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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
X EXCHANGE ACT OF 1934
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For the quarterly period ended September 30, 1997
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_______ TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from _______________ to _______________
Commission File Number: 333-22895
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Pivot Rules, Inc.
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(Exact name of small business issuer as specified in its charter)
New York 13-3612110
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
42 West 39th Street
New York, NY 10018
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(Address of principal executive offices)
(212)944-8000
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(Issuer's telephone number)
80 W. 40th St. NY, NY 10018
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(Former name, former address, and former fiscal year,
if changed since last report)
Check whether the issuer (1)filed all reports required to be filed by Section
13 or 15(d)of the Exchange Act during the past 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 ____ No X
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State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date.
Class Outstanding as of November 10, 1997
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Common Stock, par value $.01 per share 2,700,000
Transitional Small Business Disclosure Format (check one): Yes No X
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PIVOT RULES, INC.
TABLE OF CONTENTS
<TABLE>
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PAGE
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PART I - FINANCIAL INFORMATION
Item 1. Condensed Financial Statements
Condensed Balance Sheets as of September 30, 1997 (unaudited)
and December 31, 1996 ................................................................ 2
Condensed Statements of Operations for the nine months ended
September 30, 1997 and 1996 (unaudited)............................................... 3
Condensed Statements of Operations for the three months ended
September 30, 1997 and 1996 (unaudited)............................................... 4
Condensed Statements of Cash Flows for the nine months ended
September 30, 1997 and 1996 (unaudited)............................................... 5
Notes to Condensed Financial Statements..................................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................................. 9
PART II - OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds........................................................... 13
Item 6. Exhibits and Reports on Form 8-K ................................................................... 15
SIGNATURES .............................................................................................. 16
</TABLE>
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PART I - FINANCIAL INFORMATION
Item 1 - Condensed Financial Statements
PIVOT RULES, INC.
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996*
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ASSETS (UNAUDITED)
<S> <C> <C>
CURRENT ASSETS
Cash ....................................................... $ 88,000 $ 33,000
Funds deposited with factor................................. 2,494,000 --
Due from factor ............................................ 1,262,000 176,000
Non-factored receivables.................................... 63,000 45,000
Inventories ................................................ 1,476,000 835,000
Prepaid expenses and other current assets .................. 526,000 69,000
Income taxes receivable .................................... 90,000 --
Deferred income taxes ...................................... 97,000 97,000
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Total current assets .................................. 6,096,000 1,255,000
PROPERTY AND EQUIPMENT, NET .................................... 688,000 89,000
DEFERRED COSTS AND OTHER ASSETS ................................ 176,000 292,000
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Total ................................................. $ 6,960,000 $ 1,636,000
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of notes payable ........................... $ -- $ 230,000
Short-term loan payable .................................... -- 279,000
Due to factor .............................................. -- 123,000
Accounts payable, accrued expenses and other
current liabilities ..................................... 1,160,000 336,000
Income taxes payable ....................................... -- 112,000
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Total current liabilities ............................. 1,160,000 1,080,000
NOTES PAYABLE, less current portion ............................ -- 135,000
DEFERRED INCOME TAXES .......................................... 12,000 12,000
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1,172,000 1,227,000
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COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Preferred stock - $.01 par value; 2,000,000 authorized and
no shares authorized, respectively
Common stock - $.01 par value; 15,000,000 and 10,000,000 Shares
authorized, respectively; 2,700,000 and 1,200,000
Shares issued and outstanding, respectively ............. 27,000 12,000
Additional paid-in capital ................................ 6,425,000 397,000
Accumulated deficit ........................................ (664,000) --
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Total shareholders' equity............................. 5,788,000 409,000
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Total ................................................. $ 6,960,000 $ 1,636,000
============== ==============
</TABLE>
* Derived from audited financial statements.
The accompanying notes are an integral part of these condensed
financial statements.
2
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PIVOT RULES, INC.
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
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1997 1996
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<S> <C> <C>
Sales .......................................................... $ 6,616,000 $ 4,284,000
Less returns and allowances .................................... 197,000 378,000
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Net sales ............................................... 6,419,000 3,906,000
Cost of sales .................................................. 4,677,000 3,183,000
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Gross profit ............................................ 1,742,000 723,000
Selling, marketing, design and administrative expenses ......... 2,002,000 953,000
--------------- --------------
Operating loss ................................................. (260,000) (230,000)
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Other income (expense)
License fee income .......................................... 44,000 74,000
Interest income.............................................. 96,000 --
Other income ................................................ -- 50,000
Amortization and write-off of deferred costs for
Bridge financing........................................ (286,000) --
Interest expense and factoring charges ...................... (328,000) (261,000)
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(474,000) (137,000)
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Loss before taxes .............................................. $ (734,000) $ (367,000)
Income tax benefit ............................................. 70,000 --
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Net loss........................................................ $ (664,000) $ (367,000)
=============== =============
Net loss per share.............................................. $(.34) $(.31)
======== ======
Weighted average shares outstanding............................. 1,963,736 1,200,000
========= =========
</TABLE>
The accompanying notes are an integral part of these
condensed financial statements.
3
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PIVOT RULES, INC.
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
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1997 1996
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<S> <C> <C>
Sales .......................................................... $ 2,027,000 $ 1,069,000
Less returns and allowances .................................... 14,000 78,000
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Net sales ............................................... 2,013,000 991,000
Cost of sales .................................................. 1,448,000 898,000
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Gross profit ............................................ 565,000 93,000
Selling, marketing, design and administrative expenses ......... 738,000 219,000
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Operating loss ................................................. (173,000) (126,000)
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Other income (expense)
License fee income .......................................... 2,000 19,000
Interest income ............................................. 60,000 --
Interest expense and factoring charges ...................... (43,000) (85,000)
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19,000 (66,000)
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Loss before taxes .............................................. $ (154,000) $ (192,000)
Income tax benefit ............................................. -- --
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Net loss........................................................ $ (154,000) $ (192,000)
=============== ===========
Net loss per share.............................................. $(.06) $(.16)
===== =====
Weighted average shares outstanding............................. 2,700,000 1,200,000
========= =========
</TABLE>
The accompanying notes are an integral part of these
condensed financial statements.
