<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
[x] THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to __________
Commission File Number: 0-23379
I.C. ISAACS & COMPANY, INC.
(Exact name of Registrant as specified in its Charter)
DELAWARE 52-1377061
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3840 BANK STREET 21224-2522
BALTIMORE, MARYLAND (Zip Code)
(Address of principal executive offices)
(410) 342-8200
(Registrant's telephone number, including area code)
NONE
(Former name, former address and former fiscal year - if changed since
last report)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No __
---
As of March 31, 1998, 8,320,000 shares of common stock ("Common Stock")
of the Registrant were outstanding.
<PAGE>
PART I - FINANCIAL INFORMATION
I.C. ISAACS & COMPANY, INC.
CONSOLIDATED BALANCE SHEET
"BOSS-Registration Mark-," "Lord Isaacs-Registration Mark-," "I.C.
Isaacs-Registration Mark-," "Pizzazz-Registration Mark-," and "I.G.
Design-Registration Mark-" are trademarks of the Company. All other
trademarks or service marks, including "Giraud-Registration Mark-" and
"Marithe and Francois Giraud-Registration Mark-" (collectively,
"Giraud-Registration Mark-") and "Beverly Hills Polo Club-Registration Mark-"
appearing in this Quarterly Report on Form 10-Q are the property of their
respective owners and are not the property of the Company.
Item 1. Financial Statements.
<TABLE>
<CAPTION>
Assets December 31 March 31
1997 1998
---- ----
Current
<S> <C> <C>
Cash, including temporary investments of $6,512,455
and $10,013,000................................................. $ 7,422,067 $ 9,178,682
Accounts receivable, less allowance for doubtful
accounts of $1,185,000 and $1,265,000........................... 23,020,077 24,820,070
Inventories (Note 1)................................................ 23,936,226 26,613,040
Prepaid expenses and other.......................................... 1,768,792 2,070,257
----------- -----------
Total current assets................................................ 56,147,162 62,682,069
Property, plant and equipment, at cost, less
accumulated depreciation and amoritization...................... 2,678,688 3,412,985
Trademark, less accumulated amortization of $187,500
and $468,750 (Note 5)........................................... 11,062,500 10,781,250
Goodwill, less accumulated amortization of $863,505 and
$880,065........................................................ 1,788,595 1,772,035
Deferred income taxes (Note 3)...................................... 1,505,000 1,505,000
Other assets........................................................ 260,776 840,010
----------- -----------
73,442,721 80,993,349
----------- -----------
----------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
I.C. ISAACS & COMPANY, INC.
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
December 31 March 31
1997 1998
---- ----
<S> <C> <C>
Liabilities and Stockholders' Equity
Current
Current maturities of revolving line of credit................. $ - $ 61,525
Current maturities of capital lease obligations................ 172,515 177,237
Accounts payable............................................... 6,967,488 7,355,179
Accrued expenses and other current liabilities (Note 2)........ 1,979,364 3,048,935
Accrued compensation........................................... 235,309 506,630
Income taxes payable (Note 3).................................. 156,000 451,336
----------- -----------
Total current liabilities.......................................... 9,510,676 11,600,842
----------- -----------
Long-term debt
Note payable................................................... 11,250,000 11,250,000
Capital lease obligations...................................... 186,122 142,662
----------- -----------
Total long-term debt............................................... 11,436,122 11,392,662
----------- -----------
Commitments and Contingencies (Note 5)
Stockholders' Equity (Note 4)
Preferred stock; $.0001 par value; 5,000,000 shares authorized,
none outstanding........................................... _ _
Common stock; $.0001 par value; 50,000,000 shares authorized,
7,824,699 and 8,344,699 shares issued;
7,800,000 and 8,320,000 shares outstanding..................... 782 834
Additional paid-in capital..................................... 34,120,190 38,894,998
Retained earnings.............................................. 18,389,819 19,118,861
Treasury stock, at cost (24,699 shares)........................ (14,868) (14,868)
----------- -----------
Total stockholders' equity......................................... 52,495,923 57,999,825
----------- -----------
$73,442,721 $80,993,349
----------- -----------
----------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
I.C. ISAACS & COMPANY, INC.
CONSOLIDATED STATEMENTS OF OPERATION
<TABLE>
<CAPTION>
Three Months Ended March 31 1997 1998
-------------------- -----------------
<S> <C> <C>
Net Sales.......................................................... $39,311,801 $34,270,880
Cost of Sales...................................................... 25,998,499 23,563,591
----------- -----------
Gross profit....................................................... 13,313,302 10,707,289
----------- -----------
Operating Expenses
Selling........................................................... 3,920,927 4,326,084
License fees (Note 5)............................................. 1,836,382 1,782,042
Distribution and shipping......................................... 1,050,057 1,069,845
General and administrative........................................ 1,769,068 2,142,216
Recovery of legal fees............................................ (117,435) -
Provision for plant closing (Note 5).............................. - 226,326
----------- -----------
Total operating expenses....................................... 8,458,999 9,546,513
----------- -----------
Operating Income 4,854,303 1,160,776
----------- -----------
Other Income (Expense)
Interest, net of interest income of $16,045 and $133,336....... (383,879) (239,414)
Other net...................................................... 8,885 312,438
----------- -----------
Total other income (expense) (374,994) 73,024
----------- -----------
Income before minority interest and income taxes................... 4,479,309 1,233,800
Minority interest.................................................. (45,112) -
----------- -----------
Income before income taxes......................................... 4,434,197 1,233,800
Provision for income taxes (Note 3)................................ - 506,000
----------- -----------
Net Income $4,434,197 $ 727,800
----------- -----------
----------- -----------
Basic and diluted earnings per share............................... $ 1.11 $ 0.09
Weighted average shares outstanding................................ 4,000,000 8,198,667
----------- -----------
----------- -----------
Proforma financial information:
Income before income taxes, as presented........................... $ 4,434,197 $ -
Pro forma provision for income taxes............................... 1,818,000 -
----------- -----------
Pro forma net income............................................... $ 2,616,197
----------- -----------
----------- -----------
Pro forma basic and diluted earnings per share..................... $ 0.53 $ -
Weighted average shares outstanding................................ 4,930,000 -
----------- -----------
----------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
I.C. ISAACS & COMPANY, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Ended March 31 1997 1998
------------------- ---------------
<S> <C> <C>
Operating Activities
Net income..................................................... $ 4,434,197 $ 727,800
Adjustments to reconcile net income to
net cash provided by operating activities
Provision for doubtful accounts............................. 253,014 339,498
Write off of accounts receivable............................ (213,014) (259,498)
Provision for sales returns and discounts................... 1,369,365 1,603,680
Sales returns and discounts................................. (1,829,240) (1,509,918)
Depreciation and amortization............................... 237,914 542,335
Minority interest........................................... 45,112 -
Other....................................................... - 242
(Increase) decrease in assets
Accounts receivable......................................... (10,155,741) (1,972,775)
Inventories................................................. (6,913,279) (2,676,814)
Prepaid expenses and other.................................. 45,469 (301,465)
Other assets................................................ - (2,359)
Increase (decrease) in liabilities
Accounts payable............................................ 1,552,677 387,711
Accrued expenses and other current
Liabilities................................................ 1,248,644 1,069,571
Accrued compensation....................................... 106,145 271,321
Accrued compensation....................................... 106,145 271,321
Income taxes payable....................................... - 295,336
------------ -----------
Cash used in operating activities.................................. (9,818,737) (1,485,335)
------------ -----------
Investing Activities
Capital expenditures........................................... $ (369,436) $ (955,697)
Acquisition of Girbaud license................................. - (600,000)
------------ -----------
Cash used in investing activities.................................. (369,436) (1,555,697)
------------ -----------
Financing Activities
Checks issued against future deposits.......................... 3,150,530 -
Issuance of common stock....................................... - 4,774,860
Stockholder distributions...................................... (2,184,029) -
Principal proceeds from debt................................... 9,531,673 61,525
Principal payments on debt..................................... (111,916) (38,738)
------------ -----------
Cash provided by financing activities.............................. 10,386,258 4,797,647
------------ -----------
Increase in cash and cash equivalents.............................. 198,085 1,756,615
Cash and Cash Equivalents, at beginning of period.................. 938,799 7,422,067
------------ -----------
Cash and Cash Equivalents, at end of period........................ $ 1,136,884 $ 9,178,682
------------ -----------
------------ -----------
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
I.C. ISAACS & COMPANY, INC.
Summary of Accounting Policies
Basis of Presentation
The consolidated financial statements include the accounts of I. C.
Isaacs & Company, Inc. ("ICI"), I.C. Isaacs Europe, S.L. ("Isaacs Europe"), I.C.
Isaacs & Company, L.P. (the "Partnership"), Isaacs Design, Inc. ("Design") and
I. C. Isaacs Far East (collectively the "Company"). ICI operates as the general
partner of the Partnership and has a 99.0% ownership interest. The limited
partner, with a 1.0% ownership interest was an individual. The Company accounted
for the limited partner's ownership interest as a minority interest in the
accompanying consolidated financial statements. In connection with the initial
public offering of its common stock, ICI purchased the limited partnership
interest, at book value, from the limited partner. The Company established
Isaacs Europe in July 1996 as the exclusive licensee of Beverly Hills Polo
Club-Registration Mark-sportswear in Europe. Isaacs Europe did not have any
significant revenue or expenses in 1997 or 1998. All intercompany balances and
transactions have been eliminated. Also, ICI terminated its Subchapter S
corporation status on December 22, 1997, and became subject to federal, state
and local income taxes.
Business Description
The Company, which operates in one business segment, designs,
manufactures and markets full lines of sportswear for young men, women and
boys under the BOSS-Registration Mark- brand in the United States and Puerto
Rico and for men and women under the Beverly Hills Polo Club-Registration
Mark- brand in the United States, Puerto Rico and Europe. In May 1998, the
Company entered into an exclusive license agreement to manufacture and market
boys sportswear under the Beverly Hills Polo Club-Registration Mark- brand in
the United States and Puerto Rico. The Company intends to begin marketing
boys sportswear under the Beverly Hills Polo Club-Registration Mark- brand in
the first half of 1999. In February 1998, the Company began offering
collections of men's sportswear under the Girbaud-Registration Mark- brand in
the United States and Puerto Rico. The Company intends to begin marketing
women's sportswear under the Girbaud-Registration Mark- brand in the second
quarter of 1998 for delivery during the 1998 holiday season. The Company also
manufactures and markets women's sportswear under various other Company-owned
brand names as well as under third-party private labels.
Interim Financial Information
In the opinion of management, the interim financial information as of
March 31, 1998 and for the three months ended March 31, 1997 and 1998 contains
all adjustments,consisting only of normal recurring adjustments, necessary for a
fair presentation of the results for such periods. Results for interim periods
are not necessarily indicative of results to be expected for an entire year.
Risks and Uncertainties
The apparel industry is highly competitive. The Company competes
primarily with larger, well capitalized companies which may seek to increase
market share through price reductions. The risk to the Company is that such a
strategy may ultimately lead to reduced profit margins. In the past several
years, many of the Company's competitors have switched much of their apparel
manufacturing from the United States to foreign locations such as Mexico, the
Dominican Republic and throughout Asia. As competitors lower production costs it
gives them greater flexibility to alter prices. Over the last several years, the
Company has switched a significant portion of its production to contractors
outside the United States to reduce costs. Management believes that it will
continue this strategy for the foreseeable future.
The Company faces other risks inherent in the apparel industry. These
risks include changes in fashion trends and related consumer acceptance and the
continuing consolidation in the retail segment of the apparel industry. The
Company's ability, or inability, to manage these risk factors could influence
future financial and operating results.
7
<PAGE>
I.C. ISAACS & COMPANY, INC.
Summary of Accounting Policies (Continued)
Use of Estimates
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make certain estimates and
assumptions, particularly regarding valuation of accounts receivable and
inventory, recognition of liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements. Actual results could differ
from those estimates.
Concentration of Credit Risk
Financial instruments which potentially expose the Company to
concentrations of credit risk consist primarily of trade accounts receivable.
The Company's customer base is not concentrated in any specific geographic
region, but is concentrated in the retail industry. For the three months ended
March 31, 1997 and 1998 sales to one customer were 13.0% and 22.9%,
respectively. The significant customer was the same during both periods. The
Company establishes an allowance for doubtful accounts based upon factors
surrounding the credit risk of specific customers, historical trends and other
information. The Company's actual credit losses as a percentage of net sales
have been less than three-quarters of one percent.
The Company is also subject to concentrations of credit risk with
respect to its cash and cash equivalents, which it minimizes by placing these
funds with high-quality institutions.
The Company is exposed to credit losses in the event of nonperformance
by the counterparties to the letter of credit agreements, but it does not expect
any financial institutions to fail to meet their obligation given their high
credit rating.
Income Taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes ("SFAS
109"). Under SFAS 109, deferred taxes are determined using the liability method
which requires the recognition of deferred tax assets and liabilities based on
differences between financial statement and income tax basis using presently
enacted tax rates.
Earnings Per Share
Pro forma earnings per share for the period ended March 31, 1997 are
based on pro forma net income and the weighted average number of shares of
common stock outstanding (4,000,000) adjusted to include the number of shares
(930,000) sold by the Company which would be necessary to fund the distribution
of $9.3 million of previously earned but undistributed Subchapter S corporation
earnings.
In March 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, Earnings Per Share ("SFAS
128"). SFAS 128 provides a different method of calculating earnings per share
than is currently used in APB Opinion 15. SFAS 128 provides for the calculation
of basic and diluted earnings per share. Basic earnings per share includes no
dilution and is computed by dividing income available to common stockholders by
the weighted average number of common shares outstanding for the period. Diluted
earnings per share reflects the potential dilution of securities that could
share in the earnings of an entity, similar to existing fully diluted earnings
per share. As required by the policies of the Securities and Exchange
Commission, the Company treated the shares sold to fund the S Corporation
Distribution as outstanding prior to the initial public offering completed in
December, 1997. There is no difference in basic and diluted earnings per share.
Recent Accounting Pronouncements
In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"). SFAS 123 will begin to affect the Company in fiscal
1997 with the establishment of the 1997 Omnibus Stock Plan. The Company will
adopt
8
<PAGE>
I.C. ISAACS & COMPANY, INC.
Summary of Accounting Policies (Continued)
only the disclosure provisions of SFAS 123 and account for stock-based
compensation using the intrinsic value method set forth in APB Opinion 25.
In June 1997, the Financial Accounting Standards Board issued two new
disclosure standards. The Company's results of operations and financial position
will be unaffected by implementation of these new standards.
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" ("SFAS 130"), establishes standards for reporting and
display of comprehensive income, its components and accumulated balances.
