<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934 For the quarterly period ended June 30, 1998
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934 For the transition period from ______ to ______
Commission File Number: 333-22895
---------------------------------------
PIVOT RULES, INC.
(Exact name of small business issuer as specified in its charter)
New York 13-3612110
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
42 West 39th Street, New York, NY 10018
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (212) 944-8000
---------------------------------------
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 [X] No [ ]
As of July 31, 1998, the issuer had outstanding 2,717,788 of shares of Common
Stock, $.01 par value.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
<PAGE>
PIVOT RULES, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Part I . Financial Information
Item 1. Financial Statements
Condensed Balance Sheets as of June 30, 1998 (unaudited) and
December 31, 1997 3
Condensed Statements of Operations for the six months ended
June 30, 1998 and 1997 (unaudited) 4
Condensed Statements of Operations for the three months ended
June 30, 1998 and 1997 (unaudited) 5
Condensed Statements of Cash Flows for the six months ended
June 30, 1998 and 1997 (unaudited) 6
Notes to Condensed Financial Statements 8
Item 2. Management's Discussion and Analysis or Plan of Operation 13
Part II. Other Information
Item 2. Changes in Securities and Use of Proceeds 17
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 19
</TABLE>
2
<PAGE>
ITEM 1. - FINANCIAL STATEMENTS
PIVOT RULES, INC.
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
---- ----
(Unaudited) (As restated)
(Note D)
ASSETS
<S> <C> <C>
Current assets
Cash $ 67,000 $ 55,000
Funds deposited with factor 2,449,000 1,857,000
Inventories 236,000 --
Prepaid expenses and other current assets 105,000 128,000
Current assets of discontinued operations 2,058,000 4,182,000
---------- ----------
Total current assets 4,915,000 6,222,000
Property and equipment, net 529,000 500,000
Deferred costs and other assets 15,000 15,000
Assets of discontinued operations -- 414,000
---------- ----------
$5,459,000 $7,151,000
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable, accrued expenses and other current $1,194,000 $1,092,000
liabilities
Deferred income taxes 9,000 9,000
---------- ----------
1,203,000 1,101,000
---------- ----------
Commitments and contingencies
Shareholders' equity
Preferred stock -$.01 par value; 2,000,000 authorized -- --
and no shares issued
Common stock -$.01 par value; 15,000,000 authorized and 27,000 27,000
2,700,000 issued and outstanding
Additional paid-in capital 6,404,000 6,404,000
Accumulated deficit (2,175,000) (381,000)
---------- ----------
4,256,000 6,050,000
---------- ----------
$5,459,000 $7,151,000
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
PIVOT RULES, INC.
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
----------------------------------
1998 1997
---- ----
(As restated)
(Note D)
<S> <C> <C>
General and administrative expenses $ 446,000 $ 365,000
Internet business start up costs 103,000 --
Research and development 126,000 --
---------- ----------
Operating loss from continuing operations (675,000) (365,000)
Interest income 81,000 36,000
----------- -----------
Loss from continuing operations before income taxes (594,000) (329,000)
Income tax benefit -- 45,000
----------- -----------
Loss from continuing operations (594,000) (284,000)
----------- -----------
Discontinued operations - Note D
Loss from operations, net of income tax benefit of $25,000 in (934,000) (226,000)
1997
Estimated loss on disposal, including provision for operating
losses through disposal date, less applicable income tax
benefit of $0 (266,000) --
------------ ------------
Loss from discontinued operations (1,200,000) (226,000)
------------ ------------
Net loss $(1,794,000) $ (510,000)
============ ============
Basic and diluted loss per share
Continuing operations $(.22) $(.18)
Discontinued operations
Loss from operations (.34) (.14)
Estimated loss on disposal (.10) --
------ -------
Net loss $(.66) $(.32)
===== =====
Weighted average shares outstanding 2,700,000 1,589,503
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
PIVOT RULES, INC.
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
----------------------------------
1998 1997
---- ----
(As restated)
(Note D)
<S> <C> <C>
General and administrative expenses $ 207,000 $ 203,000
Internet business start up costs 103,000 --
Research and development 126,000 --
----------- -----------
Operating loss from continuing operations (436,000) (203,000)
Interest income 39,000 36,000
----------- -----------
Loss from continuing operations before income taxes (397,000) (167,000)
Income tax benefit -- 25,000
----------- -----------
Loss from continuing operations (397,000) (142,000)
----------- -----------
Discontinued operations - Note D
Loss from operations, net of income tax benefit of $55,000 in
1997 (853,000) (387,000)
Estimated loss on disposal, including provision for operating
losses through disposal date, less applicable income tax
benefit of $0 (266,000) --
----------- -----------
Loss from discontinued operations (1,119,000) (387,000)
----------- -----------
Net loss $(1,516,000) $ (529,000)
=========== ============
Basic and diluted loss per share
Continuing operations $(.15) $(.07)
Discontinued operations
Loss from operations (.31) (.20)
Estimated loss on disposal (.10) --
------ -------
Net loss $(.56) $(.27)
===== =====
Weighted average shares outstanding 2,700,000 1,974,725
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
PIVOT RULES, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
----------------------------------
1998 1997
---- ----
(As restated)
(Note D)
<S> <C> <C>
Cash flows from operating activities
Loss from Continuing Operations $ (594,000) $ (284,000)
Adjustments to reconcile loss from continuing operations to net cash (used in)
provided by operating activities:
Depreciation and amortization 40,000 6,000
Changes in operating assets and liabilities
(Increase) decrease in
Inventories (236,000) --
Prepaid expenses and other current assets 23,000 (165,000)
Other assets -- (15,000)
Increase (decrease) in
Accounts payable, accrued expenses and other current liabilities 102,000 498,000
------------ ------------
Net cash (used in) provided by operating activities - Continuing Operations (665,000) 40,000
------------ -------------
Loss from Discontinued Operations (1,200,000) (226,000)
Adjustments to reconcile loss from discontinued operation to net cash used in
operating activities:
Write-down of property and equipment 245,000 --
Write-down of prepaid expenses and other current assets 90,000 --
Write-down of other assets 119,000 --
Amortization of deferred costs for bridge financing -- 286,000
Amortization of debt discount -- 104,000
Depreciation and amortization 44,000 20,000
Changes in operating assets and liabilities
(Increase) decrease in
Inventories 331,000 16,000
Non-factored receivables 14,000 12,000
Prepaid expenses and other current assets (112,000) (166,000)
Increase (decrease) in
Income taxes receivable/payable (1,000) (196,000)
------------ -------------