4
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PIVOT RULES, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
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1997 1996
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<S> <C> <C>
Cash flows from operation activities
Net loss.................................................... $ (664,000) $ (367,000)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Loss on equipment disposal............................. 12,000 --
Amortization of discount and deferred costs
on bridge financing.................................. 388,000 --
Depreciation and amortization.......................... 43,000 34,000
Changes in operating assets and liabilities
(Increase) decrease in
Inventories...................................... (641,000) 907,000
Non factored receivables......................... (18,000) 6,000
Prepaid expenses and other current assets ....... (457,000) (43,000)
Other assets..................................... (15,000) (12,000)
Income taxes receivable.......................... -- (4,000)
Increase (decrease) in
Accounts payable and accrued expenses............ 824,000 184,000
Income taxes payable............................. (202,000) --
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Net cash provided by (used in) operating activities ............ (730,000) 705,000
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Cash flows from investing activities
Purchase of property and equipment.......................... (644,000) (35,000)
Trademark costs............................................. (8,000) (8,000)
Funds deposited with factor ................................ (4,920,000) --
Funds transferred to operations from factor ................ 2,426,000 --
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Net cash used in investing activities .......................... (3,146,000) (43,000)
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Cash flows from financing activities
Deferred costs associated with bridge financing and
initial public offering................................... (485,000) --
Net proceeds from bridge financing.......................... 1,122,000 --
Warrants issued with bridge financing ...................... 168,000 --
Net proceeds from initial public offering .................. 6,479,000 --
Payments of notes payable and short-term loan .............. (644,000) (161,000)
Payment of bridge financing................................. (1,500,000) --
Net change in due to/from factor............................ (1,209,000) (493,000)
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Net cash provided by (used in) financing activities ............ 3,931,000 (654,000)
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NET INCREASE IN CASH............................................ 55,000 8,000
Cash balance - December 31...................................... 33,000 54,000
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Cash balance - September 30..................................... $ 88,000 $ 62,000
============= ==================
Supplemental disclosure of cash flow information:
Cash paid during the period for
Interest................................................. $ 3,000 $ 113,000
============== ==================
Income taxes............................................. $ 7,000 $ --
============== ==================
</TABLE>
The accompanying notes are an integral part of these
condensed financial statements.
5
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PIVOT RULES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
NOTE A - BASIS OF PRESENTATION
The condensed financial statements included herein have been prepared
by Pivot Rules, Inc. (the "Company"), without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed
or omitted pursuant to such rules and regulations, although management of the
Company believes that the disclosures are adequate to make the information
presented not misleading. These condensed financial statements should be read
in conjunction with the condensed notes thereto. In the opinion of management
of the Company, the accompanying unaudited condensed financial statements
include all adjustments, consisting of only normal recurring adjustments,
necessary to fairly present the results for the interim periods to which these
financial statements relate.
These financial statements should be read in conjunction with the
Registration Statement filed with the Securities and Exchange Commission on
Form 8-A.
The results of operations of the Company for the three and nine months
ended September 30, 1997 are not necessarily indicative of the results to be
expected for the full year.
NOTE B - THE COMPANY
The Company designs, sources and markets a full collection of golf
sportswear with a fun attitude and style for men under the Pivot Rules brand
name.
NOTE C - SIGNIFICANT ACCOUNTING POLICIES
1. INVENTORIES
Inventories, which consist of finished goods, are valued at the lower
of cost or market. Cost is determined by the first-in, first-out method.
2. EARNINGS PER SHARE
Earnings per share are computed by dividing net income by the weighted
average number of shares of common stock outstanding and after giving effect
to the stock split, on January 2, 1997.
3. NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, Earnings Per Share, which
is effective for financial statements for both interim and annual periods
ending after December 15, 1997. Early adoption of the new standard is not
permitted. The new standard eliminates primary and fully diluted earnings per
share and requires presentation of basic and diluted earnings per share
together with disclosure of how the per share amounts were computed.
Management has not yet determined the impact that this pronouncement will have
on the Company's financial statements.
6
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PIVOT RULES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
NOTE D - BRIDGE FINANCING
On January 2, 1997, the Company issued 15 units, each consisting of one
convertible subordinated secured promissory note in the principal amount of
$100,000 per unit ("Note") and warrants to purchase 40,000 shares of common
stock of the Company, no par value, at an exercise price of $2.50
("Warrants"), for gross proceeds of $1,500,000. Net proceeds amounted to
$1,290,000 after underwriter expenses and brokerage fees, but before
additional debt issuance costs. A portion of the gross proceeds has been
allocated to the Warrants based on their estimate of fair market value,
resulting in approximately $168,000 of original issue discount and a $168,000
increase in paid-in capital.
Interest on the Notes accrued at a rate of 10% per annum from January
2, 1997 through April 30, 1997, and at the rate of 12% per annum thereafter
until such notes were repaid from the proceeds of the Company's initial public
offering ("IPO") in May 1997.
In May 1997, 237,000 out of the 600,000 Warrants issued pursuant to the
bridge financing were surrendered by the Warrant holders. The cancellation of
such Warrants resulted in a reduction of interest expense and additional
paid-in capital of $66,000. The remaining Warrants were converted in May 1997
(on a one-for-one basis) into warrants with the same terms sold in the IPO
("IPO Warrants"). The IPO Warrants are exercisable at $5.00 per share,
commencing in May 15, 1998 and expiring at the close of business on May 15,
2002.
NOTE E - COMMITMENTS AND CONTINGENCIES
1. EMPLOYMENT CONTRACTS
In March 1997, the Company entered into an employment agreement with
its Executive Vice President of Sales ("VP of Sales"). The employment
agreement expires on March 16, 2002. Pursuant to the employment agreement, the
VP of Sales is entitled to a base salary and is eligible for a discretionary
annual bonus in 1997 and in subsequent years a bonus contingent on achieving
certain performance objectives. Pursuant to the employment agreement, the VP
of Sales is also entitled to annual raises to be determined by the Board of
Directors in its discretion, but subject to certain specified minimum amounts,
as well as an annual option grant.
In March 1997, the Company entered into an employment agreement with
its Vice President of Operations, which expires on February 28, 2001. The
employment agreement provides for a base salary and discretionary annual
bonuses. In addition, the employment agreement provides for annual raises to
be determined by the Board of Directors in its discretion but subject to
certain specified minimums, and an annual option grant contingent on achieving
certain specified performance objectives.
In September 1997, the Company entered into an employment agreement
with its Chief Creative Officer, which expires on December 31, 2000. The
employment agreement provides for a base salary and discretionary annual
bonuses, together with a one-time bonus contingent on achieving certain
targeted sales requirements. In addition, the employment agreement provides
for annual raises to be determined by the Board of Directors in its discretion
but subject to certain specified minimums, and an option grant upon
commencement of employment.
In October 1997, the Company entered into an employment agreement with
its Vice President of Corporate Sales, which expires on December 31, 2000. The
employment agreement provides for a base salary and annual bonuses contingent
on achieving certain specified performance objectives. In addition, the
employment agreement provides for annual raises and option grants, each
contingent upon meeting certain targeted sales requirements.