Comprehensive income is defined to include all changes in equity except those
resulting from investments by owners and distributions to owners. Among other
disclosures, SFAS 130 requires that all items that are required to be recognized
under current accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the same prominence as
other financial statements.
Statement of Financial Accounting Standards No. 131, "Disclosure about
Segments of a Business Enterprise" ("SFAS 131"), establishes standards for the
way that public enterprises report information about operating segments in
annual financial statements and requires reporting of selected information about
operating segments in interim financial statements issued to the public. It also
establishes standards for disclosures regarding products and services,
geographic areas and major customers. SFAS 131 defines operating segments as
components of an enterprise about which separate financial information is
available that is evaluated regularly by the chief operating decision maker in
deciding how to allocate resources and in assessing performance.
Both SFAS 130 and SFAS 131 are effective for financial statements for
periods beginning after December 15, 1997 and require comparative information
for earlier years to be restated. Management believes the impact, if any, would
not be material to the financial statement disclosures. Results of operations
and financial position, however, will be unaffected by implementation of these
standards.
In February 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 132, "Employers Disclosures
about Pensions and Other Postretirement Benefits" ("SFAS 132"). SFAS 132 revised
employers' disclosures about pension and other postretirement benefit plans but
does not change measurement or recognition of those plans. Also, SFAS 132
requires additional information on changes in the benefit obligations and fair
values of plan assets. Presently, ICI does not offer postretirement benefits.
Adoption of SFAS 132 will not have an effect on reported financial and operating
results.
9
<PAGE>
I.C. ISAACS & COMPANY, INC.
Notes to Consolidated Financial Statements
1. Inventories
Inventories consist of the following:
<TABLE>
<CAPTION>
Decemer 31, 1997 March 31, 1998
---------------- --------------
<S> <C> <C>
Raw Materials $ 4,742,653 $ 5,397,720
Work-in-process 1,864,569 2,039,567
Finished Goods 17,329,004 19,175,753
------------ -----------
$ 23,936,226 $26,613,040
</TABLE>
2. Accrued Expenses
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
Decemer 31, 1997 March 31, 1998
---------------- --------------
<S> <C> <C>
Royalties $ 901,925 $ 1,495,647
Accrued professional fees 150,000 100,000
Payable to salesmen 127,634 395,011
Reserve for plant closing - 190,108
Payroll tax withholdings 139,214 202,102
Customer credit balances 240,530 254,756
Property taxes 136,700 64,138
Accrued interest 174,401 187,500
Other 108,960 159,673
----------- -----------
$ 1,979,364 $ 3,048,935
----------- -----------
----------- -----------
</TABLE>
3. Income Taxes
The Company's estimated effective tax rate for the first quarter of
1998 was 41% and is slightly higher than the statutory rate due primarily to the
effect of state and local taxes.
4. Stock Options
In May 1997, ICI adopted the 1997 Omnibus Stock Plan. Under the 1997
Omnibus Stock Plan, ICI may grant qualified and nonqualified stock options,
stock appreciation rights, restricted stock or performance awards, payable in
cash or shares of common stock, to selected employees. The 1997 Omnibus Stock
Plan will be administered by the Board of Directors. The Company has reserved
500,000 shares of common stock for issuance under the 1997 Omnibus Stock Plan.
ICI intends to grant stock options to selected employees in the second quarter
of fiscal 1998.
5. Commitments and Contingencies.
In November 1997 and as further amended in March 19998, the Company
entered into an exclusive license agreement with Girbaud Design, Inc. and its
affiliate to manufacture and market men's jeanswear, casual wear, outerwear
and active influenced sportswear under the Girbaud-Registration Mark- brand
and certain related trademarks in the United States, Puerto Rico and the U.S.
Virgin Islands. The agreement has an initial term of two years and may be
extended at the option of the Company for up to a total of ten years. Under
the agreement the Company is required to make payments to the licensor in
10
<PAGE>
I.C. ISAACS & COMPANY, INC.
Notes to Consolidated Financial Statements (Continued)
an amount equal to 6.25% of net sales of regular licensed merchandise and 3.0%
of certain irregular and closeout licensed merchandise. Payments are subject to
guaranteed minimum annual royalties as follows:
<TABLE>
<S> <C>
1998 $1,200,000
1999 $1,500,000
</TABLE>
Beginning with the first quarter of 1998, the Company is obligated to
pay the greater of actual royalties earned or the minimum guaranteed royalties
for that year. The Company is required to spend at least $350,000 in advertising
for the men's Girbaud-Registration Mark- brand in 1998 and $500,000 each year
thereafter hile the agreement is in effect.
In March 1998, the Company entered into an exclusive license agreement
with Girbaud Design, Inc. and its affiliate to manufacture and market women's
jeanswear, casual wear and active influenced sportswear under the
Girbaud-Registration Mark- brand and certain related trademarks in the United
States, Puerto Rico and the U.S. Virgin Islands. The agreement has an initial
term of two years and may be extended at the option of the Company for up to a
total of ten years. The Company paid an initial license fee of $600,000. Under
the agreement, the Company is required to make payments to the licensor in an
amount equal to 6.25% of net sales of regular licensed merchandise and 3.0% of
certain irregular and closeout licensed merchandise. Payments are subject to
guaranteed minimum annual royalties as follows:
<TABLE>
<S> <C>
1999 $ 700,000
2000 $ 800,000
</TABLE>
Beginning with the first quarter of 1999, the Company is obligated to pay
the greater of actual royalties earned or the minimum guaranteed royalties for
that year. The Company is required to spend at least $550,000 in advertising for
the women's Girbaud-Registration Mark- brand in 1998 and $400,000 each year
thereafter while the agreement is in effect. In addition, while the agreement
is in effect the Company is required to pay $190,000 per year to the licensor
for advertising and promotional expenditures related to the Girbaud-Registration
Mark- brand.
In May 1998, the Company entered into an exclusive license agreement
with BHPC Marketing, Inc., to manufacture and market boys knitted and woven
shirts, cotton pants, jeanswear, shorts, swimwear and outerwear under the
Beverly Hills Polo Club-Registration Mark- brand in the United States and
Puerto Rico. The initial term of the agreement is three years, commencing
January 1, 1999, with renewal options for a total of six years. Under the
agreement the Company is required to make payments to the licensor in an
amount equal to 5% of net sales. Payments are subject to guaranteed minimum
annual royalties as follows:
<TABLE>
<S> <C>
1999 $ 50,000
2000 $ 75,000
2001 $ 100,000
</TABLE>
In February 1998, the Company announced that it intends to close its
Newton, Mississippi manufacturing facility. This closure will occur during the
second quarter of 1998, resulting in a charge of $226,326 against earnings in
the first quarter of 1998. The production in this facility, the majority of
which is jeans, will be transferred to third party independent contractor
facilities in Mexico where the Company currently has jeans manufactured.
During 1998 the Company intends to construct a new distribution center in
Milford, Delaware. The Company anticipates that this new facility will cost
approximately $6.0 to $7.0 million and will be financed through a mortgage loan.
11
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.
Important Information Regarding Forward-Looking Statements
This Quarterly Report on Formm 10-Q contains forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933,
as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended. Those statements include statements regarding the intent, belief or
current expectations of I.C. Isaacs and its management. Such statements are
subject to a variety of risks and uncertainties, many of which are beyond the
Company's control, which could cause actual results to differ materially
from those contemplated in such forward-looking statements, including in
particular the risks and uncertainties described under "Risk Factors" in the
Company's Prospectus which include, among other things, (i) changes in the
marketplace for the Company's products, including customer tastes, (ii) the
introduction of new products or pricing changes by the Company's competitors,
(iii) changes in the economy, and (iv) termination of one or more of its
agreements for use of the BOSS-Registration Mark-, Beverly Hills Polo
Club-Registration Mark- and Girbaud-Registration Mark- brand names and images
in the manufacture and sale of the Company's products. Existing and
prospective investors are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date hereof. The
Company undertakes no obligation to update or revise the information
contained in this Quarterly Report on Form 10-Q, whether as a result of new
information, future events or circumstances or otherwise.
Results of Operations
The following tables set forth, for the periods indicated, the
Company's net sales categorized by brand and product category and the percentage
relationship to net sales of certain items in the Company's consolidated
financial statements for the periods indicated.
<TABLE>
<CAPTION>
Three Months
Ended
March 31
--------
1997 1998
---- ----
(in thousands)
<S> <C> <C>
MEN'S (1)
BOSS Bottoms $ 14,254 $ 9,444
BOSS Tops 10,866 11,923
BOSS Boys 2,899 3,207
Men's BHPC 6,678 5,016
Men's Other 26 23
--------- -----------
Men's net sales 34,743 29,613
WOMEN'S (1)
BOSS Juniors' 727 1,062
Women's BHPC 366 233
Women's Other (2) 3,476 3,363
--------- -----------
Women's net sales 4,569 4,658
--------- -----------
Total net sales $ 39,312 $ 34,271
--------- -----------
--------- -----------
</TABLE>
(1) The net sales totals incorporate product returns allocated in proportion to
gross sales.
(2) Includes Company-owned brands and third-party private labels.
12
<PAGE>
<TABLE>
<CAPTION>
Three Months
Ended
March 31
--------
1997 1998
---- ----
<S> <C> <C>
Net sales 100.0% 100.0%
Cost of sales 66.1 68.8
------ ------
Gross profit 33.9 31.2
Selling expenses 10.0 12.6
License Fees 4.7 5.2
Distribution and shipping expenses 2.7 3.1
General and administrative expenses 4.2 6.9
------ ------
Operating Income 12.3% 3.4%
------ ------
------ ------
</TABLE>
Three Months Ended March 31, 1998 Compared to Three Months Ended March 31, 1997
Net Sales.
Net sales decreased 12.8% to $34.3 million in the three months ended
March 31, 1998 from $39.3 million in the three months ended March 31, 1997.
The decrease was primarily due to lower volume shipments of BOSS-Registration
Mark- and Beverly Hills Polo Club-Registration Mark- men's sportswear. Net
sales of BOSS-Registration Mark- sportswear decreased $3.2 million or 11.1%
to $25.6 million due to softness in the men's jeans segment. Net sales of the
BOSS-Registration Mark- tops segment were $11.9 million in the three months
ended March 31, 1998 versus $10.9 million in the three months ended March 31,
1997. Net sales of Beverly Hills Polo Club-Registration Mark- sportswear
decreased $1.8 million or 25.7% to $5.2 million due to lower demand for men's
bottoms and tops. The Company's women's private label sales were essentially
unchanged from March 31, 1997 to March 31, 1998. The Company has noted that
in recent months apparel retailers have been buying goods closer to market
needs which adversely impacted net sales in the first quarter of 1998. The
Company expects this sluggishness in the retail apparel environment
especially in specialty store channels, to continue which will negatively
affect sales in the second quarter of 1998. In addition, the introduction of
the Company's men's BOSS and Beverly Hills Polo Club product lines for the
fall 1998 season was delayed for several weeks. While subsequent market
response to both lines has been encouraging, the delay in introduction may
continue to adversely affect the Company's performance through the second and
third quarters. The Company executed exclusive license agreements to
manufacture and market men's and women's sportswear, respectively, under the
Girbaud-Registration Mark- brand in the United States and Puerto Rico. The
Company expects to begin marketing a full line of men's sportswear in the
second quarter 1998. The Company intends to begin marketing women's
sportswear in the second quarter of 1998 for delivery during the 1998 holiday
season. Accordingly, the Company believes the Girbaud-Registration Mark-
merchandise will begin to contribute to net sales in the second
half of 1998. International sales were insignificant for the three months
ended March 31, 1998 and 1997. In May 1998, the Company entered into an
exclusive license agreement to manufacture and market boys sportswear under
the Beverly Hills Polo Club-Registration Mark- brand in the United States and
Puerto Rico. The Company intends to begin marketing boys sportswear under the
Beverly Hills Polo Club-Registration Mark- brand in the first half of 1999.
Gross Profit.
Gross profit decreased 19.5% to $10.7 million in the three months
ended March 31, 1998 from $13.3 million in the three months ended March 31,
1997. Gross profit as a percentage of net sales decreased from 33.9% to 31.2%
over the same period. The decrease in gross profit was primarily due to the
reduction in net sales coupled with excess capacity at its manufacturing
facilities due to the reduction in customer orders. Generally, the Company
manufactures goods based on orders. Consequently, a decline in the level of
customer orders increases overhead allocated to goods manufactured and
generates a lower gross profit on such goods. The decline in gross profit was
offset somewhat by the continued shift of production of denim bottoms from
the United States to Mexico to take advantage of the lower labor and overhead
costs.
Selling, Distribution, General and Administrative Expenses.
Selling, distribution, general, and administrative expenses ("SG&A")
increased 12.9% to $9.6 million in the three months ended March 31, 1998 from
$8.5 million in the three months ended March 31, 1997. As a
13
<PAGE>
percentage of net sales, SG&A expenses increased to 22.6% from 16.9% over the
same period due to higher advertising expenditures and costs of merchandise
samples offset somewhat by lower commissions to the Company's salespersons.
Advertising expenditures increased $.3 million to $.8 million as the Company
continued to focus on enhancing the identity and image of its brands through
increased media exposure. Also, the Company is required to spend $.9 million
in advertising for the women's and men's Girbaud-Registration Mark- brands in
1998. Distribution and shipping expenses remained essentially unchanged at
$1.1 million over the same period. The Company experienced a reduction in
overtime wages, due to decreased merchandise shipments, which was offset by
salary increases for existing employees and rent on an additional temporary
warehouse facility. General and administrative expenses increased $.5 million
to $2.4 million due to salary increases for existing employees, costs
associated with the hiring of new management and product design personnel and
a $.2 million loss provision for estimated costs associated with closing the
Newton, Mississippi manufacturing facility. The loss provision relates
primarily to severance pay for employees.
License Fees.
License fees decreased $.06 million to $1.78 million in the three
months ended March 31, 1998 from $1.84 million in the three months ended
March 31, 1997. As a percentage of net sales, license fees increased from
4.7% to 5.2%. The decrease in license fees was not in proportion to the
decrease in net sales due to the higher royalty rate, at the current level of
net sales, under the new BOSS-Registration Mark- foreign rights agreement
executed in November 1997. Also, the Company made royalty payments of
$100,000 in the first quarter of 1998 under the men's Girbaud-Registration
Mark- license agreement even though merchandise shipments will not begin
until the second quarter of 1998. Further, sales of non-denim branded
products, which continue to increase, carry higher royalty rates than other
branded products.
Operating Income.
Operating income decreased 76% to $1.2 million in the three months
ended March 31, 1998 from $4.9 million in the three months ended March 31, 1997.
The decline was due to lower sales and gross profit and to a lesser extent an
increase in operating expenses.
Interest Expense.