Net cash used in operating activities - Discontinued Operations (470,000) (150,000)
------------ -------------
Net cash used in operating activities (1,135,000) (110,000)
------------ -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<PAGE>
PIVOT RULES, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
----------------------------------
1998 1997
---- ----
(As restated)
(Note D)
<S> <C> <C>
Cash flows from investing activities - Continuing Operations
Purchase of property and equipment (69,000) (22,000)
Funds deposited with factor from initial public offering -- (4,920,000)
(Decrease) increase in funds deposited with factor (592,000) 884,000
----------- ------------
Net cash used in investing activities - Continuing Operations (661,000) (4,058,000)
----------- ------------
Cash flows from investing activities - Discontinued Operations
Purchase of property and equipment (22,000) (96,000)
Trademark costs (1,000) (6,000)
----------- ------------
Net cash used in investing activities - Discontinued Operations (23,000) (102,000)
----------- ------------
Net cash used in investing activities (684,000) (4,160,000)
----------- ------------
Cash flows from financing activities - Continuing Operations
Net proceeds from initial public offering -- 5,939,000
Deferred costs associated with initial public offering 53,000
----------- ------------
Net cash provided by (used in) financing activities - Continuing Operations -- 5,992,000
----------- ------------
Cash flows from financing activities - Discontinued Operations
Deferred costs associated with bridge financing -- 75,000
Net proceeds from bridge financing -- 1,215,000
Repayments of notes payable and short-term loan -- (644,000)
Repayments of bridge financing -- (1,500,000)
Net change in due to/from factor 1,831,000 (892,000)
----------- ------------
Net cash provided by financing activities - Discontinued Operations 1,831,000 (1,746,000)
----------- ------------
Net cash provided by financing activities 1,831,000 4,246,000
----------- ------------
Net increase (decrease) in cash 12,000 (24,000)
Cash balance - December 31 55,000 33,000
----------- ------------
Cash balance - June 30 $ 67,000 $ 9,000
=========== ============
Supplemental disclosure of cash flow information: Cash paid during the
period for:
Interest $ 28,000 $ 93,000
=========== ============
Income taxes $ 1,000 $ 99,000
=========== ============
Non-cash financing activities:
Issuance of warrants in connection with bridge financing $ -- $ 138,000
=========== ============
The accompanying notes are an integral part of these financial statements.
7
</TABLE>
<PAGE>
PIVOT RULES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
JUNE 30, 1998 AND 1997
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 and
Form 8-A/A and the Annual Report filed with the Securities and Exchange
Commission on Form 10-KSB. Subsequent to the filing of documents incorporated
by reference herein, the Company discontinued the operations of its golf
sportswear division. Accordingly, financial statements, management's discussion
and analysis or plan of operation contained therein do not reflect the effect
of the discontinued operations.
On June 25, 1998, the Company's Board of Directors adopted a plan to
discontinue operations of the golf sportswear division. The Company intends to
complete its existing sales commitments and liquidate its remaining inventory.
The condensed statements of operations for the three and six month periods
ended June 30, 1997 and for the condensed balance sheet as of December 31, 1997
have been restated. The financial statements have been prepared in accordance
with accounting standards for the presentation of discontinued operations.
The results of operations of the Company for the three and six months ended
June 30, 1998 are not necessarily indicative of the results to be expected for
the full year.
NOTE B - THE COMPANY
The Company is building and intends to market and promote a Web site (the "Web
site") that will offer men's, women's and children's apparel and accessories at
significant discounts as well as provide information on current trends and
other fashion related content.
In June 1998, the Company determined to discontinue the operations of its golf
sportswear division and to devote all of the Company's energy and resources to
building the Web site.
NOTE C - SIGNIFICANT ACCOUNTING POLICIES
1. USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
8
<PAGE>
PIVOT RULES, INC
NOTES TO CONDENSED FINANCIAL STATEMENTS
JUNE 30 1998 AND 1997
2. 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 ("FIFO") method.
3. EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per share excludes dilution and is computed by dividing
earnings (loss) available to common shareholders by the weighted average number
of common shares outstanding for the period. Diluted earnings (loss) per share
is computed by dividing earnings (loss) available to common shareholders by the
weighted average number of common shares outstanding for the period, adjusted
to reflect potentially dilutive securities. Options and warrants were not
included in the computation of diluted earnings per share because the exercise
price was greater than the market price of the stock.
4. RESEARCH AND DEVELOPMENT
Research and development costs are expensed when incurred. During the three and
six month periods ending June 30, 1998, amounts charged to research and
development were $126,000.
5. START UP COSTS
During the three-month period ending June 30, 1998, the Company adopted
Statement of Position ("SOP") 98-5 "Reporting on the Costs of Start-Up
Activities". Start-up activities include (i) one-time activities relating to
the introduction of a new product or service, conducting business in a new
territory, conducting business with a new class of customer or commencing a new
operation and (ii) organization costs. Start-up activities are expensed as
incurred. During the three and six month periods ending June 30, 1998, $103,000
of start-up costs relating to the formation of the Internet business were
incurred and charged to operations. The Company believes that there is no
cumulative effect on the amount of retained earnings at December 31, 1997
resulting from the adoption of SOP 98-5.
6. RECLASSIFICATION
The 1997 financial statements have been reclassified in order to conform with
the 1998 presentation. See Note D relating to the restatement of the financial
statements in connection with the discontinuance of the golf sportswear
division.
NOTE D - DISCONTINUED OPERATIONS
The operating loss from discontinued operations of $934,000 includes a $454,000
loss relating to the write down of the assets of the golf sportswear division.
The estimated loss on the disposal of the discontinued operations of $266,000
represents the provision for expected operating losses during the phase-out
period from June 25, 1998 through June 25, 1999.
The disposal of the golf sportswear division has been accounted for as a
discontinued operation and, accordingly, its net assets have been segregated
from continuing operations in the accompanying condensed balance sheets, and
its operating results are segregated and reported as discontinued operations in
the accompanying condensed statements of operations and cash flows.