7
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PIVOT RULES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
2. OPERATING LEASE
In May 1997, the Company signed a lease for a new office and showroom
space. The term of the lease is from September 1, 1997 through May 31, 2008.
Annual minimum rentals, excluding utilities, are $81,000 through May 31, 2003
and $90,000 for the remaining periods.
3. NEW OFFICE CONSTRUCTION
The Company has entered into various contracts totaling $400,000 for
the construction of its new office space. The construction was completed on
September 30, 1997. All unpaid amounts relating to the construction were
accrued as of September 30, 1997.
NOTE F - AUTHORIZED SHARES
In May 1997, the Company's Board of Directors authorized a new class of
2,000,000 shares of preferred stock, $.01 par value per share, and increased
the aggregate number of shares of Common Stock authorized for issuance from
10,000,000 shares to 15,000,000 shares.
NOTE G - STOCK OPTION PLAN
In May 1997, the Company's Board of Directors adopted a stock option
plan (the "Plan") for the purpose of encouraging key employees, consultants
and directors who are not employees to acquire a proprietary interest in the
growth and performance of the Company. As of October 31, 1997, 117,000 shares
were granted under the Plan, all of which have an exercise price of $5.00. The
maximum number of shares that may be granted under the Plan is 200,000.
NOTE H - INITIAL PUBLIC OFFERING
The Company completed the IPO in May 1997. The Company received net
proceeds of $6,479,000, of which approximately $2,030,000 was used to repay
Company indebtedness, including the repayment of notes issued by the Company
in connection with the bridge financing. The funds from the IPO were deposited
with the Company's factor and invested at a rate of 2% below prime. As a
result of the satisfaction of the bridge loan, the Company has written-off
$80,000 of unamortized debt discount and $233,000 of unamortized debt issuance
costs.
8
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Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
PIVOT RULES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The Company designs, sources and markets a full collection of golf
sportswear with a fun attitude and style for men under the Pivot Rules brand
name. Its current products include knit and woven shirts, sweaters,
sweatshirts, pants, shorts, outerwear, hats and socks, many of which carry the
Company's distinctive "Three Golfer" logo. The Company focuses its design
efforts on creating products with updated styling, innovative design, and
superior comfort and fit, utilizing natural fibers and bright colors.
In September 1996, as a result of increasing competition in the "upper
moderate" price segment of the golf lifestyle apparel market, the Company
initiated a strategy of repositioning its products into the "moderate" price
segment and expanding distribution to focus on higher-volume retailers.
Historically, the Company sold its products in the "upper moderate"
price segment, primarily to better department stores, specialty stores, and
catalogs. Because such retailers typically purchased small quantities of a
given product style, the Company utilized small production runs and its
profitability was dependent upon high margins. By refocusing its marketing
efforts on the "moderate" price segment of the golf lifestyle apparel market,
the Company is taking advantage of the greater distribution opportunities
available and the resulting larger order sizes in an effort to increase gross
profit through sales growth and improved sourcing.
RESULTS OF 0PERATIONS
Nine months ended September 30, 1997 ("First Nine Months of 1997")
compared to Nine months ended September 30, 1996 ("First Nine Months of 1996")
The Company's net sales increased by $2,513,000, or 64.3%, to
$6,419,000 in the First Nine Months of 1997 from $3,906,000 in the First Nine
Months of 1996. This increase was attributable to an increase in unit volume
of the Company's new customers, which was partially offset by average lower
selling prices of its men's sportswear collection both resulting from the
Company's shift to the "moderate" price segment. Revenues derived from the
sale of the men's sportswear grew $3,433,000, or 120.8%, to $6,275,000 in the
First Nine Months of 1997 from $2,842,000 for the First Nine Months of 1996.
The remaining portion of net sales in the First Nine Months of 1997 and the
First Nine Months of 1996 was attributable to the women's sportswear
collection which the Company chose to discontinue during 1996. The Company
continues to sell a limited amount of women's apparel on a contract basis.
Returns and allowances decreased by $181,000, or 47.9%, to $197,000 in
the First Nine Months of 1997 from $378,000 in the First Nine Months of 1996.
Returns and allowances represented 3.0% of gross sales in the First Nine
Months of 1997 as compared to 8.8% in the First Nine Months of 1996. This
improvement resulted principally from improved selling at retail which
resulted in lower markdowns as well as from a shift in sales to larger volume
retailers who had lower return rates.
Gross profit increased by $1,019,000, or 140.9%, to $1,742,000 in the
First Nine Months of 1997 from $723,000 in the First Nine Months of 1996.
Gross profit as a percentage of net sales increased to 27.1% in the First Nine
Months of 1997 from 18.5% in the First Nine Months of 1996. This increase was
related to reduced sourcing costs relating to larger order sizes. This
increase was partially offset by an average lower selling price.
9
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Selling, marketing, design and administrative expenses increased by
$1,049,000, or 110.1%, to $2,002,000 in the First Nine Months of 1997 from
$953,000 in the First Nine Months of 1996. As a percentage of net sales,
selling, marketing, design and administrative expenses increased to 31.2% in
the First Nine Months of 1997 from 24.4% in the First Nine Months of 1996.
This increase primarily resulted from an increase in advertising expense of
$480,000, as well as an increase in salaries of $303,000, due to the hiring of
key management personnel.
In the First Nine Months of 1997, the Company had interest income of
$96,000 which represents the interest earned on the proceeds from the IPO.
Other income of $50,000 in the First Nine Months of 1996 represented
the proceeds from lawsuit settlements, net of related costs.
Amortization of deferred costs for bridge financing of $286,000
represented the expense of the debt issuance costs associated with the bridge
financing. Unamortized costs of $233,000 were fully written-off in May 1997
upon the satisfaction of the bridge loan.
Interest expense and factoring charges increased by $67,000 to $328,000
in the First Nine Months of 1997 from $261,000 in the First Nine Months of
1996. This increase was attributable to the interest expense associated with
the bridge financing totaling $161,000 which was paid in full in May 1997. The
interest expense on the bridge financing included 168,000 of debt discount
of which 180,000 of unamortized discount was fully written off in May 1997,
upon the satisfaction of the bridge financing. In addition, the debt discount
on the bridge financing was offset by a $66,000 reduction in interest expense
resulting from the surrendering of 237,000 bridge warrants in May 1997. The
Company does not anticipate additional interest expense from the bridge
financing or associated costs in the future.
Net loss increased by $297,000 to a net loss of $664,000 in the First
Nine Months of 1997 from a loss of $367,000 in the First Nine Months of 1996.