Interest expense decreased $.1 million to $.2 million in the three
months ended March 31, 1998. The Company repaid its asset-based line of
credit with a portion of the proceeds of its initial public offering
completed in December 1997. However, the Company incurred interest expense
related to the $11.25 million note payable associated with its purchase of
the BOSS-Registration Mark- trademark in November 1997. This expense of $.3
million was offset somewhat by interest income of $.1 million earned on
available cash. The Company invests its excess cash in short-term liquid
investments.
Other Income.
The Company recognized $.3 million of income in the three months ended
March 31, 1998 related to a refund of excess premiums paid on its employee
health insurance plan. There was no comparable refund in 1997.
Income Taxes.
The Company recorded a provision for income taxes of $.5 million or 41%
of pretax income for the three months ended March 31, 1998. The difference
between the statutory and effective tax rates is due primarily to state and
local taxes. The Company expects its effective tax rate to approximate 41% for
1998. Prior to its initial public offering, the Company's earnings were not
subject to federal, state and local taxes since it elected to be treated as a
Subchapter S Corporation. The Company terminated its Subchapter S Corporation
status in December 1997.
15
<PAGE>
Liquidity and Capital Resources
The Company has relied primarily on internally generated funds,
trade credit and asset-based borrowings to finance its operations and
expansion. The Company's capital requirements primarily result from working
capital needed to support increases in inventory and accounts receivable. The
Company's working capital improved significantly during the first three
months of 1998 compared to the first three months of 1997, primarily due to
receipt and utilization of the net proceeds from its initial public offering
in December 1997 and the exercise of the over-allotment option in January
1998. As of March 31, 1998, the Company had cash, including temporary
investments, of $9.2 million and working capital of $51.1 million compared to
$1.1 million and $18.3 million, respectively, as of March 31, 1997.
Operating Cash Flow
Cash used by operations totaled $1.5 million for the first three
months of 1998 due to increases in accounts receivable and inventories which
resulted from slower than expected cash collections and reduced sales of
BOSS-Registration Mark- and Beverly Hills Polo Club-Registration Mark- men's
sportswear. These increases were partially offset by higher levels of
accounts payable and other accrued expenses. Cash used for investing
activities for the first three months of 1998 totaled $1.6 million and was
used primarily to purchase the land and initiate construction of the new
distribution center in Milford, Delaware as well as the purchase of machinery
for the Company's factories and upgrading computer equipment to help ensure
year 2000 compliance. In addition, the Company paid an initial fee of $0.6
million for the women's Girbaud-Registration Mark- license. Cash provided by
financing activities totaled $4.8 million for the first three months of 1998,
resulting primarily from the exercise of the over-allotment option on its
initial public offering in January 1998.
Accounts receivable and inventories increased $1.8 million and $2.7
million, respectively, from December 31, 1997 to March 31, 1998, compared to
$10.2 million and $6.9 million, respectively, from December 31, 1996 to March
31, 1997. The increases in 1998 are due to a normal build up of finished
inventory in the first quarter coupled with slower than expected cash
collections. The Company has been able to effectively manage its inventory
levels by scheduling production and purchases of imported inventory to meet firm
purchase orders, which resulted in an improvement in cash used in operations of
$8.3 million from $9.8 million in the first quarter of 1997 to $1.5 million in
the first quarter of 1998.
Capital expenditures were $1.0 million for the first three months of
1998 compared with $0.4 million for the first three months of 1997. The
Company's capital expenditures were primarily for the purchase of land and
related architectural fees necessary to begin the construction process on the
new distribution center in Milford, Delaware as well as the purchase of
machinery for the Company's factories and upgrading computer equipment to
help ensure year 2000 compliance. The Company anticipates that capital
expenditures will be approximately $7.0 to $8.0 million for the remainder of
1998, primarily related to the construction of the new 150,000 square foot
distribution center to be financed through a mortgage loan. Also, the Company
expects to spend approximately $0.5 million to upgrade its computer software
to ensure year 2000 compliance. The Company expects conversion of its primary
software programs to be completed in November 1998 with testing to follow in
early 1999. Recently, the Company purchased new versions of two secondary
software programs which have been updated for year 2000 compliance. There is
one remaining secondary software program in which a decision to upgrade or
outsource the processing entirely needs to be made. Management will make this
decision during 1998. The Company does not currently have commitments for any
other capital expenditures in 1998. However, as part of the Company's
expanded relationship with Girbaud-Registration Mark-, by the end of 1998 or
early 1999 the Company intends to open a Girbaud-Registration Mark- flagship
store in Manhattan, New York City, with a target selling space of no less
than approximately 7,800 square feet. The Company intends to lease the
required space for the store. Currently, the Company is still searching for a
suitable site and cannot determine the amount of capital expenditures that
may be required to appropriately fixture the store or, if it ultimately
decided to do so, to construct the store. In addition, in March 1998 the
Company paid an initial license fee of $0.6 million for the women's
Girbaud-Registration Mark- license.
In February 1998, the Company announced that it intends to close its
Newton, Mississippi manufacturing facility. This closure, which will occur in
the second quarter of 1998, resulted in a charge of $0.2 million against
earnings in the first quarter of 1998. The production in this facility, the
majority of which is jeans, will be transferred to third party independent
contractors facilities in Mexico where the Company currently has jeans
manufactured. The Company anticipates annual cost savings in the range of $0.3
million to $0.6 million after the transfer of production to Mexico as a result
of lower labor and overhead costs.
16
<PAGE>
As of March 31, 1998 the Company had less than $0.1 million in
outstanding borrowings under its revolving line of credit and term loan
facility compared to $16.7 million at March 31, 1997.
Credit Facilities
The Company has an asset-based revolving line of credit with Congress
Financial Corporation that allows it to borrow up to $30.0 million based on a
percentage of eligible accounts receivable and inventory. Borrowings under the
revolving line of credit bear interest at the lender's prime rate plus 1.0%.
Also, the Company has a term loan facility with the lender, which allows it to
continually borrow up to $1.0 million. Outstanding borrowings under the term
loan facility were $0.8 million and $0.0 million at March 31, 1997 and 1998,
respectively. The Company intends to enter into a new credit facility in the
second half of 1998, which will replace the existing revolving line of credit
and term loan facility. The Company does not expect to incur material costs in
connection with entering into a new credit facility.
In November 1997, the Company borrowed $11.25 million from Ambra,
Inc. to finance the acquisition of certain BOSS-Registration Mark- trademark
rights. This obligation is evidenced by a secured limited recourse promissory
note which matures on December 31, 2007 (the "Note"). The Note bears
interest at 10.0% per annum, payable quarterly; principal is payable in full
upon maturity of the Note.
The Company extends credit to its customers. Accordingly, the Company
may have significant risk in collecting accounts receivable from its customers.
The Company has credit policies and procedures which it uses to minimize
exposure to credit losses. The Company's collection personnel regularly contact
customers with receivable balances outstanding beyond 30 days to expedite
collection. If these collection efforts are unsuccessful, the Company may
discontinue merchandise shipments until the outstanding balance is paid.
Ultimately, the Company may engage an outside collection organization to collect
past due accounts. Timely contact with customers by collection personnel has
been effective in reducing credit losses to an immaterial amount. In the first
quarter of 1997 and 1998, the Company's credit losses were $0.2 and $0.3
million, respectively. In each of these periods, the Company's actual credit
losses as a percentage of net sales has been less than three-quarters of one
percent.
The Company believes that current levels of cash and cash equivalents
($9.2 million at March 31, 1998) together with cash from operations and existing
credit facilities, will be sufficient to meet its capital requirements for the
next 12 months.
Seasonality
The Company's business is impacted by the general seasonal trends
that are characteristic of the apparel and retail industries. In the
Company's segment of the apparel industry, sales are generally higher in the
first and third quarters. Historically, the Company has taken greater
markdowns in the second and fourth quarters. The Company generally receives
orders for its products three to five months prior to the time the products
are delivered to stores. As of March 31, 1998, the Company had unfilled
orders of approximately $32 million, compared to approximately $57 million of
such orders as of March 31, 1997. The backlog of orders at any given time is
affected by a number of factors, including seasonality, weather conditions,
scheduling of manufacturing and shipment of products. As the timing of the
shipment of products may vary from year to year, the results for any
particular quarter may not be indicative of the results for the full year.
Impact of Recent Accounting Pronouncements
In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" (SFAS 123"). SFAS 123 will begin to affect the
Company in fiscal 1998 with the granting of stock options to employees under
the 1997 Omnibus Stock Plan. The Company will adopt only the disclosure
provisions of SFAS 123 and account for stock-based compensation using the
intrinsic value method set forth in APB opinion 25.
In June 1997, the Financial Accounting Standards Board issued two
new disclosure standards. The Company's results of operations and financial
position will be unaffected by implementation of these new standards.
17
<PAGE>
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" ("SFAS 130"), establishes standards for reporting and
display of comprehensive income, its components and accumulated balances.
Comprehensive income is defined to include all changes in equity except those
resulting from investments by owners and distributions to owners. Among other
disclosures, SFAS 130 requires that all items that are required to be recognized
under current accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the same prominence as
other financial statements.
Statement of Financial Accounting Standards No. 131, "Disclosure about
Segments of a Business Enterprise" ("SFAS 131"), establishes standards for the
way that public enterprises report information about operating segments in
annual financial statements and requires reporting of selected information about
operating segments in interim financial statements issued to the public. It also
establishes standards for disclosures regarding products and services,
geographic areas and major customers. SFAS 131 defines operating segments as
components of an enterprise about which separate financial information is
available that is evaluated regularly by the chief operating decision maker in
deciding how to allocate resources and in assessing performance.
Both SFAS 130 and SFAS 131 are effective for financial statements for
periods beginning after December 15, 1997 and require comparative information
for earlier years to be restated. Management believes that impact, if any, would
not be material to the financial statement disclosures. Results of operations
and financial position, however, will be unaffected by implementation of these
standards.
In February 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 132, "Employers Disclosures
about Pensions and Other Postretirement Benefits" ("SFAS 132"). SFAS 132 revised
employers' disclosures about pension and other postretirement benefit plans but
does not change measurement or recognition of those plans. Also, SFAS 132
requires additional information on changes in the benefit obligations and fair
values of plan assets. Presently, the Company does not offer postretirement
benefits. Adoption of SFAS 132 will not have an effect on reported financial and
operating results.
18
<PAGE>
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
Exhibit 10.31 Beverly Hills Polo Club Exclusive Domestic
License Agreement (Boys) dated April 24, 1998.
(b) Reports on Form 8-K.
None
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
I.C. ISAACS & COMPANY, INC.
By: /s/ Robert J. Arnot
--------------------------
Robert J. Arnot
Chairman of the Board and
Co-Chief Executive Officer
Dated: May 15, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Name Capacity Date
---- -------- ----
<S> <C> <C>
/s/ Robert J. Arnot Chairman of the Board, May 15, 1998
- ----------------------------- Co-Chief Executive Officer
Robert J. Arnot and Director (Principal
(Executive Officer)
/s/ Eugene C. Wielepski Vice President and May 15, 1998
- ------------------------------- Chief Financial Officer and
Eugene C. Wielepski Director (Principal Financial
and Accounting Officer)
</TABLE>
<PAGE>
DEAL MEMO
FOR: I.C. ISAACS & CO., INC.
Brand: BEVERLY HILLS POLO CLUB
-------
1. DEFINITION OF TERRITORY: United States and all its territories &
possessions
<TABLE>
<CAPTION>
2. Definition of Licensed Product (by category): DISTRIBUTION DATE:
--------------------------------------------
<S> <C>
Boyswear in sizes 4x7 - 8x20 January 1, 1999
--------
(1) Boys shirts; knitted & woven fabrics
(2) Boys pants; 100% cotton, cotton mixed (with the exclusion of tailored
pants)
(3) Boys jeans
(4) Boys shorts; all fabrics
(5) Boys swim shorts
(6) Boys outerwear
</TABLE>
<TABLE>
<CAPTION>
3. Initial Term: FROM TO
-------------
<S> <C> <C>
First Contract Year: January 1, 1999 December 31, 1999
Second Contract Year: January 1, 2000 December 31, 2000
Third Contract Year: January 1, 2001 December 31, 2001
</TABLE>
<TABLE>
<CAPTION>
4. Renewal Term:**
---------------
<S> <C> <C>
Fourth Contract Year (if any): January 1, 2002 December 31, 2002
Fifth Contract Year (if any): January 1, 2003 December 31, 2003
Sixth Contract Year (if any): January 1, 2004 December 31, 2004
</TABLE>
5. Advance Royalty Payment: NONE
-------------------------
6. Royalty Rate: 5% (five percent)
--------------
<PAGE>
7. Guarantees:
-----------
<TABLE>
<CAPTION>
(A) (B) (C)
Guaranteed Guaranteed Guaranteed
Annual Annual Monthly
Net Royalty Royalty
Shipments Payments Payments
(in United States Dollars)
------------------------------------
<S> <C> <C> <C>
First Contract Year $1,000,000 $50,000 $4,166.66*
Second Contract Year $1,500,000 $75,000 $6,250.00
Third Contract Year $2,000,000 $100,000 $8,333.33
</TABLE>
* Guaranteed Monthly Royalty Payments commence January 1, 1999.
** Guaranteed Net Shipments for the Fourth through Ninth Contract Years (if any)
shall be calculated based on a volume equal to eighty percent (80%) of the
immediately preceding Contract Year's actual Net Shipments, but not less than
the previous year's Guaranteed Net Shipments. Guaranteed Annual Royalty Payments
for the Fourth through Ninth Contract Years (if any) shall be calculated based
on a volume equal to eighty percent (80%) of the immediately preceding Contract
Year's actual Annual Royalty Payment, but not less than the previous year's
Guaranteed Annual Royalty Payment.
INITIALS:
BHPC, licensor *** Illegible *** 5-5-98
ICICI, licensor *** Illegible *** 5-5-98
<PAGE>
EXCLUSIVE DOMESTIC LICENSE AGREEMENT BHPC.12
THIS AGREEMENT is made and entered into this 24th day of April, 1998 by
and between BHPC Marketing, Inc., a corporation duly organized and existing
under the laws of California, having its principal place of business at 1001
Dove Street, Suite 200, Newport Beach, CA 92660 (hereinafter referred to as
"LICENSOR"), and I.C. Isaacs & Co., Inc., a Delaware corporation, having its
principal place of business at 3840 Bank Street, Baltimore, MD 21224-2522
(hereinafter referred to as "LICENSEE").
WHEREAS, LICENSOR is the owner with the right to grant licenses of the
Trademarks illustrated in Exhibit "A" attached hereto (the "Trademarks"); and
WHEREAS, LICENSEE is desirous of obtaining the exclusive right to use the
aforesaid Trademarks in connection with the import or manufacture and sale of
certain licensed products defined herein.