9
<PAGE>
PIVOT RULES, INC
NOTES TO CONDENSED FINANCIAL STATEMENTS
JUNE 30 1998 AND 1997
Information relating to the discontinued operations of the golf sportswear
division for the six months ended June 30, 1998 and 1997 is as follows:
JUNE 30, JUNE 30,
1998 1997
---- ----
(Unaudited) (Unaudited)
Net sales $ 2,387,000 $ 4,406,000
Cost of sales 2,208,000 3,229,000
----------- -----------
Gross profit 179,000 1,177,000
Selling, marketing, design and administrative 769,000 899,000
Write down of property and equipment 364,000 --
----------- -----------
Operating (loss) income (954,000) 278,000
Other income (expense) 20,000 (243,000)
Amortization and write-off of deferred costs for
bridge financing -- (286,000)
----------- -----------
Loss before provision for income taxes (934,000) (251,000)
Benefit for income taxes -- 25,000
----------- -----------
Net loss $ (934,000) $ (226,000)
=========== ===========
The net assets of the golf sportswear division included in the accompanying
condensed balance sheets as of June 30, 1998 and December 31, 1997 are as
follows:
JUNE 30, DECEMBER 31,
1998 1997
---- ----
(Unaudited) (As restated)
Due from factor $ 433,000 $2,264,000
Non-factored receivables 37,000 51,000
Inventories 1,082,000 1,413,000
Prepaid expenses and other current assets 193,000 157,000
Income taxes receivable 204,000 203,000
Property and equipment, net 15,000 --
Deferred income taxes 94,000 94,000
------------ ----------
Total current assets of discontinued
operations $2,058,000 $4,182,000
============ ==========
Property and equipment, net $ -- $ 274,000
Deferred costs and other assets -- 140,000
------------ ---------
Total assets of discontinued operations $ -- $ 414,000
============ =========
The Company's liabilities will not be assumed by others, therefore, in
accordance with the accounting standards for the presentation of discontinued
operations all liabilities are recorded as continuing operations.
10
<PAGE>
PIVOT RULES, INC
NOTES TO CONDENSED FINANCIAL STATEMENTS
JUNE 30 1998 AND 1997
NOTE E - LONG LIVED ASSETS
The Company's policy is to evaluate long-lived assets and certain identifiable
intangibles for possible impairment whenever events or changes in circumstances
indicate that the carrying amount of such assets may not be recoverable. This
evaluation is based on a number of factors, including expectations for
operating income and undiscounted cash flows that will result from the use of
such assets.
The Company has identified certain long-lived assets specifically relating to
the golf sportswear division that have no future value. Accordingly, as of June
30, 1998 the Company has written-off the net book amount of these assets,
aggregating $364,000, and such amount is included in Discontinued
Operations-Loss from operations. The net book amount on the measurement date
(June 25, 1998) was:
PROPERTY AND EQUIPMENT
----------------------
Leasehold improvements $ 20,000
Concept area fixtures 270,000
Office equipment 65,000
Computer software 20,000
---------
375,000
Less accumulated depreciation 130,000
---------
$ 245,000
=========
DEFERRED COSTS AND OTHER ASSETS
-------------------------------
Trademarks $ 174,000
Less accumulated amortization 55,000
---------
$ 119,000
=========
Certain assets for the discontinued operations relating to the warehouse
operations will remain in use until approximately October 31, 1998. As of June
30, 1998, the net book amount of these assets is as follows:
PROPERTY AND EQUIPMENT
----------------------
Leasehold improvements $ 12,000
Computer equipment 34,000
---------
46,000
Less accumulated depreciation 31,000
---------
$ 15,000
=========
NOTE F -COMMITMENTS AND CONTINGENCIES
In July 1998, the Company entered into an employment agreement, effective June
15, 1998, with its Executive Vice President. The employment agreement expires
on July 31, 2002 and provides for a base salary and discretionary annual
bonuses. In addition, the employment agreement provides for two option grants,
one upon commencement of employment and the second on July 31, 1998.
NOTE G -SUBSEQUENT EVENTS
In July 1998, the Company entered into an employment agreement with its
Executive Vice President of Operations, who will be subsequently appointed on
August 31, 1998 to serve as Chief Financial Officer. The employment agreement
expires on July 13, 2002 and provides for a base salary and discretionary
annual bonuses. In addition, the employment agreement provides for an option
grant upon commencement of employment.
11
<PAGE>
PIVOT RULES, INC
NOTES TO CONDENSED FINANCIAL STATEMENTS
JUNE 30 1998 AND 1997
In May 1998, the Company entered into an agreement ("Agreement") with a web
development agency ("Agency") to create and design its Web site. The Agreement
requires total compensation of a combination of cash and Common Stock of the
Company valued at the market price on the date of the Agreement. The Company
has agreed to pay additional cash compensation if certain performance
objectives are met. On July 1, 1998, the Company issued 17,788 shares of Common
Stock valued at $2.00 per share. The remaining shares of Common Stock will vest
upon the satisfaction of certain performance objectives.
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The Company is building and intends to market and promote the Web site that
will offer men's, women's and children's apparel and accessories at significant
discounts as well as provide information on current trends and other fashion
related content.
The Company began the research of the Web site in March 1998, and in May 1998
the Company's Board of Directors approved the formation of the Internet
division. The Company is using its experience and relationships in the fashion
industry, knowledge of fashion trends and its marketing skills to build and
promote its Web site. The Company believes that the projected growth in the
number of Internet users (and, in particular the number of female users), the
high disposable income of today's Internet shopper, and the absence of a
dominant online apparel and fashion accessory retailer, combine to create a
highly favorable climate in which to launch the Web site.
The Company is designing its online store to combine the best traditional
retailing practices with innovative and convenient features made possible by
the Internet. As an online commerce and content provider, the Company intends
to provide a compelling and enjoyable online shopping experience that includes
a broad selection of name brand products at significant discounts to retail
prices, an intuitive store layout, friendly customer service, a visually
pleasing environment, a liberal return policy, the convenience of shopping from
home in a store that never closes, and sophisticated search technology features
which will allow customers to locate quickly the items which interest them.
In June 1998, the Company determined to discontinue the operations of its golf
sportswear division and to devote all of the Company's energy and resources to
building the Web site. The golf sportswear division had been operating at a
loss, and despite efforts to promote the brand, orders for the sportswear
collection had been significantly below the Company's business plan and even
further below the prior year's levels. As a result, the Company discontinued
the operations of this division in June 1998. The Company has accrued $266,000
for future anticipated losses relating to the discontinuation of such division.
YEAR 2000 ISSUES
The Company will be interacting with certain computer programs in connection
with credit card transactions, fulfillment operations, and programs used by the
Company's vendors and suppliers. These programs may refer to annual dates only
by the last two digits (e.g., "97" for "1997"), and could lose functionality in
the year 2000. While the Company believes that all of its internal programs are
year 2000 compliant ("Compliant"), the Company cannot guarantee that all of the
other companies with which the Company interacts has taken the year 2000
problem into account or has otherwise updated their programs. The Company does
not believe it will incur any material expenditures in connection with respect
to making its own programs Compliant but cannot predict what, if any,
expenditures will be required in the event that one or more of the companies
with which it interacts is not Compliant. Such problem could have a material
adverse effect on the Company's business, prospects, financial condition and
results of operations.
