements of operations for the three-month and nine-month periods ending September 30, 1998 (the "Financial Statements"). The Financial Statements have been prepared in accordance with GAAP, and in accordance with Buyer's usual practices, principles and procedures, except as set forth in the footnotes, if any, to such financial statements. Seller agrees to keep such Financial Statements strictly confidential. 5.5 Brokers and Finders. Except for the fee to Barry Ludlim of $.05 per garment sold by Buyer during the three-year period ending on the third anniversary of the Closing Date which utilizes the "Breaker Jeans" trademark (or any substitute trademark utilized by Buyer for the products currently sold by Seller), which Buyer assumes and agrees to pay, none of Buyer or any of its directors, officers, employees or agents has employed, or incurred any liability to, any broker, finder or agent for any brokerage fees, finder's fees, commissions or other amounts with respect to the sale of Assets, this Agreement or the Transactions contemplated herein. 5.6 Accuracy of Representations and Warranties. No representation or warranty made by Buyer in this Agreement or any disclosure schedule or certificate or other agreement delivered hereunder contains or will contain any untrue statement of a material fact or omits any material fact necessary to make the statements contained herein or therein not misleading. ARTICLE VI CONVENIENCE 6.1 Seller's Existence. After the Closing, Seller shall maintain its corporate existence for so long as shall be necessary for Seller to perform its obligations under this Agreement. 6.2 Letter Agreements. Seller and Arcia shall cause ARC Merchandising and ARC Colombia to comply with their obligations under the Warehouse Letter Agreement and the Manufacture Letter Agreement, respectively; provided, however, that the foregoing shall not require the Selling Parties to make any capital investments in ARC Merchandising or ARC Colombia. 6.3 Additional Transfer Documents. After the Closing, the Selling Parties shall from time to time, at Buyer's request and without further cost and expense to Buyer, execute and deliver to Buyer such other instruments of conveyance and transfer (including, without limitation, additional assignments suitable for filing or recording with respect to the Assets) and take such other action as Buyer may reasonably request so as more effectively to sell, assign, and transfer to Buyer title to and possession of the Assets as provided in this Agreement or otherwise to consummate the Transactions contemplated herein. 11 6.4 Manufacturing Services. Until the Purchase Price is paid in full, Buyer agrees to utilize ARC Merchandising (through its association with ARC Colombia) for manufacturing services (cutting, sewing, etc.) necessary to manufacture the Inventory into finished goods. The Selling Parties will cause ARC Merchandising to provide such services to Buyer on the same terms and conditions as ARC Merchandising currently provides to Seller. The Selling Parties and Buyer acknowledge that ARC Merchandising shall invoice Buyer for such services at the time of delivery of finished goods to Buyer (f.o.b. Miami) and Buyer will pay for such services on the Friday of the following week. No payments will be required for any services provided by ARC Merchandising if the Inventory being utilized or the finished goods are lost, damaged, impaired, destroyed, confiscated or condemned prior to delivery by ARC Merchandising to Buyer. 6.5 Noncompetition. The Selling Parties agree that, for a period of eighteen (18) months from the Closing Date or, if earlier, until the Employment Agreements are terminated by Buyer or are not renewed by Buyer in accordance with their terms when Arcia and McConkey are willing to renew, the Selling Parties will not, directly or indirectly, engage in, own, manage, operate, join, control or participate in the ownership, management, operation or control of any business engaged in the wholesale or retail sale or distribution of products that are the same as or similar to the finished goods sold or distributed by the Seller in the junior's market with a wholesale price point of between $12.00 and $15.00 per garment; provided, however, that the Selling Parties may own less than five percent (5%) of the shares of a public company engaged in such business. The foregoing covenant is a material part of the consideration for the purchase of the Assets.. 6.6 Purchase Orders. The parties acknowledge that a portion of the Purchase Price reflects payment to Seller for the Purchase Orders which are being acquired by Buyer. Seller agrees to segregate a portion of the Purchase Price necessary to pay the invoices for such Purchase Orders and agrees that it will pay such invoices when due. Seller shall deliver to Buyer (or at its direction) the materials received pursuant to the Purchase Orders. ARTICLE VII INDEMNIFICATION 7.1 Survival of Representations and Warranties. All representations and warranties made in this Agreement shall survive the closing of this Agreement. Any party learning of a misrepresentation or breach of any of its representations and warranties under this Agreement shall immediately give written notice thereof to all other parties to this Agreement. The representations and warranties of this Agreement shall terminate one year from the Closing Date and such representations and warranties shall thereafter be without force or effect except for any claim as to which notice has been given to the party to be charged prior to such expiration date; provided that the representations and warranties contained in Sections 4.2, 4.6, 4.9 and 5.2 hereof shall survive indefinitely. 12 7.2 Indemnification by the Selling Parties. The Selling Parties hereby jointly and severally agree to indemnify, defend and hold Buyer and its affiliates, directors, officers, employees, representatives, successors and assigns, harmless from and against any and all losses, liabilities, obligations, actions, suits, judgments, settlements, damages, costs and expenses, including but not limited to interest, penalties and actual attorneys' fees and expenses ("Losses") suffered by such parties and arising out of or due to: A. A breach of any representation, warranty or covenant of the Selling Parties contained in this Agreement or other writing delivered pursuant hereto. B. Any liability or obligation of the Selling Parties not expressly assumed by Buyer pursuant to Section 1.2 of this Agreement, including, but not limited to, any liability or obligation of the Business. C. Any liability or obligation for any taxes with respect to the Assets or the Transactions. 