NOW, THEREFORE, it is agreed by the parties as follows:
1. DEFINITIONS
The following terms shall have meanings as set forth below:
a. "Trademarks" shall mean the Trademarks set forth in Exhibit "A",
b. "Territory" shall mean that geographical area defined in item 1 of the
attached License Agreement Detail Schedule.
c. "Licensed Product" shall be defined as set forth in item 2 of the attached
License Agreement Detail Schedule.
d. "Net Shipments" shall mean the aggregate total of the gross dollar amount
invoiced its purchasers by LICENSEE for all the Licensed Product sold under
the Trademarks reduced by the amount of any customary trade allowances and,
subject to the provisions of Paragraph 8f., returns actually credited. No
deduction shall be made for commissions nor for any costs incurred in the
manufacture, sale, distribution or exploitation of the Licensed Product.
2. RIGHTS GRANTED
LICENSOR hereby grants to LICENSEE, upon the terms and conditions set forth
herein, an exclusive, personal, non-transferable, non- assignable license,
without the right to grant sublicenses, to use the Trademarks solely on or
in conjunction with the design, manufacture, import, distribution,
advertising, promotion, shipment, and sale of the Licensed Product in the
Territory. This license is extended to and
<PAGE>
includes wholesale sales only and does not include retail sales.
3. OWNERSHIP OF ARTWORK AND DESIGNS
LICENSEE acknowledges and agrees that LICENSOR is the owner of all artwork
and designs involving the Licensed Product and/or Trademarks, or any
reproductions thereof, notwithstanding their invention or use by LICENSEE
and that such artwork and designs will remain the property of LICENSOR who
shall be entitled to use and license others to use same, subject to the
provisions of this Agreement.
4. GOOD WILL AND PROMOTIONAL VALUE
a. LICENSEE recognizes the value of the good will associated with the
Trademarks and acknowledges that the Trademarks, and all rights therein and
the good will pertaining thereto, belong exclusively to LICENSOR. LICENSEE
further recognizes and acknowledges that the Trademarks have acquired
secondary meaning in the mind of the public.
b. LICENSEE agrees that its use of the Trademarks shall inure to the benefit of
LICENSOR and that LICENSEE shall not, at any time, acquire any rights in the
Trademarks by virtue of any use it may make of the Trademarks.
c. LICENSEE acknowledges that LICENSOR is entering into this Agreement not
only in consideration of the royalties paid hereunder but also for the good
will and promotional value to be secured by LICENSOR for the Trademarks as a
result of the manufacture, offering for sale, sale, advertising, promotion,
shipment and distribution of the Licensed Product by LICENSEE.
5. QUALITY STANDARDS, PRODUCT APPROVALS, AND INSPECTION
a. The quality of the Licensed Product, as well as the quality of all
promotional, advertising and packaging material (see Paragraph 6) which
includes the Trademarks (the "Promotional and Packaging Material"), shall be
at least as high as the best quality of similar products and promotional,
advertising and packaging material presently shipped, distributed, sold,
used, manufactured or licensed by LICENSOR in the Territory and shall be in
full conformance with all applicable laws and regulations. LICENSEE
acknowledges that the maintenance of the high quality of the Licensed
Product, and the control by LICENSOR over the nature, quality and manner of
distribution of all Licensed Products, are essential elements of this
license. All elements of the Licensed Product and use of the Trademarks
shall be subject to the prior written approval of LICENSOR. Except as
specifically provided in Paragraph 8d, below, LICENSEE shall not offer for
sale, advertise, promote, distribute, or use for any purpose any Licensed
Product that is damaged, defective, or
2
<PAGE>
are "seconds".
b. In order to maintain the high quality standard prescribed by LICENSOR,
LICENSEE may not manufacture, use, offer for sale, advertise, promote, ship
and/or distribute any Licensed Product or any Promotional and Packaging
Material relating to the Licensed Product until it has received all written
approvals of same from LICENSOR in the manner provided herein. Such approval
shall not be unreasonably withheld. Should LICENSOR fail to approve in
writing any of the submissions furnished it by LICENSEE within fourteen (14)
days from the date of submission thereof, such failure shall be considered
to be a disapproval thereof.
c. Before commencing, or authorizing third parties to commence, the design or
development of any Licensed Product or of any Promotional and Packaging
Material which have not been previously approved in writing by LICENSOR:
(i) Prior to the production of the Licensed Product, there shall be a
pre-production showing of the Licensed Product at a time and date to be
mutually agreed upon by the parties. LICENSEE shall submit for LICENSOR's
prior written approval all final designs, specifications, fabrications, and
color information. (ii) Prior to the production of each collection (also
known in the trade as a "line" or a "season"), LICENSEE shall submit to
LICENSOR a completed "Sample Approval Form" (Exhibit "B-1") for each
proposed item of the Licensed Product along with: at least one (1) final
sample of each style in the collection; two (2) sets of material which shows
color and fabrication, to be attached to a "Swatch Approval Form" (Exhibit
"B-2"); and one (1) photograph or rendering of each sample to be attached to
the "Sample Approval Form" (Exhibit "B-1"). Samples submitted for approval
shall be of the same quality as the Licensed Product that is produced and
distributed. Once a proposed item of the Licensed Product has been approved,
LICENSEE shall not deviate in any material respect from: (1) any
information, description or specification on the "Sample Approval Form" or
"Swatch Approval Form"; or (2) the quality of or material used on an
approved sample, without the prior written consent of LICENSOR. Each style,
color and fabrication must be approved for each season, regardless of
whether it was approved for a prior season. (iii) Within two (2) weeks
following the commencement of each first production run of the Licensed
Product (or, if production of the various styles of the Licensed Product
commences at different times, within two (2) weeks after commencement of
each style's first production run), LICENSEE shall deliver to LICENSOR, at
least one (1), but no more than two (2), finished production samples of each
style. If the style, appearance or quality of any production sample is
different from what was previously approved, LICENSEE shall make the
3
<PAGE>
necessary changes so that it conforms to what was originally approved.
d. LICENSEE agrees that the Licensed Product and all Promotional and
Packaging Material shall contain only those legends, markings and/or
notices as required from time to time by LICENSOR to give appropriate
notice to the consuming public of LICENSOR's right, title and interest
thereto.
e. LICENSOR may, periodically and from time to time during the term of this
Agreement, require that LICENSEE submit to LICENSOR, at no cost to
LICENSOR, or LICENSOR or its designees may randomly select and retain
during the inspection referred to in Subparagraph 5f, below, one (1)
additional set of Production Samples of the Licensed Product and/or the
Promotional and Packaging Material relating to the Licensed Product for
subsequent review and written approval of the quality of, trademark
usage and notice on same, and for any other purpose that LICENSOR deems
appropriate.
f. To assure that the provisions of this Paragraph 5 are being observed,
LICENSEE agrees that it will allow LICENSOR or its designees,
periodically and from time to time during the term of this Agreement, to
enter LICENSEE's premises and/or the premises where the Licensed Product
is being manufactured or inventoried during regular business hours and
upon reasonable notice, for the purposes of inspecting and approving the
Licensed Product and the Promotional and Packing Material relating to
the Licensed Product. LICENSEE shall provide to LICENSOR the addresses
and telephone numbers of all facilities, including third party
manufacturers, at which the Licensed Product is manufactured. LICENSEE's
agreements with third party manufacturers and warehousing facilities
shall provide for the right of LICENSOR to inspect such third party's
facilities. Inspections may include any reasonable actions necessary to
assure LICENSOR that the Licensed Product is made and displayed in
accordance with this Agreement, including, but not limited to,
laboratory testing.
g. In the event that the quality standards and/or trademark and copyright
usage and notice requirements hereinabove referred to are not met, then,
upon receipt of written notice from LICENSOR, LICENSEE shall
immediately discontinue any and all activities with respect to the
Licensed Product in connection with which the said quality standards
and/or trademark and copyright usage and notice requirements have not
been met.
6. ADVERTISING/USE OF THE TRADEMARK
a. LICENSEE will adopt and carry out its own marketing and advertising
program with respect to the Licensed Product. LICENSEE agrees that
LICENSEE's advertising, public relations and sales promotion activities
will be subject to prior consultation with, and written approval by,
LICENSOR as to the general form and
4
<PAGE>
content only with respect to the use of the Trademarks and other notices.
b. Before publication of any advertisement or promotion, LICENSEE shall
submit every element of the advertisement or promotion to LICENSOR for
written approval hereunder using the "Advertising Approval Form"
(Exhibit "B-3").
c. LICENSEE agrees that upon request of LICENSOR, it shall loan a
reasonable number of products to LICENSOR and its other licensees for
advertising and promotional purposes.
d. LICENSOR may purchase the Licensed Product from LICENSEE at the cost of
manufacture. No royalty shall be payable to LICENSOR.
e. Advertising directed to the public may not feature the name of LICENSEE.
If approved, advertising directed to the trade may feature the
following: BHPC Marketing, Inc. under Trademark License to (Name of
LICENSEE). Advertising expenditures by LICENSEE are not credited toward
the Advertising Fund provision of Subparagraph 8a(ii).
f. LICENSEE agrees that the Trademark will appear on each Licensed Product
and its packaging, if any. LICENSEE shall use only those tags, labels
and packaging materials which have been previously approved in writing.
All tags, labels and packaging materials bearing the Trademark must be
submitted on the "Advertising Approval Form" (Exhibit "B-3").
g. LICENSEE shall affix such legends, markings and notices on all License
Product as are required by LICENSOR and the law.
h. LICENSEE must submit for approval to LICENSOR a printer's proof of each
item before final printing.
7. DURATION OF THE AGREEMENT
a. This Agreement shall continue for three (3) consecutive Contract Years
in respective durations as set forth in item 3 of the attached License
Agreement Detail Schedule (hereinafter collectively the "Initial Term")
and shall then expire unless sooner terminated in accordance with the
terms and conditions set forth herein.
b. If LICENSEE fully performs according to all of the terms and conditions
hereof including, without limitation, the terms and conditions
specifically enumerated below, LICENSEE shall have three (3) consecutive
options to renew this Agreement for three (3) consecutive contract
periods, i.e. Contract Years, of one (1) year each (hereinafter
collectively the "Renewal Term"). In order to exercise each individual
option, LICENSEE must provide LICENSOR with written notice of its
intention to exercise each respective
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option and such written notice must be received by LICENSOR no later than
one hundred eighty (180) days prior to the expiration of the Initial
Term or immediately preceding Contract Year of the Renewal Term. In the
event that LICENSEE fails to exercise any of the aforementioned options
in a timely manner, the license granted herein to LICENSEE will
thereafter become non-exclusive for the remaining term of this Agreement
and LICENSOR may enter into such arrangements as it deems appropriate
with respect to the licensing of the Trademarks and the Licensed
Product. Except as specifically set forth herein to the contrary,
LICENSEE's performance in the Renewal Term shall be pursuant to the same
terms and conditions recited herein for the Initial Term.
8. ROYALTIES
a. "Royalty", as used in this Agreement, shall consist of the sum of the
following:
(i) LICENSEE agrees to pay LICENSOR, during the term of this Agreement,
a Royalty in an amount equal to five percent (5%) of the Net Shipments
by LICENSEE for Licensed Product sold under the Trademarks; and
b. LICENSEE shall pay to LICENSOR, concurrently with the execution of this
Agreement with respect to the First Contract Year, an Advance Royalty
Payment equal to the amount set forth in item 5 of the attached License
Agreement Detail Schedule, no part of which shall be refundable. The
Advance Royalty Payment shall not reduce or offset the payment of any
Guaranteed Annual Minimum Royalty hereunder. However, the Advance
Royalty Payment may be applied to reduce and offset the payment of any
royalty due hereunder in excess of the Guaranteed Annual Minimum Royalty.
c. Promotional Merchandise shall be defined as regular line Licensed
Product which is sold as an incentive at a discounted price. In the
event LICENSEE is desirous of increasing Promotional Merchandise
shipping beyond fifteen percent (15%) of total production of Licensed
Product in any Contract Year, LICENSEE must first receive LICENSOR's
prior written approval thereof on a case-by-case basis.
d. Off-priced Merchandise shall be defined as either close-out Licensed
Products or substandard Licensed
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Product. In the event LICENSEE is desirous of increasing Off-priced
Merchandise shipping beyond fifteen percent (15%) of total production of
Licensed Product in any Contract Year, LICENSEE must receive LICENSOR's
prior written approval thereof on a case-by-case basis. In no event will
LICENSEE offer for sale, or distribute any substandard Licensed Product
unless the Licensed Product are clearly identified to the consuming
public as being "seconds".
e. LICENSEE shall keep complete, detailed and accurate records of all
Promotional and Off-priced Merchandise sales, which records shall be
available to LICENSOR for inspection during regular business hours.
f. For the purposes of this Agreement, LICENSEE agrees that aggregate
returns of the Licensed Product credited during any Contract Year
hereunder shall not exceed three percent (3%) of the gross dollar amount
invoiced by LICENSEE for all the Licensed Product sold during the
respective Contract Year (the "Returns Limitation"). In the event that
aggregate returns of the Licensed Product exceed the Returns
Limitation, all returns of the Licensed Product in excess of the Returns
Limitation shall not be deducted from the gross dollar amount of sales
of the Licensed Product in determining Net Shipments hereunder.
9. PAYMENT
a. The payments provided for in Paragraph 8, above, shall be based upon all
Net Shipments in each calendar month (the "Royalty Period") and shall be
due and payable by LICENSEE to LICENSOR by the twentieth (20th) day of
the next following calendar month. All Guaranteed Monthly Royalty
Payments are due and payable by LICENSEE to LICENSOR on the twentieth
(20th) day of each respective calendar month for that Contract Year. At
the time of each such payment, LICENSEE shall provide LICENSOR with a
complete, accurate, written statement of its Net Shipment of Licensed
Product for the Royalty Period. The written statement of Net Shipments
of Licensed Product (a copy of which is attached hereto as Exhibit
"B-4") must be certified as accurate by LICENSEE and will include, but
will not be limited to, information as to: each respective invoice
number (in sequential order of all "voided" invoices), invoice date,
customer name or number, gross dollar amount invoiced, terms of any
customary trade allowances (as a percentage and in aggregate dollars),
actually credited returns (in aggregate dollars), and other deductions
taken against the gross dollar amount invoiced, and any such other
further information as LICENSOR may from time to time request. Such
statements shall be furnished to LICENSOR whether or not any Licensed
Product has been shipped, distributed and/or sold during the preceding
Royalty Period and whether or not any monies
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are then due LICENSOR.
b. LICENSEE'S statements and all amounts payable to LICENSOR by LICENSEE
shall be submitted to:
BHPC Marketing, Inc.