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1998 ("FIRST HALF OF 1998") COMPARED TO THE SIX
MONTHS ENDED JUNE 30, 1997 ("FIRST HALF OF 1997")
RESULTS FOR CONTINUING OPERATIONS
General and administrative expenses increased by $81,000, or 22.2% in the First
Half of 1998 to $446,000 from $365,000 in the First Half of 1997. This increase
was primarily a result of the additional costs in operations relating to public
company filings, registration fees, and other related expenses and as a result
of an increase in depreciation expense of $32,000 and insurance expense of
$20,000 resulting from the Company's Director's and Officer's liability policy.
The Company has incurred start up costs of $103,000 in the First Half of 1998.
These costs relate to the start up of its Internet business. The Company
anticipates that such costs will continue until the Web site reaches productive
capacity.
The Company has incurred research and development costs of $126,000 in the
First Half of 1998 primarily relating to the design and development of the
Company's Web site. The Company anticipates that it will incur additional
research and development costs in the future.
13
<PAGE>
The Company earned interest of $81,000 and $36,000 on the proceeds from the
Company's 1997 initial public offering ("IPO") in the First Half of 1998 and
1997, respectively.
The Company's loss from continuing operations increased by $310,000 to a net
loss of $594,000 in the First Half of 1998 from a loss of $284,000 in the First
Half of 1997. The loss in the First Half of 1997 was offset by an income tax
benefit of $45,000.
RESULTS FOR DISCONTINUED OPERATIONS
In June 1998, the Company discontinued the operations of its golf sportswear
division. The Company's condensed financial statements present the operating
loss, estimated loss on disposal, and net assets of the discontinued operations
separately from continuing operations. Prior periods have been restated to
conform with this presentation. Discontinued operations for the First Half of
1998 reflect a loss from operations of $934,000 net of tax. The loss from
operations includes a loss of $454,000 relating to the disposal of the assets
of the golf sportswear division. The net sales of this division decreased by
$2,019,000, or 45.8%, to $2,387,000 in the First Half of 1998 from $4,406,000
in the First Half of 1997. Gross profit decreased by $998,000, or 84.8%, to
$179,000 in the First Half of 1998 from $1,177,000 in the First Half of 1997.
This decrease is a result of the decrease in sales volume as well as due to
approximately $250,000 in inventory markdowns that were recorded in the First
Half of 1998. The additional markdowns were recorded due to the level of
inventory on hand that the Company will have to sell in the close-out market
resulting from the discontinued operations.
THREE MONTHS ENDED JUNE 30, 1998 ("SECOND QUARTER OF 1998") COMPARED TO THE
THREE MONTHS ENDED JUNE 30, 1997 ("SECOND QUARTER OF 1997")
RESULTS FOR CONTINUING OPERATIONS
General and administrative expenses increased by 4,000, or 2.0% in the Second
Quarter of 1998 to $207,000 from $203,000 in the Second Quarter of 1997. This
increase is a result of the additional costs in operations relating to the
Company completing the IPO in May 1997 and due to the increase in depreciation
expense due to the property and equipment purchased in the fourth quarter of
1997. This increase is offset by a decrease in employee's salaries from the
allocation of $52,000 to the start up costs of the Internet business.
The Company has incurred start up costs of $103,000 in the Second Quarter of
1998. These costs relate to the start up of its Internet business. The Company
anticipates that such costs will continue until the Internet business is
operational.
The Company has incurred research and development costs of $126,000 in the
Second Quarter of 1998 primarily relating to the design and development of the
Company's Web site. The Company anticipates that it will incur additional
research and development costs in the future.
The Company earned interest of $39,000 and $36,000 on the proceeds from the IPO
in the Second Quarter of 1998 and 1997, respectively.
The Company's loss from continuing operations increased by $255,000 to a net
loss of $397,000 in the Second Quarter of 1998 from a loss of $142,000 in the
Second Quarter of 1997. The loss in the Second Quarter of 1997 was offset by an
income tax benefit of $25,000.
RESULTS FOR DISCONTINUED OPERATIONS
In June 1998, the Company discontinued the operations of its golf sportswear
division. The Company's condensed financial statements present the operating
loss, estimated loss on disposal, and net assets of the discontinued operations
separately from continuing operations. Prior periods have been restated to
conform with this presentation. Discontinued operations for the Second Quarter
of 1998 reflect a loss from operations of $853,000 net of tax. The loss from
operations includes a loss of $454,000 relating to the disposal of the assets
of the golf sportswear division. The net sales of this division decreased by
$1,138,000, or 56.6%, to $872,000 in the Second Quarter of 1998 from $2,010,000
in the Second Quarter of 1997. Gross profit decreased by
14
<PAGE>
$383,000, or 67.8%, to $182,000 in the Second Quarter of 1998 from $565,000 in
the Second Quarter of 1997. This decrease is a result of a decrease in sales
volume as well as the lower gross margins associated with sales in the closeout
market. In the Second Quarter of 1998, approximately 48.2% of the Company's
sales were to the closeout market as compared to less than 1% in the Second
Quarter of 1997. The decrease was also attributable to approximately $150,000
in inventory markdowns that were recorded in the Second Quarter of 1998. The
additional markdowns were recorded due to the level of inventory on hand that
the Company will have to sell in the closeout market resulting from the
discontinued operations.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary funding requirements are to finance working capital and
the launch and marketing of the Web site. These requirements will increase as a
result of the start up costs and working capital needed for the Web site. Based
upon its current business plan, the Company believes it has sufficient
resources to finance its working capital needs for at least the next twelve
months.
The discontinued golf sportswear division has assets of $2,058,000, of which
$1,082,000 represents inventory. The Company intends to honor the sales order
commitments of its discontinued operations for its Fall 98 collection and is
liquidating all remaining inventories to the closeout market.
CASH FLOW - CONTINUING OPERATIONS
During the First Half of 1998, net cash used by operating activities was
$665,000 compared to cash provided by operating activities of $40,000 in the
First Half of 1997. The increase in cash used by operations was primarily the
result of increases in the Company's loss from continuing operations as well as
$236,000 in purchases of inventory of the Web site.
During the First Half of 1998, net cash used in investing activities was
$661,000, compared to $4,058,000 in the First Half of 1997. The cash used in
the First Half of 1998 was the result of deposits made with the Company's
factor ("Factor"). In the First Half of 1997, the Company completed the IPO.