The increase in the loss was primarily attributable to the write-off and
amortization of $286,000 of debt issuance costs and $102,000 of debt discount
associated with the bridge financing as well as to the factors noted above.
Three months ended September 30, 1997 ("Third Quarter of 1997")
compared to Three months ended September 30, 1996 ("Third Quarter of 1996")
The Company's net sales increased by $1,022,000, or 103.1%, to
$2,013,000 in the Third Quarter of 1997 from $991,000 in the Third Quarter of
1996. This increase was attributable to an increase in unit volume which was
partially offset by average lower selling prices of its men's sportswear
collection both resulting from the Company's shift to the "moderate" price
segment. Revenues derived from the sale of the men's sportswear grew
$1,239,000, or 160.1%, to $2,013,000 in the Third Quarter of 1997 from
$774,000 for the Third Quarter of 1996. The remaining portion of net sales in
the Third Quarter of 1996 was attributable to the women's sportswear
collection which the Company chose to discontinue during 1996. The Company
continues to sell a limited amount of women's apparel on a contract basis.
Returns and allowances decreased by $64,000, or 82.1%, to $14,000 in
the Third Quarter of 1997 from $78,000 in the Third Quarter of 1996. Returns
and allowances represented 1.0% of gross sales in the Third Quarter of 1997 as
compared to 7.3% in the Third Quarter of 1996. This improvement resulted
principally from improved selling at retail which resulted in lower markdowns
as well as from a shift in sales to larger volume retailers who had lower
return rates.
Gross profit increased by $472,000, to $565,000 in the Third Quarter of
1997 from $93,000 in the Third Quarter of 1996. Gross profit as a percentage
of net sales increased to 28.1% in the Third Quarter of 1997 from 9.4% in the
Third Quarter of 1996. This increase was related to reduced sourcing costs
relating to larger order sizes. This increase was partially offset by an
average lower selling price.
10
<PAGE>
Selling, marketing, design and administrative expenses increased by
$519,000 to $738,000 in the Third Quarter of 1997 from $219,000 in the Third
Quarter of 1996. As a percentage of net sales, selling, marketing, design and
administrative expenses, increased to 36.7% in the Third Quarter of 1997 from
22.1% in the Third Quarter of 1996. This increase primarily resulted from an
increase in salaries of $161,000, due to the hiring of key management
personnel, as well as an increase in advertising expense of $196,000.
Interest expense and factoring charges decreased by $42,000 to $43,000
in the Third Quarter of 1997 from $85,000 in the Third Quarter of 1996. This
decrease is attributable to the satisfaction of indebtedness from the proceeds
of the IPO in May 1997. In addition, the company has not used any of its line
of credit available from its factor.
In the Third Quarter of 1997, the Company had interest income of
$60,000, which represented the interest earned on the proceeds from the IPO.
Net loss decreased by $38,000 to a net loss of $154,000 in the Third
Quarter of 1997 from a loss of $192,000 in the Third Quarter of 1996. This
decrease in net loss was attributable to the factors noted above.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary funding requirements are to finance working
capital and the continued growth of its business. Requirements for growth of
the business include the purchase of inventory, launching advertising
campaigns, and the capital expenditures relating to the development and
installation of concept shops and/or concept areas the Company is beginning to
install within retail stores.
During the First Nine Months of 1997, net cash used by operating
activities was $730,000, compared to cash provided by operating activities of
$705,000 in the First Nine Months of 1996. The decrease in cash provided by
operations was primarily the result of increases in the Company's net loss,
prepaid insurance (relating to a 3-year Directors & Officers insurance policy)
and prepaid samples relating to the Holiday '97 and Spring '98 men's
sportswear collection, which increases are partially offset by an increase in
accounts payable. In addition, inventory on hand increased due to a greater
quantity of holiday goods on hand on September 30, 1997 as compared to
September 30, 1996.
During the First Nine Months of 1997, net cash used in investing
activities was $3,146,000, compared to $43,000 in the First Nine Months of
1996. The cash used in the First Nine Months of 1997 was primarily the
investment of the proceeds received from the IPO. The funds from the IPO were
deposited with the Company's factor and invested at a rate of 2% below prime.
Funds are transferred into the Company's operating account as needed. In
addition, the Company invested approximately $134,000 in the development of
concept shops installed in retail stores in May 1997 and $400,000 for the
construction costs relating to the Company's new office space. In the First
Nine Months of 1996, the cash was used to purchase property and equipment and
was also attributable to the costs associated with the registration of several
trademarks in the United States and foreign countries.
During the First Nine Months of 1997, net cash provided by financing
activities was $3,931,000, compared to cash used in financing activities of
$654,000 in the First Nine Months of 1996. The increase was primarily
attributable to the net proceeds from the IPO of $6,479,000 which was
partially offset by debt repayments totalling $2,144,000 (which $2,030,000 was
paid from the net IPO proceeds) and deferred costs relating to the IPO and the
bridge financing of $485,000. During the First Nine Months of 1996, net cash
used in financing activities resulted from a net decrease of $493,000 in the
amount due to the factor and from payments of $161,000 in notes payable.
Factoring Agreement: The Company is party to a Retail Collection
Factoring Agreement ("Factoring Agreement") with Heller Financial ("Heller")
pursuant to which the Company sells all of its eligible accounts receivable to
Heller. The Company renegotiated its agreement with Heller in November 1997.
The Company is eligible for advances from Heller, at Heller's discretion, for
up to 85% of the net balance due on eligible accounts receivable. At September
30, 1997, there was approximately $2,494,000 funds deposited with Heller under
the Factoring Agreement and approximately $1,262,000 in factored receivables,
net of returns and allowances. Interest on the net amount due to Heller is
payable monthly in arrears at
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the rate of 1% above the Chase Manhattan Bank, N.A. prime rate ("Prime").
Interest on the net receivable with Heller is received monthly in arrears
at the rate of 1.75% below Prime.
Bridge Financing: In the first quarter of 1997, the Company used the
proceeds from the bridge financing for the hiring of key personnel, the
initial stages of the development of concept shops and/or concept areas to be
installed within retail stores, and the payment of expenses in connection with
the IPO. The Company received these funds in January 1997 and paid this loan
in full in May 1997 from the proceeds of its IPO.
Initial Public Offering: In May 1997, the Company completed its IPO.
The IPO consisted of 1,500,000 units, each of which consisted of one share of
the Company's common stock and one IPO Warrant. Each unit was priced at $5.00
per share resulting in net proceeds of $6,479,000, after deducting
underwriting discounts, commissions, and underwriting related expenses. A
portion of the net proceeds from the IPO was used to repay the bridge
financing, the notes payable, and the short-term loan payable that totaled
approximately $2,030,000. The remaining proceeds are intended to be used for
marketing and advertising purposes, the installation of concept shops and/or
concept areas, and for working capital and general corporate purposes.