7.3 Buyer's Indemnification. Buyer agrees to indemnify, defend, and hold the Selling Parties and their affiliates, directors, officers, employees, representatives, successors and assigns, harmless from and against from and against any and all Losses suffered by such parties and arising out of or due to: A. A breach of any representation, warranty or covenant of the Buyer contained in this Agreement or other writing delivered pursuant hereto. B. The non-payment of any liability or obligation of Seller expressly assumed by Buyer pursuant to Section 1.2 of this Agreement. 7.4 Notice to Indemnifying Party. If any party (the "Indemnified Party") receives notice of any claim or other commencement of any action or proceeding with respect to which any other party is obligated to provide indemnification (the "Indemnifying Party") pursuant to Section 7.2 or Section 7.3, the Indemnified Party shall promptly give the Indemnifying Party written notice thereof, which notice shall specify, if known, the amount or an estimate of the amount of the liability arising therefrom; provided that the failure to give such notice shall not affect the Indemnifying Party's obligations hereunder except (and then only to the extent) that it is materially prejudiced thereby. The Indemnified Party shall not settle or compromise any claim by a third party for which it is entitled to indemnification hereunder, without the prior written consent of the Indemnifying Party (which shall not be unreasonably withheld) unless suit shall have been instituted against it and the Indemnifying Party shall not have taken control of such suit after notification thereof as provided in Section 7.5 of this Agreement. 7.5 Defense by Indemnifying Party. In connection with any claim giving rise to indemnity hereunder resulting from or arising out of any claim or legal proceeding by a person who is not a party to this Agreement, the Indemnifying Party at its sole cost and expense may, upon written notice to the Indemnified Party, assume the defense of any such claim or legal proceeding, and the Indemnifying Party shall advise the Indemnified Party in writing of any element 13 of the claim which the Indemnified Party believes is not covered by this indemnity. The Indemnified Party shall be entitled to participate in the defense of any such action, on any element of the claim not covered with its counsel and at its own expense. If the Indemnifying Party does not assume the defense of any such claim or litigation resulting therefrom, (a) the Indemnified Party may defend against and/or settle such claim or litigation, after giving notice of the same to the Indemnifying Party, on such terms as the Indemnified Party may deem appropriate, and (b) the Indemnifying Party shall be entitled to participate in (but not control) the defense of such action, with its counsel and at its own expense. The Indemnifying Party will not settle any claim or litigation which does not include as a term an unconditional release of the Indemnified Parties. ARTICLE VIII MISCELLANEOUS 8.1 Exhibits. All exhibits, schedules and lists attached to this Agreement or delivered pursuant to this Agreement, shall be deemed a part of this Agreement and incorporated herein as if fully set forth herein. 8.2 Expenses. Except as provided herein to the contrary, each party will bear its own fees and expenses in connection with the negotiation, preparation, execution of this Agreement and the Transactions. 8.3 Attorneys' Fees. In the event of any litigation between the parties to declare or enforce any provisions of this Agreement, the prevailing party or parties shall be entitled to recover from the losing party or parties, in addition to any other recovery and costs, reasonable attorneys' fees incurred in such litigation in both the trial and the appellate courts. 8.4 Integration. This Agreement, its exhibits and schedules, any other documents incorporated by reference herein or executed in connection herewith, constitute the entire Agreement of the parties hereto, and there are no promises, terms, conditions or obligations other than those contained herein or therein. This Agreement supercedes all prior communications, representations or agreements, verbal or written between the parties hereto and shall not be amended except in writing subscribed to by the parties hereto. 8.5 Cooperation. Each party hereto agrees, both before and after the Closing Date, to execute any and all further documents and writings and perform such other reasonable actions which may be or become necessary or expedient to effectuate and carry out the Transactions contemplated by this Agreement. 8.6 Remedies Not Exclusive. No remedy conferred by any of the specific provisions of this Agreement is intended to be exclusive of any other remedy, and each and every remedy will be cumulative and will be in addition to every other remedy given hereunder or now or hereafter existing at law or in equity or by statute or otherwise. The election of any one or more remedies will not constitute a waiver of the right to pursue other available remedies. 14 8.7 Waivers. With regard to any power, remedy or right provided herein or otherwise available to any party hereunder, (i) no waiver or extension of time will be effective unless expressly contained in a writing signed by the waiving party, and (ii) no alteration, modification or impairment will be implied by reason of any previous waiver, extension of time, or delay or omission in exercise of rights or other indulgence. 8.8 Notices. All notices under this Agreement will be in writing and will be delivered by personal service, facsimile, telegram, telecopy or certified mail (postage prepaid) to such address as may be designated from time to time by the relevant party, and which will initially be as set forth below. Any notice sent by certified mail will be deemed to have been given three (3) days after the date on which it is mailed. All other notices will be deemed given when received. No objection may be made to the manner of delivery of any notice actually received in writing by an authorized agent of a party. Notices will be addressed as follows or to such other address as the party to whom the same is directed will have specified in conformity with the foregoing: (i) If to any of the Selling Parties: ARC Manufacturing, Inc. 7100 N. W. 36th Avenue Miami, Florida 33147 Attn: Paul Arcia With a copy to: Thomas L. David, P.A. 1428 Brickell Avenue, Eighth Floor Miami, Florida 33131 (ii) If to Buyer: Jalate, Ltd. 2085 South Garfield Street Commerce, California 90040 Attn: President 8.9 Third-Party Benefits. Except as expressly provided herein, none of the provisions of this Agreement will be for the benefit of, or enforceable by, any third-party beneficiary. 8.10 Governing Law. All questions with respect to the Agreement and the rights and liabilities of the parties will be governed by the laws of the State of California, regardless of the choice of laws provisions of that state or any other jurisdiction. 