Such funds were deposited with the Factor and invested at a rate of 1.75% below
prime. Funds are transferred into the Company's operating account as needed.
During the First Half of 1997, the Company completed the IPO and received net
proceeds of $5,939,000. The funds, net of debt repayments of approximately
$2,144,000 and deferred costs relating to the IPO were deposited with the
Factor.
Factoring Agreement: The Company is party to a Retail Collection Factoring
Agreement ("Factoring Agreement") pursuant to which the Company sells all of
its eligible accounts receivable to the Factor. The Company renegotiated such
agreement in November 1997. The Company is eligible for advances, at the
Factor's discretion, of up to 90% of the net balance due on eligible accounts
receivable. As a result of the discontinuation of the golf sportswear division,
the Company anticipates that it will have factored receivables only through
October 1998. Borrowings thereafter would require a renegotiation of the
Agreement. There can be no assurance that such agreement can be attained.
At June 30, 1998, there was approximately $2,449,000 in funds invested with
the Factor under the Factoring Agreement and approximately $433,000 in
factored receivables, net of returns and allowances. Interest on the net amount
due is payable monthly in arrears at the rate of 1% above the Chase Manhattan
Bank, NA prime rate ("Prime"). Interest on the net receivable is received
monthly in arrears at the rate of 1.75% below Prime
SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS
Certain written and oral statements made or incorporated by reference from time
to time by the Company or its representatives in this report, other reports,
filings with the Securities and Exchange Commission, press releases,
conferences, or otherwise, are "forward-looking statements" within the meaning
of the Private Securities Litigation Reform Act of 1995 (the "Act").
Forward-looking statements include, without limitation, any statement that may
predict, forecast, indicate, or imply future results, performance, or
achievements, and may contain the words "believe," "anticipate," "expect,"
"estimate," "project," "will be," "will continue," "will likely result," or
words or phrases of similar meaning. Forward-looking statements involve risks
and uncertainties that may cause actual results to differ materially from the
forward-looking statements. The risks and uncertainties are detailed from time
to time in reports filed by the Company with the Securities and Exchange
Commission, including Forms 8-A, 8-K, 10-QSB, and 10-KSB, and include, among
others, the following: lack of operating history of Internet business; risks
associated with the start-up of the Internet business; limited working capital
(possible need for additional financing); recent losses
15
<PAGE>
and anticipated future losses; competition; the potential for competitors with
greater resources to enter such business and the Company's lack of experience
in such business; risk of litigation for sale of unauthentic or damaged goods;
dependence on third parties and certain relationships; availability of
merchandise; uncertain acceptance of the Company's brand; risk of capacity
constraints; reliance on internally developed systems; system development
risks; consumer acceptance of the Internet as a medium for purchasing apparel;
the capital intensive nature of such business taking into account the need for
advertising to promote a Web site; seasonality and quarterly fluctuations and
the Company's ability to retain qualified personnel for the Internet business.
The risks included herein are not exhaustive. Other sections of this report may
include additional factors that could adversely impact the Company's business
and financial performance. Moreover, the Company operates in a very competitive
and rapidly changing environment. New risk factors emerge from time to time and
it is not possible for management to predict all such risk factors, nor can it
assess the impact of all such risk factors in the Company's business or the
extent to which any factor, or combination of factors, may cause actual results
to differ materially from those contained in any forward-looking statements.
Given these risks and uncertainties, investors should not place undue reliance
on forward-looking statements as a prediction of actual results.
16
<PAGE>
PART II
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Effective May 15,1997, the Company completed the IPO (Commission File No.
333-22895). The representative of the underwriters of the IPO was Southeast
Research Partners, Inc. (formerly known as GKN Securities Corp). The following
table shows the title of each class of securities registered and the title of
any class of securities into which such securities may be converted, if any:
(1) Units
(2) Common Stock
(3) Warrants
(4) Representative's Unit Purchase Option
(5) Bridge Warrants
UNITS: Each Unit consists of one share of Common Stock and one Warrant.
WARRANTS: Each Warrant is exercisable into one share of Common Stock
at $5.00 per share, subject to adjustment, at any time until the close
of business on May 15, 2002.
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 which were converted in
May 1997 (on a one-for-one basis) into the Warrants.
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>
The net offering proceeds totaled $5,939,343 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 243,335
Other expenses 567,321
The amounts shown above represent direct or indirect payments to
others.
17
<PAGE>
Based upon the Company's decision to discontinue the operations of the golf
sportswear division and build and promote its Web site, the Company has
reallocated its use of proceeds accordingly by adding to the description of
Working Capital and general corporate purposes to include costs related to the
Web site. As of June 30, 1998, the net offering proceeds of $5,939,343 were
used for the following cash expenditures:
<TABLE>
<CAPTION>
<S> <C>
Repayment of indebtedness and other obligations (with interest) $2,031,580
Marketing and advertising 908,115
Installation of concept shops and/or concept areas 232,964
Construction of plant, building, and facilities 276,489
Working capital and general corporate purposes
including fixed assets - computer hardware and software
and costs relating to the Web site 1,785,000
</TABLE>
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.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following is a list of exhibits filed as part of this Report:
EXHIBIT NO. DESCRIPTION
10.24 Employment Agreement dated as of July 13, 1998 by and
between Pivot Rules, Inc. and Patrick Barry.
10.25 Employment Agreement dated as of June 15, 1998 by and
between Pivot Rules, Inc. and Jonathan Morris.
27 Financial Data Schedule.
(b) Reports on Form 8-K.
The Company filed a Current Report on Form 8-K dated July 2, 1998 reporting
under Item 5 the discontinuation of the registrant's golf sportswear division.
18
<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.
PIVOT RULES, INC.
By: /s/ E. Kenneth Seiff
-------------------------
E. Kenneth Seiff
President
By: /s/ Meena N. Bhatia
-------------------------
Meena N. Bhatia
Chief Financial Officer
August 10, 1998
19
<PAGE>
EXHIBIT 10.24
EMPLOYMENT AGREEMENT
This EMPLOYMENT AGREEMENT is entered into as of July 13, 1998, by and
between Pivot Rules, Inc., a New York corporation (the "Company") and Patrick
Barry ("Barry").
RECITALS
1. The Company desires to retain the services of Barry as the Chief
Financial Officer and Executive Vice President of Operations of the Company in
accordance with the terms and conditions of this Agreement.
2. Barry will serve the Company as its Chief Financial Officer and
Executive Vice President of Operations 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 Barry agree as
follows:
1. TERM
The Company hereby agrees to employ Barry as the Chief Financial
Officer and Executive Vice President of Operations of the Company, and Barry
hereby agrees to serve in such capacity, for a term commencing as of the date
hereof and ending July 13, 2002, upon the terms and subject to the conditions
contained in this Agreement.