12
<PAGE>
PART II - OTHER INFORMATION
Item 2 - Changes in Securities and Use of Proceeds
REPORT OF SALES OF SECURITIES AND USE OF PROCEEDS
Effective May 15,1997, the Company completed its Initial Public
Offering ("IPO"). The representative of the underwriters of the IPO was GKN
Securities Corp. The following table represents the title of each class of
securities registered and the title of any class of securities into which such
securities may be converted:
(1) Units
(2) Common Stock, $.01 par value
(3) Redeemable Common Stock Purchase Warrant
(4) Representative's Unit Purchase Option
(5) Bridge Warrants
UNITS: Each unit consists of one share of Common Stock and one
Redeemable Common Stock Purchase Warrant. On July 17, 1997, the
Common Stock and the Redeemable Common Stock Purchase Warrants traded
separately and the units were delisted.
REDEEMABLE COMMON STOCK PURCHASE WARRANT ("WARRANT"): Each Warrant
entitles the holder to purchase one share of Common Stock for $5.00
during the four year period commencing one year after May 15, 1997.
REPRESENTATIVE'S UNIT PURCHASE OPTION: Representative's right to
purchase up to 150,000 Units for an aggregate price of $100.
BRIDGE WARRANTS: Warrants issued to certain persons in connection
with the Company's January 1997 bridge financing.
The following table represents the amount and aggregate offering price of
securities registered and sold:
<TABLE>
<CAPTION>
Aggregate offering
Price of Amount Aggregate Offering
Title of Security Amount Registered Registered Amount Sold Price of Amount Sold
- ------------------------- ------------------------ ------------------------ ------------------------- ------------------------
<S> <C> <C> <C> <C>
Unit 1,725,000 $8,625,000 1,500,000 $7,500,000
Representative's Unit 1 $100 1 $100
Purchase Option
</TABLE>
13
<PAGE>
The net offering proceeds totaled $5,891,899 after deducting total expenses
listed below. The following amounts represent total expenses in connection
with issuance and distribution of the securities registered for each category
listed below:
Underwriting discounts and commissions $750,000
Expenses paid to or for underwriters 225,000
Other expenses 633,101
The amounts shown above represent direct or indirect payments to
others.
As of September 30,1997, the net offering proceeds of $5,891,899 were used for
the following cash expenditures:
Construction of plant, building, and facilities $ 282,000
Fixed Assets - Computer System 62,000
Repayment of indebtedness (with interest) 2,031,580
Installation of concept shops and/or concept areas 133,817
Advertising 580,000
Working Capital 546,000
The balance of the proceeds have been deposited with the Company's
factor and invested at a rate of 1.75% below prime. The amounts shown above
represent direct or indirect payments to others.
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<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Item no. Description
------- -----------
10.22 Employment Agreement dated as of September 23, 1997 by
and between Pivot Rules, Inc. and Bradley Erickson.
27 Financial Data Schedule.
15
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of
1934, the registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Dated: November 12, 1997
PIVOT RULES, INC.
/s/ E. Kenneth Seiff
-----------------------------
E. Kenneth Seiff
President and Chief Executive Officer
/s/ Meena N. Bhatia
-----------------------------
Meena N. Bhatia
Chief Financial Officer
<PAGE>
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT entered into as of September 23, 1997, by and
between Pivot Rules, Inc., a New York corporation (the "Company") and Bradley
Erickson ("Erickson").
RECITALS
1. The Company desires to retain the services of Erickson as the
Chief Creative Officer of the Company in accordance with the terms and
conditions of this Agreement.
2. Erickson will serve the Company as its Chief Creative Officer
in accordance with the terms and conditions of this Agreement.
NOW, THEREFORE, in consideration of the mutual covenants contained in
this Agreement, and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Company and Erickson agree
as follows:
1. TERM
The Company hereby agrees to employ Erickson as the Chief Creative
Officer of the Company, and Erickson hereby agrees to serve in such capacity,
for a term commencing within three weeks of the date hereof, and ending
December 31, 2000, upon the terms and subject to the conditions contained in
this Agreement.
2. DUTIES
During the term of this Agreement, Erickson shall serve as the Chief
Creative Officer of the Company, and shall be responsible for the duties
attendant to such office, which duties will be generally consistent with his
position as an executive officer of the Company and such other managerial
duties and responsibilities with the Company as may be assigned by the
President and/or the Board of Directors of the Company and which are detailed
in appendix A.
The principal location of Erickson's employment shall be in the New
York City vicinity, although Erickson understands and agrees that he will be
required to travel frequently for business reasons. Erickson shall devote his
full professional and business time and best efforts to the performance of his
duties as the Chief Creative Officer of the Company during the term of this
Agreement; provided that Erickson shall be permitted to continue to engage in
his freelance wedding design business on nights and weekends so long as it
does not interfere with the performance of his duties for the Company.
Erickson shall not, directly or indirectly, render services to any other
person or entity, without the consent of the Board of Directors.
<PAGE>
3. COMPENSATION
For services rendered by Erickson to the Company during the term of
this Agreement, the Company shall pay him a base salary of $125,000 per year,
payable in accordance with the standard payroll practices of the Company,
subject to annual increases in the sole discretion of the Company's Board of
Directors, taking into account merit, corporate and individual performance and
general business conditions, including changes in the "cost of living index,"
but in no event shall his salary, after giving effect to such increase, be
less than the amounts set forth below:
Year Amount
---- ------
September 23, 1997 to December 31, 1998 $125,000
January 1, 1999 to December 31, 1999 $137,500
January 1, 2000 to December 31, 2000 $151,250
4. BONUS/OPTIONS
a. For each fiscal year during the term of this Agreement,
Erickson shall be eligible to receive a bonus set by the Board of Directors in
its sole discretion, based on such factors as the Board deems appropriate;
provided that such bonus shall not exceed 25% of Erickson's base salary paid
during such fiscal year. Bonuses to be paid to Erickson pursuant to this
paragraph 4a shall be paid within 30 days following completion of the audit of
the annual financial statements of the Company for the fiscal year in
question.