8.11 Successors and Assigns; Assignment. This Agreement will be binding upon and inure to the benefit of the parties, their respective successors and permitted assigns. Neither this Agreement nor any of the parties' rights hereunder shall be assignable by either party without the prior written consent of the other party; provided Buyer may, without the consent of the Selling Parties, assign its rights under this Agreement to any of Buyer's affiliates. 15 8.12 Rules of Construction. 8.12.1 Headings. The Article and Section headings in this Agreement are inserted only as a matter of convenience, and in no way define, limit, extend or interpret the scope of this Agreement or of any particular Article or Section. 8.12.2 Number and Gender. Throughout this Agreement, as the context may require: (a) the masculine gender includes the feminine and neuter; and the neuter gender includes the masculine and feminine; (b) the singular tense and number includes the plural, and the plural tense and number includes the singular; and (c) the past tense includes the present, and the present tense includes the past. 8.12.3 Severability. The validity, legality or enforceability of the remainder of this Agreement will not be affected even if one or more of the provisions of this Agreement will be held to be invalid, illegal or unenforceable in any respect. 8.13 Agreement Negotiated. The parties hereto are sophisticated and have been represented by lawyers throughout the Transactions who have carefully negotiated the provisions hereof. As a consequence, the parties do not believe the presumption of the laws or rules of any jurisdiction relating to the interpretation of contracts against the drafter of any particular clause should be applied in this case and therefore waive its effects. 8.14 Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. [Remainder of Page Intentionally Left Blank] 16 IN WITNESS WHEREOF, THIS AGREEMENT has been executed as of the day and year first herein above written. Jalate, Ltd., A California corporation By: /s/ Vint Bacon ---------------------- Vint Bacon President ARC Manufacturing, Inc., A Florida corporation By: /s/ John Paul Arcia ---------------------- John Paul Arcia Co-President By: /s/ Dennis McConkey --------------------- Denis McConkey Co-President /s/ John Paul Arcia --------------------- John Paul Arcia /s/ Dennis McConkey --------------------- Dennis McConkey EX-10.3 4 EXHIBIT 10.3 1 EXHIBIT 10.3 G.E. CAPITAL FIRST FACTORS FACTORING AGREEMENT THIS FACTORING AGREEMENT (this "Agreement"), made and executed this 10th day of November, 1998, by and between JALATE, LTD. (the Client); and GE CAPITAL FIRST FACTORS CORPORATION (the "Factor"). 1. Appointment. Client appoints Factor as its sole factor with respect to all sales of its merchandise or rendition of services to customers and hereby offers to sell and assign only to Factor, as absolute owner, all Accounts Receivables arising out of such sales or services, including all such sales or services arising under any trade names or through any division or selling agent. "Accounts Receivable" shall mean and include accounts, contract rights, instruments, chattel paper, general intangibles, returned or repossessed goods arising out of or relating to the sale or other disposition of goods at any time or from time to time, all proceeds thereof and merchandise represented thereby. The assignment of Accounts Receivable to Factor shall vest in Factor all of Client's rights, securities, guaranties and liens with respect to each Account Receivable, including all rights of stoppage in transit, replevin, reclamation, and all claims of lien filed by Client or held by Client on personal property, and all rights and interest in the merchandise sold, and all of Client's defenses and rights of offset with respect to any payments received by Factor on Accounts Receivable, but Factor shall not be obligated to, and shall not be liable for, exercising or refusing to exercise any rights granted to Factor hereby. 2. Purchase of Accounts Receivable. Factor agrees to purchase from Client at the office of Factor all Accounts Receivable first approved by Factor in writing as to credit risk and terms of sale (each such approved Account Receivable being herein called a "Factor Risk Account Receivable"). All orders from customers including the amount and terms of each proposed sale or service to such customers shall be submitted in advance of purchase or rendition of service to Factor for prior written approval, which may be granted or withheld at Factor's sole discretion. Factor's approval is subject to withdrawal either orally or in writing at any time prior to delivery of merchandise or rendition of services, and shall be deemed no longer effective in any event if Client's delivery of merchandise or rendition of services is made more than thirty (30) days beyond the date specified for such delivery or rendition in the terms of sales submitted to Factor for its approval; or more than thirty (30) days from the date of Factor's approval if no delivery or rendition date has been specified. If more than 35% of the aggregate amount of Factor Risk Accounts Receivable outstanding at any time shall be due and payable from one customer, then to the extent that such percentage amount exceeds 35%, the excess shall be deemed to be Client Risk Accounts Receivable. Submission of orders for Factor's prior written approval shall not be required with regard to a sale made by Client in compliance with any customer credit line which may from time to time 2 be issued Client by Factor in its sole discretion, provided that shipments are made prior to the expiration date of the credit line approval. Any customer credit line issued by Factor may be amended or withdrawn by Factor in whole or in part at any time and for any reason without advance notice. The amount of all Accounts Receivable of each customer as to which Factor shall have approved a customer credit line shall, in the order in which they have arisen, be treated as Factor Risk Accounts Receivable up to the limit of the customer credit line in effect from time to time. Upon the receipt of payment from or issuance of credit to a customer with respect to a Factor Risk Account Receivable, the Accounts Receivable of such customer in excess of the customer credit line shall, to the extent of such payment or credit and in the order in which they have arisen, be treated as Factor Risk Accounts Receivable, unless prior to such payment or credit Factor shall have withdrawn the credit line approval. Factor's withholding or withdrawing of a customer order approval or credit line approval shall at all times be in Factor's sole discretion, and Factor's actions with regard thereto shall not render Factor liable to Client in any respect for damages or otherwise. Subject to Client's warranties and representation herein contained, Factor will assume the credit loss on each Factor Risk Account Receivable if the customer, after receiving and accepting delivery of goods or services, fails to pay in full the Factor Risk Account Receivable on its longest maturity solely because of its financial inability to pay. If, however, such failure to pay is due in whole or in part to any other cause, Factor shall not be responsible and shall have full recourse to Client. Factor at its option may purchase Accounts Receivable not approved as to credit risk or terms of sale (each such Account Receivable not approved by Factor being herein called a "Client Risk Account Receivable"), but each purchase of a Client Risk Account Receivable shall be with full recourse to Client and Client agrees to pay Factor on demand for each Client Risk Account Receivable. 