2. DUTIES
During the term of this Agreement, Barry shall serve as the Chief
Financial Officer and Executive Vice President of Operations of the Company,
and shall be responsible for the duties attendant to such office and such other
managerial duties and responsibilities with the Company as may be assigned from
time to time by the Chief Executive Officer and/or the Board of Directors of
the Company.
The principal location of Barry's employment shall be in the New York
City vicinity, although Barry understands and agrees that he will be required
to travel frequently for business reasons. Barry shall diligently and
faithfully perform his obligations under the Agreement and shall devote his
full professional and business time and best efforts to the performance of his
duties as the Chief Financial Officer and Executive Vice President of
Operations of the Company during the term of this Agreement. Barry shall not,
directly or indirectly, render services to any other person or entity, without
the consent of the Company's Board of Directors; provided, however, that
notwithstanding the foregoing between the date hereof and September 15, 1998
Barry shall be permitted to devote up to five (5) hours per week working on
matters for Audible,
<PAGE>
Inc. in order to facilitate his transition from such company.
3. BASE SALARY
For services rendered by Barry to the Company during the term
of this Agreement, the Company shall pay him a base salary of $128,000 per
year, payable in accordance with the standard payroll practices of the Company,
subject to annual increases in the sole discretion of the Chief Executive
Officer and the Company's Board of Directors, taking into account the financial
and operating performance of the Company's business and divisions and a
qualitative assessment of Barry's performance during such year.
4. BONUS/OPTIONS
a. During the term of this Agreement, Barry shall be eligible
to receive a bonus set by the Board of Directors in its sole discretion and
based on such factors as the Board of Directors deems appropriate.
b. The Company hereby agrees to cause the issuance to Barry
of options ("Options") to purchase 55,100 shares of the Company's common stock,
$.01 par value ("Common Stock"). The Options shall be issued pursuant to, and
in accordance with, the Company's 1997 Stock Option Plan (the "Plan"). The
Options shall be Incentive Stock Options (as defined in the Plan) to the
maximum extent permitted under the Internal Revenue Code of 1986, as amended,
and shall be exercisable at a price equal to the Fair Market Value (as defined
in the Plan) of the Common Stock on the date hereof. The Options shall vest
over a forty-eight (48) month period as follows: (i) 12.50% of the Options
shall vest on the six month anniversary of the date of grant and (ii) 2.083% of
the Options shall vest each month thereafter until all such Options shall have
vested, but subject to shareholder approval to the extent there are then
insufficient shares available for grant provided that if shareholder approval
is not obtained, Barry shall be entitled to the cash equivalent of the Options,
which shall be negotiated in good faith. The term of each Option shall be 10
years from the date of grant. In the event of the termination of Barry's
employment for any reason, he shall have 30 days within which to exercise any
vested Options and any unissued Options shall be forfeited. During the term of
this Agreement, Barry shall be eligible to participate in the Company's future
stock option grants as determined appropriate by the Committee in its sole
discretion.
5. EXPENSE REIMBURSEMENT AND PERQUISITES
a. During the term of this Agreement, Barry 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, if any, provided that the expenses are properly accounted
for.
b. During each calendar year of the term of this Agreement,
Barry shall be entitled to reasonable vacation with full pay; provided,
however, that Barry shall schedule such
2
<PAGE>
vacations at times convenient to the Company.
c. During the term of this Agreement, the Company shall
provide Barry with major medical insurance coverage as determined by the
Company in its sole discretion, and Barry 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.
6. NON-COMPETITION; NON-SOLICITATION
a. In consideration of the offer of employment, severance
benefits and Options to be granted to Barry 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, Barry shall not, without the prior written consent of the
Company, anywhere in the world, directly or indirectly, (i) enter into the
employ of or render any services to any 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 employed or retained by the Company while Barry 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. For
purposes of this Agreement, a "Competitive Business" shall mean any person,
corporation, partnership, firm or other entity which sells or has plans to sell
apparel, fashion accessories, or home furnishings via the Internet or otherwise
engages in any business which now or at the time has material operations which
are competitive (directly or indirectly) with the business of the Company.
However, nothing in this Agreement shall preclude Barry 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. Barry 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. Barry agrees that any breach of the covenants
contained in this paragraph 6 would irreparably injure the Company.
Accordingly, Barry agrees that the Company, in addition to pursuing any other
remedies it may have in law or in equity, may obtain an injunction against
Barry from any court having jurisdiction over the matter, restraining any
further violation of this paragraph 6.
3
<PAGE>
7. TERMINATION
a. This Agreement, the employment of Barry, and Barry's
position as Chief Financial Officer and Executive Vice President of Operations
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
Barry 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 Barry from
both his positions as Chief Financial Officer and
Executive Vice President of Operations 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 Barry has provided the Company with at least
sixty (60) days' prior written notice of such breach
and the Company has failed to cure such breach
within such sixty (60) day period;
(iv) the termination of this Agreement at any time
without cause by the Company;
(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)
Barry 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) Barry has willfully and
materially failed to perform his duties hereunder,
or (3) Barry has breached the terms and provisions
of this Agreement in any material respect, or (4)
Barry 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 Barry, which
shall occur on not less than 60 days prior written
notice from Barry.
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 Barry his
4
<PAGE>
base salary only through the date of termination. 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 Barry, 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 Barry is terminated during the first
year of the term of this Agreement;
(ii) the then-current base salary for a period of
one-hundred twenty (120) days, if Barry is
terminated during the second year of the term of
this Agreement; or
(iii) the then-current base salary for a period of
one-hundred fifty (150) days, if Barry is terminated
during the third year of the term of this Agreement
or any time during the term of this Agreement
thereafter.
The Severance Payments shall be payable in periodic installments in accordance
with the Company's standard payroll practices.
8. CONFIDENTIALITY
a. Barry 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, Barry
covenants and agrees with the Company that he will not 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 Barry 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, trade secrets and other intellectual property, designs, manuals,
confidential reports, supplier names and pricing, customer names and prices
paid, financial information or
5
<PAGE>
business plans.
b. Barry 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 Barry 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. Barry 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 Barry during his services with the Company, whether or not during
normal working hours or on the premises of the Company (all of which are
collectively referred to in this Agreement as "Developments"). All Developments
shall be the sole property of the Company, and Barry 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 trade names in
the United States and elsewhere.
d. Barry 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, Barry
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. Barry 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. Barry understands and agrees that the rights and
obligations set forth in paragraph 8 shall survive the termination or
expiration of this Agreement.