b. The Company hereby agrees to cause the issuance to
Erickson of stock options ("Options") to purchase shares of the Company's
common stock, $.01 par value ("Common Stock") in accordance with the following
schedule: (i) Options to purchase 24,000 shares of Common Stock to be issued
on the date he commences employment with the Company. All Options shall be
issued pursuant to, and in accordance with, the Company's 1997 Stock Option
Plan (the "Plan") to the maximum extent permitted by law. The Options shall be
Incentive Stock Options (as defined in the Plan) and shall be exercisable at a
price equal to the greater of $5.00 per share of Common Stock or the Fair
Market Value (as defined in the Plan) of the Common Stock on the date of
issuance of such Option. Each Option shall vest over a 33 month period at a
rate of 3 1/3% (three and one third of a percent) per month, commencing May 1,
1998. In the event of the termination of Erickson's employment for any reason,
he shall have 30 days within which to exercise any vested Options and any
unvested or unissued Options shall be forfeited.
c. In addition to the bonus granted in 4a, Erickson shall be
eligible to receive a one time bonus ("One Time Bonus") of $75,000 in the
event the Pivot Rules sportswear brand (excluding any other division's sales)
hits the agreed upon target net sales level ("Target Sales Level"). The Target
Sales level for calendar year 1999 is $20 million net sales as reflected in
the company's audited financial statements and for calendar year 2000 is $25
million net sales as reflected in the company's audited financial statements.
In the event Erickson earns this bonus in
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<PAGE>
1999, he is not eligible to earn it again in 2000. Bonuses to be paid to
Erickson pursuant to this paragraph 4c shall be paid within 30 days
following completion of the audit of the annual financial statements of
the Company for the fiscal year in question.
5. EXPENSE REIMBURSEMENT AND PERQUISITES
a. During the term of this Agreement, Erickson shall be
entitled to reimbursement of all reasonable and actual out-of-pocket expenses
incurred by him in the performance of his services to the Company consistent
with corporate policies, provided that the expenses are properly accounted
for.
b. During each calendar year of the term of this Agreement,
Erickson shall be entitled to reasonable vacation with full pay; provided,
however, that Erickson shall schedule such vacations at times convenient to
the Company.
c. During the term of this Agreement, the Company shall
provide Erickson with major medical insurance coverage as determined by the
Company in its sole discretion, and Erickson shall be entitled to participate
in all dental insurance and disability plans and other employee benefit plans
instituted by the Company from time to time on the same terms and conditions
as other employees of the Company, to the extent permitted by law.
d. During the term of this Agreement, the Company shall
purchase $250,000 of term life insurance for the benefit of Erickson, so long
as it is available on commercially reasonable terms.
6. NON-COMPETITION; NON-SOLICITATION
a. In consideration of the offer of employment, severance
benefits and Options to be granted to Erickson hereunder, and for other good
and valuable consideration the receipt and sufficiency of which are hereby
acknowledged, during the term of this Agreement and for a period equal to two
years thereafter, Erickson shall not, without the prior written consent of the
Company, anywhere in the United States where the Company conducts business or
sells its products, directly or indirectly, (i) enter into the employ of or
render any services to any person, firm or corporation engaged in any business
which now or at the time, has material operations which are engaged in any
business activity competitive (directly or indirectly) with the business of
the Company (currently the design, sourcing and marketing of golf lifestyle
sportswear and/or moderate collections for men) including, for these purposes,
the two largest other businesses (excluding other smaller businesses), if any,
in which, at the time of termination of his employment the Company is engaged,
provided however, he will not be precluded from engaging in Men's Better
Collections, (in each case, a "Competitive Business"); (ii) engage in any
Competitive Business for his own account; (iii) become associated with or
interested in any Competitive Business as an individual, partner, shareholder,
creditor, director, officer, principal, agent, employee, trustee, consultant,
advisor or in any other relationship or capacity; (iv) employ or retain, or
have or cause any other person or entity to employ or retain, any person who
was
4
<PAGE>
employed or retained by the Company while Erickson was employed by the
Company; or (v) solicit, interfere with, or endeavor to entice away from the
Company, for the benefit of a Competitive Business, any of its customers or
other persons with whom the Company has a contractual relationship. However,
nothing in this Agreement shall preclude Erickson from investing his personal
assets in the securities of any corporation or other business entity which is
engaged in a Competitive Business if such securities are traded on a national
stock exchange or in the over-the-counter market and if such investment does
not result in his beneficially owning, at any time, more than three percent
(3%) of the publicly-traded equity securities of such Competitive Business.
b. Erickson and the Company agree that the covenants of
non-competition and non-solicitation contained in this paragraph 6 are
reasonable covenants under the circumstances, and further agree that if, in
the opinion of any court of competent jurisdiction, such covenants are not
reasonable in any respect, such court shall have the right, power and
authority to excise or modify such provision or provisions of these covenants
as to the court shall appear not reasonable and to enforce the remainder of
these covenants as so amended. Erickson agrees that any breach of the
covenants contained in this paragraph 6 would irreparably injure the Company.
Accordingly, Erickson agrees that the Company, in addition to pursuing any
other remedies it may have in law or in equity, may obtain an injunction
against Erickson from any court having jurisdiction over the matter,
restraining any further violation of this paragraph 6.
7. TERMINATION
a. This Agreement, the employment of Erickson, and
Erickson's position as Chief Creative Officer of the Company shall terminate
upon the first to occur of:
(i) his death;
(ii) his "permanent disability," due to injury or
sickness for a continuous period of four (4)
months, or a total of eight months in a twenty-four
month period (vacation time excluded), during which
time Erickson is unable to attend to his ordinary
and regular duties;
(iii) a "Constructive Termination" by the Company, which,
for purposes of this Agreement, shall be deemed to
have occurred upon (A) the removal of Erickson from
his position as Chief Creative Officer of the
Company, or (B) the material breach by the Company
of this Agreement; provided that no such breach
shall be considered a Constructive Termination
unless Erickson has provided the Company with at
least thirty (30) days' prior written notice of
such breach and the Company has failed to cure such
breach within such thirty (30) day period;
(iv) the termination of this Agreement at any time
without cause by the Company;
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<PAGE>
(v) non-renewal of this Agreement by the Company and/or
the Board of Directors;
(vi) the termination of this Agreement for cause, which,
for purposes of this Agreement, shall mean that (1)
Erickson has been convicted of a felony or any
serious crime involving moral turpitude, or engaged
in materially fraudulent or materially dishonest
actions in connection with the performance of his
duties hereunder, or (2) Erickson has willfully and
materially failed to perform his duties hereunder,
or (3) Erickson has breached the terms and
provisions of this Agreement in any material
respect, or (4) Erickson has failed to comply in
any material respect with the Company's policies of
conduct including with respect to trading in
securities; or
(vii) the termination of this Agreement by Erickson,
which shall occur on not less than 60 days prior
written notice from Erickson.