3. Purchase Price. The purchase price of each Account Receivable (the "Purchase Price") is the gross amount of the Account Receivable, less any discounts made available or extended to the customer (which shall be computed on the shortest terms where optional terms are given), returns and allowances of any nature, and Factor's commission. After purchase of an Account Receivable by Factor, a discount, credit, unidentifiable payment or allowance may be claimed solely by the customer, and if not so claimed, such discount, credit, payment or allowance shall be the property of Factor. 4. Client Reserve Account. Factor shall establish on its books in Client's name a reserve account (the "Reserve Account") which Factor shall credit with the gross amount of all Accounts Receivable purchased by Factor from Client and which Factor shall debit with all advances made to Client or on its behalf, as well as all credits, discounts available to Client's customers, anticipations earned by Client's customers, factoring charges, interest and any other amounts chargeable to Client under this Agreement or any supplement hereto or any other agreement between Client and Factor. Factor shall furnish Client with advices of all credits and debits to the Reserve Account. Factor shall furnish Client with a monthly statement of its Reserve Account, and, unless exception is taken to this statement in writing mailed to Factor within thirty (30) days after receipt by Client, the monthly statement shall be deemed correct and conclusively binding upon Client. 3 5. Remittance of Funds to Client. As goods are shipped and Accounts Receivable, evidenced by invoices and shipping documents, are submitted to Factor with duly executed assignment schedules, Factor may, in its sole discretion, from time to time at Client's request make advances to Client against the Purchase Price of Accounts Receivable purchased by Factor hereunder, less a reserve equal to ten percent (10%) of all such unpaid Accounts Receivable. Factor retains the right to increase such reserve from time to time if, in Factor's discretion, the prospect of collection of the outstanding advances or any other indebtedness owing by Client to Factor, including any indebtedness with respect to unpaid Client Risk Accounts Receivable, or the ability of Client to pay or perform its obligations under this Agreement or any other agreement with Factor, becomes doubtful or insecure, or additional reserves are necessary to protect Factor against returns, claims or defenses of Client's customers with respect to Factor Risk Accounts Receivables or any other contingencies. All advances and other Obligations (as defined below) owing to Factor, including any debit balance in the Reserve Account and any amounts owing by Client to Factor for merchandise purchased from any other concern factored or financed by Factor or otherwise, are repayable by Client on demand and may be charged to the Reserve Account when due. 6. Warranties and Representations. Client warrants and represents that each Account Receivable sold and assigned to Factor hereunder: (a) shall be genuine and valid and shall represent a completed delivery or performance in fulfillment in every respect of the terms, conditions and specifications of a bona fide, uncancelled and unexpired sale or service in the ordinary course of business to a customer which is not affiliated with Client in full compliance with the specifications of such customer; (b) Client shall be at the time of delivery or performance the absolute owner of all merchandise and other property involved; (c ) except for Factor's interest therein, there are no security interests, liens or encumbrances thereon; (d) is enforceable for the full amount thereof and will be subject to no dispute or claim by the customer in whole or in part as to price, terms, quality, quantity, delay in shipment, offsets, counterclaims, contra accounts or any other defense of any other kind and character, real or claimed; (e) will be subject to no discounts, deductions, allowances, offsets, counterclaims or other contra items or to no special terms of payment which are not shown on the face of the invoice thereof; (f) will not represent a delivery of merchandise upon "consignment," "guaranteed sale," "sale or return," "payment on reorder" or similar terms; (g) is payable in United States Dollars and has been invoiced to the customer by an invoice that bears notice of the sale and assignment to Factor in compliance with the terms of this Agreement; and (h) will not represent a "pack, bill and hold" transaction unless Client furnishes Factor with a copy of the customer's purchase order and has obtained customer's agreement to grant Factor a security interest in the merchandise and to pay for the merchandise at the maturity date of the invoice irrespective of whether or not Client has received instructions to deliver the same. 7. Collateral. As security for all obligations, liabilities and indebtedness of Client to Factor, now existing or hereafter incurred, direct or indirect, absolute or contingent, whether created under this Agreement, any supplement hereto or any other agreement between Client and Factor or otherwise, including 4 without limitation, obligations owed by Client to others which Factor obtains by assignment (all of the foregoing being herein called the "Obligations"), Client grants Factor a security interest in all of Client's present and future accounts, contract rights, instruments, documents, chattel paper, general intangibles, returned or repossessed goods arising out of or relating to the sale or other disposition of goods at any time or from time to time, all books and records relating thereto, all proceeds thereof and merchandise represented thereby, and in all sums standing to the credit of Client and in any property of Client in Factor's possession. Recourse to security shall not at any time be required and Client shall at all times remain liable for the repayment upon demand of all Obligations at any time owing by Client to Factor. During the term of this Agreement, Client shall not sell or assign, negotiate, pledge or grant any security interest in its Accounts Receivable, inventory and proceeds thereof to anyone other than Factor, without Factor's prior written consent, except for sales of inventory in the ordinary course of business. 