1001 Dove Street, Suite 200
Newport Beach, California 92660
Attn: Royalty Receivables Department
c. The receipt and/or acceptance by LICENSOR of any of the statements or
reports furnished or payments paid hereunder to LICENSOR (or the cashing
of any checks paid hereunder) shall not preclude LICENSOR from
questioning the correctness thereof at any time and, in the event that
any inconsistencies or mistakes are discovered in such statements,
reports, or payments, they shall immediately be rectified by LICENSEE
and the appropriate payment shall immediately be made by LICENSEE.
d. All payments made hereunder shall be in United States currency or checks
drawn on a United States bank.
e. Time is of the essence with respect to all payments to be made hereunder
by LICENSEE. In the event LICENSEE shall fail to pay any sum required to
be paid by this Agreement after the due date thereof, the amount owing
shall thereupon bear interest at the maximum annual percentage rate
allowable by law from the due date until paid.
10. GUARANTEES
a. Guaranteed Annual Royalty Payments - LICENSEE shall pay, for each
Contract Year during the terms of this Agreement, beginning with the First
Contract Year, the respective Guaranteed Annual Royalty Payments set
forth in item 6 of the attached License Agreement Detail Schedule.
b. Guaranteed Target Net Shipments - If, in any Contract Year, LICENSEE
does not achieve the Guaranteed Target Net Shipment Volume figure set
forth in item 6 of the attached License Agreement Detail Schedule
LICENSOR may, at its option, immediately thereafter terminate this
Agreement in writing.
c. Guaranteed Net Shipments - If, in any Contract Year, LICENSEE does not
achieve the Guaranteed Net Shipments figure set forth in item 6 of the
attached License Agreement Detail Schedule LICENSOR may, at its option,
immediately thereafter terminate this Agreement in writing.
d. Guaranteed Monthly Royalty Payments - In order to ensure that the above
guarantees are met, LICENSEE shall pay to LICENSOR each month pursuant
to Paragraphs 8 and 9, above, the respective Guaranteed Monthly Royalty
Payments set forth in item 6 of the attached License Agreement Detail
Schedule for each
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Contract Year during the Term of this Agreement. In the event that any
actual Monthly Royalty Payment calculated in accordance with Paragraph
8, above, is less than the applicable Guaranteed Monthly Royalty
Payment, LICENSEE shall pay to LICENSOR the Guaranteed Monthly Royalty
Payment in accordance with Paragraph 9. In the event that any actual
Monthly Royalty Payment calculated in accordance with Paragraph 9
exceeds the Guaranteed Monthly Royalty Payment, the actual Royalty
payment shall be paid to LICENSOR in accordance with Paragraph 9.
e. In the event of the termination of this entire Agreement, LICENSEE is
obligated to pay the balance of the Guaranteed Annual Royalty Payments
due for the remainder of the Contract Years, and payment in full shall
be due and payable within thirty (30) days of said termination.
11. EXPLOITATION BY LICENSEE
a. LICENSEE agrees to commence, and diligently continue thereafter, the
distribution, shipment and sale of each category of the Licensed Product
in commercially reasonable quantities in the Territory on or before the
respective distribution date set forth next to each category of the
Licensed Product described in item 2 of the attached License Agreement
Detail Schedule.
b. LICENSEE agrees that the Licensed Product will be sold, shipped and
distributed outright, at a competitive price that does not exceed the
price generally and customarily charged the trade by LICENSEE, and not
on an approval, tie-in, consignment, or "sale or return" basis. LICENSEE
further agrees that the Licensed Product will only be sold to retailers,
jobbers, wholesalers and distributors for sale, shipment and
distribution to retail stores and merchants commonly considered and
referred to in the industry as fine department stores and better
specialty stores and/or to fine department stores and better specialty
stores for sale, shipment and distribution direct to the public.
Notwithstanding the foregoing to the contrary, LICENSOR agrees that the
Licensed Product may also be sold to those retail stores commonly
considered and referred to in the industry as "Warehouse Clubs" (such as
Price Club, Sam's Warehouse, Pace, Costco, B.J.'s) so long as the total
Net Shipment volume of Licensed Product sold to such "Warehouse Clubs"
does not exceed twenty five percent (25%) of LICENSEE's Net Shipment
volume. Any sale of Licensed Product exceeding twenty five percent (25%)
of LICENSEE's Net Shipment volume will be deemed a material breach of
this Agreement and LICENSOR will have the right thereafter to terminate
this Agreement. The manner and scope of the distribution of the Licensed
Product, availability, variety, fabrication, colors and sizes are
critical to the promotion, enhancement and protection of the Trademarks
and their associated goodwill. LICENSEE
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acknowledges that it has no right to and shall not sell or distribute
the Licensed Product to any diverter or to anyone whose sales or
distribution are or will be made for publicity, promotional or tie-in
purposes, combination sales, premiums, giveaways, direct mail, electronic
shopping, vending machines or similar methods of merchandising, or whose
business methods are or are reported to be questionable.
c. LICENSEE further agrees to sell to LICENSOR, if requested to do so by
LICENSOR, any product manufactured or sold by LICENSEE, from LICENSEE's
regular production at LICENSEE's customary net selling price.
12. BOOKS, RECORDS, AND RIGHTS TO AUDIT
a. LICENSEE agrees that it shall keep complete and accurate written books
of accounts and records, maintained in accordance with generally
accepted accounting principles consistently applied, at its principal
place of business, covering all Licensed Product manufactured,
distributed, and sold under the Trademarks. LICENSEE shall provide
LICENSOR with the following:
(i) an audited, set of financial statements (i.e., balance sheet, income
statement, and sources and uses of funds) to be delivered to LICENSOR
within ninety (90) days after the end of each fiscal year of LICENSEE;
and
(ii) an interim set of financial statements to be delivered to LICENSOR
within thirty (30) days following the end of the first six (6) months of
each fiscal year of LICENSEE. All such financial information must be
prepared by an independent certified public accountant, approved in
writing by LICENSOR, having no interest whatsoever in LICENSEE's
business other than that of an independent certified public accountant.
b. LICENSOR and its duly authorized representatives shall have the right, at
all reasonable hours of the day, with reasonable notice to audit
LICENSEE's books of account and records and all other documents and
material in the possession or under the control of LICENSEE with respect
to the subject matter and the terms of this Agreement and to make copies
and extracts thereof. Within ten (10) days following any written request
by LICENSOR, LICENSEE will deliver copies and extracts of any books of
account, records, documents, materials, and information as are requested
by LICENSOR inclusive of, but not limited to: financial statements,
general ledger detail and supporting journals, documents, sales and
credit memo registers, financial projections and wholesale price
listings. All books of account and records of LICENSEE covering all
transactions relating to this Agreement shall be retained by LICENSEE
for at least three (3) years after the expiration or termination of this
Agreement for inspection by LICENSOR. In the event that
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any such audit reveals an underpayment by LICENSEE, LICENSEE shall
immediately remit payment to LICENSOR in the amount of such underpayment
plus interest calculated at the maximum annual percentage rate allowable
by law, compounded daily, calculated from the date such payment was
actually due until the date when such payment is, in fact, actually
made. In the event that any material underpayment is revealed by any
such audit, LICENSEE shall pay all reasonable costs and expenses of the
examination and audit, including any reasonable travel expenses incurred
by LICENSOR in making such examination, and costs and expenses of any
accountants or other persons retained by LICENSOR to examine, audit, or
analyze LICENSEE's records. A "material underpayment" is hereby defined
as an underpayment of five percent (5%) or more.
13. INSURANCE
LICENSEE shall, throughout the term of this Agreement, obtain and
maintain at its own cost and expense from a qualified insurance company
accpetable to LICENSOR, a policy or policies of insurance, insuring
against those risks customarily insured against under broad form
comprehensive general liability policies arising out of any defects or
failure to perform, alleged or otherwise, of the Licensed Product or any
use thereof, including "product liability", "completed operations",
"advertisers' liability insurance", etc and any liability of LICENSEE
arising out of Paragraph 20, below. All such policies of insurance shall
have endorsements or coverage with combined single limits of not less
than $1,000,000 with deductibles reasonably acceptable to LICENSOR and
shall name LICENSOR, and those designated by LICENSOR, as additional
insureds thereunder. Such policies of insurance shall contain:
a. severability of interest;
b. cross liability; and
c. endorsement stating: "Such insurance as is afforded by this policy for
the benefit of BHPC Marketing, Inc. shall be primary as respects any
liability of claims arising out of (LICENSEE's) operation, and any
insurance carried by BHPC Marketing, Inc. shall be excess and
non-contributory."
The policies shall provide for ten (10) days notice to LICENSOR from the
insurer by Registered or Certified Mail, return receipt requested, in
the event of any modification, cancellation or termination. LICENSEE
agrees to furnish LICENSOR a certificate of insurance or copy of the
policies evidencing same within thirty (30) days after execution of this
Agreement and from time to time as requested by LICENSOR within ten (10)
days of LICENSOR's request; in no event, shall LICENSEE manufacture,
offer for sale, sell, advertise,
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promote, ship and/or distribute the Licensed Product prior to receipt by
LICENSOR of such evidence of insurance. If LICENSEE fails to procure,
maintain and/or pay for at the times and for the durations specified in
this Agreement, the insurance required hereunder, or fails to carry
insurance required by any governmental requirement, LICENSOR may (but
without obligation to do so), and without notice to LICENSEE, perform
such obligations on behalf of LICENSEE, and the cost thereof, together
with interest thereon at the maximum rate allowed by law, shall
immediately become due and payable to LICENSOR.
14. USE, DISPLAY, AND SALE INVOLVING THE TRADEMARKS AND COPYRIGHT
a. In order to protect the Trademarks and LICENSOR's reputation, LICENSEE
will manufacture, distribute and sell the Licensed Product in
compliance with all applicable laws. In no event shall LICENSEE, or any
affiliated entity, manufacture or import, distribute or sell any
products using any trademark or other designation containing the words
"BEVERLY HILLS", or "POLO", or depicting any equestrian figure, without
the written consent of LICENSOR.
b. It is specifically understood and agreed that LICENSEE may engage in the
manufacture and distribution of products similar to or competitive with
the Licensed Product for its own account or pursuant to license
agreements with others, provided, however, neither LICENSEE nor any
employee, shareholder, officer, director, parent, subsidiary or
affiliate of LICENSEE shall manufacture or import, distribute or sell
merchandise which has a closely resembling similarity to the Licensed
Product. LICENSEE further agrees not to use a closely resembling
similarity of any fabric, graphic, style or design supplied by LICENSOR.
c. LICENSEE shall exercise all reasonable efforts, within the limits
allowed by the laws and governmental regulations in effect in the
Territory, to ensure that its merchandising and sale of the Licensed
Product shall conform to policies and methods suitable for goods of high
quality sold under a prestigious label of worldwide repute.
15. OWNERSHIP OF THE TRADEMARKS
a. LICENSEE agrees that nothing in this Agreement shall give LICENSEE any
right, title, or interest in the Trademarks other than the license to
use the Trademarks on the Licensed Product; that such marks are the sole
property of LICENSOR; that all such uses by LICENSEE of such marks shall
inure only to the benefit of LICENSOR; and it being understood that all
right, title and interest relating thereto are expressly reserved by the
LICENSOR except for the rights being licensed hereunder.
b. LICENSEE recognizes that LICENSOR may already have entered into, and may
in the future enter into,
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license agreements with respect to the Trademarks for products which
fall into the same general product category as the Licensed Product, but
which are not sold to the same retail store departments as the Licensed
Product, and which may be similar to, but not the same as, the Licensed
Product in terms of function, or otherwise. LICENSEE hereby expressly
concedes that the existence of said licenses does not and shall not
constitute a breach of this Agreement by the LICENSOR.
c. LICENSEE agrees and acknowledges that if it has obtained or obtains in
the future, in any country, any right, title, or interest in any marks
which are confusingly similar to the Trademark, (including the filing of
any application for trademarks or service mark registration or the
obtaining of any issued registration), that LICENSEE has acted or will
act as an agent and for the benefit of LICENSOR. LICENSEE further agrees
to execute any and all instruments deemed by LICENSOR, its attorneys or
representations, to be necessary to transfer such right, title, or
interest to LICENSOR to protect LICENSOR's right, title and interest in
such marks.
d. LICENSEE agrees not to raise or cause to be raised to third parties,
either during the term of this Agreement or after its expiration or
termination, on any grounds whatsoever, any questions concerning the
validity of the Trademarks or LICENSOR's rights therein, or any other
trademark or service mark owned by LICENSOR.
16. COMPLIANCE WITH LIMITATIONS ON USE OF TRADEMARKS
LICENSEE agrees that the Licensed Product, an all labels, hand tags,
packaging and other trade dress, used in connection with such Licensed
Products, shall not violate any restrictions on use or display of the
marks as provided in that Settlement Agreement and Consent Judgement
with Polo Fashions, Inc., a copy of which is attached hereto as Exhibit
"D". Nothing contained in this Agreement makes Polo Fashions, Inc., or
any related company, a third party beneficiary of this Agreement.
17. THIRD PARTY INFRINGEMENT
LICENSEE agrees to notify LICENSOR in writing of any infringements or
imitations by third parties of the Trademarks, the Licensed Product
and/or the Promotional and Packaging Material which may come to
LICENSEE's attention. In the event that a third party should infringe
any of the Trademark rights or any other rights under this Agreement in
the Territory, LICENSOR shall have the sole right to determine whether
any action shall be taken on the account of such infringement, and
LICENSEE shall not take any action on account of any infringement
without first obtaining written consent of LICENSOR, such consent not to
be
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unreasonably withheld.
18. ASSIGNABILITY AND MANUFACTURING
a. The license granted hereunder is, and shall remain, personal to LICENSEE
and shall not be granted, assigned, or otherwise conveyed by any act of
LICENSEE or by operation of law. For the purposes of this Paragraph 18,
any sale or transfer of any ownership interest in LICENSEE shall
constitute a prohibited assignment of the license granted hereunder.
LICENSEE shall have no right to grant any sublicenses without LICENSOR's
prior express written approval. Any attempt on the part of LICENSEE to
arrange to sublicense or assign to third parties its rights under this
Agreement, shall constitute a material breach of this Agreement.
b. LICENSOR shall have the right to assign its rights and obligations under
this Agreement without the approval of LICENSEE.
19. NO AGENCY, JOINT VENTURE, PARTNERSHIP
The parties hereby agree that no agency, joint venture, or partnership
is created by this Agreement, and that neither party shall incur any
obligation in the name of the other without the other's prior written
consent.