b. In the event that this Agreement is terminated, other
than as a result of a Constructive Termination or by the Company without
cause, the Company shall pay Erickson his base salary only through the date of
termination and shall make no other payments under this Agreement. In the
event that this Agreement is terminated without cause by the Company pursuant
to paragraph 7(a)(iv) or through a Constructive Termination pursuant to
paragraph 7(a)(iii), the Company shall pay Erickson, in lieu of all salary,
compensation payments and perquisites set forth in paragraphs 3, 4 and 5
(including bonus payments and option grants), severance payments (the
"Severance Payments") as follows:
(i) the then-current base salary for a period of ninety
(90) days, if Erickson is terminated between
September__, 1997 and December 31, 1998;
(ii) the then-current base salary for a period of
one-hundred twenty (120) days, if Erickson is
terminated between January 1, 1999 and December 31,
1999; or
(iii) the then-current base salary for a period of
one-hundred fifty (150) days, if Erickson is
terminated between January 1, 2000 and December 31,
2000; provided that if he is terminated after July
1, 2000, he shall also be entitled to a pro rated
portion of the One Time Bonus to the extent not
previously paid and to the extent earned based upon
year end audited financial statements for the
calendar year 2000.
The Severance Payments shall be payable in periodic
installments in accordance with the Company's standard payroll practices,
provided however that any such One
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<PAGE>
Time Bonus due under this paragraph 7b (iii) shall be paid within 30 days
following completion of the audit of the annual financial statements of the
Company for the fiscal year in question.
8. CONFIDENTIALITY; INVENTIONS
a. Erickson recognizes that the services to be performed by
him are special, unique and extraordinary in that, by reason of his employment
under this Agreement, he may acquire or has acquired confidential information
and trade secrets concerning the operation of the Company, its predecessors,
and/or its affiliates, the use or disclosure of which could cause the Company,
or its affiliates substantial loss and damages which could not be readily
calculated and for which no remedy at law would be adequate. Accordingly,
Erickson covenants and agrees with the Company that he will not, directly or
indirectly, at any time during the term of this Agreement or thereafter,
except in the performance of his obligations to the Company or with the prior
written consent of the Board of Directors or as otherwise required by court
order, subpoena or other government process, directly or indirectly, disclose
any secret or confidential information that he may learn or has learned by
reason of his association with the Company. If Erickson shall be required to
make such disclosure pursuant to court order, subpoena or other government
process, he shall notify the Company of the same, by personal delivery or
electronic means, confirmed by mail, within twenty-four (24) hours of learning
of such court order, subpoena or other government process and, at the
Company's expense, shall (i) take all reasonably necessary and lawful steps
required by the Company to defend against the enforcement of such subpoena,
court order or government process, and (ii) permit the Company to intervene
and participate with counsel of its choice in any proceeding relating to the
enforcement thereof. The term "confidential information" includes, without
limitation, information not in the public domain and not previously disclosed
to the public or to the trade by the Company's management with respect to the
Company's or its affiliates' facilities and methods, studies, surveys,
analyses, sketches, drawings, notes, records, software, computer-stored or
disk-stored information, processes, techniques, research data, marketing and
sales information, personnel data, trade secrets and other intellectual
property, designs, design concepts, manuals, confidential reports, supplier
names and pricing, customer names and prices paid, financial information or
business plans.
b. Erickson confirms that all confidential information is
and shall remain the exclusive property of the Company. All memoranda, notes,
reports, software, sketches, photographs, drawings, plans, business records,
papers or other documents or computer-stored or disk-stored information kept
or made by Erickson relating to the business of the Company shall be and will
remain the sole and exclusive property of the Company and shall be promptly
delivered and returned to the Company immediately upon the termination of his
employment with the Company.
c. Erickson shall make full and prompt disclosure to the
Company of all inventions, improvements, ideas, concepts, discoveries,
methods, developments, software and works of authorship, whether or not
copyrightable, trademarkable or licensable, which are created, made, conceived
or reduced to practice by Erickson during his services with the Company,
whether or not during normal working hours or on the premises of the Company
but
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<PAGE>
exclusive of wedding dress designs as contemplated by paragraph 2 (all of
which are collectively referred to in this Agreement as "Developments"). All
Developments shall be the sole property of the Company, and Erickson hereby
assigns to the Company, without further compensation, all of his rights, title
and interests in and to the Developments and any and all related patents,
patent applications, copyrights, copyright applications, trademarks and
tradenames in the United States and elsewhere.
d. Erickson shall assist the Company in obtaining,
maintaining and enforcing patent, copyright and other forms of legal
protection for intellectual property in any country. Upon the request of the
Company, Erickson shall sign all applications, assignments, instruments and
papers and perform all acts necessary or desired by the Company in order to
protect its rights and interests in any Developments.
e. Erickson agrees that any breach of this paragraph 8 will
cause irreparable damage to the Company and that, in the event of such breach,
the Company will have, in addition to any and all remedies of law, including
rights which the Company may have to damages, the right to equitable relief
including, as appropriate, all injunctive relief or specific performance or
other equitable relief. Erickson understands and agrees that the rights and
obligations set forth in paragraph 8 shall survive the termination or
expiration of this Agreement.
9. LOAN
Subject to Erickson's employment with the Company not having
been terminated, for any reason prior to April 1, 1998, the Company shall
extend at Erickson's option a $50,000 loan to Erickson on such date on the
following terms:
a. payment of principal in monthly installments of $757.58
for the then remaining 33 months of the term of the Employment Agreement;
b. monthly payments of interest on unpaid principal at the
rate of 8% per annum;
c. 50% of any cash bonuses paid to Erickson shall be applied
to the $25,000 non-amortizing balance first and then to the amortizing balance
(in inverse order of maturity);
d. 100% of any Severance Payment will be applied to the loan
up to the amount then due.
e. Erickson will execute a promissory note and confession of
judgement at the time of receipt of the loan;
f. the promissory note will provide that all remaining
principal and accrued interest thereon shall become due and payable
immediately at the end of the term of the Employment Agreement or in the event
of the termination of employment for any reason and the
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<PAGE>
promissory note shall also provide that Erickson will waive the right to
assert any defense or counterclaim of whatsoever nature against his
obligation to repay the note; and
g. the promissory note will contain other customary terms.
h. The Company shall be entitled to deduct all payments due
per this paragraph 9 directly from Erickson's paycheck.
i. At the Company's sole option, it may elect to receive a
second mortgage on any coop or condo owned by Erickson.
10. REPRESENTATIONS AND WARRANTIES
a. Erickson represents and warrants to the Company that he
was advised to consult with an attorney of Erickson's own choosing concerning
this Agreement and that Erickson has done so.
b. Erickson represents and warrants to the Company that the
execution, delivery and performance of this Agreement by Erickson complies
with all laws applicable to Erickson or to which his properties are subject
and does not violate, breach or conflict with any agreement by which he or his
assets are bound or affected.