8. Invoicing. All invoices for merchandise sold or services rendered shall be prepared by Client and shall bear a notice that they have been assigned to, are owned by and are payable directly and only to Factor. Upon Factor's request, Client shall furnish Factor with copies of all invoices, accompanied by duly executed assignment schedules, original shipping or delivery receipts, and such other information or documents as Factor in its discretion may request from time to time. If Client fails to provide Factor with copies of such invoices (or the equivalent) or such proof of shipment or delivery when requested by Factor for any Factor Risk Account Receivable, such Factor Risk Account Receivable shall automatically become a Client Risk Account Receivable and Factor shall have no liability with respect thereto. Each invoice shall bear the terms of sale and no change from the original terms of sale shall be made without Factor's prior written consent. Factor reserves the right to mail original invoices to Client's customers at Client's expense; however, mailing, sending or delivery by Factor of a bill or invoice shall not be deemed to be any representation by Factor with respect thereto. 9. Payment of Accounts Receivable. All payments of Accounts Receivable and other payments on behalf of Client received by Factor shall be credited to Client's account on the day of receipt by Factor. No check, draft or other instrument received by Factor shall constitute final payment unless and until such check, draft or other instrument shall have been actually collected. The amount of the Purchase Price of any Factor Risk Account Receivable which remains unpaid will be deemed collected and will be credited to Client's account as of the earlier of the following dates: (a) the date of the Account Receivable's longest maturity if any proceeding or petition is instituted or filed by or against the customer for relief under any federal or state bankruptcy or insolvency law, code or act, or if a receiver or trustee is appointed for the customer; or (b) as of the last day of the fourth month following its longest maturity date if such Credit Risk Purchased Account remains unpaid as of such date without the happening of any of the events specified in the preceding clause (a). If any Factor Risk Account Receivable credited to Client's account is not paid for any reason other than the customer's financial inability to pay, Factor shall reverse the credit and charge Client's account accordingly and such Account Receivable shall then be deemed a Client Risk Account Receivable, and Client shall pay interest thereon as provided for herein. 5 10. Remittances. Without limiting the obligations of Client under Section 8 hereof, all remittances received by Client with respect to all of its Accounts Receivable purchased by Factor shall be held in trust for Factor, and Client shall immediately deliver to Factor the identical checks, drafts, monies or other forms of payment received, and Factor shall have the right to endorse Client's name on any check, draft or other form of remittance received, where such endorsement is required to effect collection. Client hereby appoints Factor or such person as Factor may name as its attorney-in-fact to execute all necessary documents in Client's name and do all things necessary to carry out this Agreement. Client ratifies and approves all acts of the attorney and agrees that neither Factor nor the attorney shall be liable for any acts of commission or omission nor for any error of judgement or mistake of fact or law. This power being coupled with an interest is irrevocable as long as Client is indebted to Factor in any manner. 11. Customer Disputes and Claims. Client agrees to notify Factor immediately of all returns and allowances and of all disputes with and claims made by customers and to adjust all such claims and disputes at its own expense, issuing credit memoranda promptly, but subject to Factor's approval. It is Factor's practice to allow a reasonable time for the settlement of disputes between Client and Client's customers without waiving Factor's right at any time to adjust any claims and disputes on a Factor Risk Account Receivable directly with the customer and to charge back to the Reserve Account at any time the full amount of the Account Receivable involved. Factor may at any time charge the Reserve Account the full amount of : (a) any customer deduction of not more than one hundred dollars; (b) any Factor Risk Account which is not paid in full when due for any reason other than the customer's financial inability to pay; (c) any Account for which there is a breach of any of Client's warranties or representations set forth herein; (d) any anticipation deducted by a customer on any Account; and (e) any Client Risk Account Receivable which is not paid in full when due. Any such charge back shall not be deemed to constitute a reassignment of the Account Receivable, and Factor shall retain a security interest therein as security for all Obligations owing to Factor. 12. Collection of Accounts; Returned Goods. As owner of the Accounts Receivable, Factor shall have the right to (a) bring suit, or otherwise enforce collection, of the Account Receivable in the name of Client or Factor, (b) modify the terms of payment, settle, compromise or release, in whole or in part, any amounts owing, on terms Factor may deem advisable, and (c) issue credits in the name of Client or Factor. Should any goods be returned or rejected by Client's customers or otherwise recovered by Client, Client shall segregate and hold such goods in trust for Factor, but at Client's sole risk and expense. Client shall also promptly notify Factor and, at Factor's request, will deliver such goods to Factor, pay Factor the invoice price thereof, or sell such goods at Client's expense for the purpose of paying Client's obligations to Factor. Once Client has granted or issued a discount, credit or allowance to a customer on any Account Receivable, Client shall have no further interest therein. Any remittances received by Client on account of any of the Accounts Receivable 6 shall be held by Client as trustee of an express trust for Factor's benefit, separate from its own property, and Client shall immediately deliver the same in kind properly endorsed to Factor. Factor may endorse Client's name on any check, instrument, draft or other document in payment of an Account Receivable. Any payments received from or for the account of a customer obligated on both Factor Risk Accounts Receivable and Client Risk Accounts Receivable shall be applied first to the Factor Risk Accounts Receivable irrespective of instructions of the customer. 