9. ADVANCE
The Company agrees that Barry shall have the right to receive
an advance (an "Advance") from the Company in the aggregate amount of up to
$15,000 against his future year end bonus, if any by providing written notice
to the Company on or before August 31, 1998. In the event that an Advance is
made, Barry shall promptly execute and deliver to the Company a written
acknowledgement of his receipt of the Advance and his agreement to be bound by
all of the terms and conditions contained in this Section 9. In the event that
an Advance is made, such Advance shall be offset by the amount, if any, of
Barry's year end bonus. If no year end bonus is earned by Barry for the first
year of the term of this Agreement, then the Advance shall be applied
6
<PAGE>
against his first future year end bonus, if any, for any year during the term
of this Agreement. Barry agrees that in the event Barry's employment with the
Company is terminated for any reason he shall repay the Advance to the Company
within 30 days of the date of termination of his employment. The Company agrees
that in the event this Agreement is terminated without cause by the Company
pursuant to paragraph 7 (a)(iii) within six months of the date hereof, the
Company shall forfeit its right to recover the Advance from Barry.
10. REPRESENTATIONS AND WARRANTIES
a. Barry represents and warrants to the Company that he was
advised to consult with an attorney of Barry's own choosing concerning this
Agreement.
b. Barry represents and warrants to the Company that, to the
best of his knowledge, the execution, delivery and performance of this
Agreement by Barry complies with all laws applicable to Barry 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 Barry and
the Company pertaining to Barry'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 Barry 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.
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:
7
<PAGE>
If to the Company, to:
Pivot Rules, Inc.
42 West 39th 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 Barry, to:
Patrick Barry
50 Cross Ridge Road
Chappaqua, New York 10514
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 paragraphs 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 paragraphs.
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.
8
<PAGE>
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
EMPLOYEE
/s/ Patrick Barry
-------------------
Patrick Barry
<PAGE>
EXHIBIT 10.25
EMPLOYMENT AGREEMENT
This EMPLOYMENT AGREEMENT is entered into as of June 15, 1998, by and
between Pivot Rules, Inc., a New York corporation (the "Company") and Jonathan
Morris ("Morris").
RECITALS
1. The Company desires to retain the services of Morris as the
Executive Vice President of the Company in accordance with the terms and
conditions of this Agreement.
2. Morris desires to serve the Company as its Executive Vice President
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 Morris agree as
follows:
1. TERM
The Company hereby agrees to employ Morris as the Executive Vice
President of the Company, and Morris hereby agrees to serve in such capacity,
for a term commencing on the date hereof and ending July 31, 2002 upon the
terms and subject to the conditions contained in this Agreement.
2. DUTIES
During the term of this Agreement, Morris shall serve as the Executive
Vice President of the Company, and he shall perform such duties, and have such
powers, authority, functions, duties and responsibilities for the Company as
are assigned to him by the Chief Executive Officer and/or the Board of
Directors of the Company.
The principal location of Morris' employment shall be in the New York
City vicinity (i.e. within a 35 mile radius of Manhattan), although Morris
understands and agrees that he will be required to travel from time to time for
business reasons. Morris shall devote his full professional and business time
and best efforts to the performance of his duties as the Executive Vice
President of the Company during the term of this Agreement. Morris shall not,
directly or indirectly, render services to any other person or entity, without
the consent of the Company's Chief Executive Officer; provided, however, that
nothing contained herein shall prevent Morris from rendering any service to any
charitable organization or family business so long as it does not interfere
with his duties and obligations hereunder.
3. COMPENSATION
<PAGE>
For services rendered by Morris to the Company during the term of this
Agreement, the Company shall pay him a base salary of Eighty-five Thousand
Dollars ($85,000) per year, payable in accordance with the standard payroll
practices of the Company, subject to 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." Notwithstanding the foregoing, the parties
acknowledge that Morris' base salary as of the date hereof is not commensurate
with his skills and value to the Company, and the parties agree that upon the
Company achieving some level of success such that it can afford to raise
Morris' salary the Company shall raise Morris' base salary to a level which is
commensurate with his skill level and in line with the Company's pay scale in
general.
4. BONUS/OPTIONS
a. During the term of this Agreement, Morris 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 seventy-five percent (75%) of Morris' base salary
paid during such fiscal year.
b. The Company hereby agrees to cause the issuance to Morris
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)
Option to purchase Ten Thousand (10,000) shares of Common Stock to be granted
on the date hereof (the "Signing Option"); and (ii) Option to purchase
Forty-five Thousand (45,000) shares of Common Stock to be granted on July 31,
1998 (the "July Option").
c. All Options to be granted pursuant to this Agreement shall
be: (i) issued in accordance with the Company's 1997 Stock Option Plan (the
"Plan"); (ii) Incentive Stock Options (as defined in the Plan) to purchase
shares of Common Stock registered under the Securities Act of 1933, as amended,
to the maximum extent permitted by law; (iii) exercisable at the Fair Market
Value (as defined in the Plan) of the Common Stock on the date of grant; (iv)
evidenced by a written option agreement duly executed by an authorized officer
of the Company, which agreement shall include a standard cashless exercise
provision and an exercise term of ten (10) years or such lesser period as shall
reflect the maximum period permitted by law. The Signing Option shall vest over
a twelve (12) month period at a rate of eight and one third percent (8 1/3%)
per month, commencing on the date hereof. The July Option shall vest over a
forty-eight (48) month period as follows: (i) 12.50% of the Options shall vest
on the six month anniversary of the date of grant and (ii) 2.083% of the
Options shall vest each month thereafter until all such Options shall have
vested, but subject to shareholder approval to the extent there are then
insufficient shares available for grant provided that if shareholder approval
is not obtained, Morris shall be entitled to the cash equivalent of the Option,
which shall be negotiated in good faith. In the event of the termination of
Morris' employment for any reason, he shall thirty (30) days, or more in the
event of termination due to death or disability as provided in the Plan, within
which to exercise any vested Options and any unvested Options shall be
forfeited. During the term of this
2
<PAGE>
Agreement, Morris shall be eligible to participate in the Company's future
stock option grants as determined appropriate by the Committee in its sole
discretion.
5. EXPENSE REIMBURSEMENT AND PERQUISITES
a. During the term of this Agreement, Morris 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,
Morris shall be entitled to reasonable vacation with full pay; provided,
however, that Morris shall schedule such vacations at times convenient to the
Company.
c. During the term of this Agreement, the Company shall
provide Morris with $250,000 worth of term life insurance, subject to
availability on commercially reasonable terms, major medical insurance coverage
as determined by the Company in its sole discretion, and Morris 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 similarly situated employees of the Company, to
the extent permitted by law.