11. GOVERNING LAW
This Agreement shall be deemed a contract made under, and for all
purposes shall be construed in accordance with, the laws of the State of New
York, without giving effect to its conflict of law provisions.
12. ENTIRE AGREEMENT
This Agreement contains all of the understandings between Erickson
and the Company pertaining to Erickson's employment with the Company, and it
supersedes all undertakings and agreements, whether oral or in writing,
previously entered into between them.
13. AMENDMENT OR MODIFICATION; WAIVER
No provision of this Agreement may be amended or modified unless such
amendment or modification is agreed to in writing, signed by Erickson and by
an officer of the Company duly authorized to do so. Except as otherwise
specifically provided in this Agreement, no waiver by either party of any
breach by the other party of any condition or provision of this Agreement to
be performed by such other party shall be deemed a waiver of a similar or
dissimilar provision or condition at the same or any prior or subsequent time.
9
<PAGE>
14. NOTICES
Any notice to be given hereunder shall be in writing and delivered
personally or sent by certified mail, postage prepaid, return receipt
requested, addressed to the party concerned at the address indicated below or
to such other address as such party may subsequently designate by like notice:
If to the Company, to:
Pivot Rules, Inc.
80 West 40th Street
New York, NY 10018
Attn: E. Kenneth Seiff
With a copy to:
Shereff, Friedman, Hoffman & Goodman, LLP
919 Third Avenue
New York, New York 10022
Attn: Richard A. Goldberg, Esq.
If to Erickson, to:
Bradley Erickson
465 West 23rd Street
Apartment 7K
New York, NY 10011
with a copy to:
Gary Moomjian
Breslow and Walker
767 Third Avenue
New York, NY 10022
<PAGE>
15. SEVERABILITY
In the event that any provision or portion of this Agreement
shall be determined to be invalid or unenforceable for any reason, the
remaining provisions or portions of this Agreement shall be unaffected thereby
and shall remain in full force and effect to the fullest extent permitted by
law.
16. TITLES
Titles of the Sections of this Agreement are intended solely
for convenience of reference and no provision of this Agreement is to be
construed by reference to the title of any Section.
16.5 PAGINATION
There is no page 1.
17. COUNTERPARTS
This Agreement may be executed in counterparts, each of which shall
be deemed an original, and all of which together shall constitute one and the
same instrument.
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement on the date first above written.
PIVOT RULES, INC.
By: /s/ E. Kenneth Seiff
--------------------
E. Kenneth Seiff
President
/s/ Bradley Erickson
--------------------
Bradley Erickson
<PAGE>
APPENDIX A
DRAFT--FOR DISCUSSION PURPOSES ONLY
JOB DESCRIPTION-PIVOT RULES INC.
DATE: July 24, 1997
POSITION: Chief Creative Officer
REPORTS TO: This position reports to the CEO of the company
along with all of the division heads making up the
executive council. This position has all design
staff reporting to it.
POSITION PURPOSE: This position is responsible for the management and
direction of the creative department including
product design, packaging and corporate image. This
includes overseeing all visual aspects of the
Company's advertising, offices, showrooms,
tradeshow booths, concept shops, packaging,
stationery, public relations material, conception
and supervision of photography and design and
approval of collateral materials.
NATURE AND SCOPE: The incumbent is responsible for all visual
aspects of the company and assuring they fit
within the parameters of the mission statement.
These include the physical design of the offices,
showroom, common space, concept shops, tradeshow
booths and warehouse, all product design, hiring of
any future designers, visual approval of all
advertising and public relations material,
stationery design and dress code.
This person is responsible for developing and
guarding the Company's visual style and attitude
and for making sure all visual aspects of the
Company's business fit.
This person is responsible for showroom set up and
design, including mannequins, props, displays to
make sure it reflects and enhances the excitement
of the line. In addition, this person should
regularly review the state of the showroom to
ensure that the sales department is maintaining the
showroom in the desired manner.
The incumbent is responsible for assuring that the
companies design programs are cutting edge and
innovative and that a consistent theme is reflected
in all visual aspects of the company. This includes
the
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accumulation of research and development as well as
market information to forecast trends. This
position must ensure that new products can be made
to fit within the Company's pricing parameters.
This position is responsible for line direction and
planning as well as the development of new product
categories (including acquisitions).
This person is responsible for the tracking and
timely delivery of quality samples. In addition,
this person is responsible for developing the
design portion of and keeping to all relevant
aspects of the Company Time/Action Calendar.
This position must identify and define the complete
needs of a professional design organization
including defining the scope and areas of
responsibility of the entire design team. The goal
of this position should be to build a self
sustaining organization.
Budgets shall be prepared by October 15th. In
addition, this person will provide timely updates
of budget changes to the CFO.
PRINCIPLE FUNCTIONS OR ACCOUNTABILITIES:
o Promote and integrate mission statement, values and service
excellence in the conduct of your daily responsibilities.
o Vision to ensure all visual aspects/features of the company
consistent with mission statement and are integrated with
the Company's visual identity.
o Company earn reputation as a cool, innovative design and
creative organization through creative and technical
excellence coupled with research and development.
o Quality and timely delivery of samples.
o Meeting departmental budgets
o Implement 25 Fun Things by December 31, 1998
o Build a self sustaining design organization
LEVELS OF AUTHORITY:
General:
Complete: [more than] $5000
Act and Report: $5,000-15,000
Second Signatory: [less than] $15,000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 88,000
<SECURITIES> 0
<RECEIVABLES> 1,325,000
<ALLOWANCES> 0
<INVENTORY> 1,476,000
<CURRENT-ASSETS> 6,096,000
<PP&E> 830,000
<DEPRECIATION> (142,000)
<TOTAL-ASSETS> 6,960,000
<CURRENT-LIABILITIES> 1,160,000
<BONDS> 0
0
0
<COMMON> 27,000
<OTHER-SE> 5,761,000
<TOTAL-LIABILITY-AND-EQUITY> 6,960,000
<SALES> 6,616,000
<TOTAL-REVENUES> 6,419,000
<CGS> (4,677,000)
<TOTAL-COSTS> (2,004,000)
<OTHER-EXPENSES> (416,000)
<LOSS-PROVISION> 2,000
<INTEREST-EXPENSE> (198,000)
<INCOME-PRETAX> (734,000)
<INCOME-TAX> 70,000
<INCOME-CONTINUING> (664,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (664,000)
<EPS-PRIMARY> (.34)
<EPS-DILUTED> (.34)
</TABLE>