13. Commissions. Client agrees to pay Factor a commission equal to forty-five one-hundredths percent (0.45%) of the gross amount of Accounts Receivable assigned to Factor hereunder up to the aggregate sum of $50,000,000.00 and thereafter, factoring commissions shall be reduced to four tenths of one percent (.40%) on the aggregate amount of all Accounts Receivable assigned to Factor in excess of the sum of $50,000,000.00 in any contract year. In any event, however, shall the commission payable to Factor be less than $2.50 for each invoice. All commissions payable hereunder shall be charged to the Reserve Account as of the date of receipt by Factor of the assignment schedules of the Accounts Receivable. The foregoing commission is based upon Client's maximum selling terms of no longer than sixty (60) days. On sales for which extended or additional terms are granted, the commission shall be increased by one-fourth of one percent (0.25%) for each thirty (30) days, or portion thereof, by which Client's selling terms are extended. Client shall pay Factor an administrative set up fee of $750.00 on November 30, 1998, which may be charged to Client's Reserve Account. 14. Interest. Client shall pay interest upon the average daily Funds Employed at the close of business each day at a rate equal to one-fourth of one percent (0.25%) per annum over the Prime Rate. Funds Employed shall mean gross Accounts Receivable outstanding on Factor's books less any balance outstanding in the Reserve Account to the credit of Client. If the Reserve Account should show a debit balance, such debit balance shall be added to gross Accounts Receivable outstanding in determining Funds Employed. The Prime Rate shall be defined as the interest rate announced from time to time by First Union National Bank as its prime or base lending interest rate which may not necessarily be its best lending rate. Interest will be calculated on a daily basis (computed on the actual number of days elapsed over a year of three hundred sixty (360) days) and shall be charged to the Reserve Account as of the last day of each month. If average daily Funds Employed reflect a credit balance, Factor shall credit the Reserve Account, as of the last day of the month, with interest on such average daily credit balance at a rate equal to three percent below the Prime Rate. The applicable Prime Rate for the month hereof shall be the Prime Rate in effect on the last day of the month preceding the date of this Agreement and the applicable Prime Rate for each month thereafter shall the Prime Rate in effect on the last day of the preceding calendar month. In computing interest payable by Client under this Agreement and any supplement hereto, all customer checks and other payments received by Factor shall be subject to bank clearance of two business days from the date of deposit. 15. Financial Statements and Information; Inspections. Client shall furnish Factor with annual financial statements audited by an independent accountant acceptable to Factor and also furnish on a timely basis interim 7 financial statements and other financial information upon Factor's request, including, but not limited to, monthly internal financial statements, all financial information furnished to the Securities Exchange Commission and Client's regular projections of cash flow and income. Client shall permit any representative of Factor to visit and inspect any of the properties of Client, to examine all books of accounts, records, reports and other papers, to make copies and extracts therefrom, and to discuss the affairs, finances and accounts of Client with its officers, employees, independent public accountants, creditors and depository institutions all at such reasonable times and as often as may be reasonably requested. 16. Financial Condition. Client warrants that it is solvent and shall remain solvent during the term of this Agreement; that any financial statements delivered to Factor accurately and fairly state Client's financial condition; that there has been no material adverse change in Client's financial condition as reflected in the statements since the date thereof nor do the statements fail to disclose any fact or facts which might materially adversely affect Client's financial condition; and there is no litigation pending or threatened, which taken in the aggregate if adversely determined, can reasonably be expected to have a material adverse affect on Client's financial condition. 17. Term of Agreement; Termination. This Agreement shall take effect on the date of acceptance by Factor and shall remain in full force and effect until terminated: (a) by Factor or Client as of its Anniversary Date or at any time thereafter upon the giving of not less than sixty (60) days prior written notice of termination to Factor or (b) by Factor at any time and without notice (unless otherwise specifically provided for) if any of the following events (each, an "Event of Default") shall occur: (i) On five calendar days notice if Client shall default in the payment of any of the Obligations on the due date thereof (whether due at stated maturity, on demand, upon acceleration or otherwise); (ii) any representation or warranty made in this Agreement or any supplement hereto, or in any other document executed in connection herewith, or any instrument, certification or financial statement furnished in compliance with or in reference hereto or thereto, or in any other agreement between Client and Factor, shall prove incorrect or misleading in any material respect when made or furnished; (iii) On 30 days notice if Client shall fail or neglect to perform, keep or observe any covenant or agreement contained in this Agreement or any supplement hereto or any other agreement between Client and Factor; (iv) Client or any guarantor of the Obligations shall file a petition, answer or consent seeking relief under Title 11 of the United States Bankruptcy Code, as now constituted or hereafter amended, or any other applicable Federal or state bankruptcy law or other similar law, or a receiver, liquidator, assignee, trustee, custodian, sequestrator or similar official shall be appointed for Client or any guarantor of the Obligations or any substantial part of its or his property, or on 30 days notice if Client or any guarantor shall have filed against it any such petition seeking relief under the Bankruptcy Code; (v) the occurrence of any event or condition which, alone or when taken together