20. INDEMNIFICATION
Except for claims of trademark infringement or similar claims, LICENSEE
will indemnify, defend and hold LICENSOR harmless from any and all
liabilities, claims, obligations, suits, judgments and expenses
whatsoever, including court costs and attorney's fees, which LICENSOR
may incur or which may be asserted against LICENSOR and which arise or
occur with respect to the operation of LICENSEE's business as it relates
to the design, import, manufacture, distribution, promotion,
advertisement, and sale of the Licensed Product under the Trademarks or
with respect to this Agreement and LICENSEE's performance hereunder; and
further provided that LICENSOR shall have the right to undertake and
conduct the defense of any cause of action so brought and handle any
such claim or demand. Such indemnity shall extend to liabilities and
claims incurred after the expiration or termination of this Agreement
but which are based on acts or events whose proximate cause arose
during this Agreement.
21. TERMINATION
a. In addition to the termination rights provided elsewhere in this
Agreement, LICENSOR will have the right to terminate this Agreement in
the event that:
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(i) LICENSEE violates or fails to perform any agreement, obligation,
term, or condition of this Agreement and that violation or failure to
perform is not cured within ten (10) days following the written notice
thereof; or
(ii) LICENSEE becomes insolvent, files a voluntary petition in
bankruptcy, a petition is filed against LICENSEE to have LICENSEE
adjudicated as bankrupt and same is not dismissed in sixty (60) days,
LICENSEE enters into any composition with the creditors of LICENSEE or
becomes subject to reorganization under the Bankruptcy Code. Provided,
however, such termination shall not relieve LICENSEE of the obligation
to pay any Royalty accrued up to the effective date of termination, nor
prejudice any cause of action or claim of LICENSOR accrued, or to
accrue, on account of the breach or default of LICENSEE.
b. Notwithstanding the provisions of sub-paragraph 21a.(i) to the contrary,
in the event that LICENSEE violates this Agreement or fails to perform
any agreement, obligation, term, or condition of this Agreement for the
third (3rd) time, for any reason, LICENSEE shall forfeit the right to
cure such violation or failure to perform, and this Agreement will
terminate upon the giving of the written notice thereof.
22. EFFECT OF EXPIRATION OR TERMINATION
a. Upon expiration or termination of this Agreement, all rights and
licenses granted to LICENSEE hereunder shall immediately expire, shall
forthwith revert to LICENSOR, and LICENSEE shall immediately cease and
desist from using the Trademarks and any technical information supplied
by LICENSOR to LICENSEE hereunder. To this end, LICENSEE will be deemed
to have automatically assigned to LICENSOR, upon such expiration or
termination, the Trademarks, equities, good will, titles, and other
rights in or to the Licensed Product and all adaptations, compilations,
modifications, translations and versions thereof, and all other
trademarks used in connection therewith which have been or may be
obtained by LICENSEE or which may vest in LICENSEE and which have not
already been assigned to LICENSOR. LICENSOR may thereafter, in its sole
discretion enter into such arrangements as it deems desirable, with any
other party, for the manufacture, promotion and sale of the Licensed
Product in the Territory. Any Licensed Product, finished or in progress,
shall be disposed of as follows.
(A) Any finished Licensed Product in LICENSEE's possession unsold on the
date of the expiration of this Agreement may, subject to payment of the
Royalty payable to LICENSOR, be sold by LICENSEE, pursuant to a plan to
be approved by LICENSOR, for a period of one hundred twenty (120) days
after expiration
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hereof. Any Royalty paid by LICENSEE to LICENSOR during the aforementioned
one hundred twenty (120) day period is separate and apart from the
Royalty generated during the term of the Agreement and such Royalty is
not to be applied to the Guaranteed Annual Royalty Payments as outlined
in Subparagraph 10b. and column (C) of item 6 of the attached License
Agreement Detail Schedule. All inventory remaining after such one
hundred twenty (120) day period shall be destroyed or stripped of all
imprints, lettering, mentions or other reproductions of or references to
the Trademarks and related logos; and all molds, patterns, transfers,
and other property bearing the Trademarks of relating thereto shall be
destroyed; all under the supervision of LICENSOR. LICENSOR shall have
the first right to purchase said Licensed Product at the direct cost
price (comprised of material and direct labor expenses as set forth in
LICENSEE's books and records, plus five percent (5%) for overhead) upon
expiration or termination of this Agreement.
(B) Any furnished Licensed Product in LICENSEE's possession unsold on
the date of termination of this Agreement, and all molds, patterns,
transfers, and other property bearing the Trademarks or relating
thereto, shall be destroyed by LICENSEE within thirty (30) days
following the termination of this Agreement; further, LICENSEE agrees,
on or before the aforementioned date, to provide LICENSOR with a
certificate signed by LICENSEE's Chief Executive Officer certifying
under penalty of perjury that such inventory, molds, patterns,
transfers, and other property have been destroyed. LICENSEE shall,
within thirty (30) days after expiration or termination of this
Agreement as the case may be, furnish LICENSOR with a full and detailed
written statement of the Licensed Product in its inventory or the
Licensed Product in progress. LICENSOR shall have the option of
conducting a physical inventory at the time of expiration or termination
and/or at a later date in order to ascertain or verify such statement.
In the event that the LICENSEE refuses to permit LICENSOR to conduct
such physical inventory, LICENSEE shall forfeit its rights hereunder to
dispose of such inventory. In addition to such forfeiture, LICENSOR
shall have recourse to all other remedies available to it.
b. Upon the termination of this Agreement, LICENSEE shall, within ten (10)
days following termination, give written notice to LICENSOR of the:
(i) Licensed Product, by style, in its possession or under its control;
(ii) location of the inventory of the Licensed Product;
(iii) amount of the work in process;
(iv) Licensed Product in transit; and
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(v) name, address, and telephone number of each contractor, shipper
and/or sales representative.
c. LICENSEE shall accept no order, or undertake any new production, that
would be delivered after the date of expiration of this Agreement. Three
(3) months prior to the expiration of this Agreement, and monthly
thereafter until expiration, LICENSEE shall provide to LICENSOR an
inventory, by style, of all the Licensed Product in its possession or
under its control, and all work in process. Three (3) months prior to
the expiration of this Agreement, and weekly until expiration, LICENSEE
shall provide LICENSOR with copies of all orders, invoices, bills of
lading, credit memoranda, and statements provided to LICENSEE's factor
(if any). LICENSEE shall be entitled to sell its inventory, of the
Licensed Product through and until the date of the expiration of this
Agreement only if the inventory, and all documents listed above, are
delivered to LICENSOR in a timely fashion.
d. LICENSEE shall deliver to LICENSOR, upon termination of this Agreement
or thirty (30) days prior to the expiration of this Agreement:
(i) the names, addresses, and telephone numbers of each supplier of any
item having the Trademarks and (ii) all materials which reproduce the
Trademarks on the Licensed Product and/or Promotional and Packaging
Material relating to the Licensed Product or shall give LICENSOR
satisfactory evidence of their destruction. LICENSEE shall be
responsible to LICENSOR for any damages caused by the unauthorized use
by LICENSEE or by others of such reproduction materials which are not
turned over to LICENSOR.
23. MODIFICATION; WAIVER
No modification of any of the terms or provisions of this Agreement
shall be valid unless contained in a writing signed by the parties. No
waiver by either party of a breach or a default hereunder shall be
deemed a wavier by such party of a subsequent breach or default of a
like or similar nature. Resort by LICENSOR to any remedies referred to
in this Agreement or arising by reason of a breach of this Agreement by
LICENSEE shall not be construed as a waiver by LICENSOR of its right to
resort to any and all other legal and equitable remedies available to
LICENSOR.
24. FORCE MAJEURE
Neither LICENSOR nor LICENSEE shall be liable to each other or be deemed
in breach or default of any obligations contained in this Agreement, for
any delay or failure to perform due to causes beyond its reasonable
control, including but not limited to delay due to the elements, acts of
the United States Government, acts of a foreign government, acts of God,
fires, floods, epidemics, embargoes, riots, strikes,
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any of the foregoing events being referred to as a "Force Majeure"
condition. In such event, dates for performance shall be extended for
the period of delay resulting from the Force Majeure condition. The
party affected by a Force Majeure condition shall, as soon as
practicable, notify the other party of the nature and extent of such
condition.
25. NOTICE
All notices, approvals, consents, requests, demands, or other
communications to be given to either party in writing may be effected by
personal delivery or by depositing the same in the United States mail,
certified and return receipt requested, postage prepaid. Such
communication shall be addressed to LICENSEE and LICENSOR at their
respective addresses as set forth in the preamble above.
26. CONSTRUCTION; VENUE
This Agreement shall be construed in accordance with the laws of the
State of California, U.S.A., and the parties agree that it is executed
and delivered in that state, and any claims arising hereunder shall, at
LICENSOR's election, be prosecuted in the appropriate Court of the State
of California in Los Angeles County or any Federal District Court
therein.
27. ENTIRE AGREEMENT
This Agreement, contains the entire understanding of the parties and
there are no representations, warranties, promises, or undertakings
other than those contained herein. This Agreement supersedes and cancels
all previous agreements between the parties hereto.
28. CONFIDENTIAL INFORMATION
LICENSOR and LICENSEE agree (and shall instruct their partners,
officers, directors, designers, and other persons to whom disclosure is
made) to keep strictly confidential all designs, manufacturing
instructions, and other information relating to the Licensed Product
that are not otherwise available to the public, whether furnished by one
to the other or in any way acquired by either party; and the same shall
be used by either party solely under this Agreement and for the purpose
of marketing of the Licensed Product.
29. EQUITABLE RELIEF
LICENSEE acknowledges and agrees that:
(i) LICENSEE's failure to meet the quality standards herein;
(ii) LICENSEE's failure: (a) to use the Trademarks, or (b) to
manufacture, offer for sale, sell, advertise, promote, ship or
distribute the Licensed Product, both in accordance with the provisions
of this Agreement;
18
<PAGE>
or
(iii) any unauthorized use or disclosure of confidential information of
LICENSOR, cannot be compensated adequately with a remedy at law and will
cause irreparable damage to LICENSOR. Accordingly, the parties agree that
LICENSOR may seek from any court having jurisdiction, such equitable relief
by way of temporary restraining orders, permanent injunctions or otherwise
as is available to compel the discontinuance of such conduct. LICENSEE
agrees that any court of general jurisdiction in Los Angeles County or any
Federal District Court therein shall have jurisdiction of such claim.
30. ATTORNEYS' FEES
In the event any legal action becomes necessary to enforce or interpret the
terms of this Agreement, the prevailing party shall be entitled, in addition
to its court costs, to such reasonable attorneys' fees as shall be fixed by
a court of competent jurisdiction.
31. BINDING EFFECT
This Agreement shall be binding on the parties, and their successors and
assigns.
32. SURVIVAL OF THE RIGHTS
Notwithstanding anything to the contrary contained herein, such obligations
which remain executory after expiration of the term or termination of this
Agreement shall remain in full force and effect until discharged by
performance and such rights as pertain thereto shall remain in force until
their expiration.
33. SEVERABILITY
In the event that any term or provision of this Agreement shall for any
reason be held to be invalid, illegal or unenforceable in any respect, such
invalidity or unenforceability shall not affect any other term or provision
and this Agreement shall be interpreted and construed as if such term or
provision, to the extent the same shall have been held to be invalid,
illegal or unenforceable, had never been contained herein.
34. CAPTIONS
The captions used in connection with the paragraphs and subparagraphs of
this Agreement are inserted only for purpose of reference. Such captions
shall not be deemed to govern, limit, modify or in any other manner affect
the scope, meaning or intent of the provisions of this Agreement or any part
thereof nor shall such captions otherwise be given any legal effect.
35. INCORPORATION OF EXHIBITS
LICENSOR and LICENSEE acknowledge and agree that the provisions of Exhibits
"A" through "D"
19
<PAGE>
attached hereto (the "Exhibits") are integral to this Agreement and that the
provisions of the Exhibits are all hereby incorporated herein and made a
part hereof as if set out in full in this Agreement.
IN WITNESS WHEREOF, the parties hereto agree that this Agreement shall take
effect as of the date and year first above written above.
LICENSOR: LICENSEE:
BHPC MARKETING, INC. I.C. ISAACS & CO., INC.
a California Corporation a Delaware Corporation
BY: /s/ ROGER TOMLINSON BY: /s/ BOB ARNOT
------------------------- -------------------------
Roger Tomlinson Bob Arnot
Treasurer Chairman of the Board, Co-CEO
Date: 5/7/98 Date: 5/7/98
-------------------- --------------------
20
<PAGE>
DEAL MEMO
FOR: I.C. ISAACS & CO., INC.
Brand: BEVERLY HILLS POLO CLUB
------
1. DEFINITION OF TERRITORY: United States and all its territories &
possessions
<TABLE>
<CAPTION>
2. Definition of Licensed Product (by category): DISTRIBUTION DATE:
-------------------------------------------
<S> <C>
Boyswear in sizes 4x7 - 8x20 January 1, 1999
--------
(1) Boys shirts; knitted & woven fabrics
(2) Boys pants; 100% cotton, cotton mixed (with the exclusion of tailored
pants)
(3) Boys jeans
(4) Boys shorts; all fabrics
(5) Boys swim shorts
(6) Boys outerwear (sports outerwear)
</TABLE>
<TABLE>
<CAPTION>
3. Initial Term: FROM TO
------------
<S> <C> <C>
First Contract Year: January 1, 1999 December 31, 1999
Second Contract Year: January 1, 2000 December 31, 2000
Third Contract Year: January 1, 2001 December 31, 2001
</TABLE>
<TABLE>
<CAPTION>
4. Renewal Term:**
-------------
<S> <C> <C>
Fourth Contract Year (if any): January 1, 2002 December 31, 2002
Fifth Contract Year (if any): January 1, 2003 December 31, 2003
Sixth Contract Year (if any): January 1, 2004 December 31, 2004
</TABLE>
5. Advance Royalty Payment: NONE
6. Royalty Rate: 5% (five percent)
<PAGE>
7. Guarantees:
<TABLE>
<CAPTION>
(A) (B) (C)
Guaranteed Guaranteed Guaranteed
Annual Annual Monthly
Net Royalty Royalty
Shipments Payments Payments
(In United States Dollars)
------------------------------------
<S> <C> <C> <C>
First Contract Year $1,000,000 $50,000 $4,166.66*
Second Contract Year $1,500,000 $75,000 $6,250.00
Third Contract Year $2,000,000 $100,000 $8,333.33
</TABLE>
* Guaranteed Monthly Royalty Payments commence January 1, 1999.
** Guaranteed Net Shipments for the Fourth through Ninth Contract Years (if any)
shall be calculated based on a volume equal to eighty percent (80%) of the
immediately preceding Contract Year's actual Net Shipments, but not less than
the previous year's Guaranteed Net Shipments. Guaranteed Annual Royalty Payments
for the Fourth through Ninth Contract Years (if any) shall be calculated based
on a volume equal to eighty percent (80%) of the immediately preceding Contract
Year's actual Annual Royalty Payment, but not less than the previous year's
Guaranteed Annual Royalty Payment.