6. NON-COMPETITION; NON-SOLICITATION
a. In consideration of the offer of employment, severance
benefits and Options to be granted to Morris 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 (subject to Section 6 b. below) thereafter, Morris shall not, without the
prior written consent of the Company, anywhere in the world, directly or
indirectly, (i) enter into the employ of or render any services to any
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 employed or retained by the Company while
Morris 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. For purposes of this Agreement, a "Competitive Business" shall
mean any person, corporation, partnership, firm or other entity which sells or
has plans to sell apparel, fashion accessories, or home furnishings via the
Internet or otherwise engages in any business which now or at the time has
material operations which are competitive (directly or indirectly) with the
business of the Company. However, nothing in this Agreement shall preclude
Morris 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
3
<PAGE>
Competitive Business.
b. Notwithstanding the foregoing, in the event that Ken Seiff
is not the Chief Executive Officer of the Company at the time of Morris'
termination, Morris shall be restricted by the provisions contained in Section
6 a. for the period of six (6) months immediately following his termination and
thereafter the restrictions contained in Section 6 a. shall lapse and be of no
further force or effect.
c. Morris 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. Morris agrees that any breach of the covenants
contained in this paragraph 6 would irreparably injure the Company.
Accordingly, Morris agrees that the Company, in addition to pursuing any other
remedies it may have in law or in equity, may obtain an injunction against
Morris from any court having jurisdiction over the matter, restraining any
further violation of this paragraph 6.
7. TERMINATION
a. This Agreement, the employment of Morris, and Morris's
position as Executive Vice President 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
Morris 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 Morris from
his position as Executive Vice President 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 Morris 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;
(v) non-renewal of this Agreement by the Company and/or
the Board of Directors;
4
<PAGE>
(vi) the termination of this Agreement for cause, which,
for purposes of this Agreement, shall mean that (1)
Morris 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, (2) Morris has willfully and
materially failed to perform his duties hereunder,
(3) Morris has breached the terms and provisions of
this Agreement in any material respect, or (4)
Morris has failed to comply in any material respect
with the Company's written policies of conduct of
which he had actual notice, including with respect
to trading in securities; or
(vii) the termination of this Agreement by Morris, which
shall occur on not less than 60 days prior written
notice from Morris.
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 Morris his base salary, unreimbursed business expenses, and
Options vested, subject to Section 4 c., only through the date of termination
and shall make no other payments or provide any other benefits 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 Morris, in lieu of all
salary, bonus and unvested options, severance payments (the "Severance
Payments") as follows:
(i) the then-current base salary for a period of ninety
(90) days, if Morris is terminated during the first
year of the term of this Agreement;
(ii) the then-current base salary for a period of
one-hundred twenty (120) days, if Morris is
terminated during the second year of the term of
this Agreement; or
(iii) the then-current base salary for a period of
one-hundred fifty (150) days, if Morris is
terminated during the third year of the term of this
Agreement or any time during the term of this
Agreement thereafter.
Notwithstanding the foregoing provisions relating to Severance Payments, in the
event of the termination of Morris' employment for any reason, he shall thirty
(30) days, or more in the event of termination due to death or disability as
provided in the Plan, within which to exercise any vested Options and any
unvested Options shall be forfeited. The Severance Payments shall be payable in
periodic installments in accordance with the Company's standard payroll
practices.
8. CONFIDENTIALITY; INVENTIONS
5
<PAGE>
a. Morris 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,
Morris 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 Morris 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. Morris 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 Morris 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. Morris 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 Morris for the Company during his services with the Company,
whether or not during normal working hours or on the premises of the Company
(all of which are collectively referred to in this Agreement as
"Developments"). All Developments shall be the sole property of the Company,
and Morris 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.
6
<PAGE>
d. Morris 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, Morris
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. Morris 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. Morris understands and agrees that the rights and
obligations set forth in paragraph 8 shall survive the termination or
expiration of this Agreement.
9. REPRESENTATIONS AND WARRANTIES
a. Morris represents and warrants to the Company that he was
advised to consult with an attorney of Morris' own choosing concerning this
Agreement and that Morris has done so.
b. Morris represents and warrants to the Company that the
execution, delivery and performance of this Agreement by Morris complies with
all laws applicable to Morris 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.
10. 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.
11. INDEMNIFICATION
a. The Company agrees that it shall to the fullest extent
permitted by law indemnify and hold Morris harmless and shall pay and reimburse
Morris for any loss, cost, damage, injury or other expense (including without
limitation reasonable attorneys' fees) which Morris incurs by reason of being
or having been an officer or director of the Company or by reason of the fact
that Morris is or was serving at the request of the Company as a director,
officer, employee, fiduciary or other representative of the Company. All
indemnification shall be paid by the Company in advance of the final
disposition of the matter (as incurred by Morris) provided that Morris executes
and deliver to the Company an undertaking to repay any amounts so advanced in
the event that it shall be determined that Morris is not entitled to
indemnification hereunder. This indemnification obligation is in addition to
any other indemnification provision contained in the Company's By-laws or
pursuant to any other document, instrument or agreement and shall survive the
term of Morris' employment hereunder.
7
<PAGE>
b. In the event that Morris asserts his right of
indemnification under Section 11 a. above, the Company shall have the right to
select Morris' counsel provided that there is no material conflict of interest
between the Company and Morris and provided such counsel is reasonably
acceptable to Morris. Notwithstanding the foregoing, the Company shall have the
right to participate in, or fully control, any proceeding, compromise,
settlement, resolution or other disposition of the claim or proceeding so long
as Morris is provided with a general release from the Company and the claimant
in form and substance reasonably satisfactory to Morris and no restrictions are
imposed on Morris as a result of the settlement.
12. ENTIRE AGREEMENT
This Agreement and the Option Agreements contain all of the
understandings between Morris and the Company pertaining to Morris's employment
with the Company, and they supersede 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 Morris 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.
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.
42 West 39th Street, 9th Floor
New York, NY 10018
Attn: E. Kenneth Seiff
With a copy to:
Swidler Berlin Shereff Friedman, LLP
919 Third Avenue
New York, New York 10022
Attn: Richard A. Goldberg, Esq.
8
<PAGE>
If to Morris, to:
Jonathan Morris
15 West 72 Street, Apt. 32A
New York, New York 10023
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.
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/ Jonathan Morris
-----------------------------
Jonathan Morris
9
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