with all other events or conditions occurring or existing concurrently therewith, Factor determines (1) has or may be reasonably expected to have a material adverse effect upon Client's business, operations, properties, condition (financial or otherwise); (2) has or may be reasonably expected to have any 8 material adverse effect whatsoever upon the validity or enforceability of this Agreement or any other agreement between Client and Factor; (3) has or may be reasonably expected to have any material adverse effect upon any security for the Obligations, Factor's liens therein or the priority of such liens; or (4) materially impairs the ability of Client to perform its obligations under this Agreement or any other agreement between Client and Factor, or the ability of Factor to enforce and collect the Obligations or realize upon any of the security for the Obligations in accordance with the terms of this Agreement or any other agreement between Client and Factor or applicable law; (vi) Client becomes unable to meet its debts as they mature, fails, closes, suspends, or goes out of business; or (vii) there is a change (by death or otherwise) in Client's principal stockholders or owners. "Anniversary Date" means the last day of the twelfth (12th) month following the date of this Agreement. 18. Effect of Termination. Upon the effective date of termination, all Obligations of Client to Factor shall become immediately due and payable without further notice or demand irrespective of any maturity dates established prior thereto. However, no such termination shall release or abrogate any security interest held by Factor in any collateral of Client until all of Client's Obligations to Factor, including commissions and interest and all costs, expenses and attorney fees as herein provided, are paid in full. In the event that Factor shall cease to act as factor for Client, Client agrees to furnish Factor with indemnity satisfactory to Factor that will protect Factor against possible charges to Client under the terms of this Agreement and with a release satisfactory to Factor of all claims Client may have against Factor and until Client does so, Factor may hold any balance remaining to Client's credit in the Reserve Account as security for all Obligations of Client to Factor. Client shall pay Factor upon demand all costs and expenses, including reasonable attorney fees, incurred by Factor to obtain or enforce payment of any Obligations due from Client to Factor or in the prosecution or successful defense of any action or proceeding concerning any matter arising out of or related to this Agreement, the factoring of the Client's Accounts Receivable by Factor, or any Obligations owing by Client to Factor. 19. Lien Perfection. Client agrees to execute and deliver to Factor all financing statements provided for by the Uniform Commercial Code and all other documents or instruments which may be required by law or which Factor may request to perfect its first priority security interest hereunder and to cooperate with Factor in the filing, recording or renewal thereof, and to pay all filing and recording fees and expenses related thereto, and Client authorizes Factor and any person whom Factor designates as Client's attorney with power to sign Client's name thereon. This power being coupled with an interest is irrevocable as long as Client is indebted to Factor in any manner. Client shall execute, acknowledge and/or deliver such other instruments as assurances as may reasonably be requested to effectuate the purposes of this Agreement. At Factor's option, this Agreement may be filed as a financing statement. 20. Preferences. Client shall indemnify and hold Factor harmless from any loss, damage or expense (including attorneys' fees) incurred by Factor as a result of a claim made at any time against Factor for the repayment or recovery of any amount received by Factor in payment of any Client Risk Account 9 Receivable by the payor or legal representative thereof (including a trustee in bankruptcy or assignee for the benefit of creditors) on the grounds of preference under the provisions of the Bankruptcy Code or any other federal or state insolvency law. If such claim is ever made against Factor, in addition to all of Factor's other rights under this Agreement, Client shall pay to Factor on demand the full net face amount of any such Client Risk Account Receivable, or if Factor so elects, Factor shall have the right to charge against the Reserve Account the full net face amount of any such Client Risk Account Receivable, but such charge back shall not be deemed a reassignment thereof. The provisions of this Section 17 shall survive the termination of this Agreement and the payment in full of the Obligations. 21. Notices. Any notices, demands, consents, or other writings or communications permitted or required by this Agreement shall be given by facsimile transmitter, overnight air courier or certified mail, return receipt requested, addressed to the party to be notified as follows: (a) If to Factor: GE Capital First Factors Corporation 777 South Figueroa Suite 3850 Los Angeles, California 90017 Facsimile No. ---------------- (b) If to Client: Jalate, Ltd. 2085 Garfield Avenue City of Commerce, California 90040 Facsimile No. 323-728-0269 or to such other address as each party may designate for itself by notice given in accordance with this Section 21. Any written notice or demand that is not sent in conformity with the provisions hereof shall nevertheless be effective on the date that such notice is actually received by the noticed party. 22. Miscellaneous. This Agreement, together with any supplement hereto, contains the entire agreement between the parties, and cannot be modified, altered, changed or amended orally. This Agreement is intended solely for the benefit of Factor and Client, and no other person or party (including any guarantor), is intended to be benefited hereby in any way. The captions in this Agreement are for convenience of reference only and shall not define or limit any of the terms or provisions hereof. Failure of Factor to exercise any rights granted to it hereunder upon any breach or default by Client shall not be deemed a waiver thereof in the event of further breaches or defaults. The remedies of Factor hereunder shall be deemed to be cumulative and not exclusive. This Agreement shall be binding upon, and inure to the benefit of, the parties hereto and their respective successors and assigns and shall become effective only from the date of Factor's written acceptance. This Agreement is made and accepted and shall be construed, interpreted and enforced in accordance with the laws of the State of California, without regard to conflict of law principles, and Client irrevocably consents and submits to the jurisdiction of state courts of, and federal courts in, the state of California, for the purpose of any suit, action or proceeding relating hereto. 