INITIALS:
BHPC, licensor *** Illegible ***
ICICI, licensor *** Illegible ***
<PAGE>
Int. Cls: 25
Prior U.S. Cls: 39
Reg. No. 1,429,311
UNITED STATES PATENT AND TRADEMARK OFFICE Registered Feb. 17, 1987
- --------------------------------------------------------------------------------
TRADEMARK
PRINCIPAL REGISTER
[BEVERLY HILLS POLO CLUB LOGO]
EXHIBIT A
<PAGE>
[BEVERLY HILLS POLO CLUB LOGO]
<PAGE>
BHPC MARKETING, INC. [LOGO]
SAMPLE APPROVAL FORM
ATTACH COMPLETED FORM TO SAMPLE AND SEND TO BHPC MARKETING, INC.
<TABLE>
<S> <C> <C> <C>
- -------------------------------------------------------------------------------------
Licensee: Product: Style #: Date:
- -------------------------------------------------------------------------------------
Season: Year: Ship Date: Delivery:
- -------------------------------------------------------------------------------------
Supplier: Country of Origin: Fiber Content:
- -------------------------------------------------------------------------------------
Sample Description:
- -------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Colorway Body Trim Embroidery/Logo Buttons/Snaps Other
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------
Colorway #1
- ------------------------------------------------------------------------------------------------
Colorway #2
- ------------------------------------------------------------------------------------------------
Colorway #3
- ------------------------------------------------------------------------------------------------
Colorway #4
- ------------------------------------------------------------------------------------------------
Colorway #5
- ------------------------------------------------------------------------------------------------
</TABLE>
ATTACH PHOTO/DRAWING HERE LICENSOR APPROVAL
Sample Approved / /
Sample Disapproved / /
Signature/Date: ___________________________
Comments: _________________________________
___________________________________________
___________________________________________
___________________________________________
___________________________________________
___________________________________________
___________________________________________
Although BHPC Marketing, Inc. has approved the submitted Sample Approval Form,
such approval applies only to your usage of the Licensed Trademarks (as that
term is defined in our license agreement). As to any graphics, names,
likenesses, designs, logos, words and/or trademarks other than the Licensed
Trademarks (collectively the "Other Marks") set forth on the Approval Forms, we
waive our objection thereto without representation or warranty with respect to
any rights therein; and in any event conditioned upon and subject to your
securing any and all rights, approvals, consents, agreements, releases and the
like as may be necessary or required from any third party that may own or
control any rights to any or all of the Other Marks in your Territory. Nothing
contained herein shall in any way be deemed to be a limitation or waiver of any
of BHPC Marketing, Inc.'s rights or remedies as set forth in our license
agreement.
EXHIBIT B-1
<PAGE>
TRADEMARK BEARING [LOGO]
TRIM FORM
<TABLE>
<S> <C>
- ----------------------------------------------------------------------------
Licensee: Date:
- ----------------------------------------------------------------------------
Trim Description: Mfg.'s Style #:
- ----------------------------------------------------------------------------
Trim content or materials from which trim is made:
- ----------------------------------------------------------------------------
Intended use of trim:
- ----------------------------------------------------------------------------
Trim Source Information:
- ----------------------------------------------------------------------------
Manufacturer:
- ----------------------------------------------------------------------------
Tel: Fax:
- ----------------------------------------------------------------------------
Address: PLACE TRIM HERE
- ----------------------------------------------------------------------------
Cost (USD$): Per (Unit of Measure):
- ----------------------------------------------------------------------------
Comments:
- ----------------------------------------------------------------------------
</TABLE>
- ----------------------------------------------------------------------------
Approvals:
BHPC Marketing, Inc. use only
Legal: ________________________________________________ Date: _____________
Quality Control: ______________________________________ Date: _____________
EXHIBIT B-2
<PAGE>
Design Form [LOGO]
<TABLE>
<S> <C>
- ----------------------------------------------------------------------------
Date: Licensee:
- ----------------------------------------------------------------------------
Design #: Season:
- ----------------------------------------------------------------------------
Style #:
- ----------------------------------------------------------------------------
Artwork Description:
- ----------------------------------------------------------------------------
Placement:
- ----------------------------------------------------------------------------
Size:
- ----------------------------------------------------------------------------
Technique Description:
- ----------------------------------------------------------------------------
Visual Art: Sketch of Placement on Garment:
- ----------------------------------------------------------------------------
Body Color:
- ----------------------------------------------------------------------------
1)
- ----------------------------------------------------------------------------
2)
- ----------------------------------------------------------------------------
3)
- ----------------------------------------------------------------------------
4)
- ----------------------------------------------------------------------------
5)
- ----------------------------------------------------------------------------
</TABLE>
Although BHPC Marketing, Inc. has approved the submitted Design Form,
such approval applies only to your usage of the Licensed Trademarks (as that
term is defined in our license agreement). As to any graphics, names,
likenesses, designs, logos, words and/or trademarks other than the Licensed
Trademarks (collectively the "Other Marks") set forth on the Design Form, we
waive our objection thereto without representation or warranty with respect to
any rights therein; and in any event conditioned upon and subject to your
securing any and all rights, approvals, consents, agreements, releases and the
like as may be necessary or required from any third party that may own or
control any rights to any or all of the Other Marks in your Territory. Nothing
contained herein shall in any way be deemed to be a limitation or waiver of any
of BHPC Marketing, Inc.'s rights or remedies as set forth in our license
agreement.
- ----------------------------------------------------------------------------
BRAND:
Approved: / / ___________________________________
Licensor Signature/Date
Disapproved / /
- ----------------------------------------------------------------------------
<PAGE>
Advertising Approval Form [LOGO]
<TABLE>
<S> <C>
- ----------------------------------------------------------------------------
Date: Licensee:
- ----------------------------------------------------------------------------
Form of Advertising:
- ----------------------------------------------------------------------------
Description of Advertisement:
- ----------------------------------------------------------------------------
Place Advertising to be Submitted Here,
or Affix to This Page:
- ----------------------------------------------------------------------------
Name of Publication:
- ----------------------------------------------------------------------------
Dates of Publication:
- ----------------------------------------------------------------------------
</TABLE>
Although BHPC Marketing, Inc. has approved the submitted Advertising Approval
Form,such approval applies only to your usage of the Licensed Trademarks (as
that term is defined in our license agreement). As to any graphics, names,
likenesses, designs, logos, words and/or trademarks other than the Licensed
Trademarks (collectively the "Other Marks") set forth on the Advertising
Approval Form, we waive our objection thereto without representation or
warranty with respect to any rights therein; and in any event conditioned upon
and subject to your securing any and all rights, approvals, consents,
agreements, releases and the like as may be necessary or required from any
third party that may own or control any rights to any or all of the Other Marks
in your Territory. Nothing contained herein shall in any way be deemed to be a
imitation or waiver of any of BHPC Marketing, Inc.'s rights or remedies as set
forth in our license agreement.
- ----------------------------------------------------------------------------
BRAND:
Approved: / / ___________________________________
Licensor Signature/Date
Disapproved / /
- ----------------------------------------------------------------------------
EXHIBIT B-3
<PAGE>
Licensee [LOGO]
Net Sales and Royalty Report
<TABLE>
<CAPTION>
Category #1 Category #2 Category #3 TOTAL
----------- ----------- ----------- -----
Net Sales Royalty Net Sales Royalty Net Sales Royalty Net Sales Royalty
Month ($USD) ($USD) ($USD) ($USD) ($USD) ($USD) ($USD) ($USD)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------
January 19__
- -------------------------------------------------------------------------------------------------
February 19__
- -------------------------------------------------------------------------------------------------
March 19__
- -------------------------------------------------------------------------------------------------
April 19__
- -------------------------------------------------------------------------------------------------
May 19__
- -------------------------------------------------------------------------------------------------
June 19__
- -------------------------------------------------------------------------------------------------
July 19__
- -------------------------------------------------------------------------------------------------
August 19__
- -------------------------------------------------------------------------------------------------
September 19__
- -------------------------------------------------------------------------------------------------
October 19__
- -------------------------------------------------------------------------------------------------
November 19__
- -------------------------------------------------------------------------------------------------
December 19__
- -------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------
TOTAL:
- -------------------------------------------------------------------------------------------------
</TABLE>
I hereby certify that the Net Sales and Royalties amount set forth herein above
are true and accurate, and I am able to provide BHPC Marketing, Inc. with any
such supporting documentation as BHPC Marketing, Inc. may request.
Licensee: _____________________________ Name: _______________________________
Signature: _____________________________ Title: _______________________________
Date: _____________________________
Note: Category descriptions on this Report must correspond to the category
description defined in the License Agreement.
You Must Attach to this Net Sales and Royalty Report Lists Indicating the
Following:
1. Licensee's sales per month, per category and style.
2. Licensee's sales per customer per month.
3. Licensee's remaining inventory per category and per style at the
conclusion of the applicable contract quarter
EXHIBIT B-4
<PAGE>
BHPC.12
SECTION (I)
NET SHIPMENT STATEMENT
The written statement of Net Shipments of Licensed Product (a copy of which is
attached hereto as Exhibit "B-4") referred to in Paragraph 9a must be certified
as accurate by LICENSEE and will include, but will not be limited to,
information as to: each respective invoice number (in sequential order inclusive
of all "voided" invoices), invoice date, customer name or number, gross dollar
amount invoiced, terms of any customary trade allowances (as a percentage and in
aggregate dollars), actually credited returns (in aggregate dollars), and other
deductions taken against the gross dollar amount invoiced, and any such other
further information as LICENSOR may from time to time request. Such statements
shall be furnished to LICENSOR whether or not any Licensed Product has been
shipped, distributed and/or sold during the preceding Royalty Period and whether
or not any monies are then due LICENSOR.
SECTION (II)
BOOKS, RECORDS, AND RIGHTS TO AUDIT
Within ten (10) days following any written request by LICENSOR, LICENSEE will
deliver copies and extracts of any books of account, records, documents,
materials, and information as are requested by LICENSOR inclusive of, but not
limited to: financial statements, general ledger detail and supporting journals,
documents, sales and credit memo registers, financial projections and wholesale
price listings. All books of account and records of LICENSEE covering all
transactions relating to this Agreement shall be retained by LICENSEE for at
least three (3) years after the expiration or termination of this Agreement for
inspection by LICENSOR.
EXHIBIT "C"
Page 1 of 3
<PAGE>
BHPC.12
SECTION (III)
INSURANCE REQUIREMENTS
All such policies of insurance shall have endorsements or coverage with combined
single limits of not less than $1,000,000 with deductibles reasonably acceptable
to LICENSOR and shall name LICENSOR, and those designated by LICENSOR, as
additional insureds thereunder. Such policies of insurance shall contain:
a. severability of interest;
b. cross liability; and
c. endorsement stating: "Such insurance as is afforded by this policy for the
benefit of BHPC Marketing, Inc. shall be primary as respects any liability
of claims arising out of (LICENSEE's) operation, and any insurance carried
by BHPC Marketing, Inc. shall be excess and non-contributory."
The policies shall provide for ten (10) days notice to LICENSOR from the
insurer by Registered or Certified Mail, return receipt requested, in the event
of any modification, cancellation or termination. LICENSEE agrees to furnish
LICENSOR a certificate of insurance or copy of the policies evidencing same
within thirty (30) days after execution of this Agreement and from time to time
as requested by LICENSOR within ten (10) days of LICENSOR's request; in no
event, shall LICENSEE manufacture, offer for sale, sell, advertise, promote,
ship and/or distribute the Licensed Product prior to receipt by LICENSOR of such
evidence of insurance.
SECTION (IV)
DISPOSAL OF INVENTORY ON EXPIRATION OR TERMINATION
(A) Any finished Licensed Product in LICENSEE's possession unsold on the date of
the expiration of this Agreement may, subject to payment of the Royalty payable
to LICENSOR, be sold by LICENSEE, pursuant to a plan to be approved by LICENSOR,
for a period of one hundred twenty (120) days after expiration hereof. Any
Royalty paid by LICENSEE to LICENSOR during the aforementioned one hundred
twenty (120) day period is separate and apart from the Royalty generated during
the term of the Agreement and such Royalty is not to be applied to the
Guaranteed Annual Royalty Payments as outlined in Subparagraph 10b. and column
C of item 6 of the attached License Agreement Detail Schedule. All inventory
remaining after such one hundred twenty (120) day period shall be destroyed or
stripped of all imprints, lettering, mentions or other reproductions of or
references to the Trademarks and related logos; and all molds, patterns,
transfers, and other property bearing the Trademarks of relating thereto shall
be destroyed; all under the supervision of LICENSOR.
EXHIBIT "C"
Page 2 of 3
<PAGE>
LICENSOR shall have the first right to purchase said Licensed Product at the
direct cost price (comprised of material and direct labor expenses as set forth
in LICENSEE's books and records, plus five percent (5%) for overhead) upon
expiration or termination of this Agreement.
(B) Any finished Licensed Product in LICENSEE's possession unsold on the date of
termination of this Agreement, and all molds, patterns, transfers, and other
property bearing the Trademarks or relating thereto, shall be destroyed by
LICENSEE within thirty (30) days following the termination of this Agreement;
further, LICENSEE agrees, on or before the aforementioned date, to provide
LICENSOR with a certificate signed by LICENSEE's Chief Executive Officer
certifying under penalty of perjury that such inventory, molds, patterns,
transfers, and other property have been destroyed.
EXHIBIT "C"
Page 3 of 3
<PAGE>
SETTLEMENT AGREEMENT
This Settlement Agreement is made, in multiple originals, by and among
Polo Fashions, Inc., a corporation organized and existing under the laws of the
State of New York, having an office and place of business at 40 West 55th
Street, New York, New York ("PFI"); Beverly Hills Polo Club, Inc., a
corporation organized and existing under the laws of the State of California,
having an office and place of business at 1940 Lovelace Avenue, Los Angeles,
California ("BHPC"); Stephen Wessler, an individual residing at 19500
Valdez Drive, Tarzana, California ("Wessler"); and Gregory Lang, Inc., a
corporation organized and existing under the laws of the State of California,
having an office and place of business at 1940 Lovelace Avenue, Los Angeles,
California ("Lang"). BHPC, Wessler and Lang will hereinafter be collectively
referred to as the "Beverly Hills Polo Club Parties."
Witnesseth:
WHEREAS, there are presently pending before the United States District
Court for the Central District of California two civil actions entitled
"Beverly Hills Polo Club, Inc. and Gregory Lang, Inc. v. Polo Fashions, Inc.,
- ----------------------------------------------------------------------------
Civil Action No. 83-3342 LTL (JRx)" (the "BHPC Action") and "Polo Fashions,
----------------
Inc. v. Action Industries, Inc., et al., Civil Action No. 84-162 LTL(JRx)"
- ---------------------------------------
(the "PFI Action"), which involve claims
<PAGE>
of trademark infringement, false designation of origin and unfair competition
by PFI against the Beverly Hills Polo Club Parties and others and claims of
unfair competition, antitrust violations and declaratory relief of trademark
non-infringement by various of the Beverly Hills Polo Club Parties against
PFI; and
WHEREAS, the parties hereto have vigorously contested the BHPC Action
and the PFI Action (collectively the "Civil Actions"), and have expended
considerable time and effort, and have incurred considerable expense, in
doing so; and
WHEREAS, in order to avoid the additional expense which would be
necessary for the continued prosecution of the Civil Actions, the parties are
willing to resolve the controversy among them and to settle the Civil Actions
under the terms and conditions set forth herein;
NOW, THEREFORE, in mutual consideration of the covenants and premises
contained herein, the parties agree as follows:
1. Except as provided in paragraph 3 hereunder, as of February 15,
1985, the Beverly Hills Polo Club Parties, their affiliates, officers, agents
and employees and any person or entity under their discretion or control, or
in active concert or participation with them, shall cease and desist from
anywhere in the world:
(a) Using as a design or decoration on or in connection with wearing
apparel, home furnishings,
<PAGE>
personal care and fragrance products, and related items, accessories and
services (collectively the "Subject Products and Services"), including
but not limited to related packaging, labels, tags and other trade
dress, or as a trademark, service mark or trade name the word "polo"
alone, or the words "polo club" alone, apart from the composite "Beverly
Hills Polo Club," except as may be permitted by paragraph 18 herein;
(b) Using as a design or decoration on or in connection with the
Subject Products and Services, including but not limited to related
packaging, labels, tags and other trade dress, or as a trademark,
service mark or trade name the composite "Beverly Hills Polo Club" in
any configuration in which (i) the words "Beverly Hills" are not of
equal prominence with the words "Polo Club" or not in close proximity to
such words or (ii) a different type face or color is used for the words
"Polo Club" than for the words "Beverly Hills"/or (iii) the word "Polo"
is surrounded by a rectangle, or (iv) the word "Polo" is in any way
emphasized;
(c) Using as a design or decoration on or in connection with the
Subject Products and Services, including but not limited to related
packaging, labels, tags and other trade dress, or as a trademark or
service mark, the design of a polo player astride a horse
<PAGE>
which is shown in Exhibit A (the "Polo Player Symbol"), or any design
which is a colorable imitation or simulation thereof;
(d) Using as a design or decoration on or in connection with the
Subject Products and Services, including but not limited to related
packaging, labels, tags and other trade dress, or as a trademark,
service mark or trade name the design of a polo player astride a horse
which is shown in Exhibit B (the "BHPC Symbol"), or any design which is
a colorable imitation or simulation thereof or is substantially similar
thereto, in an overall size smaller than five and a half inches by five
and a half inches (5 1/2" x 5 1/2") (measured from mallet head to hoof
and from nose to tail), except as may be permitted by paragraph 2 hereof;
(e) Using either of the typefaces shown in Exhibit C (identified
hereinafter as the "Subject Typefaces") for the name "Beverly Hills Polo
Club";
(f) Placing or causing to be placed any advertisements or using any
materials of any type making reference, either directly or indirectly to
Polo Fashions, Inc. or to Ralph Lauren or their licensees and
affiliates; and
(g) Using dark blue as the background color of any packaging,
label, tag or trade dress containing the words "Beverly Hills Polo
Club", and/or the BHPC Symbol.
<PAGE>
2. Notwithstanding the size limitations imposed by paragraph 1(d)
hereof, the Beverly Hills Polo Club Parties may use the BHPC Symbol in
an overall size smaller than the five and a half inches by five and a
half inches (5 1/2" x 5 1/2") set forth in paragraph 1(d) hereof but
only if
(a) the same is used in combination with and in close proximity to
the words "Beverly Hills Polo Club" in the configuration shown in
Exhibit D annexed hereto (the "Composite BHPC Logo") or the label shown
in Exhibit E annexed hereto (the "BHPC Label"); or
(b) the BHPC Symbol is used in a repetitive pattern covering
substantially all of the front or back of any of the Subject Products,
provided that the initials "BHPC" shall appear in close proximity to the
BHPC Symbol, and that somewhere on each of the Subject Products the
words "Beverly Hills Polo Club" shall be prominently displayed.
3. The Beverly Hills Polo Club Parties may sell or otherwise dispose of
any and all articles of clothing and accessories which are represented by
them to be in their possession or under their control as of February 15,
1985, as set forth in Exhibit F, to be added hereto not later than March 1,
1985, which would otherwise come within the prohibitions of paragraph 1 of
this Agreement, and may fill orders accepted on or before such date for any
clothing or accessories coming within such prohibitions so long as such
orders are filled within ninety (90) days of such date. Notwithstanding the
foregoing,
<PAGE>
BHPC may have until June 15, 1985 to dispose of garments in the process of
manufacture in the Orient as of February 15, 1985. PFI or its attorneys or
such attorneys' agents, on reasonable notice, which notice shall not be
required to exceed ten (10) days, may review purchase orders, bills of
lading, or inventory records at the place of business of any Beverly Hills
Polo Club Parties sufficient to verify compliance with this paragraph. Such
information is to be used solely to verify and enforce compliance, and shall
be held in confidence by PFI's attorneys or their agents.
4. Simultaneously with its execution of this settlement agreement, (a)
BHPC shall promptly withdraw with prejudice Opposition No. 68,754 to PFI's
United States Trademark Application Serial No. 333,206, filed October 19,
1981 for the trademark POLO, and (b) Lang shall promptly withdraw with
prejudice the federal, state and foreign trademark applications listed in
Exhibit G annexed hereto, and take the appropriate steps to cancel or delete
or withdraw registrations issued pursuant to such applications; and none of
BHPC, Lang or Wessler, nor any one affiliated with each of them shall file
any trademark application with the United States Patent and Trademark Office
or with any state in the United States or in any foreign country for any mark
incorporating the words "Polo Club" and/or "Beverly Hills Polo Club" and/or
any horse and rider design, where the use of which such mark would be
prohibited hereunder, provided that in no event shall any of them file any
such application for any design of a horse and rider alone.
<PAGE>
5. Neither PFI nor any person or entity under its direction or control,
may oppose the registration by the Beverly Hills Polo Club Parties of any
trademark which the Beverly Hills Polo Club Parties are entitled to register
under this Agreement, nor shall they petition to cancel, either directly or
through court action the registration of any such trademark unless said mark
or registration is the basis for legal action by BHPC, Lang or any affiliated
entity against PFI or its licensees. If PFI learns that any of its licensees
objects to the registration by any of the Beverly Hills Polo Club Parties of
the words "Beverly Hills Polo Club," and/or the Composite BHPC Logo and/or
the BHPC Label, then PFI will inform such objecting licensee in writing of
the terms of this Agreement, and provide written confirmation thereof to BHPC.
6. The parties agree to entry in the Civil Actions of Final Judgment
Upon Consent in the form annexed hereto as Exhibit H, or in such other form
as the Court may require consistent with the terms and conditions of this
Settlement Agreement.
7. None of the Beverly Hills Polo Club Parties or any person or entity
under their direction or control shall oppose any registration by PFI or any
affiliated entity of any of the trademarks or service marks POLO, POLO BY
RALPH LAUREN or the Polo Player Symbol, alone or in combination (collectively
"the PFI Marks"), nor shall they petition to cancel, either directly or
through court action, any registration owned by PFI or any affiliated entity
for any of the PFI Marks unless said
<PAGE>
trademark, service mark or registration is the basis for legal or
administrative action by PFI or any such affiliated entity against such a
party or its licensees.
8. The parties will not initiate any publicity concerning the terms and
conditions of this Agreement and such terms and conditions shall be held in
confidence except as otherwise provided herein. The Beverly Hills Polo Club
Parties may provide a copy of this Settlement Agreement or portions or
summaries thereof to any person or entity licensed or otherwise permitted to
use the name "Beverly Hills Polo Club," the BHPC Symbol or the Composite BHPC
Logo, to potential licensees, to sales representatives or, upon inquiry being
made, to customers. Either party may refer to the terms and conditions of
this Agreement in conjunction with its registration, or judicial or
administrative protection or enforcement of its trademarks, trade names and
service marks.
9. This Settlement Agreement represents no concession by any party as
to the validity or merit of any of the claims raised in the Civil Actions by
any other party, except as may be set forth in the Final Judgment of Exhibit
H.
10. PFI and its officers, agents, employees and sales representatives
shall not make, directly or indirectly, any claim that the purchase of
products complying with the terms of this Agreement from BHPC or Lang or
their distributors or sublicensees constitutes trademark infringement, unfair
competition or trademark dilution, nor threaten sanctions with respect
thereto. This undertaking does not in any way admit or imply
<PAGE>
that PFI, or anyone acting on its behalf, has in the past made any such claims
or threatened any such sanctions.
11. In consideration of the warranties, representations and promises
made by the Beverly Hills Polo Club Parties herein, PFI does hereby fully
release and forever discharge BHPC, Stefan, Inc., Richard Enterprises, Inc.,
Lang and Wessler and all of their respective officers, directors, agents,
employees and representatives and all those in active concert or
participation with any of them, and their customers, both immediate and
remote, from and against any and all claims, causes of action, demands,
damages or charges for trademark infringement and unfair competition made
against them by PFI in the Civil Actions or which could have been made in
such Civil Actions, up to and including the date of the execution of this
Settlement Agreement.
12. In consideration of the warranties, representations and promises made
by PFI herein, BHPC, Lang and Wessler do hereby fully release and forever
discharge PFI, its officers, directors, agents, employees and representatives,
and all those in active concert or participation with any of them, from and
against any and all claims, causes of action, demands, damages or charges made
against PFI in the Civil Actions or which could have been made in such Civil
Actions, up to and including the date of the execution of this Settlement
Agreement.
13. This Settlement Agreement represents the entire understanding between
the parties with respect to the subject matter hereof; shall not be varied or
amended except by a
<PAGE>
writing signed by all parties; shall be binding upon the parties, their
successors and assigns; and shall, as respects contractual construction, be
governed by and construed in accordance with the laws of the State of New York.
Neither party hereby waives any claim as to the propriety of venue or as to the
existence of personal jurisdiction, in any lawsuit or other proceeding that may
arise concerning the subject matter of this Settlement Agreement.
14. PFI warrants and represents that it has full right and power to enter
into this Settlement Agreement.
15. Lang warrants and represents that it has full right and power to enter
into this Settlement Agreement.
16. BHPC warrants and represents that it has full right and power to enter
into this Settlement Agreement.
17. Wessler warrants and represents as follows:
(a) He is the president and sole shareholder of BHPC and Lang; and
(b) He has the full right, power and authority to enter into this
Settlement Agreement.
18. Nothing contained herein shall be deemed to preclude the Beverly
Hills Polo Club Parties, their affiliates, officers, agents and employees and
any person or entity under their direction or control, or in active concert
or participation with them, from making any use, otherwise than as a trade or
service mark, of the words "polo" or "polo club" alone, descriptively, fairly
and in good faith only to describe the sport of polo, clubs at which the
sport of polo is played (i.e.
<PAGE>
"polo clubs") or items of wearing apparel which have come to be described by the
word polo (e.g. "polo shirts" or "polo coats"), provided, however, that any such
use will not violate any of the terms and conditions of this Agreement.
19. The Beverly Hills Polo Club Parties shall take all steps reasonably
necessary to ensure that any person or entity which is licensed or otherwise
permitted to use the term "Beverly Hills Polo Club", the BHPC Symbol or the
Composite BHPC Logo, complies fully with the restrictions set forth in
paragraph 1 hereof.
20. PFI acknowledges that the rights of any person or entity which it
licenses or otherwise permits to use the PFI Marks are subject to the terms
and conditions of this Agreement and that such rights cannot be used in
contravention of the provisions of paragraphs 5 and 10 hereof. PFI agrees to
inform any of its licensees whom it learns object to the use by the Beverly
Hills Polo Club Parties of any of the names or marks which they are permitted
to use hereunder of the foregoing acknowledgements.
21. In the event that a dispute arises between the parties as to the
subject matter of this Agreement, then the parties shall attempt to amicably
resolve the same prior to seeking judicial intervention. If the parties are
unable to resolve such dispute within thirty (30) days after it arises,
<PAGE>
then either party may take such action as it deems appropriate to protect
its rights.
IN WITNESS WHEREOF, the parties have executed this Settlement on the
days indicated adjacent to their respective signatures below.
POLO FASHIONS, INC.
Dated: 2/15/85 By: /s/ Peter Strom
-------------------------- --------------------------
Peter Strom
BEVERLY HILLS POLO CLUB, INC.
Dated: 2/20/85 By: /s/ Stephen Wessler
-------------------------- --------------------------
Stephen Wessler, President
STEPHEN WESSLER
Dated: 2/20/85 By: /s/ Stephen Wessler
-------------------------- --------------------------
GREGORY LANG, INC.
Dated: 2/20/85 By: /s/ Stephen Wessler
-------------------------- --------------------------
Stephen Wessler, President
<PAGE>
[POLO LOGO]
<PAGE>
[POLO LOGO]
Exhibit B
<PAGE>
[POLO LOGO]
<PAGE>
[POLO LOGO]
Note: Typeface to be changed per Paragraph 1(e).
<PAGE>
[POLO LOGO]
Note: Typeface to be changed per Paragraph 1(e).
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 9,178,682
<SECURITIES> 0
<RECEIVABLES> 26,085,070
<ALLOWANCES> (1,265,000)
<INVENTORY> 26,613,040
<CURRENT-ASSETS> 62,682,069
<PP&E> 17,133,651
<DEPRECIATION> (13,720,666)
<TOTAL-ASSETS> 80,993,349
<CURRENT-LIABILITIES> 11,600,842
<BONDS> 0
0
0
<COMMON> 834
<OTHER-SE> 57,998,991
<TOTAL-LIABILITY-AND-EQUITY> 80,993,342
<SALES> 34,270,880
<TOTAL-REVENUES> 34,270,880
<CGS> 23,563,591
<TOTAL-COSTS> 23,563,591
<OTHER-EXPENSES> (312,438)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 239,414
<INCOME-PRETAX> 1,233,800
<INCOME-TAX> 506,000
<INCOME-CONTINUING> 727,800
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 727,800
<EPS-PRIMARY> .09
<EPS-DILUTED> .09
</TABLE>