10 23. WAIVER OF JURY TRIAL. TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, FACTOR AND CLIENT HEREBY WAIVE, IRREVOCABLY AND UNCONDITIONALLY, TRIAL BY JURY IN ANY ACTION BROUGHT ON, UNDER OR BY VIRTUE OF OR RELATING IN ANY WAY TO THIS AGREEMENT OR ANY SUPPLEMENT HERETO OR ANY OF THE OTHER DOCUMENTS EXECUTED IN CONNECTION HEREWITH, OR ANY CLAIM, DEFENSE, RIGHT OF SETOFF OR OTHER ACTION PERTAINING HERETO, OR TO ANY OF THE FOREGOING. 24. Special Covenants. For so long as any of the Obligations are outstanding, Client covenants that, unless otherwise consented to by Factor in writing, it shall comply with the covenants set forth in Schedule A attached hereto. IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement on the day and year first above written. JALATE, LTD. By: /s/ John Diesenbruch ------------------------------------------- Title: Vice President Finance and Chief Financial Officer -------------------------------------- Accepted in Los Angeles, California: GE CAPITAL FIRST FACTORS CORPORATION By: /s/ Dave Reza --------------------------------- Title: Senior Vice President --------------------------- Date: November 10, 1998 ---- 11 SCHEDULE A TO FACTORING AGREEMENT Special Covenants of Client ---------------------------- For the purposes of this Schedule A to the Factoring Agreement, the following terms shall have the following meanings: Affiliate as to of its Subsidiaries, any other person (other than a Subsidiary): (i) which directly or indirectly through one or more intermediaries controls, or is controlled by, or is under common control with, Client or any of its Subsidiaries; (ii) which beneficially owns or holds 5% or more of any class of the stock of Client or any of its Subsidiaries; or (iii) 5% or more of the stock (or in the case of a person which is not a corporation, 5% or more of the equity interest) of which is beneficially owned or held by Client or any of its Subsidiaries. "Consolidated" the consolidation in accordance with GAAP of the accounts or other items as to which such term applies. "Consolidated Adjusted Tangible Assets" all assets of Client and its Subsidiaries which would in accordance with GAAP be classified as assets on their Consolidated balance sheet except: (i) any surplus resulting from any write up of assets subsequent to the date of the Agreement; (ii) deferred assets, other than prepaid insurance and prepaid taxes; (iii) patents, copyrights, trademarks, trade names, non compete agreements, franchises and other similar intangibles; (iv) goodwill, including any amounts, however designated on such Consolidated balance sheet, representing the excess of the purchase price paid for assets or stock over the value assigned thereto on the books of Client and its Subsidiaries; (v) unamortized debt discount and expense; and (vi) Accounts Receivable, notes and other receivables due from Affiliates, officers or employees. "Consolidated Adjusted Tangible Net Worth" at any date means a sum equal to: (i) the net book value (after deducting related depreciation, obsolescence, amortization, valuation, and other proper reserves) at which the Consolidated Adjusted Tangible Assets of Client and its Subsidiaries would be shown on a Consolidated balance sheet at such date in accordance with GAAP, minus (ii) the amount at which the liabilities of Client and its Subsidiaries (other than capital stock and surplus) would be shown on such Consolidated balance sheet in accordance with GAAP. "Consolidated Current Assets" at any date means the amount at which all of the current assets of Client and its Subsidiaries would be properly classified as Consolidated current assets shown on a Consolidated balance sheet at such date in accordance with GAAP except that amounts due from Affiliates and investments in Affiliates shall be excluded therefrom. "Consolidated Current Liabilities" at any date means the amount at which all of the Consolidated current liabilities of Client and its Subsidiaries would be properly classified as Consolidated current liabilities on a Consolidated balance sheet at such date in accordance with GAAP. 12 "Consolidated Working Capital" at any date the excess of Consolidated Current Assets at such date over Consolidated Current Liabilities at such date. "GAAP" generally accepted accounting principles in the United States of America in effect from time to time. "Subsidiary" any corporation of which Client owns, directly or indirectly through one or more intermediaries, more than fifty percent (50%) of the stock at the time of determination. For so long as the Agreement is in effect, and thereafter for so long as there are any Obligations to Factor, Client covenants that, unless otherwise consented to by Factor in writing, it shall comply with the following financial covenants: (a) Consolidated Adjusted Tangible Net Worth. Client and its Subsidiaries shall maintain at all times a Consolidated Adjusted Tangible Net Worth of not less than the amount shown below for the period corresponding thereto: Consolidated Adjusted Period Tangible Net Worth ------ --------------------- SEE ATTACHED EXHIBIT (b) Consolidated Working Capital. Client and its Subsidiaries shall achieve maintain at all times Consolidated Working Capital of not less than the amount shown below for the period corresponding thereto: Period Consolidated Working Capital ------ ---------------------------- SEE ATTACHED EXHIBIT 13 SCHEDULE A EXHIBIT 1
Nov-98 Dec-98 Jan-99 Feb-99 Mar-99 Apr-99 Tangible Net Worth: Projected $ 1,204 $ 1,070 $ 1,062 $ 1,221 $ 1,748 $1,942 Covenant 750 750 850 1,000 1,500 1,500 Working Capital: Projected $ (999) $ (1,195) $ (1,178) $ (942) $ (438) $ (118) Covenant (1,250) (1,500) (1,500) (1,500) (1,000) (750)
May-99 Jun-99 Jul-99 Aug-99 Sep-99 Oct-99 Tangible Net Worth: Projected $ 2,242 $ 2,606 $ 2,819 $ 2,938 $ 2,994 $ 3,456 Covenant 1,750 1,750 2,000 2,000 2,000 2,500 Working Capital: Projected $ 142 $ 649 $ 847 $ 1,083 $ 1,163 $ 1,704 Covenant (500) 0 250 500 500 1,000
Nov-99 Dec-99 Tangible Net Worth: Projected $ 3,319 $ 3,109 Covenant 2,500 2,500 Working Capital: Projected $ 1,596 $ 1,416 Covenant 1,000 1,000
EX-27 5 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM JALATE, LTD. CONDENSED BALANCE SHEET AS OF SEPTEMBER 30, 1998 AND CONDENSED STATEMENT OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH STATEMENTS FILED IN JALATE, LTD.'S QUARTERLY REPORT FILED ON FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1998. 1,000 9-MOS DEC-31-1998 JAN-01-1998 SEP-30-1998 64 0 569 231 3,680 4,249 3,359 1,819 6,517 4,764 88 0 0 5,576 (4,386) 6,517 36,222 36,222 26,575 26,575 0 245 766 104 0 104 0 0 0 104 0.03 0.03
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